At 20 per cent of revenue but only 14 per cent of EBITDA (earnings before interest, taxes, depreciation and amortization), it's clear that the unit – which supplies restaurants — was a bruised apple, dragging down profitability.
The Globe and Mail
December 6, 2001
Sobeys SERCA sales a good first step, but many tasks ahead
TORONTO — Sobeys Inc. is selling its food-service division in a $440-million deal that will help the supermarket giant pay down some of its heavy debt.
The buyer is Sysco Corp., a Houston-based restaurant supplier and the biggest company of its kind in North America with annual sales of $21.8-billion (U.S.).
Industry analysts said the sale of SERCA did not come as a surprise because Sobeys has been trying to unload the orphan division since it was picked up as part of the acquisition of the IGA supermarket chain three years ago.
But analysts were intrigued by one aspect of the deal — Sobeys and Sysco are planning a strategic alliance that would create a powerhouse food company that will supply restaurants, hospitals, schools and supermarkets in Canada and the U.S., selling everything from raw carrots to prepared meals.
The alliance will also give Sobeys access to Sysco's immense buying power and North American distribution network.
"We'll get fresh California lettuce in two days instead of in four days," said one Sobeys spokesman. "Sysco has a huge distribution network."
The two companies alluded to the benefits of an alliance in their joint announcement yesterday.
"The strategic alliance between Sobeys and Sysco will see the companies working together to optimize the sourcing and procurement of produce and private-label products, increase efficiency … and develop new concepts."
"We see real opportunities in the alliance," Bill McEwan, Sobeys president and chief executive officer, added yesterday.
"There has never been an effective leverage of retail and food service. We recognize that if we combine retail and food service, both will gain … we want to support our aggressive growth prospects."
Mr. McEwan said yesterday that Sysco will pay $440-million cash in a transaction expected to close early in the new year.
The deal requires the approval of various regulatory bodies, including the Canadian Competition Bureau.
Most of the net proceeds — a sum estimated at $350-million — will be used to pay down Sobeys' debt, Mr. McEwan said.
Dominion Bond Rating Service Ltd. yesterday placed Sobeys and parent Empire Co. Ltd. of Stellarton, N.S., "under review with positive implications …. The use of the proceeds to reduce debt levels would be viewed positively from a credit perspective as Sobey's balance sheet continues to suffer from high debt levels."
Mr. McEwan said the sale would have little impact on Sobeys' bottom line because the profit in the thin-margin food-service business equals the cost of interest on the sale proceeds.
The deal will reduce Sobeys' debt-to-capital ratio to 26 per cent, he said. Sobeys has debt of $1.8-billion.
Sobeys revenue will fall by about $2.27-billion a year, a sum that SERCA garnered in the year ended May 5, 2001, from sales to restaurants, hospitals and schools across Canada.
The division has 4,000 employees and 500 trucks, with a coast-to-coast network of warehouses and suppliers.
"It is the largest and only national provider" to the food-service industry in Canada, Mr. McEwan said, with a business that is growing by about 15 per cent a year.
He added that the division is operated separately from the Sobeys chain of supermarkets, and will have no impact on supermarket operations.
Richard Schnieders, Sysco president and chief operating officer, said he intends to operate SERCA as a freestanding, independent subsidiary under the current management. He is not planning any layoffs.
The two companies complement each other very well, Mr. Schnieders said.
"We're in the same business, doing the same thing," he said. "We have worked closely with SERCA, and we have great respect for its management."
He added that the two companies overlap in only one region, British Columbia, where Sysco makes most of its Canadian sales of $900-million a year.
Brought to you by WikidFranchise.org
Risks: Canada, 20011206 Sobeys’ SERCA
