A merger of the top two U.S. food distributors, Sysco and US Foods, could mean cutbacks at facilities in Severn and Jessup that employ hundreds of workers and sit fewer than 10 miles apart as a combined company consolidates operations across the United States.
Sysco Corp. announced Monday that it plans to buy US Foods Inc., based in Columbia until a 2007 buyout, for about $3.5 billion in a deal that will create a company commanding at least a quarter of the $235 billion North American market.
Sysco, which would assume US Foods' debt of $4.7 billion, said it expected about $600 million in annual cost savings within three to four years.
The companies, both of which distribute foods to restaurants, hotels, hospitals, schools and other institutions, overlap in most markets, one analyst said.
"There is significant redundancy in both companies, with both operating in virtually every U.S. market with duplicate distribution centers and sales forces," Ajay Jain, an analyst with Cantor Fitzgerald in New York, said in a research note Monday.
Sysco Baltimore, on Dorsey Run Road in Jessup, employs about 650 workers, according to the state Department of Business and Economic Development. Houston-based Sysco also operates an Eastern Maryland division in Pocomoke City in Worcester County.
US Foods runs a Baltimore division from a nearly 350,000-square-foot distribution center on Telegraph Road in Severn with between 250 to 499 employees, according to the Department of Labor, Licensing and Regulation.
Neither Sysco nor US Foods responded to calls seeking the exact number of Maryland-based employees.
An official at Anne Arundel Workforce Development Corp. had not heard from representatives of US Foods but said it is too early in the process for any official notification.
"With other mergers, what we find for the most part, they do try to absorb what they can [of workers] and at least give enough notice that they will need to start looking" for work, said Donna Camp, an industry sector navigator who offers services for workers who lose jobs through mergers or downsizing.
Sysco said it will form a team with members from both companies to oversee integration of employees, customers and suppliers.
US Foods, based in Rosemont, Ill., was formerly US Foodservice, a Columbia distributor rocked by an accounting scandal early last decade before being acquired for $7.1 billion in 2007 by the private equity firms Clayton, Dubilier & Rice and KKR & Co. At the time, US Foodservice employed about 500 people in Columbia.
US Foodservice had been owned by the Dutch grocer Ahold, which also owns the Landover-based Giant supermarket chain. A nearly $1 billion accounting scandal that surfaced in 2003 at US Foodservice nearly bankrupted Ahold. Ahold had to restate profits that had been overstated by $880 million over three years, restructure and pay shareholders more than $1 billion in damages. Four US Foodservice executives and more than a dozen vendors were convicted of criminal charges.
Before selling to the private equity firms, Ahold was able to turn the company around and make it one of its most profitable divisions.
Sysco, whose shares jumped nearly 10 percent Monday, promoted the combination of its supply chain expertise with the strong consumer-facing technologies of US Foods as a key driver for the deal, which creates a company with revenue of $65 billion.
"The purchase price seems fairly reasonable … and there are synergies that are expected to result from the deal," Morningstar analyst Erin Lash told Reuters.
The deal is expected to close in the third quarter of 2014 if it passes antitrust muster.
"A major consideration in our view will be FTC [Federal Trade Commission] related," Jain wrote Modany.
Sysco CEO Bill DeLaney, speaking on a conference call with analysts, said Sysco now has an 18 percent share of the market, while US Foods has 9 percent.
Sysco, with annual revenue of about $44 billion, is the largest operator in the U.S. food distribution business, with US Foods in the No. 2 spot.
DeLaney said the FTC, which rules on antitrust matters, would certainly scrutinize the deal, but he noted that there were about 15,000 private companies involved in the U.S. food distribution industry.
Three antitrust experts agreed that the deal would get a close look, and that the FTC could order some asset sales.
The plan to close the deal in the third quarter indicated the companies know they will have tough meetings with regulators, they said.
"I think it's a problematic deal," said Robert Doyle, an FTC veteran now at Doyle, Barlow and Mazard, an antitrust consultancy.
However, Herb Hovenkamp, who teaches antitrust at the University of Iowa College of Law, agreed with Morningstar's Lash that the deal was likely to go through, given the industry's fragmented nature.