By Brent Kendall
WASHINGTON-- Sysco Corp.'s chief executive in federal court
testimony on Monday disputed government claims his company could
target customers for price increases if it is allowed to acquire
rival US Foods Inc.
"It would be a very stupid thing to contemplate," Sysco CEO Bill
DeLaney told U.S. District Judge Amit Mehta, who is considering the
Federal Trade Commission's challenge to the planned $3.5 billion
merger.
Thousands of food distributors compete vigorously for business
from restaurants and other customers, and that competition has
grown more acute since the financial crisis while industry growth
has flattened, Mr. DeLaney said.
Sysco's top executive said the company's acquisition of US Foods
would help it cut costs by hundreds of millions of dollars,
including through increased purchasing power with food
manufacturers. Reducing costs was a top priority for Sysco and the
deal would allow it to compete more effectively, he said.
Mr. DeLaney said that if a combined Sysco-US Foods sought to
raise prices postmerger, the company would feel the pain from
customers, who would take their business to other distributors
eager for more clients. Competing food distributors already were
picking off some customers during the current transition period
when Sysco and US Foods were trying to get their deal across the
finish line, he said.
The FTC filed suit in February, asking Judge Mehta to issue a
preliminary injunction blocking the deal, which would combine the
nation's top two food distributors. The companies provide
ingredients, paper goods and a range of other products to
restaurants and other institutions that serve food.
Mr. DeLaney's testimony lasted about two hours and came at the
beginning of the second week of court proceedings. The FTC
presented its case to the judge last week, arguing the merger would
combine the only two distribution companies that are national in
scope and can offer a broad line of products to customers.
The commission said the transaction would leave both large
national customers and small food service players in many local
markets vulnerable to higher prices and reduced service.
The companies began presenting a defense Monday with the Sysco
chief executive's testimony.
Mr. DeLaney said large restaurant chains, hospitality companies
and group purchasing organizations are powerful buyers that
negotiate product prices directly with food manufacturers, not
Sysco. Those large customers also have leverage against Sysco, he
said.
After the merger, both national and local food businesses would
still have plenty of distribution choices, Mr. DeLaney said. He
also said Sysco and US Foods' plans to divest 11 distribution
centers to the industry's next-largest company, Performance Food
Group Inc., would position that firm to be a strong national
competitor. PFG landed the divested assets "at bargain basement
prices," he said.
On cross examination by an FTC lawyer, Mr. DeLaney acknowledged
customers had benefited from competition between Sysco and US
Foods, and said Sysco had moved in some circumstances to lower its
prices to keep US Foods away from some of its customers.
But Sysco also has had to take similar actions to keep from
losing business to other competing food distributors, and customers
have benefited from that competition, too, he said.
Testimony in the case is expected to continue through
Wednesday.
Write to Brent Kendall at brent.kendall@wsj.com
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