By Brent Kendall
During nearly two weeks of court proceedings last month, the
legal battle between U.S. antitrust enforcers and would-be merger
partners Sysco Corp. and US Foods Inc. appeared to be a close
decision. Turns out it wasn't close at all.
U.S. District Judge Amit Mehta in Washington issued a
preliminary injunction on Tuesday blocking the planned merger of
the nation's two largest distributors of food and related supplies
to restaurants and other foodservice establishments. On Friday
evening, he released a public version of his opinion, revealing he
sided decisively with the Federal Trade Commission, which had sued
to block the deal.
Judge Mehta's 128-page ruling said the Sysco-US Foods tie-up,
announced in December 2013, was the type of large combination that
lawmakers were concerned about long ago when they gave the
government the power to halt mergers.
"The proposed merger of the country's first and second largest
broadline foodservice distributors is likely to cause the type of
industry concentration that Congress sought to curb at the outset
before it harmed competition," the judge wrote.
Judge Mehta said the would-be merger was of considerable
national importance, citing statistics showing Americans now spend
more money per month in restaurants and bars than in grocery
stores.
The judge sided with the FTC on the crucial point in the case:
how to define the food distribution market for the purposes of
deciding whether the merger could harm competition and lead to
higher prices for consumers.
He agreed with the FTC that there was a separate market for
distributors like Sysco and US Foods that offered comprehensive
products and services to restaurants and other businesses. He
rejected arguments from the companies that their size and power
should be considered against the backdrop of the entire $231
billion foodservice distribution industry, which includes thousands
of competing regional, local and specialty food distributors.
When viewed from that perspective, Sysco and US Foods had only
about a quarter of the market, the companies argued.
The judge said smaller distributors may compete with Sysco and
US Foods in some circumstances, but they didn't have the
capabilities to serve customers in the same full-service manner
with a broad range of product offerings.
Judge Mehta said large national customers rely particularly
heavily on the top food distributors. Food service management
companies like Sodexo and Aramark and hospitality companies like
the Hilton and Interstate hotel chains do a significant amount of
their purchases through Sysco and US Foods, he said.
The judge said the FTC's claim that the merger would harm local
markets in many cities wasn't as strong as its arguments about the
merger's effect on the national market. Nevertheless, the judge
said the FTC's case was good enough to prevail on that issue,
too.
Sysco and US Foods also fell short in their arguments that their
proposed sale of assets to the No. 3 distributor, Performance Food
Group Inc., would boost the smaller firm enough for it to replace
any competition being eliminated by the merger.
The judge said Performance's five-year business plan "shows that
post-merger PFG will not be nearly as competitive as [US Foods] is
today."
Judge Mehta rejected another key argument by the companies,
related to the cost-savings the merger would create. Sysco and US
Foods said their combination would produce $500 million or more in
annual efficiencies, savings that could be passed along to
customers through better prices and service. The judge suggested a
significant chunk of those cost-savings could be achieved
independent of the deal.
The judge made statements during last month's court proceedings
that indicated he believed there were some flaws with the economic
data and analysis compiled by the FTC in support of its case. Judge
Mehta reiterated that sentiment in his written opinion, but said
the agency's analysis still better reflected real-world business
conditions than the economic analysis offered by the companies in
rebuttal.
Sysco and US Foods haven't yet said whether they plan to
terminate their merger or try to continue to litigate to save it.
That announcement could come any day. A US Foods executive
testified during last month's proceedings that his company planned
to walk away from the deal if Judge Mehta ruled against the
merger.
Sysco expressed disappointment with the ruling after the judge
issued the injunction Tuesday. A company spokesman declined further
comment on Saturday. US Foods and the FTC couldn't immediately be
reached.
Write to Brent Kendall at brent.kendall@wsj.com
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