Wednesday, June 24, 2015

Federal Judge Halts Sysco-US Foods Merger

Judge sides with FTC on antitrust challenge to merger of food distributors

A federal judge ruled in favor of the Federal Trade Commission and blocked a merger between Sysco and US Foods on antitrust grounds. WSJ’s Brent Kendall joins Lunch Break with Tanya Rivero. Photo: AP
A federal judge on Tuesday issued a preliminary injunction blocking Sysco Corp.’s planned acquisition of US Foods Inc., a ruling that could kill a deal to combine the nation’s two largest food distributors.
The decision handed a high-profile victory to the Federal Trade Commission, which filed a lawsuit in February challenging the transaction on antitrust grounds. The win is the latest in a string of merger-enforcement matters in which antitrust officials appointed to the FTC and the Justice Department by President Barack Obama have flexed their muscles to block or pare back mergers they believed would harm competition.
The Sysco-US Foods deal, announced in December 2013, sought to combine the food distributors that lead the pack in providing ingredients and a range of other supplies to restaurants, hotels, schools and other food-service operations. The FTC argued the merger would leave customers large and small vulnerable to higher prices and reduced levels of service. The companies argued their tie-up would help them improve service and become more efficient, while cutting hundreds of millions of dollars in costs.
U.S. District Judge Amit Mehta in Washington said the FTC had shown that putting the brakes on the merger was in the public interest.
“The FTC has shown that there is a reasonable probability that the proposed merger will substantially impair competition in the national customer and local broadline markets and that the equities weigh in favor of injunctive relief,” the judge wrote in a two-page order.
Details of the judge’s ruling weren’t immediately available. The opinion was released under seal because it contains confidential business information. A redacted public version of the ruling will be released on Friday.

The judge’s announcement left some restaurants and other food service businesses breathing a sigh of relief.Shares of Sysco dropped 1.9% to $36.87 in after-hours trading.
“This is great news. There was some serious panic in the industry,” said the director of purchasing for a national Mexican restaurant chain. The Texas-based chain had switched to US Foods from Sysco several years ago because of Sysco’s pricing. If the merger had gone through, the director said he would have been left using a patchwork of different distributors and would have had to hire more people to reallocate the restaurant chain’s food purchasing. “It would have been brutal,” he said.
Others wished the companies would have prevailed. “It would have made the little guys step up their game, just like US Foods did,” said Phil Pace, the owner of San-Diego chain Phil’s BBQ. He added that he believed a merged company would have more buying power and been able to offer lower prices.
Judge Mehta, appointed to the bench by President Obama last year, held nearly two weeks of legal proceedings on the merger in May, which included testimony from top company executives and customers served by Sysco and US Foods. The proceedings didn’t appear a slam dunk for either side. During closing arguments, the judge asked tough questions of both the companies and the FTC.

MARKET TALK

Fed Injunction Blocking US Foods-Sysco Merger Stings PE Firms A federal judge’s injunction blocking the proposed US Foods-Sysco merger is big setback for US Foods’ private-equity backers KKR and CD&R, who’ve been seeking to unload their 2007 investment. The firms each paid about $1.1B and had US Foods borrow another $5B to fund the buyout, leaving the nation’s No. 2 food distributor loaded with debt. A sale to Sysco would have made the firms a decent profit on an investment that at various times has been marked at a loss and a narrow gain. Also seeing some collateral damage: Blackstone, owner of Performance Food Group, the third largest U.S. food distributor, which had agreements in place to expand into new markets by buying assets that its merging rivals planned to shed in an attempt to pass regulatory muster. (ryan.dezember@wsj.com; @RyanDezember)
The FTC had asked the judge to block the merger preliminarily while it holds a full trial on the deal in its own in-house administrative court, beginning in July. The companies, however, said Judge Mehta’s ruling would be crucial to whether the merger survived.
Sysco Chief Executive Bill DeLaney in a written statement said the company was “profoundly disappointed” in the outcome, but he didn’t lay out the company’s next steps.
“We will take a few days to closely review the court’s ruling and assess our legal and contractual obligations, including the merits of terminating the merger agreement,” Mr. DeLaney said.
Sysco has a lot to lose financially if the deal dies. It would have to pay US Foods $300 million and had already invested $355 million in integration planning, hiring top antitrust lawyers and other related costs, as of the end of March.
The decision also puts pressure on Sysco to come up with another way to improve its lagging profitability and fend off rising competition that is threatening Sysco’s traditional business model. More restaurant chains and other customers want to negotiate prices directly with manufacturers, have access to new technology that helps them run their kitchens more efficiently, and they are turning to alternatives like Costco Wholesale Corp., eating away at Sysco’s earnings.
In the nine months ended March 28, its operating profit fell to 3% from 3.4% the prior-year period.
A US Foods executive said during court proceedings that the company would walk away from the deal if Judge Mehta ruled for the FTC.
US Foods Chief Executive John Lederer, in a statement, said, “We are ready for whatever comes next. We have the talent, passion and financial foundation to take this company to the next level for our customers and for our employees.”
Debbie Feinstein, director of the FTC’s bureau of competition, said the ruling “will preserve competition in both local and national broadline foodservice distribution markets. We look forward to proving at trial that this deal would lead to higher prices and diminished service for customers.”
Tuesday’s ruling also was a blow to the industry’s third-largest company, Performance Food Group Inc., which stood to expand its business significantly by picking up 11 distribution centers that would have been divested from the merging companies. Those operations generated $4.6 billion in annual revenue.
Sysco and US Foods agreed to sell the assets to PFG in a bid to address the FTC’s antitrust concerns. The companies and the government, however, disagreed over whether PFGwould be able to replace the competition provided previously by US Foods.
PFG declined to comment on the ruling.
The case was the FTC’s most notable merger challenge in eight years, since the agency sued to prevent Whole Foods Market Inc. from acquiring a competitor. After a series of up-and-down court proceedings, the two sides eventually settled that case.
Tuesday’s ruling is a win for Democratic appointees at the FTC. The lawsuit had split the commission 3-2 along partisan lines, with Democrats in the majority.
Antitrust officials at the FTC and the Justice Department continue to ride a wave of enforcement victories both in and out of the courtroom. The Justice Department has been more active, stopping several transactions in recent years, either through court victories or because merging parties abandoned their deal in the face of government opposition. In April Comcast Corp. walked away from its planned acquisition of Time Warner Cable Inc.
Other deals that have fallen at the hands of the department include AT&T Inc.’s 2011 deal for T-Mobile USA and Applied Materials Inc.’s 2013 deal to acquire Tokyo Electron Ltd.
The FTC has kept a somewhat lower profile on merger cases, but it has won a series of court rulings stopping hospital mergers the agency found anticompetitive.

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