BREAKINGVIEWS-Food supply tie-up relies on an old family recipe

By Sebastian Pellejero

NEW YORK, March 30 (Reuters Breakingviews) - For half a century, Sysco SYY.N has trucked ingredients to America’s kitchens. On Monday, it agreed to pay $29.1 billion for privately owned Jetro Restaurant Depot, which instead runs the equivalent of big-box stores frequented by small-time restaurateurs. The combination creates a supply-side behemoth spanning delivery and pick-up. Making it into a compelling financial stew means sticking to the seller’s family recipe, though.

The strategy sounds tasty enough. Restaurant Depot’s cash-and-carry format, where customers load their own trolleys and pay on the spot, is distinct from Sysco’s door-to-door operation. Still, there will be inevitable operational duplications, whether in salesforce or logistics. Paring them should leave Jetro leaner, but it’s already starting from a hearty base. Last year, it generated about $2 billion in operating profit on $16 billion sales, implying a profit margin that vastly outstrips the U.S. wholesaler average, according to NYU Stern data, and more than doubles Sysco’s own.

This comes at a hefty price. Including debt, Sysco is paying roughly 14 times Jetro’s EBITDA, a premium to the buyer’s current valuation of about 12 times. Add in $250 million of predicted cost cuts, tax them at the standard 21% rate, and the implied return on invested capital is a measly 6%, Breakingviews calculates. Little wonder that investors turned up their collective noses, sending Sysco’s shares down 14%.

In fairness, Jetro has grown EBITDA at 14% annually since 2004. At that rate, operating profit would approach $4 billion within five years. At even half that pace, the implied return on capital pushes up to around 7%. Sysco says it will run Jetro separately, with the existing management team intact.

There is little margin for error. The deal will push leverage to 5 times adjusted EBITDA at close, well beyond the threshold that prompted Moody’s to cut Sysco’s credit rating in January. At $5.5 billion in annual free cash flow, there’s a credible path to paying down $21 billion in new debt, but one that leaves little in the pantry for any difficult times ahead.

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CONTEXT NEWS

Sysco announced on March 30 that it has entered an agreement to acquire Jetro Restaurant Depot at an enterprise value of $29.1 billion. Jetro shareholders will receive $21.6 billion in cash and 91.5 million Sysco shares. The transaction is expected to close by the third quarter of Sysco’s fiscal year 2027.

Goldman Sachs and TD Securities served as advisors to Sysco. Jetro was advised by Evercore.