JP Foodservice Inc. of Columbia said yesterday that it has cut off talks with Sara Lee Corp. about taking control of Sara Lee's restaurant supply business in a dispute over the financial terms of the deal, walking away from a chance to become a Fortune 500 company.
Three months of talks ended abruptly Monday night when JP Foodservice's board voted at a meeting near the Chicago headquarters of Sara Lee to reject the proposal. Three independent directors and two JP Foodservice executives who sit on the board vetoed the plan, over the objections of three JP Foodservice directors appointed by Sara Lee.
The board decided the deal would cut the earnings per share of existing JP Foodservice stock and effectively give control of the company to Sara Lee without making it pay any bonus above JP Foodservice stock's everyday trading value.
"That's the problem with any of these deals -- it's always price," JP Foodservice Chief Executive Jim Miller said.
Sara Lee in November proposed exchanging its PYA/Monarch food business for 52.4 million shares of newly issued JP Foodservice common stock, worth more than $1 billion at yesterday's closing price of $19.375.
The offer was unusual because it was -- on paper at least -- a public offer to sell a business rather than to buy one. But Sara Lee, which already owns about 39 percent of the Columbia firm, would have become an 84 percent shareholder of JP Foodservice if the deal had gone through, making the sale a form of takeover.
To keep a takeover from happening without JP Foodservice's consent, the company also announced that it had approved a "poison pill" plan that would be activated if Sara Lee buys any more shares, or if any other holder bought 10 percent of JP's common stock.
James Abramson, a Columbia attorney who chaired a committee of independent JP Foodservice directors appointed to review the proposal, said the deal would have "substantially" diluted the value of existing JP Foodservice shares.
But he and Mr. Miller declined to give details, citing a confidentiality agreement JP Foodservice signed in exchange for look at detailed financial information about PYA/Monarch.
Sara Lee spokesman Jeffrey Smith called the poison pill "inappropriate and unnecessary" but said the company would not comment on JP Foodservice's statement about its offer.
The two companies have a long history together, which analysts had expected would lead to an agreement after some negotiation.
JP Foodservice was created when a management team led by Mr. Miller executed a leveraged buyout of what had been part of Sara Lee's food service operation in 1989.
The companies retained close ties, with Sara Lee acting as a major supplier of meat and baked goods to JP Foodservice as well as becoming a major shareholder. The local company supplies food to major restaurant chains such as Ruby Tuesday's and Subway, as well as to Oriole Park at Camden Yards.
The combined company would have had annual sales of about $3.5 billion, putting it close in size to Baltimore insurance giant USF&G; Corp., which ranked 352nd on the 1995 Fortune 500 list of America's largest companies. JP Foodservice had $1.1 billion in sales last fiscal year, and is on a pace to boost sales 16 percent this year, Mr. Miller said.
PYA/Monarch, the nation's No. 3 "broadline" food service company in a 1995 survey, is big in the South and the Midwest; No. 7 JP Foodservice is a major player in mid-Atlantic and Northeastern markets.
"I guess mild surprise is my reaction," said Kurt Funderberg, an analyst with Ferris, Baker Watts Inc.
"I'm more surprised Sara Lee didn't go a little further."