A New Era for Contract Services

John Lawn

In October, two high-profile transactions characterized in dramatic form the consolidation taking place in the contract services market today. 

The first, a joint announcement by Marriott International and Sodexho Alliance that they intend to merge their North American operations to form Sodexho Marriott Services (SMS), underscored how that sector is rapidly becoming dominated by a few giant, global companies (see page 22). 

The second event, Fine Host Corporation’s acquisition of Miami-based Total Food Service Direction, illustrated the kind of regional players that these large contractors are continuing to acquire. TFSD has long held a reputation as an entrepreneurial player that competed aggressively for premier accounts in its territory. Its “restaurateuring” philosophy and retail-style concepts established it both as a foodservice leader and as a leading acquisition candidate.

The two deals signify other trends as well. A significant one is the recognition the investment community has given to those companies that demonstrate a strong focus on and commitment to a “core” business. Fine Host’s success with this approach since going public in mid 1996 may be one of the forces helping drive the Sodexho-Marriott deal. 

Some analysts believe Wall Street consistently undervalued MMS in its former position, which was almost always overshadowed by Marriott’s lodging interests. The new company will have a focused commitment to the contract services market and investors will be able to establish its value based on its results.

Another factor is the consolidation also going on in the global lodging industry. By spinning off three-quarters of its debt along with MMS, Marriott International significantly strengthens its financial position and prepares it for new investments in that business.

There are mixed messages in the Marriott-Sodexho announcement as well. One could argue these are both by necessity and design. 

The new company gives the Sodexho name first billing, and only licenses the Marriott trademark. Yet operations will be consolidated at MMS’ present headquarters, and MMS President Chuck O’Dell will assume that same role for SMS. While some see this as a sign that the Marriott culture will dominate, they  should note that technical requirements for a tax-free spinoff of MMS necessitate that Marriott International’s stockholders retain “control” of the company; they also should note that Sodexho Alliance chairman Pierre Bellon will become the largest single investor in the new company. 

The investor community would like to see SMS integrate Marriott’s highly-developed systems and visibility in the U.S. market with the global focus and European service traditions that have fueled the growth of Sodexho USA over the last 12 years. The proposed  SMS structure seems designed to signal that that indeed is the intention.

On the competitive front, the merger frees both MMS and Sodexho from a need to compete with one other, letting them instead shift their attention to others with whom they contend for national and segment market share.

Finally, this emergence of dedicated, publicly-traded contract services companies (we can expect to see more in coming years) means there will be increased public attention given to this sector and to the segments in which it operates. In significant ways it marks a coming of age, as noncommercial foodservice continues to achieve a greater public exposure in its own right.       FM