WASHINGTON—A federal judge heard lively closing
arguments Thursday in the government's challenge to the planned
merger of rival food distributors Sysco Corp. and US Foods Inc.,
pressing both sides on potential weaknesses in their positions.
After more than three hours of questioning by U.S. District
Judge Amit Mehta, the outcome of the case appeared unclear.
When a lawyer for the Federal Trade Commission, which is
challenging the deal, came to the podium, Judge Mehta questioned
the reliability of the commission's calculations showing that the
two companies held 75% of the market for large national customers
and high market shares in 32 cities.
He questioned whether the FTC's methodology made the two
companies look more dominant than they are.
Judge Mehta also said there was "plenty of evidence" in the case
that showed restaurants and other buyers of food-distribution
services use a mix of providers besides Sysco and US Foods. He
cited the companies' argument that those other providers would keep
the market competitive after the merger.
"Why is that wrong?" he asked a lawyer for the FTC.
But when lawyers for Sysco and US Foods were in front of the
court, the judge said that even if the FTC's market-share numbers
were wrong, there did appear to be some customers who view Sysco
and US Foods as the only two viable options for providing
coast-to-coast service. And the companies' have strong positions in
many local markets, too, he said.
Many national customers prefer a one-stop shop like Sysco or US
Foods instead of piecing together a network of different regional
food distributors, a process that can be more labor-intensive and
produce higher administrative costs, the judge said. He suggested
that if the deal is approved, those customers would have to choose
between doing business with the merged company or changing the way
they have obtained ingredients and other products they need.
"That's what you're asking me to conclude," the judge told a lawyer
for Sysco.
The two companies are the largest U.S. distributors who sell
food, paper products and a broad line of other supplies to
customers like restaurants, schools, hotels and health care
facilities. They announced their $3.5 billion merger in December
2013. The FTC spent more than a year examining the deal before
suing to block it in February.
FTC lawyer Stephen Weissman on Thursday said the merger "would
eliminate an intense rivalry between close competitors" that has
produced benefits for customers.
The companies have said they could cut costs by hundreds of
millions of dollars through the transaction, but Mr. Weissman said
such cost savings weren't a legal justification for an otherwise
anticompetitive merger.
Sysco lawyer Richard Parker said the evidence showed the market
to be intensely competitive and "relentlessly demanding" on food
distributors to lower their prices and become more efficient.
Sysco and US Foods wouldn't be able to raise prices after the
merger because customers would take their business elsewhere, Mr.
Parker said. "We're big, but we're not the only game in town," he
added.
Judge Mehta held eight days of evidentiary proceedings in the
case earlier this month. He is deciding whether to issue a
preliminary injunction that would block the deal while the FTC
holds a longer in-house trial.
In reality, the judge's ruling will determine the fate of the
merger. US Foods signaled during court proceedings that it will
walk away from the deal if the judge decides to block it
preliminarily.
The judge on Thursday didn't say how long it would take to issue
a decision.
Part of Thursday's closing arguments focused on whether any
potential reduction in competition would be alleviated by the
merging companies' proposed divestiture of assets to the
next-largest distributor, Performance Food Group Inc.
The companies have agreed to sell 11 distribution centers to PFG
that generate $4.6 billion in revenue. PFG's top executive
testified earlier in the proceedings that the company will be ready
and able to use the assets to compete for large national
customers.
Judge Mehta noted that PFG has been enjoying double-digit growth
rates, a fact that suggested the company could eventually replace
the competition previously provided by US Foods. But he said that
PFG's own internal projections showed that even in five years the
company will be a fraction of the size US Foods is now.
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