Leading U.S. food distributor Sysco Corp. SYY has filed a memorandum in the U.S. Federal District Court for the District of Columbia in opposition to the U.S. Federal Trade Commission's (FTC) effort to block its takeover of US Foods (announced in Dec 2013).
Earlier on Feb 19, the U.S. government filed a lawsuit to block the Sysco-US Foods proposed merger, saying that the deal would eliminate competition in the sector. (Read: Will Sysco Win Antitrust Lawsuit on US Foods Deal?).
FTC believes this preliminary conjunction would temporarily stop the deal while an FTC administrative law judge hears the case. The court’s hearing on the FTC's motion is scheduled to begin on May 5.
Sysco’s merger with US Foods has been controversial from the beginning. The FTC was concerned that the merger would reduce competition nationwide and in local markets for foodservice distribution, as these two companies happen to be the only two food distributors to offer nationwide contracts to deliver food and other supplies to hotels, hospitals and fast food restaurants. A combination of these two companies would control 75% of the national market, according to the FTC, and would give them enough power to control or raise prices for customers.
Sysco’s officials challenged the commission’s view and stated that competition level will not be affected as their business is based on local markets, where competition is fierce.
Sysco has been trying to resolve FTC’s concerns over the past 12 months related to its acquisition of US Foods for approximately $8.2 billion, inclusive of debt. Not only this, in order to seek FTC’s approval for the merger, Sysco, on Feb 2, agreed to sell 11 facilities of US Foods to the Performance Food Group, contingent upon the closing of its proposed merger with US Foods. However, FTC still finds this offer inadequate as these divestitures will not help to restore lost competition.
The deal is important for both the companies, as together they are expected to improve efficiencies, particularly in supply chain, merchandising and general and administrative activities. The merger will give Sysco increased size and scale and will also provide significant cost savings opportunities. In fact, the merger would help create one of the largest food companies in the country.
Sysco now carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Some better-ranked companies in the broader consumer staple sector include Monster Beverage Corp. MNST, Tyson Foods, Inc. TSN and Altria Group, Inc. MO. While Monster Beverage holds a Zacks Rank #1 (Strong Buy), Tyson and Altria Group carry a Zacks Rank #2 (Buy).
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