By Brent Kendall And Annie Gasparro
A divided Federal Trade Commission sued Thursday to block Sysco
Corp.'s acquisition of rival US Foods Inc., a long-awaited move
that sets the stage for a major court battle over a plan to combine
the nation's two largest food distributors.
The FTC alleged the proposed tie-up would create a dominant
national company that could raise prices and reduce service for
restaurants, hotels, schools and other institutions that buy food,
paper products and a wide range of supplies from Sysco and US
Foods.
A combined company would control 75% of the sales in broadline
food-service distribution for national customers, the FTC alleged.
It also said the merger would be problematic in 32 local markets
around the U.S.
The lawsuit came after the FTC spent more than a year reviewing
the proposed deal and after negotiations between the companies and
the government didn't lead to a settlement.
The case is the most prominent FTC merger challenge since
nominees of President Barack Obama took the commission's helm in
2009. The decision to sue split the panel along partisan lines. FTC
Chairwoman Edith Ramirez and two other Democratic commissioners
voted for the challenge, while the panel's two Republicans voted
against.
The FTC said the two companies were the only food distributors
with a broad national footprint that offered extensive product
lines, frequent deliveries and services like menu planning.
The commission said many hotel chains and food-service
management companies consider Sysco and US Foods to be each other's
closest competitor.
"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," said
Debbie Feinstein, who heads the FTC's bureau of competition.
Sysco said a merger with US Foods would help improve service and
cut hundreds of millions of dollars in costs. The companies have
said they can lower prices for customers as they save money by
buying and trucking food in greater bulk.
"The facts are strongly in our favor, and we look forward to
making our case in court," Sysco Chief Executive Bill DeLaney said
in a written statement. "Those of us who work in this industry
every day know it is fiercely competitive."
Mr. DeLaney said the FTC misunderstood market dynamics, arguing
that the majority of national customers use multiple regional and
local food distributors. He also said local restaurants have plenty
of choices, from self-service stores like Costco Wholesale Corp. to
specialty artisan options.
US Foods didn't respond to a request for comment. The company is
owned by private-equity firms including KKR & Co. Shares of
Sysco fell 3.4% to $38.56 on the NYSE on Thursday.
Restaurant owners offered a mix of views on the suit. Suzanne
Aquila, a Sysco customer who owns Bloomington Bagel Co. in
Bloomington, Ind., said that local distributors can't compete with
companies like Sysco because of its ability to buy in bulk and its
wide range of services.
"I think the decision to challenge the merger is the only
decision to make," Ms. Aquila added. "We've had quite a run-up in
food costs this year, and without competition, we would have no
tools to try to contain those costs."
Others said the anticipated merger has already sparked more
heated competition in their markets.
"Everybody in our area in South Carolina thought it was a done
deal," said Bobby Williams, owner of a Southern home-cooking chain
called Lizard's Thicket. "There have been a lot of new distributors
coming into town to try to snatch up business because of it."
Sysco and some of its peers have taken a hit on profits in
recent years as rivals such as Restaurant Depot, which offers
online ordering and self-service warehouses, wooed its customers.
Sysco's earnings have been declining steadily for years, falling
6.1% to $932 million in fiscal 2014, which ended in June, despite a
4.7% increase in revenue to $46.5 billion.
Sysco in recent days escalated preparations to battle a
government lawsuit, hiring top antitrust lawyers who are former FTC
officials to lead the company's defense. Sysco has said it could
keep the merger agreement in place long enough for any case to go
to trial.
The FTC plans to try the merger case through its own
administrative litigation system, and it set a trial date of July
21. Concurrently it is asking a Washington, D.C., federal court to
issue a preliminary injunction to block the deal while the case at
the FTC proceeds.
The federal court proceedings could be a crucial testing ground
for the case because they will likely take place before the
in-house trial scheduled at the FTC.
The companies' merger agreement expires in September, but they
could extend it if litigation isn't wrapped up by then.
Lengthy settlement talks between the two sides, including
last-ditch meetings between the firms and the commissioners last
week, failed to produce an agreement to allow the merger.
Sysco offered to address FTC concerns about competition by
selling off a large package of assets that generate $4.6 billion in
annual revenue to the nation's third-largest food distributor,
Performance Food Group. Under that proposed deal, PFG would expand
significantly by buying 11 US Foods distribution centers. The
company declined to comment on the FTC's lawsuit.
The FTC's Ms. Feinstein said the proposed settlement didn't fix
the problems the commission has identified. "We don't think PFG
will be as good a competitor as US Foods was prior to the merger,"
she said.
The lawsuit is the FTC's highest-profile merger challenge since
2007, when it sought to stop Whole Foods Market Inc. from acquiring
a rival. Recent headline-grabbing merger lawsuits under the Obama
administration have come from the Justice Department, which shares
U.S. antitrust authority.
The FTC's two Republicans didn't offer details on why they
opposed the lawsuit. Dissenting commissioners often choose not to
air their criticisms while the FTC is in active litigation. One of
the dissenters, Commissioner Joshua Wright, acknowledged this
custom on Twitter, but he also tweeted that he had "no reason to
believe" the merger violated federal antitrust law.
Write to Brent Kendall at brent.kendall@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
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