Sysco Contesting FTC's Challenge to US Foods Deal

View that merger would reduce competition, raise prices is "erroneous view of competitive dynamics"

WASHINGTON -- The Federal Trade Commission (FTC) has filed an administrative complaint charging that the proposed $8.2-billion merger of Sysco Corp. and US Foods Inc.--the foodservice industry's two largest distributors--would violate the antitrust laws by significantly reducing competition nationwide and in 32 local markets for broadline foodservice distribution services.

Sysco US Foods foodservice (CSP Daily News / Convenience Stores / Gas Stations)

The FTC alleges that if the merger goes forward as proposed, foodservice customers, including restaurants, hospitals, hotels and schools, would likely face higher prices and diminished service.

Sysco said it will contest the FTC's attempt to block the deal. The company said it is looking forward to a full judicial review of the significant competitive benefits of the merger.

The five FTC commissioners voted by a slim margin of 3-2 to seek a preliminary injunction in the U.S. District Court for the District of Columbia to prevent the parties from closing the transaction. The narrow vote demonstrates a lack of consensus within the commission that the proposed merger could be viewed as harmful to competition under the law, according to Houston-based Sysco.

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.

"This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline foodservice distributor," said Debbie Feinstein, director of the FTC's Bureau of Competition. "Consumers across the country, and the businesses that serve them, benefit from the healthy competition between Sysco and US Foods, whether they eat at a restaurant, hotel or a hospital."

Sysco and US Foods are by far the largest broadline foodservice distributors in the United States. Broadline distributors offer extensive product lines, including national-brand and private-label food products and provide frequent and flexible delivery, high levels of customer service and other value-added services such as order tracking, menu planning and nutritional information.

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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.

As detailed in the complaint, the merger presents a significant risk of competitive harm for two sets of customers who rely on broadline foodservice distribution:

*National customers. Sysco and US Foods are the only broadline distributors with a truly national footprint, and they compete vigorously with each other to meet the needs of customers with foodservice locations dispersed nationwide or across multiple regions of the country. Sysco and US Foods are the only broadline distributors with numerous distribution centers spread throughout the country. Many hotel chains, foodservice management companies and group purchasing organizations, for example, consider Sysco and US Foods to be each other's closest competitor, and in some cases those customers' only meaningful alternatives, for national broadline distribution services.

*Local customers. Sysco and US Foods also compete aggressively for the broadline business of independent restaurants and other local customers that operate in a local area or region. The merger is likely to harm competition in 32 local markets, according to the agency's complaint.

The commission also charges 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. According to the FTC, even with the addition of 11 distribution centers, PFG would not approach the scale or competitiveness of US Foods today, and therefore would not restore the competition eliminated by this merger.

Sysco believes that the FTC's decision is based on an erroneous view of the competitive dynamics of the foodservice distribution industry.

"The facts are strongly in our favor, and we look forward to making our case in court," said Bill DeLaney, Sysco's president and CEO. "Those of us who work in this industry every day know it is fiercely competitive. Customers of all types have access to food distribution services from a wide variety of companies and any number of channels. In fact, the overwhelming majority of restaurants and food operators choose their foodservice distributor locally, where they have choices among many excellent companies."

He continued, "For example, the FTC claims that Sysco and US Foods combined have a 75% market share in an ill-defined 'national broadline market,' ignoring the fact that the vast majority of 'national customers' use multiple regional or local distributors. Additionally, the FTC claims the merger would harm competition in 32 local markets, ignoring the existence of myriad local suppliers, including broadline companies, specialty companies, cash-and-carry, and club stores with whom Sysco and US Foods compete on a daily basis."

The merger will benefit customers and help the business become more efficient in an evolving and competitive marketplace, Sysco said. It will increase efficiency and innovation to the benefit of small and large customers across the country. This includes providing the highest-quality service, great brands and competitive pricing. The combined company will continue to create value for customers through product innovation and expanded services that go beyond food. The merger will enhance the company's flexibility and responsiveness to provide unique, on-trend food products that save customers time and improve performance.

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