, Newburyport, MA

December 14, 2013

U.S. Foods merger may spoil plans for Seabrook


---- — SEABROOK — Stock shares for food distribution giant Sysco Corp. jumped up significantly on Monday when news got out it would buy its major competitor U.S. Foods, but many in Seabrook believe the merger has doomed the deal for U.S.Foods expansion to town.

According to the Associated Press, Sysco stock rose the most in the Standard & Poor’s 500 index after its Dec. 9 announcement of its agreement to buy rival US Foods in an $8.2 billion deal. Sysco’s stock jumped $3.31, or 9.7 percent, to $37.62.

But when Seabrook Town Manager Bill Manzi read the news in the Wall Street Journal, his hopes crumbled for U.S. Food’s $62-million proposed expansion project from its Peabody site to the 88-acre half-million square foot Poland Springs warehouse in Seabrook’s industrial park, that would have brought hundreds of existing, plus about 100 new jobs to town.

After speaking with U.S. Foods Corporate Real Estate Director Jeffrey Barnes, Manzi said he got the impression the move to Seabrook was probably not going to happen. Barnes was coordinating the company’s purchase of the Poland Springs building and the Seabrook expansion. Manzi believes none of those involved in the Seabrook move knew anything about the merger.

“In a merger like this everything is frozen and I don’t want to say definitively that the deal is off, but as we speak the deal is suspended,” Manzi said. “As of this point, they won’t be continuing with the process to relocate here.”

According to Sysco’s announcement on its website, Sysco Corporation and U.S. Foods have an agreement to merge for a total transaction value of about $8.2 billion. The venture has been approved by the boards of directors for each company.

Sysco will pay $3.5 billion for U.S. Foods to its private equity owners in $3 billion of Sysco common stock and $500 million of cash. Sysco will assume or refinance US Foods’ debt of about $4.7 billion, bringing the value to $8.2 billion, according to the Sysco release.

Sysco president and chief executive officer, Bill DeLaney, will lead the combined company, which retain only the name Sysco and stayed at its Texas headquartered. U.S. Foods headquarters is in Illinois.

According to his research, Manzi believes the Seabrook expansion may be off since mergers of this magnitude usually bring significant consolidations of assets to make the merger work financially.

“From what I read, with this merger they’re looking to make $600 million in back end savings,” Manzi said. “That kind of savings means the consolidation of locations and the elimination of jobs and redundancies. Sysco has a distribution center right over the border in Maine, and one in (Massachusetts), that could mean that U.S. Foods Peabody warehouse will close.”

According to the announcement: “Sysco will establish a team comprising members of both companies to prepare for and oversee a comprehensive integration for employees, customers and suppliers.”

However, given that Sysco and U.S. Foods are ranked one and two in the nation’s food distribution network, Manzi said the Federal Trade Commission will have to review the merger and approve it to ensure it doesn’t create a monopoly. Nationally, the FTC rules on antitrust issues such as this.

Sysco operates 193 distribution facilities in the U.S., Canada, the United Kingdom, and Ireland serving approximately 425,000 customers with 48,100 employees. US Foods has 24,000 employees nationwide, with 60 distribution centers in 37 states.

The two companies distribute food anywhere food is sold or served for restaurants, hotels, hospitals, schools and other institutions, Manzi said. By combining the distributors ranked one and two in the nation, they will eliminate their major competitors, he said.

“The lack of competition isn’t good for pricing,” Manzi said. “That could create a real problem for the industry since there would be no where else for restaurants, hospitals and schools to go (to buy the goods they need). The FTC needs to take a really close look at this.”

But if the FTC approves, the transaction is expected to close in the third quarter of calendar year 2014. If so, the two national food distribution giants will morph into one behemoth, with annual sales of about $65 billion and an operating cash flow of about $2 billion, according to Sysco’s announcement.

During their conversation, Barnes thanked Seabrook officials for all the hard work they did in expediting the conditional approval of the expansion, which needed a nod from town officials to meet its Nov. 30 deadline with the owner of the Poland Springs property, for a purchase price of about $27 million.

U.S. Foods paid more than $30,000 in application fees to Seabrook during its siting plan process, which is not refundable, Manzi said. But if it entered into a deal for the real estate on Nov. 30 more significant funds may have changed hands.

“I don’t know exactly what their understanding was with Poland Springs,” Manzi said. “I think they had the property tied up until Nov. 30, and if they were to go forward with the purchase, by Nov. 30 it would require some serious earnest money paid by U.S.Foods. That could be in the millions, and that could be non-refundable.”

In mid-November, the Seabrook Planning Board gave its conditional approval of the U.S. Food deal which, a $62 million project, $27 million for the property and $35 million in renovations. The only thing that would have stopped the project, Barnes said at the time, was U.S. Foods Board of Directors not giving its approval.