October 16, 2014 / 8:10 PM / in 3 years

DEALTALK-Sysco looks to divestitures to nail down US Foods deal

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By Diane Bartz

WASHINGTON, Oct 16 (Reuters) - Food distributor Sysco Corp , fighting to complete a merger with U.S. Foods Inc , is attempting to craft a package of potential asset sales weighty enough to convince U.S. antitrust regulators to approve the deal.

The proposed tie-up is seen as problematic because Sysco and U.S. Foods are the only companies with the geographic reach to offer nationwide contracts to deliver a wide range of goods to customers ranging from hotel chains to fast food restaurants.

Sysco and US Foods, which is owned by private equity companies including KKR & Co, announced the $3.5 billion deal in December.

The Federal Trade Commission, which can approve the deal or file a lawsuit to stop it, remains concerned about the loss of the only national competitor to Sysco, according to two sources with knowledge of the commission's viewpoint.

Three big regional players, Reinhart Foodservice, Performance Food Group and Gordon Food Service, have been negotiating with Sysco to buy certain divested assets.

Sysco is the biggest food distributor and US Foods is No. 2.

Performance, Reinhart and Gordon are major regional players, but each is concentrated on the eastern United States, leaving a wide swath of the west less covered. None of them serves Idaho, Montana, North Dakota, South Dakota, Washington state, Utah or Wyoming, according to the companies' web sites.

The FTC is waiting to see what kind of asset sales Sysco and U.S. Foods can put together to overcome "serious concerns," said one person familiar with the regulators' thinking.

Three others familiar with the FTC's thinking said no decision had been made on whether a lawsuit aimed at stopping the deal would be filed. All four asked not to be named since they did not have authorization to speak on the record.

An official for one of the handful of big, nationwide customers said his company generally preferred national contracts but could work with regional contracts if needed.

"The FTC, ultimately what they're focusing on is the impact on the consumer and I think one of the main things that they're looking at is alternatives on a national level," said the official, who asked that he and his company not be named because of business sensitivities.

The official said that his company had been offered a chance to oppose the proposed deal but had not done so.

Sysco, optimistic that the deal will get done, in August announced a transition team made up of eight Sysco executives and two from U.S. Foods.

The company is in regular talks with the FTC, said Sysco spokesman Charley Wilson, adding, "We still believe that these discussions will lead to completion of the merger in the fourth quarter of this year."

Sysco has said the combined company would be able to maintain fewer warehouses and run fuller trucks, thus driving down costs for customers. (Reporting by Diane Bartz, editing by Ros Krasny and Andrew Hay)

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