Industry News | May 14, 2007

US Foodservice Buyout Raises Questions

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The proposed takeover of U.S. Foodservice by KKR and CDR raises concerns about how pension contributions for thousands of current employees and payments to retirees will be maintained and whether the private equity funds will commit to protect the safety of food being delivered to schools, restaurants, and government facilities, including Army, Navy and veterans' facilities.

Richard J. Schnall of CD&R has stated that private equity firms intend to leverage U.S. Foodservice's market positions to "accelerate growth in both revenue and profitability," but thus far nothing has been said publicly about plans for the thousands of U.S. Foodservice employees.

The $7.1 billion price tag is considerably more than analysts had previously valued the company, and some observers note the high level of debt included in the deal, estimated to total $4.5 billion of the $7.1 billion price tag. Royal Ahold purchased U.S. Foodservice in 2000 for $3.6 billion, and recent valuations were between $5.5 and $5.7 billion. As recently as 2001, CDR owned part of U.S. Foodservice -- Alliant Foodservice -- which Ahold bought for $2.2 billion, including $750 million in debt.

The private equity buyout industry, armed with more than a half-trillion dollars of capital, is today engineering financial deals that together are larger than the annual budgets of most of the world's countries. This financial juggernaut is generating hefty returns to its investors, extraordinary riches for its executives, and newly relevant questions about the impact of its business practices on American workers, businesses, communities, and the nation.

SEIU released a set of principles designed to address the concerns of investors, the public, and workers including:

-- The buyout industry should play by the same set of rules as everyone else, including providing transparency and disclosure about their businesses, and eliminating conflicts of interest and other potential abuses in their transactions;

-- The public, including workers directly affected by the deal and consumer organizations should have a voice in the deals and benefit from their outcome; and

-- Community stakeholders should have a voice in the deals and benefit from their outcome.

SEIU members participate in pension funds with more than $1 trillion in assets, most of which invest 5 percent to 10 percent of their assets in private equity. SEIU is a longtime advocate of responsible corporate governance practices and an active member of the Council of Institutional Investors, an organization of more than 130 pension funds whose assets exceed $3 trillion.