(News Bulletin 247) – According to Bloomberg, the French collective catering group is considering buying this large American company. What worries investors?

Contrary to a Parisian market in clear progress, Sodexo fell this Thursday. The title of the collective catering group fell by 3.4% at the start of the afternoon after having plunged by more than 7% at the start of the session. For its part, the SBF 120 advanced by 1.4% at the same time.

The decline is linked to information from Bloomberg. The press agency reported on the night of Wednesday to Thursday that Sodexo had been considering for several months a takeover of the American group Aramark, a major competitor of the French group in North America.

Sources close to the matter cited by the agency add that there is “no certainty that the deliberations will lead to a transaction.”

Contacted by News Bulletin 247, Sodexo did not wish to comment on this information.

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Regulatory risks

Aramark offers, like Sodexo, collective catering and “facilities management” services (cleaning services, elevator repairs, etc.) to businesses, hospitals and even schools and universities.

Its market capitalization, of 9.8 billion dollars, is comparable to that of Sodexo (11 billion euros). In its last financial year, Aramark generated revenues of $18.8 billion, up 16% on a comparable basis. Sodexo had published revenues of 20.2 billion euros, up 17% on a comparable basis for its 2022-2023 financial year.

A bit like Sodexo, which split its Pluxee restaurant and gift voucher business in February, Aramark carried out a split, with the IPO last year of its former subsidiary Vestis, specializing in the supply and maintenance of work clothing.

“From a strategic perspective, Sodexo has lagged its competitors’ net growth in recent years, so Aramark would be a useful growth engine with likely significant synergies. However, given the shares of market held, we believe that antitrust could be an issue in certain regions,” explains Jefferies.

Negative synergies

The establishment calculates that an operation would allow Sodexo to strengthen its position in North America, an important and fast-growing market for collective catering, with a significant movement towards outsourcing of catering services. The new combined group would have 60% exposure to this market, compared to 46% for Sodexo, he estimates.

The bank notes, however, that given Aramark’s market capitalization, Sodexo could be forced to finance the buyout with a significant mix of debt and securities. Which may explain the market’s fear.

Additionally, Jefferies warns that if a tie-up were to proceed, it would represent an opportunity for another competitor, Britain’s Compass, which could gain market share while Sodexo focuses on integrating Aramark.

Royal Bank of Canada draws a fairly similar observation. The bank judges that this merger would allow Sodexo to benefit from “a more attractive geographical and sectoral distribution, as well as increased pricing power”. “However, antagonisms (negative synergies, editor’s note) and antitrust obstacles constitute a risk and investors have generally reacted poorly to large-scale mergers and acquisitions in the business services sector,” warns the Canadian establishment.

Among the possible “antagonisms”, Royal Bank of Canada argues that certain clients of the two groups could request contract renegotiations or choose to relaunch calls for tenders. She also mentions potential difficulties in retaining employees due to cultural differences.

“We believe it is unlikely that many Aramark shareholders would be willing to accept Sodexo paper in exchange for a transaction, given jurisdictional and governance considerations, making it more likely a cash offer (or at least a strong cash component), which would require financing,” the bank also estimates.