By Brent Kendall
WASHINGTON--The Federal Trade Commission in court proceedings
Wednesday sought to build its case against the merger of food
distribution rivals Sysco Corp. and US Foods Inc. by arguing that
the next-largest industry competitor can't replace competition
being eliminated by the $3.5 billion deal.
In the second day of federal court hearings before U.S. District
Judge Amit Mehta, the most closely watched testimony came from
George Holm, the chief executive officer of Performance Food Group
Inc., the No. 3 food distributor behind Sysco and US Foods. The
companies provide ingredients and related goods to restaurants,
schools, hotels and other establishments.
Mr. Holm's company stands to benefit if the merger goes through
because it would acquire 11 distribution centers from Sysco and US
Foods that generate a combined $4.6 billion in revenue. The merging
companies entered into the side transaction to address potential
antitrust concerns, and the deal would considerably boost PFG's
market presence.
Mr. Holm's testimony began late in the afternoon and featured
several prickly exchanges with FTC lawyer Stephen Weissman, who
repeatedly cited prior comments the executive made to the FTC as it
was investigating the merger and preparing its case against the
deal.
Mr. Holm's previous statements, from a written declaration and a
sworn deposition, appeared to offer some support for the
government's views that Sysco and US Food are the two dominant
firms in providing food distribution services for large national
customers.
Mr. Weissman often displayed on courtroom video screens written
passages from Mr. Holm's previous testimony that suggested PFG
wasn't on the same nationwide level with Sysco and US Foods. The
two bigger firms are the ones that win business from large
customers that want coast-to-coast delivery of products from one
distributor, Mr. Weissman said.
Mr. Holm said PFG had customers in every ZIP Code, but he
conceded his company didn't currently have a nationwide presence in
distributing a broad line of products. He also acknowledged that a
food distributor faces challenges in expanding its businesses
because it is difficult to break into new markets where it hasn't
previously had a presence.
But Mr. Holm also said his comments referred to the state of the
market before PFG reached the divestiture deal in February to buy
assets from its two larger rivals.
The FTC has argued that a Sysco-US Foods combination is
problematic even after the proposed divestitures.
One tense moment Wednesday came when the FTC's Mr. Weissman said
there was a "clear trend" toward national customers wanting a
single food distributor who can offer a wide range of products. Mr.
Holm disputed that contention, prompting Mr. Weissman to show in
court a November 2014 letter from PFG to the FTC that said there
was such a trend.
Mr. Holm's testimony will continue Thursday, when he likely can
expect a friendlier line of questioning from lawyers for Sysco and
US Foods.
Judge Mehta is holding a seven-day hearing to consider evidence
from the two sides as he decides whether to issue a preliminary
injunction blocking the merger.
In Wednesday's earlier testimony, the FTC called on customer
witnesses who testified in support of the government's challenge to
the transaction.
Gary Hoffman, executive chef of Upstream Brewing Co. in Omaha,
Neb., said he used US Foods to supply him with a range of products
for his two restaurants, from food to brooms to chemicals. The
company delivers frequently and makes life easier because it offers
so many products and services, he said.
Mr. Hoffman said Sysco was the only other viable option in the
area, and if the two firms merged and raised prices, "I wouldn't
have any competitor to turn to."
Joan Ralph of Premier Inc., a group purchasing organization that
negotiates food supply contracts for hospitals, schools and other
facilities, said US Foods had the expertise, products and services
to meet its needs. The merger is a concern for Premier's members
because Sysco "is the only other national player out there," she
said.
Ms. Ralph said she wasn't sure whether PFG could be an adequate
substitute competitor with the divested assets from Sysco and US
Foods.
Lawyers for the companies sought to exploit what they believed
were weaknesses in the FTC witnesses' testimony.
For example, Mr. Hoffman on cross examination acknowledged that
he hadn't called for competing bids for his food business in
several years and hadn't spent time looking at the product catalogs
of potential competitors.
Sysco and US Foods are expected to present their case to the
judge beginning later this week.
Write to Brent Kendall at brent.kendall@wsj.com
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