The FTC has decided to block the proposed $3.5 billion merger between Sysco and US Foods. The FTC’s complaint alleges that Sysco’s acquisition of debt-ridden US Foods would violate antitrust law. According to the FTC:
[T[he extraordinarily high post-merger market share [75% of the national market for broadline distribution services], the market-concentration level, and the increase in concentration in the market for broadline foodservice distribution services sold to national customers render the merger presumptively unlawful.
“This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline foodservice distributor,” said Debbie Feinstein, the Director of the FTC’s Bureau of Competition. “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.” Additionally, the FTC has also sought a temporary restraining order and preliminary injunction to prevent Sysco and US Foods from completing the merger and to maintain the status quo pending the outcome of the administrative complaint. The FTC has been joined by several states attorney generals in the suit against Sysco, including: California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee, and the District of Columbia.
The FTC’s decision to block the merger comes despite the fact that the FTC recently met with Sysco in an attempt to avoid filing suit. During those meetings, Sysco, in hopes of overcoming the commission’s concerns, offered to sell eleven distribution centers with $5 billion in sales to Performance Food Group. However, the commission was not persuaded, saying the proposed divestitures would not “counteract the significant competitive harm caused by the merger.” According to the FTC, even with the addition of eleven distribution centers, Performance Food Group would not approach the scale or competitiveness of US Foods today, and therefore would not restore the competition eliminated by this merger.
Sysco has said it will contest the FTC’s action. Sysco has hired former top FTC officials, including Richard Parker. who now works at the law firm O’Melveny & Myers to serve as the company’s new lead counsel. Parker, one of the nation’s most prominent antitrust lawyers, served as director of the FTC’s competition bureau from 1999-2001. Sysco CEO Bill DeLaney said in a recent news release in response to the suit being filed, “[t]he facts are strongly in our favor and we look forward to making our case in court, and that the merger “has always been about serving customers better and driving costs out of the system.” However, it remains to be seen whether Sysco will be able to defend against the FTC suit given the undeniable potential market share and concerns over price hikes that the proposed merger has created.