10/13/2021
Opinion: An Investor's Entry Stirs Bad Memories at US Foods
Crain's Chicago Business (10/13/21) Cahill, Joe
Joe Cahill writes in Crain's Chicago Business that Sachem Head Capital Management disclosed a 5.1% stake in US Foods (USFD), with the investor calling the company's shares "undervalued" and laying out actions it might discuss with management, other shareholders, and "other interested parties." Such actions, as detailed in Sachem Head's filing with the Securities and Exchange Commission, include mergers, asset sales, and management or board changes. Cahill says the move calls up bad memories of the Kraft Heinz (KHC) debacle. Of concern is two typical moves of dissident investors: selling off non-core assets and an outright sale of the entire company. The former strategy can raise share prices fast, especially if non-core businesses are underperforming compared to core operations. But US Foods has few non-core assets. Beyond that, it runs a smaller, relatively profitable cash-and-carry business. Splitting up its core business along geographic or market lines would produce smaller businesses in an industry where scale is critical to success. Meanwhile, selling the company would likely invite government opposition to a merger with the most logical buyers in the food service industry. In 2015, White House antitrust enforcers blocked the planned sale of US Foods to industry leader Sysco (SYY). The current antitrust-aggressive administration also likely ensures a failed acquisition by Sysco or Performance Foods Group (PFGC). "The best hope for a sale of US Foods appears to lie with so-called 'financial buyers,'" Cahill writes. "Private equity, in other words." However, Kraft Heinz owner 3G Capital fits the definition of the kind of company that would be interested. "The question is whether 3G or any private-equity firm would see sufficient upside in US Foods," Cahill says. "Sachem Head calls the stock undervalued, but it hasn't performed all that badly. In the three-year period ending Oct. 6, US Foods stock rose 21.5%, outpacing Sysco's 12.6% rise, but trailing Performance Food Group's 61.6% gain. In the 12 months ended Oct. 6, however, US Foods led the pack with a 55.6% rise." To generate even more value, a private-equity firm would have to raise earnings significantly and increase cash flows to cover the huge debt that a buyout entails. US Foods carries some $5.7 billion in debt, which could double in a debt-financed merger. The company has a market capitalization of $8.5 billion. "The simplest and quickest way to boost margins and cash flow, of course, is to slash costs," Cahill writes. But if the Kraft Heinz episode offers any insight, it is that drastic overhead reductions could also shrink sales growth.
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