The grand planned merger between Sysco Corp (SYY, Financial), the world’s largest food products distributer and its immediate competitor in the United States, US Foods Inc. that was announced in December 2013 expected to complete in this quarter, has been under the scanner ever since the Federal Trade Commission challenged the $3.5 billion deal between the biggest two food distributers of America to protect consumer interests.
Fighting allegations of possible monopolistic dealing and chances of escalated pricing in the food distribution sector, CEO of Sysco, Bill DeLaney testified in the U.S. District Court in front of Judge Amit Mehta on May 11, 2015 saying increasing prices post-merger for individual benefit would be senseless in the vigorously competitive food distribution business that is packed with contenders for sourcing food to restaurants and other food consumers, all operating in a fairly limited financial growth scenario. While David Schreibman, the executive vice president of strategy in US Foods, revealed reluctance to engage in prolonged legal proceedings with intentions to pull out from the deal to avoid uncertain prospects, in case the preliminary ruling defers it for the appealed detailed review.
The acquisition
Sysco Corporation is the American multinational distribution giant, Systems and Services Company, dealing in delivery of food products to restaurants, hospitality businesses like hotels, healthcare centres, educational facilities and other food service consumers. The Energy corridor, Texas-based Fortune 500 company has more than 200 massive deep freeze distribution centres across the U.S. and Canada and with strategic international acquisitions, and it has emerged as the global leader in this business. Series of semi-truck and trailers can be seen across America unloading boxes of fresh, canned, and frozen food and food related materials like paper packaging etc., at food centres. The company declared a strategic plan to acquire the next largest food distributer in United States, privately owned US foods for $8.2 billion catering for debt of $4.7 billion, to bring about substantial cost cutting in operating expenditures through the cumulative and much augmented buying power from food manufacturers and sources. Reducing costs in a tough economy was cited as the top agenda behind this deal. But many U.S. state attorneys disagreed and approached the Federal Trade Commission to probe the proposed merger. After almost a year of review, FTC sued the two deal makers in February 2015 requesting a preliminary block of the upcoming deal as well as an in-depth assessment from July 15.
Current legal proceedings
Last week FTC representatives justified their stand against the two wide-ranging, multiple food product distributers to protect the interests at the national level as well as small scale food distributors. Monday saw defense fight back led by Sysco CEO who agreed that the competition between Sysco and US Foods had led to favorable pricing games and worthy alternatives for the food consumers and expressed plans to empower the next largest food distributor in North America, the $4.6 billion revenue-generating Performance Food Group Inc. (PFGC, Financial) with 11 divested distribution centres to boost its position as a strong national level contender. Performance group Chief Executive George Holm told the court last week that this merger would serve as a major boost to its industry and acquiring assets at negotiated low prices will open the path for extending the group’s distribution capacity.
With the ongoing case gathering steam, one can look forward to more juicy testimonials in the daily court proceedings.
