A chance to get big, quickly JP Foodservice ponders deal for Sara Lee unit

Maryland's newest Fortune 500 company may be in the process of being born -- but most people locally haven't really noticed.

That is the result of Sara Lee Corp.'s unusual public offer last week to sell its food service distribution business to JP Foodservice Inc. of Columbia, a one-time Sara Lee subsidiary that gained its independence through a 1989 leveraged buyout and only went public last year.


"We might end up being the largest company in [metropolitan Baltimore]," JP Foodservice chief financial officer Lewis Hay III said. "Even if we're not No. 1, we'll be in the top five."

If JP takes Sara Lee up on its offer, the combined company would have up to $3.5 billion in sales -- behind only Towson-based Black & Decker Corp., the Annapolis-based utility that will be formed when Baltimore Gas & Electric Co. formally completes its merger with Potomac Electric Power Co., and possibly Baltimore insurance giant USF&G; Corp., ranked 352nd on the 1995 Fortune list, among metropolitan Baltimore firms.


Among other Maryland companies, the combined company would be smaller than only household names like Lockheed Martin Corp., Marriott International Inc. and Giant Food Inc.

Analysts believe JP should -- and will -- take Sara Lee up on its offer. The Chicago consumer-products giant offered to sell JP Food service its PYA/Monarch hotel-and-restaurant supply business for JP Foodservice stock worth $821 million, with JP Foodservice assuming $125 million in Sara Lee's debt.

The sale would boost Sara Lee's share of JP Foodservice to 84 percent from about 38 percent, including shares owned by a foundation endowed by Sara Lee, Mr. Hay said.

The deal would let Sara Lee leave management of food service operations to JP Foodservice, freeing the Chicago firm to concentrate on other businesses that generate more profits.

Rodman & Renshaw Inc. analyst Ronald Morrow said the combination serves both companies in a competitive, consolidating business.

Each company works mostly in a different part of the nation: PYA/Monarch, the nation's No. 3 "broadline" food-service company, is big in the South and the Midwest, while No. 7 JP Foodservice is a major player in Mid-Atlantic and Northeastern markets.

Sara Lee spokesman Jeffrey P. Smith said the combination would help each company get business from major clients that use their services in one part of the country but use competitors in areas where JP Foodservice or PYA/Monarch are not active. The deal also will increase the companies' buying clout with suppliers, helping to hold down costs in a business where operating profits equaling 4 percent of sales are considered extraordinarily high.

"The deal makes a lot of sense," Mr. Hay said. "Clearly the benefit for us would be increased margins for both companies."


The combination of narrow margins and a highly fragmented market -- no player has a 10 percent national market share -- are driving food service companies toward mergers. Industry leader SYSCO Corp. has boosted its growth with a steady stream of acquisitions for more than two decades, and its reward has been the highest profits in the industry.

"The combined company would have market dominance from the Carolinas north through the Mid-Atlantic and on to the Midwest," Mr. Morrow wrote in a report released Friday. "The combination would raise JP to the No. 3 distributor and perhaps make other mid-to-large-sized acquisitions easier as other foodservice operations see the next rising giant."

Because of the close ties between the companies, however, Mr. Hay said JP Foodservice is taking its time before making a decision on the offer.

He said the company last Friday appointed a committee of JP Foodservice directors who don't work for the company or for Sara Lee to figure out whether Sara Lee is offering PYA/Monarch at a fair price.

"I think there will be negotiations," Mr. Hay said, that could result RTC some change in the terms of Sara Lee's offer. "It was just a

proposal from Sara Lee. It's not a done deal."



JP, Sara Lee at a glance

JP Foodservice

Headquarters, Columbia

Top official, James L. Miller, Chairman, CEO

Employees, 2,100


FY '95 profit, $6.1 million

FY '95 revenues, $1.11 billion

Yesterday's stock price, $18 (- 50 cents)


Food distributor for 2,100 restaurants and institutions.

Sara Lee


Headquarters, Chicago

Top official, J. H. Bryan Jr., Chairman, CEO

Employees, 149,100 (3,700 in Food Service Distribution)

FY '95 profit, $804 million

FY '95 revenues, $17.7 billion (about $2.0 billion from food service)

Yesterday's stock price, $32.875 (+ 25 cents)



Food service, baked goods, pantyhose, packaged meat, underwear, others.