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Deal's End Doesn't Change Sysco's Moat

Even without US Foods, Sysco's vast scale is advantageous as fixed costs plague industry profits.


After a month of deliberations, a judge upheld the Federal Trade Commission's challenge to  Sysco's (SYY) proposed merger with US Foods on antitrust concerns. We view the termination of the agreement as the most likely outcome. Further, we now doubt Sysco will follow through with plans to sell 11 facilities to Performance Food Group, which had been intended to allay regulator's concerns, prompting a $25 million payment to PFG.

Despite the improved purchasing power and enhanced scale we expected from the proposed tie-up between these two industry cohorts, which was announced in December 2013, we're standing by our narrow economic moat rating for Sysco, which reflects our view that the profit deterioration that has plagued the firm in the past few years is unlikely to abate, given intense competitive pressures, volatile commodity costs, and soft consumer spending. However, we still believe Sysco's vast distribution scale, with sales more than 2 times its next-largest competitor and operating margins about 3 times other industry heavyweights, is an advantage in an industry plagued by high fixed costs.

Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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