By Diane Bartz
WASHINGTON Jan 31 The antitrust battle over
whether food giant Sysco Corp will be allowed to buy
rival US Foods Inc will likely focus on whether the
merger will drive up costs for thousands of restaurants,
hospitals and hotels that they supply on nationwide contracts.
The Federal Trade Commission will examine Sysco's $3.5
billion deal to buy debt-ridden US Foods from private equity,
which was announced in December and would combine the only two
food suppliers with a nationwide reach.
While the review is in early stages, the mega-merger has
already rattled customers who rely on the companies for
everything from pre-scrambled eggs for school meals to truffle
mousse desserts for high-end restaurants.
One source said some restaurants and school districts have
begun to discuss how to oppose it, and hospital food providers
are "buzzing" about the proposed transaction, according to a
The main concern is that national buying groups that
negotiate for perhaps hundreds of hospitals or hotels will no
longer be able to play Sysco and US Foods off against each other
to get the best contracts for their members.
"If there's a problem here, it's in the national market
place," said Seth Bloom, a former general counsel of the U.S.
Senate Antitrust Subcommittee. "There is a potential for a
problem even if the (overall) market share isn't that large."
Bloom also said a national-level problem could be fixed if
the companies agreed to sell off enough warehouses, food
distribution centers or other assets to build a regional
competitor up into a national competitor.
Restaurants, schools, hospitals and hotels spend $223
billion annually buying food and other products to serve meals
for their customers, according to industry data experts
Sysco is by far the biggest food distributor, with revenues
of $39 billion in 2012. US Foods, the only other company with
nationwide reach, is No. 2, with $21 billion in revenue.
Following the giants are Performance Food Group ($12 billion in
revenues); Reinhart Foodservice ($6 billion) and Gordon Food
Service Inc at $5 billion, according to consulting firm
The FTC will approve the merger if it complies with
antitrust law, but can try to stop it or require asset sales if
it would severely damage competition or drive up costs.
The agency held meetings with regional competitors,
including Performance Food Group, on Thursday and Friday of this
week, according to a source, who was not authorized to speak on
In addition, the Florida and Indiana attorneys general have
acknowledged that they are part of a "multi-state group"
reviewing the deal. There are 11 attorneys general in the group,
the source said.
John Briggs, an antitrust expert with Axinn, Veltrop and
Harkrider, said the deal could live or die depending on what
national customers tell officials about the likely price effect
on them. "I think there's a chance that the deal won't happen,"
Sysco defends the merger as efficient and good for
customers. "Sysco operates in a highly competitive and
fragmented space," the company said in a statement this week.
"This proposed merger will allow us to take meaningful cost out
of the system and thereby make Sysco more competitive."
Sysco, whose shares jumped when the deal was announced in
December, has said that it would be able to save money with
fewer warehouses and fuller trucks and thus drive out costs.
Profit margins in the industry are tight, and have been
getting tighter in recent years, but this deal would allow Sysco
to make them larger, according to an industry expert who was not
authorized to speak on the record.
"US (Foods) is known for being extremely price competitive
in their efforts to secure new business, and this has had a
direct impact on the falloff in Sysco's margin on their street
customers," said the expert, referring to individual customers
or small chains.
"Taking US (Foods) out of the equation will help Sysco
increase their margins. And everybody else," the expert said.
David Balto, a veteran of the FTC who has clients concerned
about the deal, said the market power of the two companies could
prove problematic for the prospects of approval.
"If you look at the crucial competition in the market, it's
between US Foods and Sysco," Balto.
Sysco, which will assume US Foods' debt of $4.7 billion,
said it expected about $600 million in annual cost savings
within three to four years.
Sysco has said that it would limit any divestitures in the
deal to $2 billion in revenues. US Foods would receive $300
million in a termination fee if the deal is scrapped.
Diana Moss, an antitrust expert who teaches economics at the
University of Colorado, said it's hard to see how divestitures
would resolve this deal's problems.
"I'd be skeptical that the way the market is structured,
that they could easily pull that off," said Moss, who believes
that the deal should be stopped.