Wellspring, Blackstone Expand Food Distribution Platform

Wellspring Capital Management’s food-service rollup dreams are finally coming true.

Six months ago, a rival bidder muscled the firm and its partner, The Blackstone Group, out of the running for U.S. Foodservice, the North American food distributing arm of Dutch multinational Royal Ahold. But last month, mid-market LBO firm Wellspring Capital found a match for its food distributing platform, Vistar Corporation.

Once again joining with Blackstone Group, Wellspring Capital has agreed to pay $1.3 billion, or around 8x EBITDA, to acquire Virginia-based distributor Performance Food Group. The offering price works out to $34 per share, a 43 percent premium over the previous day’s stock price. Vistar has a 50-day go-shop window to find another suitor, although market sources consider that a remote possibility given the synergies between Vistar and Performance Food Group and the dislocation in the credit markets.

The combination of two distributors—Vistar with $3 billion million in 2006 revenue and Performance Food Group with an estimated $6.2 billion during the same span—creates a player large enough to compete with the sector’s biggest companies, including SYSCO Corp. and U.S. Foodservice. While more consolidation is possible, the next step for the newly combined company is likely a public offering, a source close to the transaction said.

The deal’s financing details are sparse, but a second source familiar with the deal told Buyouts that the sponsors—advised by Wachovia Corp., Goldman Sachs and Credit Suisse Group, and financed by Wachovia Corp. and Goldman Sachs—would rely on asset-based debt, which has been easier to come by amid the credit crunch. Like many LBOs in recent months, the deal is light on leverage, the first source said. The deal agreement contains a 3 percent reverse breakup fee, continuing a trend among recently announced take-privates in which the fee has risen from the 2 percent level common in the first half of 2007.

New York-based Wellspring Capital bought Vistar in 2002 for $180 million. Carved out from food manufacturer International Multifoods Corp., the distribution business “needed fixing,” the first source said. Since acquiring the Vistar platform, Wellspring Capital has folded in Roma Food and certain assets of Luna Vend Distributing.

Over the last five years, under the leadership of CEO George Holm, Vistar has doubled its EBITDA, the first source said. Even with this growth, Wellspring Capital decided last summer that it needed more firepower to complete its roll-up strategy for Vistar. Prior to the U.S. Foodservice bid last summer, Wellspring Capital took some chips off the table when it recapped Vistar and brought Blackstone in as a majority investor for $421 million. Neither firm would disclose its equity contribution for the Performance Food Group buyout, but Blackstone will be the majority owner of the combined entity as well.

Blackstone already has a food distribution company in its portfolio—Pinnacle Foods Corporation, a New Jersey-based company that it acquired for $2.2 billion in 2007. Analysts call the food-service industry more recession-resistant than some industrial sectors, although they also warn of risks such as commodity cost inflation, rising fuel prices, and a downturn in restaurant traffic brought on by a depressed economy.

Performance Food Group serves more than 41,000 corporate customers, a list that includes several restaurant operators backed by the recent flurry of LBO interest in the restaurant space. Clients include Outback Steakhouse, owned by Bain Capital and Catterton Partners; Subway, owned by Triarc Companies; and Burger King, recently taken public by Bain Capital, Goldman Sachs and TPG Capital.

Equity for the deal is coming from Wellspring Capital’s fourth fund, Wellspring Capital Partners IV, a $1 billion pool closed in 2005, and Blackstone Capital Partners V, a $21.7 vehicle closed in 2007. Executives at Wellspring Capital and Blackstone declined to comment for the story. —E.G.