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Sysco terminates merger with US Foods

Sysco terminates merger with US Foods

Distributor opts not to appeal injunction delaying deal

Sysco Corp. has terminated its merger with US Foods Inc., the company said Monday, 18 months after the $8.2 billion proposal to combine the nation’s two largest distributors rocked the foodservice industry.

Houston-based Sysco also terminated a deal to sell 11 US Foods facilities to Performance Food Group, or PFG, a sale rendered moot by the demise of the merger.

By terminating the merger, Sysco must pay a $300 million break-up fee to US Foods, as well as a $12.5 million fee to PFG.

“We made this decision after reviewing our options, and concluded that this step is in the best interest of all our stakeholders,” Bill DeLaney, Sysco president and CEO, said during a conference call Monday. “We believed the merger was the right strategic decision for us, and we’re disappointed with the outcome. But we’re extremely well positioned to move forward.”

The end of the deal will also let US Foods move forward. The Rosemont, Ill.-based distributor has been operating in limbo over the past 18 months. On Monday, it unveiled a “Just Taking Off” campaign to highlight what it calls a “re-launch” following the end of the merger.

“Throughout the unique environment of the past 18 months, we’ve continued to serve our customers by never forgetting what we’re about: delivering great food, cultivating talented people and making it easy for our customers to work with us,” John Lederer, US Foods CEO, said in a statement. “It’s because of this unwavering dedication that I can confidently say that we are ready to take this company to the next level.”

Sysco’s decision was widely expected in the days after U.S. District Court judge Amit Mehta sided with the Federal Trade Commission, ruling that the merger would hurt competition.

“The proposed merger of the country’s first and second largest broadline foodservice distributors is likely to cause the type of industry concentration that Congress sought to curb at the outset before it harmed competition,” Mehta wrote in a redacted opinion made public Friday.

Sysco, the nation’s largest broadline distributor, agreed to buy US Foods, the second largest distributor, in December 2013, for $3.5 billion. Including assumed debt, the deal was valued at $8.2 billion. Sysco later agreed to sell 11 US Foods facilities to PFG as part of an effort to win FTC approval.

The companies argued that the merger of the two traditional rivals would ultimately help competition by enabling them to lower costs and forcing competitors to take steps to rival the giant. The FTC did not agree, and sued this year, asking Mehta to delay the deal pending the lawsuit.

Mehta “found for the FTC on everything that was important,” said Bruce Sokler, chair of the antitrust section of the law firm Mintz Levin.

That included whether there was a national market for broadline distribution and whether the deal would have concentrated competition in some local markets. Mehta also agreed with the FTC that the cost efficiencies from the merger wouldn’t offset the loss of a strong rival.

“Defendants’ merger is likely to cause unduly high market concentrations in two relevant markets — broadline foodservice distribution to national customers and broadline foodservice distribution to local customers — and eliminate a key competitor in those markets, USF,” Mehta wrote.

Sysco and US Foods could have appealed the decision, but an appeal would take up to a year, and is hardly guaranteed to succeed.

“You could have an expedited hearing, but it probably wouldn’t be able to be argued until fall at the earliest,” Sokler said. “And there’s no shot clock on judges as to how fast they have to put out an opinion.”

What's ahead

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The question now is what will happen to the two companies, as well as the distribution market.

Sysco plans to spend $3 billion, $1.5 billion in each of the next two years, on share buybacks. DeLaney acknowledged that the company is still looking for other potential acquisitions.

“Our goal is to grow faster than the market,” DeLaney said. “We are a company that needs to grow. To leverage our scale and leverage our footprint, we need to grow.”

Observers have said that the industry has changed during the 18 months since the merger was first announced, as both distributors and customers prepared for a market with a combined Sysco–US Foods entity. Yet many still expect there to be more mergers in the distribution space, despite the deal’s death.

“It wouldn’t surprise me if we see a short-term pickup in some disruptive competition,” DeLaney said. “We’ve seen it before. We’ll see it again. Everybody has to run their business. We could see some things over the short-term, medium- or longer-term.”

Sysco plans to focus on customer service, as well as category and revenue management. The company has cut $750 million in costs over the past three years and could find more cost-saving opportunities.

“We haven’t had a lot of time to focus on that until the last few days,” DeLaney said. “We will become very focused on that in the next few weeks and months.”

Sysco could target different segments and look at more ethnic markets, fresh and natural markets, and emerging chains. The key for the company is to “find ways to differentiate ourselves in the eyes of our customer,” he said.

Meanwhile, US Foods is focused on its re-launch. The company has invested millions of dollars in new technology, and has new facilities to serve markets in Boston and Jackson, Miss. The company also vows to provide customers with new technology and new services.

“It’s evident that we have the talent, passion and financial foundation to become an even stronger force in the foodservice industry,” Lederer said. “Our unprecedented momentum is going to propel us farther and faster forward. I can’t wait for our customers to see all that we have in store for them.”

This story has been revised to reflect the following update:
 
Update: June 29, 2015
  This story has been updated with additional information from US Foods, quotes from a news conference and a legal opinion.

Contact Jonathan Maze at jonathan.m[email protected]
Follow him on Twitter: @jonathanmaze

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