Big Deal In The Food And Beverage Distribution Game

Two large private carriers are set to combine, as Performance Food Group (PFG) PFGC announced that it has entered into an agreement to acquire Reinhart Foodservice, LLC in a $2 billion deal ($1.7 billion excluding a $265 million tax benefit).

Richmond, Virginia-based PFG is a foodservice distribution company with a national network of more than 80 distribution centers and almost 18,000 employees. Rosemont, Illinois-based Reinhart, a top-five foodservice distributor with 26 distribution centers and 5,600 employees, is being acquired from Reyes Holdings, LLC, a holding company of five different beverage and foodservice providers.

Reyes Holdings was fourth on the Transport Topics Top 100 Private Carriers list in 2018 with 5,443 tractors, 804 trucks, 1,250 pickups/cargo vans and 6,659 trailers. It trailed only PepsiCo, Inc PEP, Sysco SYY and Walmart Inc WMT. PFG was tenth on the same list with 2,835 tractors, 214 trucks and 3,810 trailers.

PFG believes that the deal will result in approximately $30 billion in annual net sales. (Reinhart has net sales in excess of $6 billion annually.)

"We are excited to announce the strategic acquisition of Reinhart and welcome them to Performance Food Group. I've known the Reyes family for nearly two decades, and they have built and grown an incredible company. We believe the addition of Reinhart and its complementary strengths will expand Performance Foodservice's broadline presence, improve our network efficiency and help us achieve our long-term growth goals," said PFG's Chairman, President and Chief Executive Officer George Holm.

"We are excited to partner with PFG and believe this acquisition provides meaningful benefits to our customers and expanded opportunities for our employees. PFG has a solid track record of growth and leadership in our industry. We believe our strengths and the strong cultural connection our companies share will support continued success for many years to come," said Reyes Holdings Co-Chairman Christopher Reyes.

PFG expects adjusted earnings per share to increase in the single-digit range in year one with double-digit earnings accretion being seen in year three. The company also expects to realize approximately $50 million in annual cost synergies in three years.

The deal price assumes a 10.6x multiple of Reinhart's 2018 estimated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) excluding the $265 million tax benefit, and an 8.1x EBITDA multiple after accounting for the $50 million in expected cost synergies.

PFG plans to finance the purchase by employing its asset-based revolver, new unsecured notes and equity proceeds. The company believes it can achieve a net debt-to-adjusted EBITDA ratio below 4x within 24 months of closing.

PFG fielded several questions on its acquisition conference call regarding the required investment to catch Reinhart up to speed on its technology and tractor fleet age. Management acknowledged it plans on a one-time capital expenditure of $90 million to address information technology integration and updates over the next five years. Further, Reinhart's ongoing capital expenditure needs of roughly $50 million annually will address refreshing its fleet, which is older than that of PFG's.

The transaction is not subject to shareholder approval. The deal is subject to antitrust clearance and customary closing conditions and is expected to close by the end of 2019.

Sysco's attempt to acquire US Foods was successfully halted by the Federal Trade Commission in 2015. That said, this deal is much smaller than the size of that transaction which would have combined the two largest food distribution companies in the U.S. Although PFG was not a large player in that transaction, it did receive a $12.5 million breakup fee as the blocked deal kept it from acquiring 11 of US Foods' distribution centers.

PFG also modestly updated its fiscal 2019 outlook. The company expects adjusted EBITDA to increase in the 9 to 10 percent range year-over-year, up from the prior expectation of 8 to 10 percent growth.

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