Sysco Urges Judge to Save US Foods Deal in Antitrust Duel

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Sysco Corp. Distribution Center
Sysco Corp. tractor trailers sit parked outside the company's distribution center in Louisville, Kentucky, U.S. Sysco, based in Houston, argues that food-service distribution is a fragmented, $230 billion industry with more than 16,000 companies competing. Photographer: Luke Sharrett/Bloomberg

Sysco Corp.’s takeover of US Foods Inc. would create an industry “behemoth” in food distribution, eliminating intense head-to-head competition between the companies, a U.S. lawyer said at the start of a courtroom battle over the merger.

The Federal Trade Commission is asking a federal judge to block the $3.5 billion combination, arguing the merger would give Sysco an oversized share in an industry where it’s the biggest player and lead to higher prices for restaurants, hotels, school cafeterias and other customers.

Sysco and US Foods “dwarf” their rivals and their tie-up “will harm competition in many markets,” Stephen Weissman, an attorney for the FTC, said in opening statements Tuesday in Washington.

U.S. District Judge Amit Mehta is hearing arguments in the FTC’s request to halt the merger pending an administrative proceeding before the agency’s in-house court. Sysco and US Foods say delaying the deal now will kill it. The hearing is scheduled to last as long as seven days.

The industry is highly competitive and includes a wider array of options for customers than the FTC claims, the companies argue. Rich Parker, a lawyer for Sysco, disputed the FTC’s claim that the combined companies would have a 75 percent market share, saying food distribution is a “sprawling industry” where more than 16,000 other businesses have about 60 percent of the market.

‘Competing Fiercely’

“People are competing fiercely,” Parker said. “Antitrust law is about promoting competition. That’s what we’re doing.”

The FTC sued Sysco and US Foods in February after rejecting their offer to remedy antitrust concerns by selling 11 facilities to Performance Food Group Co. The commission says the deal would eliminate competition between the only two distributors with national footprints.

During his opening remarks, Weissman displayed a map of the companies’ distribution centers that showed overlaps between them across the country. The companies see one another as their main competition and customers leverage that rivalry to negotiate better deals, Weissman said.

The FTC and the Justice Department, which share antitrust enforcement power in the U.S., rarely sue to stop mergers. Of the 1,326 transactions reviewed in the year ended Sept. 30, 2013, fewer than 1 percent went to court without a settlement, according to the latest report on federal antitrust enforcement available.

Market Definition

The case centers on how broadly to define the market that Sysco and US Foods compete in. The FTC argues that so-called broadline distributors like Houston-based Sysco and US Foods, based in Rosemont, Illinois, operate in a distinct segment of the industry. They provide a kind of one-stop shopping for customers that others can’t, according to the agency.

Broadliners are unique because they offer extensive food products, frequent and flexible delivery and other services like menu planning, according to the FTC. Other options like Costco, Restaurant Depot and specialty distributors aren’t adequate substitutes for customers, according to the agency.

Parker, the Sysco lawyer, argued the competitive landscape is much broader and that the FTC is relying on a “constrained” market definition that makes the companies appear to have more sway than they really do.

“Markets are messier than that,” Parker said.

The case is FTC v. Sysco Corp. 15-00256, U.S. District Court, District of Columbia (Washington).

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