Behind the Headlines: Inside Sysco’s $29 Billion Restaurant Depot Deal

Hey Charles. Hi David. How are you? Good yourself?

Good good it's the end of the week. It is the end of the week. All right so let's jump into it. Today we're going to cover a story.

What headline are we going behind? We're going behind the headline which is as restaurants struggle with cost a major food supplier deal raises a few fears. A few fears? Yeah.

What is the deal? The deal is Cisco, the world's largest food service distributor, is making a move to acquire Restaurant Depot. Restaurant Depot. Yeah, which is making a bid to pay $29 billion for Restaurant Depot, who has revenues of $16 billion last year.

And Restaurant Depot's model is basically to serve the small independent restaurant owners. Explain how a Cisco and how a Restaurant Depot operate. Yeah. So food service distributors are serving, well, restaurants and institutions, whether these are cafeterias, prisons, hospitals, you know, where the food is being prepared and consumed.

And so in Cisco's model, these orders are prepared. So customers will place orders. These are prepared within the distribution center, put on trucks, and those trucks will deliver, mostly have multiple stops on their route, will do those stops and deliver the food to these restaurants. So Cisco delivers food from a warehouse on trucks to customers.

Customers. And then, so how does Restaurant Depot work? Restaurant Depot is known as a cash and carry, meaning they will warehouse or stock the same kind of inventory, but it's the actual customer. Essentially stores.

Yeah, large. Warehouse, club warehouses. Club warehouses. Much more like a Costco.

Exactly. And then you drive to the store. If you own a restaurant, you drive to the restaurant depot and you buy what you need and you go back. Correct.

Not like it's not a nice supermarket, right? It's not to be appealing from a marketing, but rather to. It's clean. Exactly.

It's not ugly. No, it's not ugly, but it's. It's for food service. and the so yeah known as cash so the key is if you think about it if i'm a restaurant and i want to buy from cisco and maybe this is but there's some minimum order quantity right because cisco in order to deliver the food to your restaurant there has to be a drop size a size of order that makes sense and there are lots of restaurants who a you know very disorganized don't have a good handle on things or don't do the kind of volume like if you think about even something like a cafe that might have some meal solution at the cafe, they don't necessarily want to go and buy that minimum order size.

They'd rather go every week to the cash and carry like Restaurant Depot and buy one or two cases of something. It could be soups. It could be a soup that they just want to pour in a kettle and pretend it's homemade so that you can walk in and get a soup and a bun and some butter and people call that lunch. So it's two different kinds of restaurants, really, that are being served.

Yeah, which also have, obviously, different operating costs if you remove this whole delivery and transportation. And Restaurant Depot, they've got locations all over the United States. Yeah. Okay.

And you were saying it's a $29 billion acquisition? Yeah, for $16 billion in revenue. In revenue. That really crazy Yeah When you think about it When your headline says it causing fears who is scared Everybody I would think Well you got like anything there be two sides But the small, the Restaurant Depot customers are very worried that if they lose this access to this business, or they won't lose access, but they claim that then Cisco will have a greater control over the prices.

and therefore they'll see their bill go up because of it. Cisco is making the opposite claim, which is, no, no, we will use our purchasing power to maintain low costs. If I were Judge Brown, I actually would decide for Cisco on that one. I mean, it's $16 billion of revenue.

That's a big company. I'd love to have a $16 billion business. But in the total food market, that's really not a lot. In other words, you're only adding somewhat more volume to Cisco.

You're not doubling Cisco's volume. So I think the argument that food prices will go up, I don't think it's big enough a deal to make that happen. The people I think should be scared are the shareholders of Cisco. I mean, you were telling me before we started this, the free cash flow that will be generated would be $2 billion.

$2 billion. So I'm going to spend $29 billion to buy $2 billion of cash flow. Yeah. That is a long return.

I mean, 15 years to get your money back. That's a long time. So if I were Cisco, I'd have to make some argument that there is something clever. I know I saw in the article there's like $250 million of basically, you know, getting rid of one finance department and merging the HR department.

Yeah, okay. There's some of that. But that's still pennies on the dollar. Yeah.

And you wonder for what you've explained earlier about the minimum job size, the volume ordered or bought by the Restaurant Depot customers will not change. So it's not - it's - I guess what I'm saying is the overlap, there's not a lot of overlap between customers, existing Cisco customers and Restaurant Depot customers, where you could say, well, I'm going to buy my competition. But really, the overlap is not there. It's something like 10%.

I have a theory. I have a theory. Okay. Here's what maybe they do, or at least this is how they should be marketing it.

We know that the big players in the food service world, Cisco, U.S. Foods, Performance Food Group, they're all doing something to e-commerceify their business. Right.

And maybe what they can say, so what will happen is all the whatever private label restaurant depot is running today will now become Cisco. and then Cisco's going to say to its customers, hey, if you did forget XYZ, well, we now will do a very, not even a last mile, a half mile, a last half mile emergency orders from our restaurant depot locations. That's very interesting. Because, you know, a metro is going to have a couple of restaurant depots, not necessarily just one.

Oh, correct. And those restaurant depots are going to be more urban in their location than the Cisco warehouse. That's very interesting. You remember when we were talking years ago when Amazon bought Whole Foods?

Yeah. We had similar thoughts around the urban locations of enabling faster deliveries. Interesting. Yeah, well, I'm full of interesting ideas.

But I mean, I'm making a joke. I'm sure these are mature thoughts that have been out in the industry. So I wouldn't be surprised if there's something like that. Otherwise I don get it Yeah but it interesting the twist or the fact that you bring the e to food service Because namely this is not an industry This is not e-commerce.

Well, but they all have done variations, right? U.S. Foods has that, I forget what, the Pronto program.

So they all know they're trying to, because what they've got to protect themselves is they've got to protect themselves from Amazon, which almost perennially hints that they're going to get into the food service industry. I don't think that will happen, but that's what they hint at. And there's no way they're going to be able to compete with Cisco. Cisco's incredibly sophisticated operator.

Anyway, it's very surprising acquisition. It also what it makes me think about. So my entire 27 years have been always more deeply in the early days in the food service industry. And the way a metropolitan area would work, you'd have some large national distributor.

Then you'd have a couple of medium-sized, let's say they were all roughly equal within the metro area, family-owned businesses. And Cisco, for a whole generation, performed this roll-up. And what would happen, the parents running the business, their children don't want to run the business. The parents sell to Cisco.

And Cisco has snapped up businesses all over North America, Canada, the United States. And other folks have done that to a lesser extent. Here in Canada, Gordon Food Service did that. And then you have this like last family standing in each metropolitan area, right?

And that family could own more than just one metropolitan area. But but let's just say last family standing. And those folks actually do have a succession, do have a next generation, do have a family that wants to continue the business. And they're not up for sale.

And to me, twenty nine billion for two billion of free cash flow. It's kind of a hint that it's that Cisco, it's at the end of the road of acquisition potential. and that means you know it's earning i forgot i just saw it this morning it's like 21 price to earnings on the stock market right so the price is 21 years of earnings to get that price and and that's okay when i was a kid i don't know if you remember this when like stock in market clubs were really hot and but you you had this thing burned in your head 12 a price to earnings ratio of 12, that's considered okay.

And now 20 is the new 12. But you think about that. Cisco needs 20 years of earnings to pay for that investment in their stock price. And you see an acquisition like this, and you go, inorganic growth, it's probably done.

It's finished for Cisco. And I don't think that bodes well i think it's you know would i pay a pe of 20 for a business that at best is going to grow two to three percent for the next umpteen years think about it it's not exactly like we made you made this where you said at first you said cisco's the biggest in the u.s and then you said it's the biggest in the world but i mean it's important cisco has exhausted every foreign market that it can realistically exhaust at this point it's building you know it's got like three new warehouses going up, one in Florida, one in Ireland, one in Sweden, you know.

So that gives you a sense of just they've done geographic expansion. They've done buying up the independents. Now, as we know, there's lots of private equity firms that are trying to stitch together, you know groups other businesses So there fierce competition for what little what little available acquisition potential acquisition And again you say yeah I can I can tell because they just said we willing to do something to pay 15 times cash flow. Now, I know there are financial engineers who are going to explain why all of that is really genius.

And I'm really dumb to think about it like that. But I don't know. I mean, I'm surprised they aren't they aren't purchasing like 2% of SpaceX when it launches. We need IPOs.

That's the kind of supply to the moon. The other thing I got to say, and I don't mean to, but the biggest, single biggest threat to the long-term health of the food service industry is the GLP-1. You know, the entire population of Texas. Okay.

Like 30 million people are on GLP-1s right now in the United States. And if the GLP-1 prices keep going down, now there was, last week they were saying there's a correlation to reduced cancer risk in women. Okay. It's just, you know.

Everywhere. The GLP-1s are becoming this magical wonder drug. But it seems inevitable. That there's going to be a reduction.

Certainly in my life. I know. I have a crystal ball. I look into my future.

And there's a GLP-1 in that future. Right? And that is the real. Worry.

Yeah. Who's going for a burger when a burger thought of a burger makes you sick? And I don't know. I don't know.

I would sell Cisco stock, except that as soon as they announced this, their price dropped. Price dropped. Yeah. 12 bucks a share from 76 to something.

Yeah. That's not nothing. That's a huge drop. It has gone up like five or six bucks, but still not where it was.

Well, that's everything in life, right? One bit of news that pisses everyone off and then the price drops way too far. And then you go to bed. You should just make a bad reaction and you know you can make like 10% a day.

For the following weeks. Yeah. Well, look, we'll see. I mean, the Association of Independent Restaurant Owners, I'm not sure I have the name right, but are bringing this to the attention of the authorities.

Not the authorities. The Federal Trade Commission. Thank you. The Anti-Competition Bureau.

Yes. To push against this deal. So we'll see who gets it right. I mean, the Cisco U.

S. food didn't work out. I mean, it's a different. U.

S. food is a much bigger business. I don't know. Interesting.

The fun thing about it, though, is there is a bit of a whack-a-mole. Like, the food distribution requires people with a lot of experience to operate. Yeah. But that's almost all it takes, you know?

give me a freezer and a truck and a couple of experienced operators and and one good salesman and you can build a food service operation yeah yes capture the demand yeah have a good salesperson it's just funny because it's a bit like the grocery industry we're always complaining about the you know monopoly the oligopoly in both of those industries but in both of those industries every metropolitan area there is either a small chain of grocery stores that the only way to stop them is to buy them at some crazy multiple and the same in food service you know there there are always new players in the market and and and they are they have some niche that they they use as a moat to build on they're they're just hyper specialists in the pizza business or whatever and then they build that and then they start adding other accounts and and suddenly you know people like Cisco have to deal with notice.

Yeah. So actually we should do that in retirement. We should start a business and see if we can get 15 times cash flow, you know, from Cisco. Well, maybe I'll think about it over the weekend.

Yeah. Okay. That makes sense. All right.

Thank you, Charles. Take care.