Sysco: We Think Market May Be Overreacting to Acquisition of Jetro Restaurant Depot

Key Morningstar Metrics for Sysco

• Fair Value Estimate
  : $84.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

On March 30, Sysco SYY announced its acquisition of privately held Jetro Restaurant Depot, the largest US cash-and-carry food distributor, for $29.1 billion, based on Sysco’s pre-announcement share price of $81.80. The deal consists of $21.6 billion in cash and 91.5 million shares.

Why it matters: Jetro’s warehouse-focused business targeting cost-conscious customers complements Sysco’s services-focused distribution offering. We’re skeptical of the benefits of an omnichannel strategy, but we think the cost synergies look reasonable.

• The deal is expected to close in Sysco’s third quarter of fiscal 2027 (ending March). We expect minimal regulatory pushback, given the different markets and customers served. That difference also drives our view that the acquisition won’t derail Sysco’s ongoing local case growth strategy.
• Cost synergies of $250 million, representing less than 2% of Jetro’s cost of goods sold and operating expenses, look achievable, especially through distribution. We don’t see a lot of revenue synergies, but we think Sysco could accelerate Jetro’s growth of five to six new stores annually.

The bottom line: We don’t expect a material change to our $84 per share fair value estimate for wide-moat Sysco, as we think the company paid a fair price. The shares are down 15% intraday, which we think creates an attractive entry point. Our Exemplary Capital Allocation Rating is unchanged.

• The price paid of roughly 14 times enterprise value/trailing 12-month EBITDA sits above the roughly 12 times that Sysco trades at, which likely is driving some of the market reaction. However, after considering cost synergies and Jetro’s higher free cash flow margin, the multiple looks justified to us.
• Another likely concern is the $21 billion in debt with which Sysco expects to fund the bulk of the deal. Management expects net leverage to rise to 4.5 times EBITDA at close from 2.9 times, then fall by at least 1 times within two years. Overall, leverage concerns look overstated to us.