US Foods (USFD.N) and Performance Food (PFGC.N) are signaling an increased likelihood of a merger, driven by a recently signed "clean team agreement" for information sharing and the appointment of activist investor Scott Ferguson to Performance Food's board. This potential combination of the second and third-largest food distributors, with respective market caps of $16.9 billion and $15.7 billion, aims to create a stronger challenger to market leader Sysco (SYY.N) and achieve significant scale. While regulatory approval for a deal that would concentrate approximately 35% of the market among three players remains the primary hurdle, analysts suggest the current M&A climate and administration may be more accommodating, with both companies' stocks seeing significant gains year-to-date.
NEW YORK, Oct 8(Reuters) - US Foods (USFD.N) has long had its eye on rival Performance Food (PFGC.N), arguing a potential tie-up between the nation's No. 2 and No. 3 food service distributors could lead to more growth, challenge industry leader Sysco (SYY.N) and cut costs for consumers. But over the summer, overtures from US Foods, which supplies restaurants, hospitals, and universities with everything from beef to butter, were rebuffed by Performance Food CEO George Holm, who told analysts there was "no basis" to engage. Get a quick look at the days breaking legal news and analysis from The Afternoon Docket newsletter. Sign up here. Advertisement · Scroll to continue Now the mood seems to be shifting. Two notable recent developments – a new board member and an information sharing agreement between the companies – raise the odds of a deal, lawyers, bankers and analysts said. US Foods and Performance Food declined to comment for this article. Analysts, consultants and investors also seem to like the possible combination. Merging the two companies "makes sense since it is driving scale," said Randal Kenworthy, who leads business consulting firm West Monroe's Consumer & Industrial Products practice. "US Foods has a great management team, so if someone's able to pull a big deal off it's going to be them." Advertisement · Scroll to continue US Foods has a $16.9 billion market capitalization while Performance Food has a $15.7 billion market cap and together they could more forcefully challenge the market's single biggest player Sysco, which is valued at $38.1 billion and has a market share of 17%. To be sure, a merger of two of the largest food service distributors would leave three companies controlling around 35% of the market, which likely would have invited antitrust scrutiny under prior U.S. administrations, lawyers specializing in mergers and acquisitions say. The industry is fragmented from there – the next biggest players are smaller, privately owned and some aren't pure-play distributors. Wall Street analysts noted that regulatory scrutiny will play a role in the steps ahead. Wells Fargo analysts wrote last month "Deal Likely Hangs on Regulatory Assessment: The big question is antitrust approval and required divestitures." NEW ADMINISTRATION, NEW OPPORTUNITY But with a more accommodating regulatory regime under the Trump administration that reviews mergers for anticompetitive effects, plus a red-hot M&A market for food companies, a deal may be closer at hand than ever before, M&A bankers and lawyers said. There is a "wider aperture from the Federal Trade Commission to approve these big acquisitions. A new administration means new opportunity," Kenworthy said. While neither Performance Food nor US Foods are household names, their services and supplies are instrumental to feeding millions of people and a deal could cut costs and time. "This is a very important industry in our economy and so if there's some deal that happens that affects competition or leads to more efficiency it has a big impact on people's everyday lives," said retired Carnegie Mellon professor Martin Gaynor, who also held a senior position at the Federal Trade Commission. But Gaynor also said this would be the kind of deal the FTC would take a close and serious look at. "The big concern is would there be a substantial amount of competition eliminated by the merger of No. 2 and No.3?" CLEAN TEAM AGREEMENT SIGNALS CHANGE IN THINKING The first sign of a thawing came in mid-September when Performance Food said it signed a "clean team agreement" with US Foods that lets the two competitors share sensitive financial information while safeguarding confidential information. Outside advisers are permitted to review financial information like pricing, costs, customers and sales strategies, among other data in a process that can take months and is often seen as a critical step to a successful merger, industry analysts, lawyers and bankers said. Another hint that a merger may be on the table, Performance Food publicly disclosed the arrangement in a press release even though such agreements are traditionally kept confidential. Clean team agreements have been instrumental in paving the way for mergers in other industries, analysts and lawyers said. The news sent Performance Food's stock price up nearly 3% when it was announced on September 16. SACHEM HEAD KEEPS UP THE PRESSURE A week later, Performance Food said it was adding hedge fund Sachem Head Capital Management's founder Scott Ferguson to its board and giving him a seat on the committee that would discuss any deal. Ferguson, who once served as a director at US Foods, began building the fund's roughly 2% stake in Performance Food during the third quarter and quietly began pushing the company to pursue a merger with its rival. In late August, Ferguson ratcheted up the pressure by nominating four director candidates, including himself, to the Performance Food board. This threatened the kind of bitter proxy fight that vaulted Ferguson onto the US Foods board in 2022 and cost former US Foods CEO Pietro Satriano his job the same year. From the start, the tone was more congenial at Performance Food and it took just five weeks to settle a potentially costly and time-consuming fight. CEO Holm immediately reached out by email to Ferguson to make time to interview him and the other director candidates, hinting at a personal willingness to at least talk about a deal after having been set against it earlier, people familiar with the matter said. Ferguson made clear he was going to keep up the pressure by not backing off his proxy fight after the clean team agreement was announced. Word also filtered back to the Performance board that Ferguson was more helpful than harmful as a US Foods director and generally sought compromise over conflict, according to two people familiar with the board's thinking. A representative for Ferguson and Sachem Head declined to comment. A representative for Holm also declined to comment. Since May 2022, when Ferguson joined the US Foods board, through today, the company's stock price has climbed 130%. Ferguson left the board in early 2024 and the fund does not own any US Foods stock now, a person familiar with the matter said. Along with other winners, US Foods has boosted Sachem Head's performance. Since January, the fund has returned 25%, according to a person familiar with the firm's performance. The shares of Performance Food and US Foods have climbed by 19% and 12% so far this year. Whether a deal will be reached remains to be seen, analysts and investors agreed. Peter Saleh, managing director at financial services company BTIG said, "from a regulatory standpoint, they might just squeak in under the 30% hurdle that the government is looking for on national accounts." But Barclays analyst Jeffrey Bernstein wrote last month that Performance Food has "strong fundamental momentum, and therefore a combination may not prove necessary/essential in the short-to-medium term." Reporting by Svea Herbst-Bayliss Our Standards: The Thomson Reuters Trust Principles. The potential merger between US Foods (USFD) and Performance Food (PFGC) has gained significant momentum, indicated by a recently signed "clean team agreement" for sensitive information sharing and the appointment of activist investor Scott Ferguson to PFGC's board. This marks a notable shift from previous rejections by PFGC, with the clean team agreement leading to a nearly 3% stock price increase for PFGC upon its announcement. This strategic tie-up, combining the nation's second ($16.9 billion market cap) and third ($15.7 billion market cap) largest food service distributors, aims to create a more formidable challenger to industry leader Sysco ($38.1 billion market cap). The combined entity would command a substantial market presence, driving scale and potentially enabling cost efficiencies for consumers across a fragmented industry. While the prospect of merging two major players, controlling an estimated 35% of the market among the top three, introduces significant antitrust scrutiny, analysts suggest the current administration's more accommodating regulatory stance, coupled with a robust M&A market, could facilitate approval. However, the FTC is expected to take a very serious look at the deal, potentially requiring divestitures. Both USFD and PFGC have seen strong year-to-date stock performance, up 12% and 19% respectively, reflecting investor optimism. Activist investor Scott Ferguson, who previously influenced USFD's board and contributed to its 130% stock climb since May 2022, is now strategically positioned on PFGC's board to push for the merger. This demonstrates a clear intent to unlock shareholder value, with his fund, Sachem Head, returning 25% year-to-date.
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