Sysco Scraps US Foods Merger After FTC Victory In Court
Sysco Corp. announced yesterday that it is abandoning its plans to acquire food service rival US Foods Inc., following last week’s setback to the deal in federal court.
In an opinion that closely tracked the FTC/DOJ Merger Guidelines, Judge Amit Mehta of the U.S. District Court for the District of Columbia granted the Federal Trade Commission a preliminary injunction to halt the proposed merger of nation’s two largest distributors of food and related supplies to restaurants and other foodservice establishments. Sysco’s announcement that it was abandoning its plans to acquire its rival is no surprise, given the substantial hurdle imposed on the deal by the FTC’s victory in court.
The 18-month-old proposed deal encountered regulatory scrutiny from the start. Last February, Sysco and US Foods proposed a divestiture of 11 US Foods distribution facilities to a smaller competing foodservice company, Performance Food Group (“PFG”), as a “fix-it-first” remedy designed to allay the FTC’s concerns. The FTC was not swayed, however, and decided to sue Sysco and Us Foods to block the deal.
As is typical in merger battles, much of the antitrust fight centered on market definition. Whereas the foodservice companies advocated a broad product market consisting of entire foodservice and distribution industry, the FTC argued for two product markets of broadline food distributors—meaning distributors with a breadth of product offering and availability of private label products—servicing both national client and local clients.
In agreeing with the FTC’s product market definition, Judge Mehta relied heavily on expert economic reports, industry testimony, and the companies’ ordinary course documents. As parties to a deal often learn, one of the most damning pieces of evidence was an analyst report prepared by a management consulting firm, which was hired by Sysco for purposes of merger integration, that described the market in the terms the FTC put forward.
After finding the markets alleged by the FTC, the court also found the agency had succeeded in making a prima facie case that the proposed merger would cause a significant increase in the concentration of firms in the market through convincing HHI figures (the standard for measuring concentration in industries). To rebut the presumption of decreased competition, Sysco and US Foods argued that PFG would become an effective competitor after acquiring the 11 divested distribution centers. Yet the court found this argument to be refuted by PFG’s own internal five-year plan, which did not paint a rosy picture of its ability to achieve customer scale.
The Defendants also made a significant attempt to argue an “efficiencies” defense, arguing that the proposed merger would generate over $490 million merger-specific cost savings per year. However, the court questioned the credibility of the economic analysis underlying this estimate, and saw no reason why most of the proclaimed cost savings could not be achieved independently of the merger. Moreover, Judge Mehta pointed out that $490 million was less than one percent of the combined companies’ total revenue, and thus even a modest increase in prices could easily offset any cost savings generated by the alleged efficiencies.
The court’s opinion reflects the significant hurdles that audacious attempts at consolidation by industry giants must overcome when such deals are challenged. This case and other recent activity by antitrust regulators (including the U.S. Justice Department’s pressure that led to Comcast abandoning its deal to acquire Time Warner) show just how high those hurdles can be when antitrust regulators decide to take advantage of them.
– Edited by Gary J. Malone