Shares of Sysco Corp SYY declined 2% on Monday after it terminated its merger agreement with US Foods. This came after a U.S. federal judge temporarily blocked the deal last week, as was urged by the Federal Trade Commission (FTC). The FTC had filed an antitrust lawsuit in February to block the $3.5 billion controversial merger of the two largest U.S. food distributors. The deal was announced in Dec 2013.
The FTC was concerned that the merger would reduce competition nationwide and in local markets for foodservice distribution. These two are the biggest food distributors to offer nationwide contracts and deliver food and other supplies to hotels, hospitals and fast food restaurants. The combined entity would have held 75% share of the national market, according to the FTC, and would thus have enough power to control or raise prices for customers.
Sysco’s officials challenged FTC’s view and stated that their business is based on local markets, where competition is already fierce.
Houston-based Sysco tried its level best to resolve FTC’s concerns. In order to seek FTC’s approval for the merger, Sysco, on Feb 2, offered to sell 11 facilities of US Foods to the Performance Food Group. However, FTC still found the offer inadequate.
Finally, the deal was cancelled and with that, the agreement with Performance Food Group was also terminated.
Sysco, though disappointed with the court’s decision, was quite certain about this outcome. It already started developing plans for the business. Moreover, the company continues to plan other smaller acquisitions.
However, the termination of the merger agreement came at a hefty price. Sysco will now have to pay $300 million as break-up fee to the owners of US Foods. Also, the company will have to pay $12.5 million to Performance Food Group.
In addition, Sysco has reportedly spent more than $400 million for integration planning, as financing charges and for defending the transaction in court, per Reuters analysis.
Furthermore, Sysco will have to begin the process of redeeming the $5 billion of merger-related debt under the mandatory redemption provisions contained within those notes. This process is expected to take no more than 40 days.
Nevertheless, Sysco has decided to spend $3 billion over the next two years to buy back shares, in addition to the present share repurchase sanctions, in an effort to make it up to the shareholders.
Sysco now carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Some better-ranked companies in the broader consumer staple sector include Ingredion, Inc. INGR, McCormick & Co., Inc. MKC and Post Holdings, Inc. POST. All of them carry a Zacks Rank #2 (Buy).
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