FTC blocks Sysco-US Foods Merger

by Erica Shaffer
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WASHINGTON – The Federal Trade Commission (FTC) filed a lawsuit challenging the merger of Sysco Corp. and US Foods.

The Commission voted 3-2 to issue the administrative complaint and to authorize staff to seek a temporary restraining order and preliminary injunction in federal district court. The FTC files a complaint when it has “reason to believe” that the law has been or is being violated. The Commission believes the Sysco-US Foods merger would raise prices for foodservice customers, including restaurants, hospitals, hotels and schools. FTC said foodservice customers also would likely faced diminished service.

“This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline foodservice distributor,” Debbie Feinstein, the Director of the FTC’s Bureau of Competition, said in a statement. “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.”

The total value of the transaction is $8.2 billion. The combined companies are expected to have annual sales of approximately $65 billion and generate operating cash flows of approximately $2 billion.

A combined Sysco-US Foods would have 75 percent of the national market for broadline foodservice distribution, according the FTC complaint. Additionally, both companies would also have high market shares in a number of local markets. The FTC said the merger is likely to cause competitive harm in 32 local markets.

Sysco said the company will contest the FTC's decision to block the merger. The company said the Commission's decision is based on "an erroneous view of the competitive dynamics of the foodservice distribution industry."

“For example, the FTC claims that Sysco and US Foods combined have a 75 percent market share in an ill-defined ‘national broadline market,’ ignoring the fact that the vast majority of ‘national customers’ use multiple regional or local distributors,” Bill DeLaney, Sysco’s president and CEO, said in a statement. “Additionally, the FTC claims the merger would harm competition in 32 local markets, ignoring the existence of myriad local suppliers, including broadline companies, specialty companies, cash-and-carry, and club stores with whom Sysco and US Foods compete on a daily basis.”

The Commission noted that the proposed sale of 11 US Foods distribution centers to Performance Food Group (PFG) isn't enough to counteract the competitive harm caused by the merger. Even with the addition of 11 distribution centers, FTC argued, PFG would not restore the competition eliminated by the Sysco-US Foods merger.

PFG delivers more than 150,000 proprietary branded and national food and food-related products to more than 150,000 independent and national restaurant chains and other foodservice operations. The company also operates 67 distribution centers and 11 Merchant's Mart locations.

But Sysco argued the merger will enhance customer focus and employee opportunities while creating substantial efficiencies through optimization of inbound and outbound freight.

As for the sale of distribution facilities to PFG, Sysco said the divestiture would expand PFG's national footprint and enable PFG to compete more effectively for customers.

“This merger has always been about serving customers better and driving costs out of the system,” DeLaney said. “By unlocking at least $600 million in annualized cost synergies, the merger will allow Sysco to lower costs for customers, deliver better service and improve selection across all product segments, all of which will increase competition across the entire foodservice distribution industry to the benefit of customers.”

State attorneys general that have joined the FTC’s complaint for a preliminary injunction in federal court include: California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee and the District of Columbia.

The administrative complaint puts in motion proceedings in which the Commission's allegations will be tried in a formal hearing before an administrative law judge. The administrative trial is scheduled to begin on July 21.
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