Sysco at Standstill With FTC Over US Foods Deal
Food Service Firm Offers to Sell 11 Distribution Centers to Appease FTC
A deal between Sysco and US Foods would create an industry giant with about 25% of the market for selling food and other supplies to restaurants, schools, hospitals and other institutions. PHOTO: ASSOCIATED PRESS
Sysco Corp. ’s negotiations with antitrust regulators over its planned acquisition of US Foods Inc. have reached a standstill, a person familiar with the matter said, as the company announced an agreement to divest far more in assets than originally planned to obtain approval.
Sysco has been wrestling for more than a year with the Federal Trade Commission over its acquisition, which would unite the two largest companies in the food distribution industry into a single giant.
Sysco said Monday that it reached a deal with rival Performance Food Group Co. to sell 11 distribution centers with a combined $4.6 billion in revenue—more than double the $2 billion in annual revenue that Sysco originally planned to sell.
However, FTC staff members haven’t signed off on the divestiture proposal. Sysco representatives met with FTC staff members again in Washington, D.C. last week, during which they couldn’t agree on a solution, leaving the talks at a stalemate, according to the person familiar with the situation.
Shares of Sysco were down 1.7% in Monday morning trading.
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So Sysco is now turning its hopes to the five-member FTC commission, hoping it will agree to approve the deal despite the staff’s reluctance.
“Unfortunately, the FTC has taken a different view of the potential competitive impacts of the merger” than Sysco’s view, Chief Executive Bill DeLaney said in a news release. “While we respectfully but vigorously disagree with the FTC’s analysis, we believe this divestiture package fully addresses its concerns.”
An FTC spokeswoman declined to comment.
The divestiture, which is contingent on the merger winning approval, covers US Foods distribution centers from San Diego to Denver that make up nearly a quarter of US Foods’ sales. Financial terms of the sale weren’t disclosed.
Sysco and US Foods buy food and other restaurant supplies that they then sell and deliver to restaurants, hospitals and other institutions. Without the proposed divestitures, they account for more than 25% of the industry’s sales.
The FTC has given the deal close scrutiny amid concerns from some restaurants and others in the industry that a combination would give Sysco too much pricing power. Sysco says the industry is rife with regional and specialty distributors that will make for stiff competition even after the pending $3.5 billion acquisition of US Foods.
Both the FTC’s bureau of competition and bureau of economics have been looking at the deal. A majority of the agency’s five commissioners must agree upon any course of action. The agency, which has three Democratic commissioners and two Republicans, is known for bipartisan cooperation but the commissioners do sometimes disagree on the agency’s approach.
Sysco in November again pushed back the timeline for completing the acquisition, saying talks with antitrust regulators were taking longer than expected.
Performance Food Chief Executive George Holm said the new distribution centers will enable the company to compete for national broadline food service customers.
After Sysco and US Foods, Performance Food is the largest competitor in the market. PFG’s operations are focused most heavily in the Southeast and along the Eastern Seaboard. The company has been preparing for an initial public offering, and expects to raise around $100 million. It has done 12 acquisitions in the past six years and that acquisitions remain a key part of its strategy.
Meanwhile, for the quarter ended Dec. 27, Sysco reported a profit of $157 million, or 27 cents a share, down from $211 million, or 36 cents a share, a year earlier. Excluding merger and integration-planning expenses and other items, earnings rose to 41 cents a share from 39 cents the year earlier.
Revenue increased 7.6% to $12.1 billion.
Analysts polled by Thomson Reuters expected a per-share profit of 41 cents and revenue of $11.93 billion.
The company’s food-cost inflation was 6%, driven mainly by the meat, dairy and seafood categories.
Operating costs grew 10% due to an increase in payroll expenses.
Sysco and traditional distributors have struggled in recent years with declining profit margins, as higher commodity and transportation costs make it tough to beat the low prices of a growing sector of self-service wholesale food stores, such as Costco WholesaleCorp. and Restaurant Depot.
Shares of Sysco had risen 12% in the past 12 months through Friday’s close.
