Food distributor Performance Food Group shook up the space July 1, agreeing to acquire privately held Reinhart Foodservice for $2 billion. The deal is for about $1.7 billion net of an estimated tax benefit to PFG of $265 million.
Reinhart, with annual net sales of more than $6 billion, is the second-largest privately held foodservice distributor in the U.S. The company will be acquired from its owner, Reyes Holdings LLC, in an all-cash deal. Reinhart has about 90,000 SKUs sold to its 42,500 customers and 26 distribution centers.
“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 chairman, president, and CEO George Holm, in a statement.
He said the deal would provide PFG with greater overall scale, a diverse customer base, including a solid base of independent customers.
“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,” added J. Christopher Reyes, Reyes Holdings co-chairman, in a statement.
Combined the companies would have more than 30 billion in sales. PFG has a market value of $4.2 billion.
According to The Wall Street Journal, the deal will help PFG tackle rising costs. Food distributors have faced mounting pressures from higher pay for truck drivers and logistics workers in a tight labor market. The company’s operating expenses lifted more than 9 percent in its latest quarter. Part of the reason was higher personnel costs, it said. Operating profit fell about 2 percent year-over-year to $59.2 million.
Holm told The Wall Street Journal the company doesn’t plan to close any of Reinhart’s 26 centers. It wants to use them alongside its 80 or so facilities to more efficiently serve customers across the country.
The company said it expects to save $50 million in costs annually by the third year after the deal is completed. This could come in the form of procuring products from suppliers, hiring outside trucking firms when needed, and boosting overall productivity. PFG also said it would retain Reinhart’s drivers, warehouse workers, and other employees. The company would be adding about 5,600 employees to its current base of 18,000. A spokesman did tell the Wall Street Journal PFG would assess potential staff reductions, however.
The deal is expected to close by year’s end.
PFG listed “compelling strategic and financial benefits” of the acquisition:
- Expands Geographic Reach and Overall Scale: The addition of Reinhart’s distribution footprint in key geographies enhances PFG’s existing distribution platform and market density.
- Complementary Customer-Centric Operating Models: Consistent go-to-market approaches and selling cultures are focused on customer success.
- Enhances Attractive Customer Base and Product Offerings: Reinhart has a diverse customer base, which includes independent restaurants, healthcare, education and other segments. The combined portfolio of proprietary brands broadens PFG’s offering.
- Significant Synergy Opportunities: PFG expects to achieve approximately $50 million in annual run-rate cost synergies in the third year following the close of the transaction. Cost synergies have been identified primarily in procurement, operations, and logistics. PFG estimates one-time capital expenditures of $90 million in IT upgrades and integration over the next five years. Reinhart’s ongoing maintenance capital expenditures are approximately $50 million, which is in-line with PFG’s capital expenditures to net sales ratio.
- Compelling Financial Impact: On a percentage basis, excluding transaction-related depreciation and amortization, PFG expects the transaction to be low-single digit accretive to Adjusted Diluted EPS in year one after the close and double-digit accretive to Adjusted Diluted EPS in the third year following the close. PFG is targeting a net debt-to-Adjusted EBITDA ratio of less than 4.0x within 24 months following closing of the transaction.
- Attractive Valuation: The purchase price reflects a multiple of 10.6x, based on Reinhart’s 2018 estimated Adjusted EBITDA from unaudited financial statements of $1641 million, after taking into account the approximately $265 million estimated present value of cash tax benefits to be realized as a result of the acquisition. Including $50 million in annual run-rate synergies and tax benefits, the purchase price reflects a 2018 estimated Adjusted EBITDA multiple of 8.1x.
“Reinhart Foodservice understands the important role our associates play in our success. We have proudly invested in our people and infrastructure to build our business, and we’re excited about this acquisition knowing that PFG supports a similar approach,” said M. Jude Reyes, Reyes Holdings co-chairman, in a statement.