PFG opens the door to US Foods amid activist pressure

Investing.com -- Performance Food Group Co (NYSE:PFGC) has entered into an information-sharing agreement with US Foods Holding Corp (NYSE:USFD), a shift that comes only weeks after activist investor Sachem Head urged the company to explore a potential merger and nominated four directors to its board.

The agreement, announced Sept. 16, sets up a “clean team” process to evaluate regulatory considerations and potential synergies between the two food distributors, the first formal step toward examining a possible combination.

US Foods first confirmed its interest in a combination during its Q2 earnings call on Aug. 7, saying in an 8-K filing that it had approached PFG about a potential deal but received no response. CEO Dave Flitman reiterated on that call that the company “believes there could be significant benefits from a combination” and would “welcome the opportunity to engage” with PFG

On Aug. 13, PFG CEO George Holm told analysts there was “no reason to engage” with US Foods’ request for information. Less than a month after, PFG reported that Sachem Head delivered a nomination notice for four directors with deep industry experience, including founder Scott Ferguson, former Sysco CFO Chris Kreidler, former US Foods board member David Toy, and former McDonalds exec Karen King. The activist also urged the company to improve margins or consider strategic alternatives.

PFG disclosed the nomination on Sept. 2 and said its governance committee would evaluate both the nominees and any “value-enhancing transaction.” Just weeks later, it agreed to enter a clean team agreement with US Foods.

“While FTC considerations are not likely to be insurmountable, any deal would require cooperation from both parties and likely entail remedies,” BMO Capital Markets analyst Kelly Bania wrote in a note following the announcement. “We believe synergies could be at least $725 million — roughly 18% of pro forma ~$4 billion in EBITDA — but would require a meaningful equity raise by US Foods.” 

Bania maintained an “Outperform” rating on the group, with a $125 target price on PFG and $95 on US Foods.

PFG is the third-largest foodservice distributor in North America, behind Sysco and US Foods. A combination with US Foods would be the largest deal in the sector since Sysco’s attempted acquisition of US Foods in 2013, which was blocked by the Federal Trade Commission.

While a US Foods–PFG deal would merge the second- and third-largest players rather than the first and second, analysts expect regulators to scrutinize overlapping markets closely.

The clean team agreement does not obligate either company to pursue a transaction. It allows both sides to evaluate whether a deal is feasible and financially attractive while keeping sensitive data walled off.

Whether PFG’s move reflects direct pressure from Sachem Head or simply coincides with it is unclear. However, the sequence of events underscores how quickly the conversation around consolidation has shifted.

If no deal emerges, PFG still faces calls to improve its cost structure and margins. If it does, the merger would reshape the U.S. food distribution landscape and test the FTC’s stance on industry consolidation.

By entering into a clean team agreement, PFG is formally evaluating a combination it previously declined. Investors will be watching both the regulatory analysis and any governance changes as Sachem Head’s push plays out.

US Foods stock is down 2.1% near the end of trade Tuesday, while Performance Food Group is 0.4% higher as of 3:26 pm ET.