(Bloomberg) -- French food catering firm Sodexo SA is exploring a potential acquisition of US rival Aramark as it seeks growth overseas, people familiar with the matter said.
Sodexo has been discussing a possible purchase of Aramark on and off in recent months, according to the people, who asked not to be identified because the information is private. Shares of Aramark jumped as much as 13% in after-hour trading in New York following the Bloomberg News report. The stock has gained 33% this year, giving the company a market capitalization of about $9.8 billion.
Shares of Sodexo slumped as much as 14% in early Thursday trading, the biggest intraday drop since March 2020. They were down 7.6% at 11 a.m. in Paris, giving the company a market value of about €10.7 billion ($12 billion). Any potential deal could face antitrust scrutiny, and Sodexo would also need to secure the funds for such a sizable acquisition.
Aramark would be a helpful growth engine with meaningful synergies for Sodexo, which has lagged its peers in recent years, Jefferies Financial Group Inc. analyst Allen Wells wrote in a report Thursday. However, the rise in Aramark shares this year means an acquisition by Sodexo would be “approaching a merger of equals” that would likely require significant equity and debt raising, according to Wells.
There’s no certainty the deliberations will lead to a transaction, the people said. Representatives for Sodexo and Aramark declined to comment.
Aramark provides catering services and facilities management to schools, hospitals, corporates as well as major sports events in more than a dozen countries. It’s also a concessions provider to 60 national and state parks in the US. The company spun off its uniform rental services unit and listed the business as Vestis Corp. last year.
“An enlarged Sodexo in particular would have a more attractive geographical and sectoral mix, as well as enhanced purchasing power,” RBC Capital Markets analysts Karl Green and Andrew Brooke wrote in a report on Thursday. “However, disynergies and antitrust hurdles are a risk and investors have generally responded poorly to large-scale business services M&A.”
Vestis attracted a preliminary takeover approach by Elis SA, another French company, earlier this month. Elis, a provider of uniform and linen cleaning services and workplace supplies, made the move after Vestis cut its fiscal-year revenue growth and profitability guidance in May.
What Bloomberg Intelligence Says
Sodexo’s potential Aramark acquisition — based on Bloomberg News reports — may need a significant equity component, given Sodexo’s leverage goal of 1-2x. Absent any premium and before synergies, leverage would rise to about 5.5x, based on our calculations. A combination is likely to be the subject of regulatory and competition scrutiny and would vie with Compass as the largest global contract caterer.
— Stuart Gordon, BI consumer industry analyst
Sodexo, based in the Paris suburb of Issy-les-Moulineaux, specializes in providing food services to institutions, businesses, schools and hospitals. It catered in several Olympics including the most recent games in Paris.
In the US, Sodexo merged its North American operations with Marriott International Inc.’s food services and facilities management business in 1997. Sodexo now has more than 104,000 employees across over 3,400 locations including K-12 schools, its website shows
Antitrust could be an issue for a potential deal as Sodexo is number two in the US market, while Aramark is number three, according to Emira Sagaama, an analyst at Oddo Bhf. The French company would need an equity raise or shares issued to Aramark shareholders to finance a potential deal, the analyst said, adding there’s also a risk of integration given each firm has hundreds of thousands employees.
--With assistance from Crystal Tse, Joshua Gaunt-Warner, James Cone and Aaron Kirchfeld.
(Adds analyst comment from fifth paragraph.)
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