Antitrust Law Daily Wrap Up, TOP STORY: Sysco abandons US Foods merger, (Jun 29, 2015)

By Greg Hammond, J.D.

Less than a week after the federal district court in Washington, D.C., entered preliminary injunction, halting the proposed merger between Sysco Corp. and US Foods, Inc., Sysco has walked away from the deal. The company is required to pay break-up fees of $300 million to US Foods (FTC v. Sysco Corp., File No. 141 0067; Dkt. 1:15-cv-00256 (APM)).

Sysco and US Foods are the largest broadline foodservice distributors in the United States, accounting for approximately 75 percent of the national market for broadline distribution services, according to the FTC’s complaint. Broadline distributors offer national-brand and private-label food products and provide frequent and flexible delivery, customer service, and other value-added services such as order tracking, menu planning, and nutritional information.

The termination of the proposed merger also has led to the cancellation of Sysco’s agreement with Performance Food Group (PFG)—the third largest broadline foodservice distributor—under which PFG would purchase 11 of US Foods’ 61 distribution centers. The 11 centers currently account for an approximate $4.5 billion in broadline sales. As a result, Sysco is on the hook for an additional $12.5 million in break-up fees, payable to PFG.

“After reviewing our options, including whether to appeal the Court’s decision, we have concluded that it’s in the best interests of all our stakeholders to move on,” stated Sysco president and CEO, Bill DeLaney. “We believed the merger was the right strategic decision for us, and we are disappointed that it did not come to fruition. However, we are prepared to move forward with initiatives that will contribute to the success of Sysco and our stakeholders.”

“Sysco and U.S. Foods’ decision to abandon the transaction is a victory for both competition and consumers,” said FTC Bureau of Competition Director Debbie Feinstein in a statement released today. “The evidence shows that Sysco and US Foods were strong rivals in broadline food distribution whose combination would have harmed consumers.”

Sysco’s decision to walk away from the proposed transaction was not entirely a surprise. In its June 26 memorandum opinion, the federal district court noted that both Sysco and US Foods announced that they would not proceed with the merger if the court granted the requested injunction. Nevertheless, the court found a reasonable probability that the proposed merger would substantially impair competition in the markets for broadline foodservice distribution services sold to national and local customers, and consequently entered its order of preliminary injunction on June 23, 2015.

In concluding that the proposed merger of the two largest broadline foodservice distributors was “likely to cause the type of industry concentration that Congress sought to curb at the outset before it harmed competition,” the court first found that the FTC carried its burden of demonstrating a relevant product market for both local broadline distribution and broadline foodservice distribution to national customers. The geographic markets were localized around Sysco’s and US Foods’ distribution centers for local broadline customers and nationwide for national broadline customers.

The Commission demonstrated through its expert’s post-divestiture market concentration calculations and HHI increases that a merged Sysco-US Foods would significantly increase concentrations in local and nationwide markets for broadline distribution, the court found. The FTC therefore made a prima facie case and established a rebuttable presumption that the merger would lessen competition in both relevant product markets.

Sysco and US Foods made four arguments to support their claim that the food industry would remain competitive after the merger: (1) a post-divestiture PFG will be a strong competitor for customers seeking nationwide distribution; (2) competition from other broadliners and other distribution channels will continue and grow; (3) the entry of new competition and the repositioning of existing competitors will keep the industry competitive; and (4) customers will benefit from efficiencies arising from the merger. The court held that, even collectively accepting Sysco’s and US Foods’ arguments, the companies could not overcome the FTC’s strong presumption of anticompetitive harm. Further, the court could not determine on the record that the merger’s alleged cost savings would outweigh the potential harm to customers from losing the country’s second largest broadline distributor as a competitor.

“The court recognizes the extraordinary amount of time, energy, and money that Sysco, [US Foods], and PFG have devoted to the proposed merger,” the court stated. “Their efforts, and the risk that the parties will abandon the merger rather than proceed to an administrative trial on the merits is, however, ‘at best, a private equity’ which cannot overcome the significant public equities weighing in favor of a preliminary injunction.”

Companies: Sysco Corp.; US Foods, Inc.; USF Holding Corp.

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