Skip navigation
Sysco tries to salvage merger with US Foods

Sysco tries to salvage merger with US Foods

Faceoff with FTC will determine fate of Sysco-US Foods combination

Sysco Corp. will face off with the Federal Trade Commission in a federal court Tuesday at the start of a seven-day hearing that will likely determine the fate of the company’s proposed merger with US Foods Inc.

The merger could have significant consequences for the restaurant industry, which depends on companies like Sysco and US Foods to get the ingredients they need to produce the products they sell to consumers. But how exactly the deal would impact restaurants is at the core of the argument between the companies and the federal government.

To block the merger, the FTC must prove that combining the two largest, most influential food distributors in the market will hurt competition and drive up prices for consumers.

Meanwhile, Sysco argues that the FTC has misjudged the market, and suggests that there is plenty of competition and that its combination with US Foods would lower prices.

“One of the challenges for the FTC is how you define the relevant market,” said Mike Keeley, antitrust litigator with the Washington law firm of Axinn, Veltrop & Harkrider LLP. “The government has to define the relevant market, the national market and national providers, and how that squares with local school districts. They can presumably turn to local providers not competing nationally. The legal burden is on the FTC. They have to make their case.”

Sysco and US Foods proposed the $8.2 billion merger in December 2013. In February, the FTC decided to sue the companies to block the combination. The hearings that begin Tuesday will be over a preliminary injunction the FTC is requesting to block the merger.

The result of the hearing will determine the merger’s fate, because the loser is expected to drop its case. If the FTC loses, the merger would proceed. If Sysco loses, it will likely cancel the merger with US Foods.

“It’s quite rare that at the end of a preliminary injunction hearing you don’t know whether the deal is dead or alive,” Keeley said.

Keeley suggested that the deal could be settled in the midst of a hearing, although that is uncertain at this point. Sysco and US Foods have already offered to sell 11 US Foods facilities, with $4.6 billion in annual revenue, to a smaller competitor, Performance Food Group.

The FTC argues that combining Sysco and US Foods would eliminate competition in the market and create a single, dominant, national broadline distributor. It argues that restaurants and other foodservice companies would pay higher prices as a result, and those prices would be passed onto consumers.

But the FTC’s five-member commission — three Democrats and two Republicans — was split along party lines over whether to pursue a lawsuit. Historically, that’s rare, Keeley said, but it’s less rare now amid a debate within the FTC over how aggressively to block challenges to mergers.

Defining the market has proven difficult. The FTC argues that the distribution market is divided between specialty distributors, systems distributors, cash-and-carry stores like Restaurant Depot and broadline distributors like Sysco. A combined Sysco-US Foods entity would have 75 percent of the market for national broadline distribution, the company argues.

It also argues that Sysco would have more than a 50-percent market share in 32 cities, including 100-percent market share in San Diego.

But Sysco argues that there is no market for national broadline distributors, and that it would have just 25 percent of the distribution market after the merger and the sale of the US Foods facilities to PFG. The company argues that foodservice distribution is a $231 billion industry with 16,000 companies.

“The totality of the evidence reveals a vital marketplace,” Sysco wrote in a recent court filing. “Customers’ diverse and plentiful buying options will more than constrain the behavior of the merged entity.”

Sysco also argues that efficiencies resulting from the merger will enable the company to lower costs, which would make the deal a win for consumers.

The FTC must prove that the merger would enable Sysco-US Foods to increase prices and hold them there without fear that a competitor could come in with lower prices, Keeley said.

Both companies will likely take testimony from restaurant executives, other competitors and economists.

“In these cases, what the customers say is always important,” Keeley said. “Pay close attention to the accounts of customers.”

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

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish