US Foods IPO Is Enticing

Summary

The second-largest food services distribution company in the nation, USFD hopes to raise nearly $1 billion in its IPO, set for 5.26.2016.

US Foods is hoping to use the proceeds from its IPO to pay towards its debts and to raise its credit profile.

A strong underwriting team is led by Goldman Sachs, J.P. Morgan, and Morgan Stanley; and includes BofA, Credit Suisse, Deutsche Bank, and others.

We suggest investors consider taking a bite.

US Foods Holding Corp. (Pending:USFD) (ticker symbol pending) hopes to raise $950 million through its upcoming IPO, or up to $1,095 million if the additional shares are purchased in full by the underwriters. Based in Rosemont, Illinois, US Foods Holding Corp. is the second-largest food services distributor in the U.S.

From its SEC Filings, US Foods Holding Corp. plans to make an initial offering of 44.4 million shares of its class B common stock. The company also plans to offer an additional 6.66 million shares of class B common stock that its underwriters will have the option to purchase in full if they wish. The expected price range is $21 to $24. If the midpoint of the range is reached, the company should raise $999 million through its IPO.

Business Summary

US Foods Holding Corp. has a national footprint in the U.S. and is just one of two food services distributors in the country that do. The company had net profits of $23 billion for the most recent fiscal year, which ended on Jan. 2, 2016. The company distributes its products to more than 250,000 customers across the country, including individual and multiple location restaurants, national chains, colleges, retail locations, hospitals, hotels and motels, nursing homes and others. The company has a network of 62 distribution centers and a fleet of around 6,000 delivery trucks per its filings.

Executive Management Overview

The president and CEO of US Foods Holding Corp. is Pietro Satriano, who was named to the role in July 2015. He joined US Foods in 2011 and previously served as the company's Chief Merchandising Officer. Prior to that, Mr. Satriano served as the president of LoyaltyOne Canada, the company that owns AirMiles, the largest consumer rewards program in that country. Mr. Satriano earned his Masters of Business Administration at Harvard University.

Chief merchandising officer Steve Guberman has in excess of 30 years of industry experience. He previously served as the company's vice president of merchandising and marketing operations. Mr. Guberman joined the company in 1991 and has held roles of increasing responsibility over the years. He started his career in restaurant management.

Financial Highlights and Potential Risks

The company reported net earnings of 23.1 billion for the fiscal year that ended on Jan. 2, 2016. A major risk and potential drawback, however, is the significant debt burden held by US Foods Holding Corp. The company had a fully priced leveraged buyout in 2007, resulting in remaining long-term debt of around $5 billion. An acquisition by Sysco fell through in July 2015 when US regulators didn't approve of the merger. As a consequence, US Foods is now seeking an IPO in order to repay a large portion of its debt.

As the company points out in its filings, the food services distribution industry operates with razor-thin margins and in an environment of stiff competition. Its profits could be negatively impacted by increased interest rates, food cost deflation, economic downturns and increases in fuel costs.

Conclusion: Consider Taking A Bite

Despite its heavy debt load, US Foods Holding Corp. should be an exciting IPO. A strong underwriting team is led by Goldman Sachs, J.P. Morgan, and Morgan Stanley; and includes BofA Merrill Lynch, BMO Capital, Citigroup, Credit Suisse, Deutsche Bank, Guggenheim, ING Financial, KKR Capital, Natixis Securities, RABO Securities USA, and Wells Fargo.

While net sales have been generally flat, USFD swung to $168M in profits in 2015, up from a loss of $73M in 2014.

We suggest investors consider an allocation.