US Foods to buy SGA’s Food Group for $1.8 billion

(Reuters) – Food distribution company US Foods Holding Corp (USFD.N) said on Monday it would buy SGA’s Food Group of Cos for $1.8 billion in cash and reported disappointing second-quarter sales, sending its shares down 15 percent.

With 12 distribution centers and more than 20 private brands, SGA’s Food had 2017 net sales of $3.2 billion from its five operating units – Food Services of America Inc (FSA), Systems Services of America Inc, Amerifresh Inc, Ameristar Meats Inc and GAMPAC Express Inc.

US Foods said it expected to achieve about $55 million in annual run-rate cost savings by the end of fiscal 2022 and that the deal was likely to add to its adjusted profit in the second year following the closing of the transaction.

The deal will be funded primarily through a $1.5 billion term loan from J.P. Morgan and Bank of America Merrill Lynch and the remaining through its existing liquidity resources, US Foods said.

For the reported quarter, US Foods’ sales were $6.16 billion, missing analysts’ average estimate of $6.46 billion, according to Thomson Reuters I/B/E/S.

“While our volume growth with independent restaurants was solid, it fell below our expectation, mostly due to some operational challenges,” US Foods Chief Executive Officer Pietro Satriano said.

Centerview Partners is the financial adviser to US Foods, while Cravath, Swaine & Moore LLP is its legal adviser.

Morgan Stanley & Co. LLC is SGA’s financial adviser and Davis Polk & Wardwell LLP provided legal counsel.

Shares of US Foods were on track for the worst day ever since their IPO in 2016.