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U.S. Foodservice: Success story has unexpected chapter


In the 14 years since it was founded in the Baltimore suburbs, U.S. Foodservice has grown to become the second-largest food distributor in the nation. It has swallowed up competitor businesses, become a public company and sold itself to the Dutch food giant Royal Ahold NV.

Now U.S. Foodservice is at the center of the storm that engulfed its owner yesterday.

The announcement by Ahold that it overstated earnings in 2001 and 2002 by at least $500 million, largely because of accounting irregularities at U.S. Foodservice, shocked Wall Street. Ahold's top two executives, Chief Executive Officer Cees van der Hoeven and Chief Financial Officer Michiel Meurs, resigned and some unidentified U.S. Foodservice officials were suspended, as accountants reviewed questionable promotional deals made with suppliers. Founder James Miller was left in charge.

Ahold's U.S. shares skidded 61 percent to $4.16 a share.

But after the initial jolt, analysts and observers said U.S. Foodservice, with sales of $17.5 billion last year, still appears solid and likely to continue on its path of growth.

U.S. Foodservice "has always been a very ambitious, growth-oriented company," said Stephanie Salkin, new editor of ID Management Report, a publication that covers the foodservice distribution industry. "It went under the Ahold umbrella because it saw it as a growth enabler. The company has been moving along, and Ahold has consistently expressed support for U.S. Foodservice. I wouldn't expect them to go away."

Salkin said the company has bought some of the industry's major players, including "old names" in the business.

U.S. Foodservice was created in 1989 under the name J.P. Foodservice through a leveraged buyout of a Sara Lee subsidiary engineered by Miller. He came from Sysco Corp., the Houston-based rival company, and has followed a similar path as the industry leader: Grow the existing business and buy new ones.

Expansion of the company, which supplies food and equipment to restaurants, has been rapid. It became a public company in 1994.

The company began using the U.S. Foodservice name in December 1997 when it bought Wilkes-Barre, Pa.-based Rykoff-Sexton in a deal valued at $1.4 billion in stock and assumed debt. The acquisition made the company the second-largest restaurant-supply company in the nation.

The company stayed focused on foodservice distribution by transferring a manufacturing division it acquired in the Rykoff-Sexton deal to a subsidiary the following year.

But the buying spree was just beginning.

In January 1998, the company bought Sorrento Food Services of Buffalo, N.Y., which had $108 million in annual sales, and gave it a greater reach into the Northeast.

In July 1998, it purchased a three-story building in Columbia to serve as its new headquarters. Workers had been in two buildings nearby for the previous four years, and based in Hanover before that. The Howard County economic development department, which aided the company's move to its new building, said there are about 400 workers there now.

"This has been a home-grown success story," said Richard W. Story, the Economic Development Authority executive director. "As J.P. Foodservice and through acquisitions and other shrewd business maneuvers, including selling to Ahold, it has become a giant in the foodservice industry."

Story said there was never a fear that Ahold would cut U.S. Foodservice's work force or tell its executives how to run the business. Ahold allowed the company to continue expanding, he said.

The company bought J.H. Haar & Sons Inc. of Kearny, N.J., with $57 million in annual sales, in Oct. 1998. It was a relatively small acquisition, but one that expanded its foothold further into the New York metropolitan area.

By April 1999, the growth had pushed the company into the Fortune 500 ranking. The company's sales grew from $1.4 billion in 1996 to $6.2 billion in 1999, the year Ahold bought the company.

Ahold, which also owns Landover-based Giant Food Inc. and four other American supermarket chains, agreed to buy U.S. Foodservice for $3.6 billion in cash and debt.

Analysts largely heralded the sale. Ahold was able to diversify from supermarkets into restaurant supply at a time when retailers such as Wal-Mart were eating into grocery sales.

U.S. Foodservice received $26 a share, an $8 premium on its trading price, for its stockholders. It also got leverage to continue expanding.

Ahold "has become very diversified in the last five to seven years - groceries, foodservice, convenience stores," said Jeff Metzger, publisher of Food World, a food industry trade journal based in Columbia. "They are all about being, their Web site says, 'your food specialists for the world.' The diversification has worked out fine. Some of the pieces haven't produced. Obviously, you look at the value of the stock over the last 18 months, it's been disappointing and today's news is troubling."

But Metzger pointed out that Ahold and U.S. Foodservice have not lost customers and there are no problems with the company's distribution infrastructure. Provided other troubles are not uncovered in the internal investigation, they will not be "alterably damaged," he said. U.S. Foodservice now has 300,000 customers, according to the company.

Since its purchase by Ahold, the company has continued to scoop up smaller competitors.

In December 2000 it bought PYA/Monarch, a leading food distributor in the Southeast, and followed that in February 2001 with the acquisition of Parkway Food Service of Clearwater, Fla., which had annual sales of $85 million. That move expanded it into Florida, as did its May 2001 purchase of Lakeland, Fla.-based Mutual Wholesale Co., with annual sales of $300 million.

By the end of 2001, U.S. Foodservice had swallowed the third-largest foodservice distribution company, Deerfield, Ill.-based Alliant Foodservice Inc., with $6.6 billion in annual sales. The $2.2 billion deal put the business into 21 new regions and thousands of hospitals and hotels.

At the time, Miller said, "We have grown from a $600 million regional company in 1989 to a $19 billion company that can now reach 95 percent of our country's population."

But faced with competition and a sagging economy, sales have dropped at U.S. Foodservice. The company reported that sales skidded 5.2 percent in last year's fourth quarter after a drop of 7 percent in the third quarter. Global issues also haunted the parent company. Ahold, now the world's third largest retailer, reported its first net loss in more than 25 years in August 2002, largely because of the economic crisis in Argentina.

Despite the drop in sales, U.S. Foodservice continued to grow. In September 2002, it bought Lady Baltimore Foods Inc of Kansas City, Kan. It bought St. Louis-based Allen Foods Inc., with annual sales of $245 million, three months later. Each deal helped the company extend its reach in the Midwest.

It is unclear if the pace of acquisitions will continue as the U.S. Foodservice investigation continues. The company, in a statement yesterday, said it remains a "profitable and viable business" and officials "remain focused on our day-to-day operations."

That and the past are good indicators of the company's future, observers said.

"Jim Miller founded this company and has done a good job to this point," said Food World's Metzger. "To this point it's been nothing but positive things. He took the company public. He sold it to Ahold."

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