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James Gambill

on 24 April 2014

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Transcript of Sysco

Sysco, US Foods: Reverse Triangular A
US Foods
Sysco will pay $3 billion in stock (87 million shares, 13% of Sysco) and $500 million cash.
Sysco will acquire 95% of all of U.S. Food’s stock from majority shareholders Clayton, Dubilier & Rice, LLC, and Kohlberg, Kravis Roberts & Co., L.P.
Sysco will refinance U.S. Food’s net debt of $4.6 billion

The Merger
Step 1
Step 1 of the transaction is when Sysco actually acquires US Foods, representing the aforementioned reverse triangular merger under IRC Section 368(a)(1)(A).
Step 2
On December 8, 2013, Sysco Corp. and U.S Foods agreed to merge in a IRC Section 368(a)(1)(A) reverse triangular merger. The merger is expected to save the companies $600 million over a 4 year period through improved synergies.
The Elephant in the Room
Sysco could have utilized a “horizontal double dummy” transaction under IRC Section 351 and received a step-up in basis
This would have saved Sysco approximately 200 million in future tax liabilities
It is important to note that despite the tax advantages, the double dummy has rarely been used, in part because it complicates the corporate structure by creating a permanent holding company at the top.

Sysco will create two subsidiaries for the purchase, Sub-1 corporation and Sub-2 LLC
In Step 1, Sub-1 will merge into USF and USF will continue as a wholly owned subsidiary of Sysco
In Step 2, USF will merge into Sub-2 immediately following the initial merger. Sub-2 will survive the merger as a wholly owned subsidiary of Sysco.

Step 2 is essentially a liquidation of US Foods
It is merging a wholly owned corporate subsidiary into a wholly owned single-member LLC subsidiary
Single-member LLC’s are disregarded entities for tax purposes, so after Step 2 is completed, all of US Foods operations will be included in Sysco’s tax return.

Public company
Largest food distributor in US
Private company
Food distributor
Why it Qualifies
US Foods shareholders must receive no more than 20% boot
The $500 million in cash represents 14.3% of the purchase price, $3.5 billion
If Sysco attempted to structure this as a Type C reorganization, the liabilities ($4.6 billion) would be added to boot and the transaction would fail the Type C requirements
Full transcript