Sysco May Be Selling “Fix-it-First” To Save Food Distributors’ Merger, But FTC May Not Be Buying
Sysco Corp. announced a divestiture plan this week that it claims should address concerns of the Federal Trade Commission (the “FTC”) about the food behemoth’s proposed acquisition of US Foods, which would combine the two largest food distributors in the United States.
Sysco, the nation’s largest food distributor, said on Monday that it is prepared to sell 11 US Foods distribution centers in the West and Midwest to smaller competitor Performance Foods Group, should the FTC approve its pending deal, which would give Sysco more than 25% of the national market, before divestitures, in the business of buying food and other supplies and selling them to restaurants, hospitals and other institutions. The company has been in discussions with the FTC for over a year with no resolution in sight. What does this proposed divestiture mean for the deal?
The proposed divestiture is designed to address the FTC’s belief that there is a national market for food distribution. This has been a major point of disagreement for the parties during their discussions. Under Sysco’s view of the world, distribution is inherently local in nature, and networks of distributors can create an effective response to its presence in any local market. Under the FTC’s view, the question is really whether restaurants like McDonald’s and Applebee’s, or any other company with a national footprint that sources its foods on an national basis, have been able to play the largest and second largest food distributors against each other in the past.
The FTC has not yet commented on Sysco’s announcement. In theory, no FTC comment can mean the FTC is still reviewing the proposal. Indeed, this may simply have been a way for Sysco to bridge the gap between its own view of the relevant markets and the FTC’s, and move the discussions along. But whether the proposed divestiture to rival PFG would create a sufficiently viable competitor to replace the competition eliminated as a result of the merger is a very open question. PFG is concentrated to the east of the Mississippi River with just a smattering of locations in the West and Midwest. If the food distribution market is truly national, divestiture of 11 facilities in the West and Midwest is not likely to eliminate the market power of one national foodservice giant.
The most interesting view is that Sysco knows it has reached an impasse with the FTC and has decided to attempt a “fix-it-first” remedy so they eliminate the FTC’s ability or desire to file a case. However, unlike its merger counterparts at the U.S. Department of Justice, the FTC has never been particularly amenable to home-cooked structural solutions, and has stated that it does not have a formal policy of accepting “fix-it-first” remedies. Given the FTC’s position, Sysco’s announcement may really be a signal that it is ready to litigate the case, and wants to have a structural remedy in place to present to any court as a fait accompli to argue there is no antitrust violation left to remedy.
Either way, the financial markets reacted very poorly to Sysco’s announcement, signaling that trouble may be brewing for the foodservice giant, and, in our view, Sysco’s acquisition of US Foods is still very far from a done deal.
– Edited by Gary J. Malone