Company: US Food Holdings Corp. (USFD)
Business: US Food Holdings markets and distributes fresh, frozen, and dry food and non-food products to foodservice customers in the United States. The company's customers include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations.
Stock Market Value: $8.3B ($37.73 per share)
Activist: Sachem Head Capital
Percentage Ownership: 5.13%
Average Cost: $33.71
Activist Commentary: Sachem Head was founded in 2013 by Scott Ferguson, the first investment professional hired at Pershing Square where he worked for nine years. Sachem Head has a history of solid value investing, but we believe that they really found their activist stride in 2020 with their investment in Olin. Scott Ferguson took a board seat at Olin – the first public company board seat he has taken in an investment that was not part of a group – and created tremendous value there where he remains on the board. His next activist 13D was at Elanco, where he again took a board seat and is in the process of creating value there. Taking board seats signifies both commitment and contribution and this philosophy and style is really paying off for Sachem Head.
Sachem Head Capital took a 5.13% position for investment purposes.
Behind the Scenes:
Sachem Head subtly signals in its 13D filing that it might be interested in a board seat. It states in the filing that Sachem Head has entered into an agreement with Bernardo Hees who has agreed to serve as an advisor to Sachem Head and as a potential director nominee. This makes sense as Sachem Head founder Scott Ferguson is already on two public company boards, and Hees has extensive industry and operating experience.
But to truly understand Sachem Head's thesis here, we have to go back to August 2015, when Trian filed a 13D on USFD competitor Sysco, and Nelson Peltz took a board seat creating significant value for shareholders by improving operating margins and focusing more on Sysco's higher margin businesses. Three years later, in 2018, Sachem Head took a 2% position in USFD stating in a letter to investors that USFD could benefit from many of the same steps Sysco took at the urging of Trian. Sachem Head further stated: "With the help of an activist shareholder, Sysco meaningfully expanded profitability by improving discipline around pricing and increasing focus on high-margin private label goods and lucrative smaller restaurant customers.... US Foods can implement many of the same initiatives while innovating in other areas, such as technology and central replenishment." In 2018, Sachem Head predicted that the company could generate $3 in earnings per share in 2020 with a stock price of $45. Cut to 2020, and both gross and operating margins are worse than 2018, earnings per share is $1.66 and the stock price is $36.08. So, there is even more work to be done and more opportunity for value creation.
However, while Scott Ferguson does have extensive activist experience, he is already on two public company boards and does not have the operating experience of Trian's Nelson Peltz (few activists do). So, he wisely partnered with Hees who has extensive operating experience. Hees is a former partner of 3G Capital and former CEO of Kraft Heinz and H.J. Heinz from 2013 to 2019. Interestingly, Nelson Peltz was a director of H.J. Heinz and served on the special committee of the board that negotiated the acquisition of Heinz by 3G Capital in 2013. Two years later, Peltz started an activist campaign at Sysco. Two years after Hees left Heinz, he is starting one with Sachem Head at Sysco competitor USFD. The blueprint to this campaign has already been written and Sachem Head seems to have recruited the right players for shareholder value creation. The only question that remains is does the company see it that way?
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. US Food Holdings is owned in the fund.