WASHINGTON (Reuters) - Following a successful government lawsuit to block the deal, Sysco Corp (SYY.N), the biggest U.S. food distribution company, dropped plans to merge with US Foods, its biggest rival, Sysco said on Monday.
Cancellation of the deal means Sysco will have to pay a $300 million break-up fee to US Foods and another $12.5 million to a second company, which had agreed to buy 11 facilities that Sysco hoped to sell in order to satisfy U.S. antitrust regulators.
The Federal Trade Commission filed a lawsuit to block the deal in February, and a U.S. federal judge ruled in the agency’s favor last week.
“We have concluded that it’s in the best interests of all our stakeholders to move on,” Bill DeLaney, Sysco president and chief executive officer, said in a statement. “We believed the merger was the right strategic decision for us and we are disappointed that it did not come to fruition.”
In a call with investors, DeLaney indicated that the company’s appetite for deals had not abated. “We definitely believe that there is plenty of acquisition opportunity out there,” he said.
Sysco’s shares were down 2.1 percent in late morning trading on Monday, at $37.54.
Sysco has also decided to spend $3 billion over the next two years to buy back shares, in addition to share purchases it already does, the company said. “Sysco will continue to assess the merits of repurchasing shares over time,” it said in a statement.
The failed deal comes at a hefty price.
In addition to paying off partners in the now-scrapped merger plan, Sysco has spent more than $400 million on a combination of integration planning, financing charges and defending the transaction in court, based on a Reuters analysis of its filings. The total comes to more than 40 percent of Sysco’s net profit of $932 million for its fiscal year ended June 28, 2014.
The FTC had argued that a deal combining the top two companies in the industry would create a behemoth that could raise prices on goods delivered to national customers like hotel and hospital chains, which need delivery of a broad range of products, ranging from vegetables to cleaning supplies.
The FTC said Sysco and US Foods together had 75 percent of that market. Sysco calculated the market share at much less.
Debbie Feinstein, director of the FTC’s Bureau of Competition, called the decision to abandon the deal “a victory for both competition and consumers.”
US Foods is controlled by private equity firms KKR & Co LP (KKR.N) and Clayton, Dubilier & Rice LLC.
The case was Federal Trade Commission v. Sysco Corp, in the U.S. District Court for the District of Columbia, No. 15-00256.
The FTC is preparing for a trial to block a second deal. In May, it sued to stop the proposed $1.9 billion merger of medical technology provider Steris Corp and British sterilization services provider Synergy Health Plc.
That case is FTC v. Steris Corp in the U.S. District Court, Northern District of Ohio. The case is No. 15-01080.
Reporting by Diane Bartz; Additional reporting by Sruthi Ramakrishnan; Editing by Dan Grebler