Sysco Us Foods Case Study

On 2/19/15, the FTC filed an administrative complaint charging that the proposed merger of Sysco and US Foods would violate the antitrust laws by significantly reducing competition nationwide and in 32 local markets for broadline foodservice distribution services. The FTC alleged that if the merger goes forward as proposed, foodservice customers, including restaurants, hospitals, hotels, and schools, would likely face higher prices and lower levels of service than would be the case but for the merger. The FTC also authorized staff to seek in federal court a temporary restraining order and a preliminary injunction to prevent the parties from consummating the merger, and to maintain the status quo pending the administrative proceeding. The PI action was filed on 2/20/15. According to the FTC complaint, a combined Sysco/US Foods would account for 75% of the national market for broadline distribution services. In addition, the parties would also hold high shares in a number of local markets. The Commission also charged that the proposed sale of 11 US Foods distribution centers to Performance Food Group would neither enable PFG to replace US Foods as a competitor nor counteract the significant competitive harm caused by the merger. The following state attorneys general have joined the FTC’s complaint for a preliminary injunction to be filed in federal district court: California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee, and the District of Columbia. Following a June 23, 2015 ruling by the U.S. District Court for the District of Columbia granting the Federal Trade Commission request for a preliminary injunction, Sysco and US Foods abandoned their proposed merger, and the Commission dismissed its administrative complaint.

Federal Trade Commission, District of Columbia, State of California, State of Iowa, State of Maryland, State of Minnesota, State of Nebraska, State of Ohio, Commonwealth of Pennsylvania, State of Tennessee, and Commonwealth of Virginia, Plaintiffs v. Sysco Corporation, USF Holding Corporation, and US Foods, Inc., Defendants

Federal regulators ignored many local competitors in its claim that the proposed merger of Sysco and Rosemont-based US Foods would significantly reduce competition and raise prices, lawyers for Sysco argued Friday.

Sysco's lengthy attempt to buy US Foods for $3.5 billion was dealt a blow Thursday when the Federal Trade Commission, on a 3-2 vote, sought to block the deal along with 11 attorneys general.

The FTC claimed the takeover would violate antitrust laws by significantly reducing competition nationwide and in 32 local markets.

In the Chicago area, for example, Sysco and US Foods together control 83 percent of the market for local and regional customers, the lawsuit alleges.

The agency will seek a temporary restraining order and a preliminary injunction to prevent the deal from closing.

During a news conference Friday, Sysco lawyers took issue with the FTC's claim that combined Sysco-US Foods would have a 75 percent share of the U.S. market for what it calls broadline distribution services, or distributing food products with frequent and flexible delivery, customer service and other services such as menu planning.

The lawyers claimed no national market for food service distribution exists and that customers have many choices.

"If you're in Chicago and you need food delivered, you can look at the broadline suppliers, you can look at local suppliers — there are a lot of them. There is no national market. It is pure mythology," said Richard Parker, an attorney representing Sysco from O'Melveny & Myers. Parker was lead trial counsel with another recent high-profile antitrust case, the merger of American Airlines with US Airways, a dispute that was ultimately settled with the merger proceeding.

"There are local companies in each and every market that constrain our price and that provide options, alternatives to customers," Parker said. "In challenging the merger of Sysco and US Foods, the commission simply got it wrong. ... This transaction is pro-competitive. It's good for customers, it's good for the United States and we proceed to court with confidence."

Sysco attorney Damian Didden of Wachtell, Lipton, Rosen & Katz, posed the question that if the merger really would create 75 percent market share, how could two of five FTC commissioners fail to find a reason to believe the merger was anti-competitive?

He also noted that according to the FTC's own merger guidelines, market share is not the only analysis in deciding whether a merger is anti-competitive.

"In this case, the market share seems to be the beginning, middle and end of the analysis for the government," Didden said.

Lawyers also noted Sysco would voluntarily divest itself of 11 distribution centers by selling them to competitor Performance Food Group.

Sysco lawyers said the food companies are no longer in negotiations with the FTC, and that a federal court hearing on the injunction likely will take place in the next 60 to 90 days.

Attorneys general from California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee and the District of Columbia joined the FTC's antitrust suit.

"The loss of competition between Sysco and US Foods would raise costs for their customers and ultimately for anyone purchasing food served at hospitals, schools, hotels and restaurants," Attorney General Lisa Madigan said in a statement.

Houston-based Sysco announced its plan to buy US Foods in December 2013.

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