Sodexo, the French catering behemoth, is reportedly considering a significant move in the global food service industry by exploring the acquisition of its U.S. competitor Aramark. This potential deal, however, has been met with skepticism from investors, as evidenced by a 7% drop in Sodexo's share price following the news.
The catering industry, valued at $651.5 billion in 2020, has faced significant challenges, including a 32% decline due to the COVID-19 pandemic. Despite this, both Sodexo and Aramark have maintained their positions as major players in the sector. Sodexo, founded in 1966 by Pierre Bellon, operates in 53 countries and serves 100 million consumers daily. Aramark, established in 1936 as a peanut vending business, now provides services in 19 countries across various sectors.
Investors' concerns stem from several factors:
- Debt implications: A cash takeover could result in a leverage ratio of 7 times trailing EBITDA, which is exceptionally high for a publicly listed company.
- Control issues: The Bellon family, which currently holds 43% of Sodexo shares and 58% of voting rights, may struggle to maintain control in a combined entity.
- Low returns: Projections suggest a potential 5% return on invested capital by 2027, well below the estimated 8% cost of capital.
To achieve satisfactory returns, the merged company would need to realize annual cost savings exceeding $750 million, equivalent to Aramark's entire projected operating expenses for the current year. This ambitious target raises questions about the feasibility and potential risks of the acquisition.
Recent history in the business-services sector has shown that large acquisitions can lead to integration challenges and negatively impact acquirer share prices. Examples include Rentokil Initial's acquisition of Terminix and Teleperformance's purchase of Majorel.
"Sodexo has been periodically discussing the deal with food and facilities management provider Aramark in recent months"
The global contract catering market is expected to reach $477.3 billion by 2028, highlighting the sector's growth potential. However, the low-margin nature of the industry makes large-scale acquisitions particularly risky.
Both Sodexo and Aramark have diversified their services beyond catering, offering facilities management and uniform services. They have also faced scrutiny regarding labor practices and their involvement in the U.S. prison food service market. Additionally, both companies have made commitments to sustainability and reducing their environmental impact.
As the market digests this potential deal, it remains to be seen whether Sodexo can address investor concerns and demonstrate the long-term value of acquiring Aramark in an increasingly competitive global catering landscape.