Franco-US food M&A is $10 bln recipe for heartburn
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Sept 26 (Reuters Breakingviews) -Two subscale companies in a low-margin, slow-growing sector might seem like ideal candidates for a deal. Not according to investors, who sent shares in $13 billion French catering group Sodexo EXHO.PA down 7% after Bloomberg reported that it was eyeing $10 billion U.S. rival Aramark ARMK.N. Recent iffy takeovers in the business-services sector show that scale isn’t always worth the risk.
Sodexo, which offers everything from food to cleaning services to corporate clients, didn’t comment on the news report. The company is effectively controlled by the family of deceased founder Pierre Bellon. Their vehicle, as of last August, had 43% of the shares and 58% of the voting rights. One practical question in any possible Aramark tie-up would be how to keep the Bellons in the driving seat of the enlarged group.
A cash takeover of the U.S. company would do the trick. But it would also risk a nasty debt hangover. The pair’s combined net debt, using their own definitions, is about $9 billion, or 3 times combined EBITDA over the past 12 months using Visible Alpha data. If Sodexo bought Aramark at a typical 30% premium in cash, implying a $13 billion equity value, the enlarged company would have a leverage ratio of 7 times trailing EBITDA before factoring in any cost synergies. That’s extremely high for a publicly listed company.
To keep debt below 4 times EBITDA after a deal, Sodexo would have to pay three-quarters in stock, according to Breakingviews calculations assuming the same 30% takeover premium. That, however, would reduce the Bellon vehicle’s economic ownership to 25% of the combined entity, and likely leave the family’s voting power below 50%. It’s also unclear whether U.S. investors would want to own Paris-listed shares in a larger group with quirky corporate governance.
An even bigger problem, potentially explaining Sodexo investors’ spooked reaction, is that the returns look low. At a 30% premium, the French group would be paying $18.2 billion for Aramark, including debt. The reward, by 2027, would be $900 million of net operating profit after tax, implying a miserable 5% return on invested capital, using analyst forecasts from Visible Alpha. To get the return above 8%, Aramark’s probable cost of capital, annual cost savings would have to exceed $750 million, equivalent to the U.S. company’s entire operating expenses this year, using analyst estimates.
Recent deals in the wider business-services sector, like Rentokil Initial’s RTO.L acquisition of Terminix and Teleperformance’s TEPRF.PA purchase of Majorel, have damaged the acquirer’s share prices. Big deals can lead to messy integrations and heavy debt loads, absorbing resources that might otherwise have gone towards boosting growth. Little wonder Sodexo’s shareholders are finding the news hard to stomach.
Follow @Breakingviews on X
CONTEXT NEWS
Sodexo is exploring a potential acquisition of its U.S. rival Aramark, Bloomberg reported on Sept. 25 citing people familiar with the matter.
Sodexo has been periodically discussing the deal with food and facilities management provider Aramark in recent months, the report said.
Contacted by Reuters, Aramark and Sodexo declined to comment on the report.
Shares in Sodexo were down 7.4% to 72.95 euros as of 0850 GMT on Sept. 26.
Graphic: Investors fret about business-services M&A https://reut.rs/3BmYtPZ
Editing by Neil Unmack and Oliver Taslic
Aset Berkaitan
Berita Terkini
Penafian: Entiti XM Group menyediakan perkhidmatan pelaksanaan sahaja dan akses ke Kemudahan Dagangan Atas Talian, yang membolehkan sesorang melihat dan/atau menggunakan kandungan yang ada di dalam atau melalui laman web, tidak bertujuan untuk mengubah atau memperluas, juga tidak mengubah atau mengembangkannya. Akses dan penggunaan tersebut tertakluk kepada: (i) Terma dan Syarat; (ii) Amaran Risiko; dan Penafian Penuh. Oleh itu, kandungan sedemikian disediakan tidak lebih dari sekadar maklumat umum. Terutamanya, perlu diketahui bahawa kandungan Kemudahan Dagangan Atas Talian bukan permintaan, atau tawaran untuk melakukan transaksi dalam pasaran kewangan. Berdagang dalam mana-mana pasaran kewangan melibatkan tahap risiko yang besar terhadap modal anda.
Semua bahan yang diterbitkan di Kemudahan Dagangan Atas Talian kami bertujuan hanya untuk tujuan pendidikan/maklumat dan tidak mengandungi – dan tidak boleh dianggap mengandungi nasihat kewangan, cukai pelaburan atau dagangan dan cadangan, atau rekod harga dagangan kami, atau tawaran, atau permintaan untuk suatu transaksi dalam sebarang instrumen kewangan atau promosi kewangan yang tidak diminta kepada anda.
Sebarang kandungan pihak ketiga serta kandungan yang disediakan oleh XM, seperti pendapat, berita, penyelidikan, analisis, harga, maklumat lain atau pautan ke laman web pihak ketiga yang terdapat dalam laman web ini disediakan berdasarkan "seadanya" sebagai ulasan pasaran umum dan bukanlah nasihat pelaburan. Sesuai dengan apa-apa kandungan yang ditafsir sebagai penyelidikan pelaburan, anda mestilah ambil perhatian dan menerima bahawa kandungan tersebut tidak bertujuan dan tidak sediakan berdasarkan keperluan undang-undang yang direka untuk mempromosikan penyelidikan pelaburan bebas dan oleh itu, ia dianggap sebagai komunikasi pemasaran di bawah peraturan dan undang-undang yang berkaitan. SIla pastikan bahawa anda telah membaca dan memahami Notifikasi mengenai Penyelidikan Pelaburan Bukan Bebas dan Amaran Risiko mengenai maklumat di atas yang boleh diakses di sini.
