Update: Sysco Abandons Merger After Federal Judge Upholds FTC Injunction

US Foods Sysco Merger DoneThe FTC has announced that it has closed its case against Sysco and U.S. Foods arising out of a planned merger between the two.  The FTC’s dismissal comes after a U.S. District Court judge ruled in favor of the FTC in it’s attempt to stop the proposed merger between Sysco and US Foods.  In February 2015, the FTC sued to block the merger, saying that the proposed merger of Sysco and US Foods would violate antitrust laws by significantly reducing competition nationwide and in 32 local markets for broadline foodservice distribution services.  The FTC alleged in its administrative complaint that if the merger were allowed to go forward, foodservice customers, including restaurants, hospitals, hotels, and schools, would likely face higher prices and diminished service.  The FTC also sought a temporary restraining order and preliminary injunction against the merger in federal district court.

In his decision, federal district judge, Amit Mehta, sided with the FTC’s argument that a tie-up between Sysco and US Foods would reduce competition in the food service industry.  According to Judge Mehta, “The FTC (Federal Trade Commission) 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.”

About the ruling, Sysco president and CEO Bill DeLaney said in a statement:

We diligently pursued this transaction for nearly two years because we strongly believed the merger of Sysco and US Foods would be pro-competitive and good for customers, associates and shareholders.  Nevertheless, we certainly understood this outcome to be possible and have been developing plans for the business moving forward . . . 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.  This work will be conducted in close collaboration with Sysco’s Board of Directors and the primary owners of US Foods.  We will provide additional clarity in the coming days.

US Foods president and CEO John Lederer said in a statement that the company is “ready for whatever comes next.”  According to Lederer:

Throughout the merger review process, we’ve continued to serve our customers with the full support and dedication of our employees and by never forgetting what we’re about: delivering great food, cultivating talented food people and making it easy for our customers to work with us.  We have the talent, passion and financial foundation to take this company to the next level for our customers and for our employees.

The FTC’s response to the judge’s decision was quite different than that of Sysco’s and US Foods’.  The FTC’s Bureau of Competition Director Debbie Feinstein said:

The Court’s ruling today temporarily blocking Sysco’s proposed acquisition of US Foods 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, including restaurants, hospitals, hotels, and schools.

In the wake of the judge’s ruling against Sysco and US Foods, Sysco then announced that it would be abandoning the proposed merger.  In a press release, Mr. DeLaney said:

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 . . . 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.

 FTC Bureau of Competition Director Debbie Feinstein said of Sysco’s plans to abandon the proposed merger:

Sysco and U.S. Foods’ decision to abandon the transaction is a victory for both competition and consumers. The evidence shows that Sysco and US Foods were strong rivals in broadline food distribution whose combination would have harmed consumers.

While the FTC rejoices in its victory, Sysco isn’t walking away from the broken merger unscathed.  In order to walk away from the merger, Sysco will have to pay $300 million to US Foods and $12.5 million to PFG, in breakup fees.  Even still, the FTC’s victory is momentous, and one that may provide a template for regulators in defining national marketplaces that can be used to challenge overly aggressive mergers.