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US Foods to Acquire SGA Foods Group for $1.8 Billion

US Foods Holding Corp. entered into a definitive agreement to acquire Services Group of America’s (SGA) Food Group of Cos. for $1.8 billion July 30. The transaction, which will expand US Foods’ network in the Northwest, will include Food Services Of America (FSA), Systems Services Of America, Amerifresh, Ameristar Meats and Gampac Express.

The companies share strategic priorities, including a strong focus on serving independent restaurants, a forward-thinking approach to technology and strong private brands, said CEO Pietro Satriano on a second-quarter earnings call.

US Foods was attracted to SGA Food Group’s diverse customer base, serving about 33,000 customers through 12 distribution centers. Independent restaurants account for almost 40% of FSA’s sales, which is responsible for roughly 75% of SGA’s total revenue.

SGA brings with it center-of-the-plate capabilities from three specialty meat cutting facilities, as well as produce sourcing capabilities. Both food categories are essential to US Foods’ growth strategy, Satriano noted.

“We believe there is a lot of product overlap, but particularly on the meat side and on the produce side, they do some things very well, and we have the ability to expand our assortment. They do local sourcing very well, especially with restaurants along the Northwest coast,” Satriano said. “There are a lot of markets or geographies where they have facilities [that] we are not even present.”

The acquisition is forecast to help US Foods achieve $55 million in annual cost synergies by the end of fiscal 2022. The synergies are largely driven by distribution, including reducing miles on long-distance routes, as well as making the company’s logistics more efficient. In addition, synergies will exist in direct and indirect procurement as a result of US Foods’ increased scale.

The acquisition will be funded through a $1.5 billion loan and US Foods’ liquidity resources, said CFO Dirk Locascio.

“We don’t expect any changes to our planned investments in our own facility, fleets and systems as a result,” Locascio said. “Each of these facilities is well-positioned to expand if needed in the future to continue growth.”

An overall issue for US Foods is rising fuel prices affecting operating expenses, resulting in the company calling for 5% to 7% growth for the year, down from the 6% to 8% it called for earlier this year.

However, US Foods’ transition to central replenishment is 95% complete. The company is working on better recruiting, onboarding and retention programs for selectors and drivers, as well as addressing late deliveries from vendors.

“We’ve made a lot of progress in terms of changing the carriers we work with to ensure we get better service, as well as modifying some of our operational practices to be more carrier friendly, which is more important today than it was a few years ago,” Satriano noted.

For the full story, go to this week’s Food Institute Report.