By Brent Kendall And Annie Gasparro
The Federal Trade Commission on Thursday sued 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, in a 3-2 vote, 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.
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,"
Debbie Feinstein, head of the FTC's bureau of competition, said in
a written statement.
Postmerger, the combined companies were expected to generate
more than $65 billion in annual revenue. Sysco and US Foods have
said the $3.5 billion merger would allow them to improve service
and achieve hundreds of millions of dollars in cost savings.
"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." He said the majority of
restaurants and other food service operators work with local
distributors-of which there are many choices.
US Foods didn't immediately respond to a request for
comment.
The FTC's antitrust case will move forward amid a partisan split
on the wisdom of filing a lawsuit. The FTC's three Democratic
commissioners voted in favor of the merger challenge, while the
commission's two Republicans voted against it.
Sysco in recent days began escalating its preparations for 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 set a trial date of July 21.
But the commission said it would concurrently ask a Washington,
D.C. federal court to issue a preliminary injunction to block the
deal while the case at the FTC proceeds.
The companies' merger agreement expires in September, but they
could extend it if litigation isn't wrapped up by then.
The commission had been investigating the merger for more than a
year. Lengthy settlement talks between the two sides failed to
produce an agreement to allow the merger.
Sysco recently offered to address FTC concerns about competition
by selling off a large package of assets that generate $4.6 billion
in annual revenue, far above its original $2 billion divestiture
commitment. A round of meetings last week between the companies and
the FTC's five commissioners failed to spark further settlement
discussions.
The lawsuit is the FTC's highest-profile merger challenge since
the commission in 2007 sought to stop Whole Foods Market Inc. from
acquiring rival organic supermarket chain Wild Oats Markets, a case
brought under Republican leadership that led to a lengthy court
fight and ultimately a settlement.
Since Obama administration nominees took the helm at the FTC in
2009, the agency has won some notable hospital-merger cases, but it
hadn't brought a marquee case. Recent headline-grabbing merger
lawsuits under the Obama administration have come from the Justice
Department, which shares U.S. antitrust authority.
The FTC's decision to sue doesn't necessarily foreclose the
possibility of a settlement down the road, a point underscored by
recent Justice Department cases. The department in 2013 filed major
antitrust lawsuits challenging mergers in the airline and beer
industries. Both cases ended up settling before trial, with the
government agreeing to allow the mergers after the companies
involved made additional concessions.
Write to Brent Kendall at brent.kendall@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
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