Sysco Corp.’s planned $3.5 billion takeover of US Foods Inc. was blocked by a federal judge who said a merger of the food distribution giants would probably reduce competition and raise prices for hotels and restaurants.
The Federal Trade Commission’s request to delay the tie-up was granted by a federal judge in Washington. The case now shifts to the FTC’s in-house administrative court, where the agency will seek to permanently block the deal.
Sysco fell more than 3 percent on the news in after-hours trading. It previously said postponing the deal would probably scuttle it.
The FTC, which sued in February, successfully argued the takeover would eliminate competition between the two companies that dominate the industry. That would lead to higher prices for customers including school cafeterias as well as restaurants and hotels. The costs would then be passed on to consumers, the commission argued.
“The FTC has shown that there is a reasonable probability that the proposed merger will substantially impair competition,” U.S. District Judge Amit Mehta wrote in Tuesday’s order. The judge sealed the opinion explaining his reasoning.
Houston-based Sysco and Rosemont, Illinois-based US Foods countered that the industry is highly competitive and includes a wider array of options for customers.
Sysco said it’s disappointed in the decision and would assess “the merits of terminating the merger agreement.”
“We certainly understood this outcome to be possible and have been developing plans for the business moving forward,” Sysco Chief Executive Officer Bill DeLaney said in a statement. “We will provide additional clarity in the coming days.”
In arguments before Mehta in May, the two sides clashed over the scope of the market in which the companies compete, the size of their market shares and the ability of competitors to act as a check on potential price increases by the combined company.
The FTC said Sysco and US Foods dominate a unique market known as broadline foodservice that provides a range of food products and services to local and national customers. They meet unique needs of customers that can’t be matched by other businesses such as Restaurant Depot, the FTC said.
“We look forward to proving at trial that this deal would lead to higher prices and diminished service for customers,” said Debbie Feinstein, the head of FTC’s competition bureau, referring to the administrative proceeding.
Sysco and US Foods responded that the commission’s case relies on a “tortured” analysis that ignores a dynamic industry where customers depend on a variety of distribution channels, often simultaneously. The combination would generate more than $1 billion in savings that would lead to lower prices for customers, they said.
Mehta said in the order that he would issue a public version of his opinion on June 26 after redacting any confidential company information.
The case is FTC v. Sysco Corp., 15-00256, U.S. District Court, District of Columbia (Washington).