Sysco is buying privately held US Foods for about $3.5 billion in cash and stock. When the deal closes, Sysco expects the addition of US Foods to boost its annual sales by about 46 percent to around $65 billion.
Sysco shares jumped as much as 26 percent Monday, setting an all-time high.
Houston's Sysco will pay $3 billion in common stock and $500 million in cash. It will also assume or refinance about $4.7 billion in debt. That puts the total value of the deal at about $8.2 billion.
Sysco President and CEO Bill DeLaney said that the two companies have highly complementary core strengths including large product portfolios.
For the fiscal year that ended in June, Sysco's sales totaled $44.41 billion.
US Foods' customers include independent and chain restaurants, health care and hospitality companies, and government and educational institutions. Major stakeholders in the company, based just outside of Chicago, in Rosemont, Ill., include Clayton, Dubilier & Rice and Kohlberg Kravis Roberts & Co.
Representatives from both of those investment firms will join Sysco's board.
When the deal closes, US Foods shareholders will own about 87 million shares, or about 13 percent, of Sysco's common stock.
The buyout has been approved by the boards of both companies. Sysco said it expects the deal, which is set to close in the third calendar quarter of 2014, to immediately boost its profit after adjusting for acquisition-related costs and expenses. It's also expected to create annual cost savings of at least $600 million after three or four years.
Moody's Investors Service placed all of Sysco's ratings, including its investment-grade "A1" long-term rating, under review for possible downgrade. Moody's said that while the deal makes sense and the price seems fair, a downgrade is likely given the amount of debt Sysco will assume.
In midday trading, Sysco (SYY) shares rose $4.20, or 12 percent, to $38.53 after peaking at $43.39 earlier in the day. The company's shares have risen about 8 percent since the beginning of this year.