EUR 850.00 For Business Accounts Only

Morningstar | Reinhart Tie-Up Improves Performance Food Group’s Scale, Still Falls Short of Cost-Advantaged Moat

No-moat Performance Food Group announced the intent to purchase regional distributor Reinhart Foodservice for $2.0 billion. Assuming the deal receives FTC approval, we expect to increase our current $32.50 fair value estimate by a low- to mid-single-digit rate. We still think investors should remain on the sidelines for a more attractive entry point.

With over $6 billion in revenue (19% of consolidated sales), Reinhart is one of the largest regional distributors with operations across the eastern U.S. Despite the added scale, enhanced purchasing power, and lower distribution costs, we think a cost-advantaged competitive edge remains elusive, particularly given the overlap with PFG’s regional footprint and as its market share (less than 8% post-deal) still falls short of narrow-moat Sysco’s 16% and no-moat US Foods’ 10% including SGA. Also, PFG’s absence is some western markets prohibits it from securing lucrative contracts in the healthcare and hospitality markets, which require a nationwide presence.

Including tax benefits, the purchase price reflects a multiple of 10.6 times 2018 adjusted EBITDA of $164 million and 8.1 times when including synergies ($50 million annually by the third year post close, primarily from procurement, distribution, and overhead). This strikes us as reasonable, as it compares favorably with the 12.5 times and 8.6 times including synergies that US Foods paid for SGA, a similar business with comparable margins.

We’ve surmised that PGF (like its industry peers) would remain consolidators, and as such, see little to warrant a change to our standard stewardship rating. We expect the deal to result in net debt to adjusted EBITDA of 4.5 times (up from 2.6 times expected for fiscal 2019 before the deal). We think the firm will prioritize the debt reduction, and as such, we don’t believe the debt will constrain its flexibility. We expect leverage to fall to 3.2 by 2021, allowing the firm to resume consolidating the space.

While PFG expects the deal to close in calendar 2019, we think the FTC review could push the close date into 2020. As the industry has continued to consolidate, it appears the FTC is scrutinizing large transactions, with the review process stretching out several months. For example, US Foods’ $1.8 billion acquisition of SGA, announced nearly a year ago, still has not received the FTC’s approval. We expect to have improved visibility regarding the likelihood the PFG-Reinhart deal receives approval when the agency announces its decision on the SGA transaction, which is expected at any time.