By Brent Kendall
WASHINGTON--A US Foods Inc. executive said in federal court
Monday that his company would walk away from its planned merger
with rival Sysco Corp. if the presiding judge issues an injunction
to preliminarily block the deal.
David Schreibman, an executive vice president for strategy at US
Foods, told U.S. District Judge Amit Mehta his company isn't
willing to endure additional lengthy periods of uncertainty about
its business while engaging in a protracted legal fight with U.S.
antitrust enforcers.
The Federal Trade Commission, which spent more than a year
reviewing Sysco's proposed acquisition of US Foods, sued the
companies in February. The commission wants Judge Mehta to block
the deal preliminarily while it holds a longer in-house
administrative beginning in July.
"We will terminate if this court enjoins the transaction," Mr.
Schreibman said.
Monday's court proceedings saw testimony from top executives at
both companies attempting to rebut the FTC's case against 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.
Sysco Corp. CEO Bill DeLaney disputed government claims his
company could target customers for price increases if it is allowed
to acquire US Foods.
"It would be a very stupid thing to contemplate," Mr. DeLaney
told Judge Mehta.
Thousands of food distributors compete 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.
Mr. DeLaney 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.
He said that if a combined Sysco-US Foods sought to raise prices
after a merger, the company would feel the pain from customers, who
would take their business to other distributors eager for more
clients.
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.
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 plans by Sysco and US Foods 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.
Mr. Schreibman said food distributors are facing competition
from cash-and-carry businesses like Restaurant Depot, where local
businesses can go and buy the goods they need at a cost
advantage.
On cross-examination, the FTC suggested Mr. Schreibman couldn't
point to examples where US Foods had lowered its prices in bidding
for business in response to cash-and-carry competition.
FTC lawyers also said both Sysco and US Foods could make
significant progress on cutting costs without the merger.
Testimony in the case is expected to continue through
Wednesday.
Write to Brent Kendall at brent.kendall@wsj.com
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