F.T.C. challenges Sysco-US Foods merger

by Eric Schroeder
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WASHINGTON — The Federal Trade Commission on Feb. 29 filed an administrative complaint charging that the proposed merger of Sysco and US Foods would “eliminate significant competition in the marketplace” and create “a dominant national broadline food service distributor.”

The F.T.C. alleges that if the merger goes forward as proposed, food service customers, including restaurants, hospitals, hotels and schools, likely would face higher prices and diminished service. The F.T.C. also authorized staff to seek in federal court a temporary restraining order and a preliminary injunction to prevent the parties from consummating the merger, and to maintain the status quo pending the administrative proceeding.

Details of the merger were first announced in December 2013. Under terms of the transaction, Sysco agreed to pay approximately $3.5 billion for the equity of US Foods, comprising $3 billion of Sysco common stock and $500 million of cash. As part of the transaction, Sysco also would assume or refinance US Foods’ net debt, which is currently approximately $4.7 billion, bringing the total value of the transaction to $8.2 billion.

“This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline food service distributor,” said Debbie Feinstein, director of the F.T.C.’s Bureau of Competition. “Consumers across the country, and the businesses that serve them, benefit from the healthy competition between Sysco and US Foods, whether they eat at a restaurant, hotel or a hospital.”

Sysco and US Foods are the largest broadline food service distributors in the United States. Broadline distributors offer extensive product lines, including national brand and private label food products, and provide frequent and flexible delivery, and other value-added services such as order tracking, menu planning and nutritional information.

In its complaint, the F.T.C. said a combined Sysco/US Foods would account for 75% of the national market for broadline distribution services. In addition, the parties also would hold high shares in a number of local markets, the F.T.C. said.

Specifically, the F.T.C. said the merger presents a significant risk of competitive harm for national customers and local customers.

As detailed in the complaint, the merger presents a significant risk of competitive harm for two sets of customers who rely on broadline foodservice distribution.

The F.T.C. also charges that the proposed sale of 11 US Foods distribution centers to Performance Food Group would neither enable PFG to replace US Foods as a competitor nor counteract the significant competitive harm caused by the merger. According to the F.T.C., even with the addition of 11 distribution centers, PFG would not approach the scale or competitiveness of US Foods today, and therefore would not restore the competition eliminated by this merger.

In a Feb. 20 conference call with analysts to discuss the facts supporting Sysco’s proposed merger with US Foods, Richard Parker, a partner with O’Melveny & Myers and counsel for Sysco, said the company is in “massive disagreement” with the decision by the F.T.C. to file suit.

“In challenging the merger of Sysco and US Foods, the commission simply got it wrong,” Mr. Parker said. “This transaction is procompetitive. It’s good for customers. It’s good for the United States, and we proceed to court with confidence in our defenses of this merger and with confidence that the preliminary injunction will be denied and these transactions will close.”
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By Wadiya 3/14/2015 1:23:15 PM
Wadiya