By Brent Kendall And Annie Gasparro
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.
Shares of Sysco dropped 1.9% to $36.87 in after-hours
trading.
The judge's announcement left some restaurants and other food
service businesses breathing a sigh of relief.
"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.
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 DeLaneyin 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 PFG would 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.
Write to Brent Kendall at brent.kendall@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
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