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- [00:00]
Ann Barry
Ugh.
- [00:01]
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- [00:18]
John
Hey, still got my hoodie?
- [00:19]
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- [00:33]
Ann Barry
Cisco, the number one US Food distributor cooks up its entry into the cash and carry game. We survey its 29 billion dollar purchase of Restaurant Depot. One company CEO buys its shares, usually a signal they believe the stock is undervalued and catching the market's attention. We unveil one such purchase that prompted a share boost today. And so much for not mixing your alcohol. The owners of Jack Daniels Whiskey and Absolute Vodka could be coming together in a merger that would reshape the alcohol industry. We break it all down for Monday, March 30th. It's blue markets Daily. And I'm Ann Barry. More market details to come, but first we are raising a glass to Monday's merger moment, one that could shake up the global alcohol industry by creating a company worth around $30 billion. That's the reported merger of global spirit player Pernu Ricard, valued at around 17 billion doll, with American whiskey giant Brown Foreman. That company worth up to 12 billion. So it's not exactly a merger of equals that could be on the horizon, but a strategic fit that would position a combination directly against the industry heavyweight Diageo, which has a market cap of around $42 billion. Well, the revenue rationale makes that clear. Brown Foreman generates about $4 billion a year with brands like Jack Daniels, Woodford Reserve, and Ford's Gin, with a heavy concentration in the United States is which accounts for about 50% of sales. Pernod Ricard, with $13 to $14 billion of revenue, has a wider global portfolio that includes Absolute Vodka, Jameson Irish whiskey and Shivas Regal. And less than 20% US exposure overall. Together, they would have a more diversified set of beverages that's also a little bit less dependent on any one region. And it would be better positioned to grow in faster moving markets like Asia and Latin America. Well, there is, of course, a cost story embedded in here, too, with synergies likely planned from streamlined supply chains, combined marketing budgets, and more leverage with distributors. And that's in a market where growth has been slowing. So those efficiencies can really make a difference. And it's hard to understate the enormity of that growth issue. Brown Forman's US Organic growth has been roughly flat. Not a great outcome in this cool market. And Perno saw strong growth coming out of the pandemic. But that then turned into low single digit declines over the past two. And we see all this manifest in their share prices. Brown Forman stock fell around 20% over the past year. Pernod Ricard down almost 30%. Leaving the question is this a deal that's just about doubling down on weakness? And it's the same question by the way, that's hanging over the in process talks between Estee Lauder and Pooch in their merger negotiations. The alcohol deal itself similarly has execution complexity in the Beauty mega merger. Both estate and Pooch have founding family voting controls to work with. And heritage matters for this deal too. The Brown family at Brown Foreman and the Rickard family at Pono Ricard hold meaningful stakes in the respective businesses. The Brown family owning more than 50% of the Kentucky based company's voting stock while the Rickard family holding approximately 15% of the Paris based giant and 20% of its voting rights. The other thing too, of course regulators, they will take a close look at whether this reduces competition too much in key categories like whiskey or vodka. So there's a lot going on here. Brown Foreman shares. Let's talk about the volatility here, down about one and a half percent today. That was after an initial surge suggesting that investors are trying to weigh whether a deal really could solve the growth issue over time. Pernod Ricard shares gone the other direction. They gained around 1% after though an initial drop down. Caution again over how expensive or complicated a deal like this could actually be to pull off. Well, there's a lot going on. I just want to really shine a light on the fact these mega mergers really are something that folks in the market have been waiting for since the election. They're coming about. This isn't going to stop. We're going to keep on watching. We're keeping the theme of an M and a Monday from a merger in the beverage space to an acquisition in foods. Well, it was announced today that Cisco, the largest US Food distributor to restaurants, hospitals and schools, struck a deal to acquire privately owned, owned cash and carry Jetro Restaurant depot for roughly 29 billion. That's including debt. While Cisco leadership is touting the synergies and the margin expansion potential of the deal, Cisco shareholders though, appear a little bit less confident with the company's share price dropping throughout the day and ultimately ending down over 15% as the trading session was coming to a close. But we'll get into the deal specifics in a moment. But John, start us off with some background on the two companies.
- [05:25]
John
All right, let's start with Cisco Ticker Sy yy on the New York Stock Exchange market cap of nearly 33 billion doll, which is down $6 billion since Friday with that drop in share price. It's the largest distributor of away from home food. So we're thinking about hospitals, colleges, sports venues, even some large restaurant chains, companies based in Houston with more than 330 distribution centers in 10 countries. And they brought in about $81 billion in sales last year. And those distribution centers are key. Cisco delivers the food. They can even offer white glove service. So they maybe even bring the food inside the restaurant, even pack it into your chiller. And they also have reps that work with customers to build out the orders. And I'm mentioning all this because those steps cost money, of course. And Restaurant Depot, conversely, is cash and carry. So there's no delivery. A customer goes in, they pay, they bring the food back. Restaurant depot has 166 warehouse locations across the US with restaurant supplies and bulk food. So think 50 pounds of rice and there's no membership fee. So smaller independent restaurants and caterers often go and buy, grab what they need, and they go more often and buy less.
- [06:36]
Ann Barry
Well, that's kind of an amazing. And there's a very consumer ish feel to this, right? On the one hand, cash and carry is literally like going to the grocery store, right? Versus there are these bougie grocery services out there where it's delivered to your home. Someone can in fact unload the grocery van, put it into your home kitchen fridge. So there are analogies where it exists in business to consumer. It can exist in business to business, too. We're just to dig a little bit into the history of Restaurant Depot, and I'm very excited about this. I love these kinds of businesses. I love distribution businesses. Typically pretty thin margins, but they're typically stable. Right. If you think about what this is, this is food. It's in a category that we know has been growing over time, that's away from home food consumption. And these are also pretty good ones in terms of managing their cash flows. And as we all know, cash is queen. Well, Restaurant Depot is majority owned by the Kish Group. And the now billionaire Nathan Kirsch, founder founded Jetro Cash and carry in 1976 in Brooklyn. And that company later acquired Restaurant Depot, which is why we keep referring to Jetro Restaurant Depot. Restaurant Depot shareholders, although this is a private company. Yes. Okay, so this is a privately held business. These are private shareholders, will receive just under $22 billion in cash, plus 92 million Cisco shares. So Cisco expects to fund the cash portion with yeah, sort of 21 ish billion dollars of new and hy debt, along with a billion dollars of cash that the company has on hand. And Cisco is also doing something to fund this deal. It does have a share buyback program in place. So if you're a Cisco shareholder, you have been seeing that buyback activity at least being talked about, that buyback program now being paused by Cisco and that cash instead being used to try to de lever more quickly. I pay down some of the debt that's been taken out to fund the deal and after making progress on the integration plans to revisit whether that share buyback program needs to come back into play. Just to give you a sense of the size of this, the deal is worth almost 75% of Cisco's market cap. That's as of Friday's close. So this is a very, very big nut that Cisco is taking.
- [08:45]
John
Yes, exactly. And that was the conversation all around the news shows today was about this debt was how much debt they're taking on. Cisco CEO Kevin Hurricane was making the rounds and touting the virtues of the deal. He is not worried about the debt. Apparently Restaurant Depot is expected to continue operating as a standalone business inside Cisco. The company said there's no layoffs planned, but the company still expect $250 million in annual cost savings to be achieved within the first three years. And I saw Hurricane on CNBC saying that by year four they're projecting $2 billion in excess free cash flow. And how do they expect to do it? Well, one more example of joint supply chain and getting synergies there. And they're looking to open more Restaurant Depot locations, looking to add five or six more stores each year over the next 20 years. They have a long term plan that's
- [09:35]
Ann Barry
a very, very long term plan. Interesting. So everything you've just said, let's just sort of just go back to the top, right? Cisco, a share price we've seen bouncing down around 15 over the course of today. And just listening to what you, what you've just said, John, trying to sell investors on a 20 year plan is something that public markets are not known for. Right. In certain instances you've seen People buy into a very long term view. Otherwise companies like Amazon, right, would never have made it for as long as they did. Just raising round after round of public capital despite not generating any cash. But for a mature company, not a sort of glamorous tech startup, the idea of saying to investors get behind a 20 year vision is not an easy one at all. That's number one. Number two, when you take a look at the components of the strategy, looking to add those stores, still thinking you're going to have significant excess free cash flow demonstrates that Restaurant Depot's new locations are expected to have a pretty quick, pretty quick, decently quick payback period. So for those technical nerds amongst you, like me, that sort of caught my eye. The other thing I'm just going to say is the idea that there's no layoffs planned at either business. I find that, I find that very difficult to believe that that's completely true.
- [10:44]
John
Sure. They're talking about finding $250 million.
- [10:46]
Ann Barry
No, exactly. Well, the question is why, right? Other than why, if you're Cisco, do you wake up one morning and say I'm going to buy something that is 75% of my market cap, take on a whole bunch of debt and frankly spook my investors with a 20 year vision? Well, Cisco says that this gives some exposure to the growing cash and carry market that has higher margins and can be more resilient in downturns. Delivering the food. John, you sort of said this right, 15 to 20% to the overall cost of the service. And then we saw in Covid that when folks were told to stay home, Cisco's business dropped by 65% along with its share price. Same 65% dip there. On the other hand, Restaurant Depot increased its profit in 2020. Now it's a little bit unfair because Cisco, as we said at the top, is exposed, for example, to things like colleges. And we know that college campuses were basically, you know, students just couldn't go or sports arenas or sports arenas and that people weren't going to stadiums to watch sports as opposed to Restaurant Depot. We saw restaurants pretty quickly try to pivot to cater to delivery and take out. And so after a terrible, terrible time for the restaurant industry, some of them were able to make that pivot, keeping Restaurant Depot, ironically, with a sort of more sort of stable base through that downturn than Cisco had. But that was a very esoteric experience, you know, experience, hopefully esoteric. We all hope that doesn't happen again. Also, just to put in perspective here, Restaurant Depot 2025, $16 billion in revenue, EBITDA at about a 13% margin. That's a measure of profitability. 13% comparing very favorably to Cisco's margin, which is typically closer to 6%. So that is something that's more tangible I think the market can understand, which is this is margin accretive. And the thing here is that while Restaurant Depot is the number one cash and carry company in this particular segment today, apparently it's only 17 of the market. So there is room to grow, which would justify that plan of opening five or six new locations.
- [12:45]
John
And if we're talking about from a shareholder perspective and we're covering that, but just as a consumer perspective and talking about the approval of mergers and acquisitions, I'm a little bit concerned about this idea that there's going to be one supply chain, there won't be one, but that there'll be an even bigger supply chain of food. And so when you go to a restaurant, maybe you go to these smaller mom and pops, they might be getting the same food to reheat or I understand there's ingredients at restaurants, but just, just generally I feel like the food space is getting more homogenous and this plays into it. It could also lead to higher prices. That would be a concern for, for restaurant patient.
- [13:21]
Ann Barry
I think you're exactly right. I mean there is a concern about consolidation. That being said, there are competitors out there just googling it. As you were making that point, you've got US Foods, that major national broadline rival Chef Resources, private label, extensive produce and meat in particular. So perishables.
- [13:37]
John
And let me mention that.
- [13:38]
Ann Barry
Yeah.
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John
I was reading today that in 2020 U.S. food acquired that Chef Resources.
- [13:44]
Ann Barry
Yeah.
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John
Business.
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Ann Barry
Yeah.
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John
And so very similar. But then in 2024 they announced that they were looking for buyers.
- [13:49]
Ann Barry
Yeah.
- [13:50]
John
And so a similar, a smaller deal, but a similar get the cash and carry arm into the food distributor. And then a couple years later they were looking for a seller. I haven't seen any news that there has been a sale, but there was
- [14:03]
Ann Barry
some, some noise, strategic noise. Performance Food Groups, another one Gordon Food Groups, a family owned one there as well. So there's a lot going on. Yeah.
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John
Costco.
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Ann Barry
Yes. Let's talk about Costco.
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John
Everything comes back.
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Ann Barry
I know any excuse to buy Costco.
- [14:18]
John
When I was in California, I would go to the Costco Business center, which is a different location. There's 28 locations in the United States and they have many different products than you would find at a normal Costco, including huge cuts of meat and a lot of that food. So that's one competitor.
- [14:33]
Ann Barry
Well, let's talk a little bit more about Nathan Kirsch who is the founder of Jetro Restaurant Depot. There was a bio on him in the Wall Street Journal today and amazing. He's 94 years old. Y and at the grand age of 94, he's just cut this unbelievable deal. And just to go back to what we were saying at the beginning, $22 billion of cash going to go to the lucky shareholders. I got to imagine he still had a big chunk of the business.
- [14:57]
John
Yes, absolutely. He started it in Brooklyn and it's been growing. It's, it's an amazing story.
- [15:02]
Ann Barry
Amazing story. Well, shares in Cisco again down over 15% today. The market really terrified of that debt load and just what a big lift the integration is going to be. Shares down 5% year over year as well. So lots going on there. We're going to keep watching. Definitely brings a different definition of mega merger into the conversation. Well, let's take a break and when we come back, a spin through the headlines that were moving the markets today. Hey John, do you ever try to help people save money?
- [15:29]
John
I gave my nephew a piggy bank with my face on it. Does that count?
- [15:32]
Ann Barry
Absolutely. You and Vanguard have that in common because they help financial advisors help their clients keep more of what they earn.
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John
Low fees are a great, great thing. They can give Vanguard's skilled bond managers more freedom to maneuver as they pursue the best outcomes for their clients. This is a fixed income team obsessed with consistent outperformance.
- [15:48]
Ann Barry
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- [15:54]
John
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- [15:58]
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- [16:27]
Ann Barry
Well, it's 4pm on the east Coast. There it is, the closing bell. The market's wrapping up for the day. We don't have a ticker tape but we're going to throw it over to our human Ticker John the S&P 500
- [16:37]
John
finished down 4.10 of a percent today. The NASDAQ finished down nearly three quarters of a percent and the Dow finished up 1.10 of a percent for the day. Some other market headlines, Shares in Palo Alto Networks ticker Panw rose as much as 6 1/2% today. That's after a company filing on Friday that CEO Nikesh Arora purchased around $10 million of its stock. Perhaps Arora is buying the dip as company shares have been down 15% so far this year. Part of the larger software sell off CEO or insider purchases are often seen by the market as a sign of conviction that a stock is undervalued. Palo Alto Networks was the biggest gainer today on the S&P 500. And finally, some updates from the airline industry. Air Canada announced its CEO will retire later this year after backlash over an English only message of condolence he delivered following this month's deadly crash at New York's LaGuardia Airport in which two pilots were killed, including one from Quebec. Canadian Prime Minister Mark Carney said the decision was, quote, appropriate and that it's essential that the next CEO Be bilingual. Shares in Air Canada fell 2% today.
- [17:44]
Ann Barry
Well, here at home, JetBlue Airways announced it is raising baggage fees to offset higher jet fuel prices and that is of course due to the ongoing war in the Middle East. In a statement, JetBlue said they regularly evaluate how to manage costs while, quote, keeping base fares competitive and continuing to invest in the experience our customers as value. Well, these kinds of moves are often accompanied by similar price hikes across the industry. It's something known as signaling so your competitors take note and then perhaps follow with a sense of confidence that everyone's going to be using the same playbook. So we will be keeping an eye on the skies. Airline stocks, though really struggling just given everything that's going on, still got airspace restricted across the Middle east, which is a core air market. And of course the the feed stocks going up just with the continued restrictions on the Strait of Hormuz. Airline stocks read across the board state JetBlue not alone then in finishing down nearly 2%. That's it for today's Blue Markets Daily.
- [18:40]
John
Blue Markets Daily is hosted by Anne Barry, Produced by Jacque To Tarek Abdul Tief Avenue Leroy and Emily Miller. Technical direction by Lonnie Fiskus Bernie De Taco is our audio engineer and the president of Morning Brew Inc. Is Devin Emery.
- [18:52]
Ann Barry
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on morning brew Daily. See you back here tomorrow, same time, same place.