JP Foodservice has appetite for rivals

January 30, 1995|By Timothy J. Mullaney | Timothy J. Mullaney,Sun Staff Writer

Is this a case of the purloined playbook, or simply the sincerest form of flattery?

Only Jim Miller knows for sure. The 46-year-old chairman of JP Foodservice Inc. of Columbia is out to make some noise with the state's quietest billion-dollar company. After years of stumbling under the debt load of a 1989 leveraged buyout, JP Foodservice shook off much of the debt by going public in November, announced big gains in sales and operating earnings last week, and is winning backers for its plan to begin growing again.

That plan calls for boosting profits by snapping up smaller competitors in the highly fragmented restaurant supply business an industry in which no one has 10 percent market share.

It calls for getting about 3 percent more sales every year out of the existing business plus another 3 percent sales gain from the acquisitions, and forcing most of that to the bottom line through upgraded information systems and service. The plan, analysts say, will let earnings rise 10 percent a year or more in a mature business.

One more thing: The plan also happens very much to resemble the long-term behavior of Sysco Corp., the Houston-based industry leader that used to employ Jim Miller.

"Sysco has very high goals and expectations," he allows. "We are setting the same kind of high goals and high expectations for our company."

Wall Street sees JP Foodservice as having a chance to become the next Sysco, and it likes the idea a lot. For now, however, there are both a lot of similarities and a lot of differences.

Both companies sell food to restaurants, institutions, hotels and the like. JP sells hot dogs to the food service vendors at Fenway Park and Oriole Park at Camden Yards, hamburgers to Ruby Tuesday's and Perkins, and lunch meats to Subway. About 44 percent of its sales are to chain customers but most of the rest are to small, often mom-and-pop operations. JP's 2,300 employees, about 400 of them in Maryland, fill orders from nine warehouses spread from Severn to Boston to Minneapolis, enough to make JP the sixth-biggest broad line food distributor in America.

But Sysco is three times bigger than industry runner-up Kraft Foodservice Inc., and its $10 billion in sales dwarfs JP Foodservice's $1 billion. While JP's operating profit margins are above the industry average, Sysco's are nearly 20 percent higher. And Sysco makes about two and a half times as much on the bottom line, after JP makes the payments on its $155 million debt.

But JP's push to make its profits climb toward the rarefied zone Sysco occupies is under way. JP's debt load got a lot smaller in November, when it partially cashed out the 1989 LBO with an $11-a-share initial public offering that raised $80 million. The company also replaced debt that paid interest rates of up to 14 percent with investment-grade bonds that pushed their average interest rate below 8 percent. The result: annual interest payments cut by $18 million.

"They're basically taking a page out of Sysco's playbook," said ,, Mark Allen, an analyst at Robinson Humphrey Co. in Atlanta, a co-manager of JP's initial public offering. "They have been very successful with that strategy for 20 years."

Formed in 1989

JP Foodservice has never been an investor's darling before. The company was formed in 1989, when Mr. Miller and a group of managers and investors bought its predecessor from Sara Lee Corp. in a leveraged buyout. For $317 million, about $303 million of it borrowed, Mr. Miller and other managers got 11 percent of the company while Sara Lee kept 47 percent and institutional players bought 41 percent.

Sara Lee currently owns 38 percent of its stock.

"Sara Lee is a conglomerate," Mr. Miller said. "You could not get the same type of returns as a Hanes or Champion [which were also units of Sara Lee]. . . . It was a situation where we had certain problems with obtaining funds. If you could get 50 or 60 percent returns, you are not going to fund a 20 percent return business."

Mr. Miller insists, to the skepticism of many, that the LBO was successful. The company always lost money while it was privately held because of its debt load. But it did what LBOs are supposed to force companies to do: It made JP clean up its operation, dump nearly a quarter of its sales as too unprofitable to be kept around, and doubled its earnings before interest payments. What it did not do was raise the value of the stock.

"It worked. It was a very successful LBO," Mr. Miller said. "We were showing a net loss, but every LBO would show that until they were able to do a public offering. You have to retire your debt. . . . The whole objective was to take the company public in five years."

But even by the standards of 1980s leveraged buyouts, this one was overheated. People who did LBOs for a living typically financed up to 90 percent of their deals. This one was 95.6 percent debt.

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