December 24, 2014 / 12:10 PM / 4 years ago

Sysco, US Foods must narrow gap with rival to clear merger -analysts

WASHINGTON (Reuters) - The proposed merger of Sysco Corp (SYY.N) and US Foods Inc [USFOO.UL] hinges on the top two U.S. food companies helping to turn a far smaller rival into a national player to ease antitrust concerns, but the gap may be too big, analysts said.

Sysco and US Foods, the only two companies with national distribution to hospitals, restaurants and schools, have been discussing the sale of assets such as distribution centers to No. 3 Performance Food Group. Many of those centers are in the western United States, where Performance has little or no presence.

The Federal Trade Commission is still reviewing the $3.5 billion deal announced one year ago.

But non-geographic gaps cannot be addressed through the divestitures, antitrust experts said.

Sysco offers about 400,000 different food service items, and US Foods has 350,000, while PFG has 150,000, according to data provided by the companies.

“That seems like a big discrepancy,” said Andre Barlow of Doyle, Barlow and Mazard PLLC, pointing to the companies’ products, itemized as stock keeping units (SKUs). “If you want to restore that lost competition, you want someone to also provide those SKUs.”

The gap in product offerings makes a major difference to restaurant managers and chefs.

Brenda Langton, a co-owner of Spoonriver restaurant in Minneapolis, would prefer to work with a smaller supplier but uses US Foods because only the two largest ones have the particular tuna needed for her menu.

“Basically this is not a company that I would even choose to do business with, but they’re the only ones that carry some products that I need in restaurant sizes,” said Langton.

Carl Hittinger, an antitrust expert with the law firm Baker Hostetler, said the product gap would likely be a concern for FTC as it considers whether the deal preserves choice for consumers.

“They will take this seriously,” he said.

Some food industry experts said Performance Foods could still ramp up its product offerings, and has done so in the past. “If it’s an available item, a powerful enough customer can pull the product through the system,” said Bob Goldin, executive vice president of the consulting firm Technomic. “It’s all about leverage.”

Sysco and Performance Food Group declined to comment. Sysco executives have said in investor calls that it is trying to reduce the number of items it stocks to reduce duplications and be more efficient.

Reporting by Diane Bartz; Editing by Richard Chang

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