Sysco Corp. is trying to persuade regulators that intense competition in the food-service industry justifies its
planned $3.5 billion merger with US Foods Inc.
It now could have fresh material to bolster its argument: a lofty valuation for a rival that indicates a growing
Jetro Holdings LLC., which operates restaurant-supply retailers, recently bought back a sliver of its shares at a
price that values the closely held company at about $9 billion, people familiar with the matter said. That is nearly
nine times the company's value 10 years ago, underscoring its rapid growth.
Analysts say competitors such as Jetro's Restaurant Depot LLC and small specialty suppliers are increasing pressure on
Sysco and US Foods. Sysco's operating profit margin shrank to 3.7% in the fiscal year through last June from 5.3% in
Restaurant Depot, founded in New York in 1990, supplies small, independent restaurants and grocery stores. A few years
later it combined with Jetro Cash-and-Carry, which was founded in 1976 and focuses on urban convenience stores and small
Jetro Holdings has expanded swiftly, particularly since 2004, when private-equity firms CCMP Capital Advisors LLC and
Leonard Green & Partners LP bought minority stakes. Those deals valued Jetro, which is controlled by South African
billionaire Nathan Kirsh, at just over $1 billion, the people said.
Jetro in late March sold $1 billion of debt and used much of the proceeds to buy back an 8% stake from CCMP, the
people familiar with the matter said. The deal implies a $9 billion value for Jetro, they said.
Including earlier dividend payments, CCMP has made about 10 times its original investment of about $200 million, the
people said. The figure includes an 11% stake in Jetro that CCMP still holds and is valued at about $1 billion, the
Jetro's size still pales in comparison with that of Sysco and US Foods, which together have about $65 billion in
annual sales. Jetro had sales of about $8 billion last year, the people said. But Jetro's revenue has increased at
double-digit percentage rates over the last several years, faster than Sysco's, one of the people said.
Today there are more than 100 Restaurant Depot and Jetro locations, up from about 40 in 2004. In warehouse settings,
they stock staples like wheels of cheese, salad dressing and soy sauce by the gallon and 50-pound bags of flour, as well
as supplies including beer pitchers, plastic cutlery and aluminum pans. Unlike Sysco, Restaurant Depot doesn't have
purchasing minimums or additional fees, as for delivery.
"Local restaurants still make up a high percentage of our business, and we need to be more productive and efficient to
compete with cash-and-carry for their business," Sysco Chief Executive Bill DeLaney said recently.
Sysco says merging with US Foods, the No. 2 in the industry, will help it trim $600 million in annual costs and allow
it to lower prices for customers, such as restaurants, schools and hospitals.
But the proposed merger--which would create a company with 25% of the market--has stirred objections, as the combined
company would have more leverage in price negotiations.
Brian Shapiro stocks his family's Indianapolis eatery from Restaurant Depot but still relies on US Foods for most food
and supplies. "Depot gives very competitive pricing, but it has a limited number of items," Mr. Shapiro said. "I could
never use it for everything."
The Federal Trade Commission is reviewing the proposed merger, and in February asked the parties for more information.
Sysco on Monday said net income for its fiscal third quarter fell 10% from a year earlier, even though revenue rose
3.2% to $11.28 billion. Profit fell to $180.9 million, or 31 cents a share, for the quarter through March, down from $
201.4 million, or 34 cents a share.
The Houston-based company blamed unusually severe winter weather in January and February for rising delivery expenses
and slow sales growth.
Sysco said March and April sales have been significantly stronger than the first two months of the year. Its shares
rose 98 cents, or 2.7%, to close at $37.19 on Monday.
Inflation in the meat and dairy industries will raise Sysco's revenue in the current quarter, but the company may have
to absorb some of the added cost. "It's challenging at times to pass that along as fast as you might like to the
customers; sometimes that's not even the right thing to do," Mr. DeLaney said. Salespeople can, however, work with
customers to add poultry to their menus when beef costs are high, he said.
Ben Fox Rubin contributed to this article.
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