By Baliny Ganeshakumaran, Deimante Chailenko, Matilda Oculy, Zahra Malik (University of Manchester), Anthony Borgese, Susan Xiao, Claire Zhong, Jessica Pei, Zen Suzuki and Mustafa Bayramli (Wharton)
Photo: Franki Chamaki (Unsplash)
Overview of the deal
Acquirer: Performance Food Group
Target: Core-Mark
Total Transaction Size: $2.5B
Closed date: H1 2022
Acquirer advisors: BMO Capital Markets, JP Morgan
Target advisor: Barclays
M&A activity is a key driver in a highly competitive industry based on reliable supply chains and broad product offerings. Performance Food Group (PFG) seems to broaden its geographical reach while expanding into the convenience store channel; the target is the leader in fresh deliveries to convenience stores. PFG is planning to finance the transaction through cash through an asset-based revolving credit facility as well as the issuance of new senior unsecured notes. As well as the immediate addition of ~$17B in net sales for the pro-forma company, it is expected to result in ~$40M worth of cost synergies in the third year after closing.
"Core-Mark is an outstanding company that we believe will significantly strengthen our business diversification and expansion into the convenience store channel…This transaction will also combine Core-Mark’s footprint and operational excellence with PFG’s existing capabilities in both convenience and foodservice." - George Holm, Chairman, President & CEO (PFG)
Company Details: (Acquirer - Performance Food Group Company)
Performance Food Group connects with customers by delivering food products to consumers all across the United States. PFG works with a variety of different groups, including national chain restaurants, independent restaurants, concessions, and more. It has 3 divisions that each focus on a different market segment: Performance Foodservice, Vistar, and PFG Customized
Founded in 1885, headquartered in Goochland County, Virginia (USA)
CEO: George Holm
Number of employees: 25,000
Market Cap: $6.78B (as of 02/06/2021)
EV: $9.59B
LTM Revenue: $26.87B
LTM EBITDA: $473.2M
LTM EV/Revenue: 0.36x
LTM EV/EBITDA: 20.27x
Company Details: (Target - Core-Mark)
Core-Mark Holding Company supplies fresh and frozen merchandise to convenience stores in the United States. They provide services to convenience retailers, including traditional convenience stores and grocery stores. It provides business assistance such as category management and management of promotions. They are one of the most prominent marketers in the convenience retail industry for supply solutions.
Founded in 1888, headquartered in Westlake, Texas (USA)
CEO: Scott E. McPherson
Number of employees: 8,413 (2017)
Market Cap: $2.09B (as of 21/05/2021)
EV: $1.98B (2020)
LTM Revenue: $13B
LTM EBITDA: $167.2M
LTM EV/Revenue: 0.19x
LTM EV/EBITDA: 15.83x
Projections and Assumptions
Short-term consequences
Grocery distributor Performance Food Group Co’s planned acquisition of Core-Mark, which is expected to close in the first half of calendar 2022, has had noticeable business repercussions for the target and acquirer market equity in the short term. Despite being halted for the news, Core-Mark shares jumped 6.9% to $45.08 in pre-market trading on Wednesday. In the meantime, PFGC shares slipped by 6.2% to $48.52 but are still up 7.9% YTD as of the day of this writing. Seemingly, the announcement of the deal has garnered mixed reviews from the investor community.
However, a solid business case can be made for PFG’s $2.5BN acquisition. One remarkable rationale is the fact that the expanded market reach and market diversification into the convenience store business in the wake of the deal boost net sales by $17BN, which puts the Pro-forma LTM net sales figure at $44BN. Furthermore, the addition of Core-Mark to PFG’s existing portfolio is forecasted to be accretive to Adjusted Diluted Earnings Per Share, pointing to the value-add brought by the complementary nature of the business operations and talent at the 2 companies. The completion of the deal will not only enable Core-Mark to pay its quarterly dividends but also make it possible for the combination to provide immediate benefit to investors through participation in the “the upside potential of being part of a larger, diversified and customer-centric supplier in the foodservice and convenience retail industry,” as per the press release.
Long-term Upsides
In the long run, Performance Food Group’s acquisition of Core mark will allow PFG to expand its convenience store channels by creating the second-largest distributor in the field. Their expansion would not only allow for market diversification but also a growth in their geographic reach; enabling PGF to have a more global platform. This would allow PGF to increase their sales by 60% and increase its adjusted EBITDA by 30%. This acquisition would build on PFG’s current foodservice focus within the convenience store channel as it would allow for more customers and increase the product services. Additionally, the annual run-rate net cost synergies of about $40 million are expected to be achieved by the third year after closing the deal.
However, multiple investors have stated that this acquisition may have negative long-run effects as this purchase is “not exactly what most people wanted”. Despite Core-Mark’s well-known reputation, investors still wanted the company to acquire a broadline business for PFG to be more competitive with Sysco. Investors have long-term concerns over PFG’s growth rate as Core may be dilutive to it.
Risks and Uncertainties
The uncertainty of the adverse impact of the COVID-19 pandemic has had and is expected to have on the global market and specifically, the convenience retail industry is likely to cause issues in Performance Food Group being able to realize the full benefits of the acquisition. There will likely be disruptions in suppliers’ operations, including potential problems with inventory availability. Given Core-Mark’s reliance on relatively few suppliers, the impact of COVID-19 on the supply chain is likely to be heightened. Also, there is the potential risk of a higher cost of product and freight due to the high demand of products and low supply for an unpredictable period. Furthermore, there are concerns of antitrust risk as there have been previous transactions that have led to anti-trust risk such as after the FTC blocked Sysco’s purchase of US Foods in 2015.