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Selling Sysco On The Pop From US Foods Deal

|Includes: Sysco Corporation (SYY)

I closed my position in Sysco (NYSE:SYY) as soon as options prices stabilized and bid/ask spreads became workable.

Looking at the deal, EV/EBITDA as reflected in the purchase price is comparable to Sysco's. So the price was fair. But SYY has been losing margin over the past year or more, and a protracted effort to get ERP from SAP up and running has yet to come to successful conclusion.

Sysco demonstrably failed to properly integrate its numerous acquisitions over the years, or to realize the supposed economies of scale due to increasing revenue by acquisition. There is little reason to believe it will suddenly turn around and make the US Foods acqusition into a homerun.

The deal has not taken place, and won't close until the third quarter of calendar 2014. It might garner anti-trust attention, although I think it would be approved.

My position was a diagonal spread, long Jan 2015 28 calls and short May 2014 37 calls. I legged out for a net $9.00, after correctly guessing the stock would trade down from the high it hit pre-market. IRR worked out to 143%, since June this year, I can live with that.

Sysco needs to get their transformation project completed: this ERP from SAP has been an ongoing disaster and drain on management resources. I plan to monitor conference calls and earnings, and reconsider my exit if and when the transformation project is completed and margins begin to head back to what they were.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.