Shares of Sysco Corp SYY declined 1.92% in after-market trading on Jun 23 after a federal judge temporarily blocked Sysco from buying US Foods, as was urged by Federal Trade Commission (FTC). FTC has also requested the U.S. District Court for the District of Columbia to further review the merger deal.
Houston-based Sysco was disappointed with the court’s decision, but is unlikely to go for further review as it is a very lengthy process. In fact, Sysco was quite certain about this kind of a verdict and has been developing plans for the business moving forward.
The judge's decision came as a victory for the FTC, which has been trying to block the $3.5 billion controversial merger of the two largest U.S. food distributors 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. 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 FTC’s view and stated that their business is based on local markets, where competition is already fierce.
Sysco tried its level best to resolve FTC’s concerns over the past 12 months. 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, contingent upon the closing of its proposed merger with US Foods. However, FTC did not find this offer adequate as these divestitures would not have helped to restore lost competition.
If the deal fails, Sysco will have to pay $300 million to US Foods as a termination fee. Also, the company will have to pay up to $25 million to Performance Food Group, which has agreed to buy assets to be divested as part of the Sysco-US Foods deal. After the court’s decision, it is likely the end of the road for the deal.
Sysco now carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Some better-ranked companies in the broader consumer staple sector include General Mills, Inc. GIS, McCormick & Co., Inc. MKC and Post Holdings, Inc. POST. All of them carry a Zacks Rank #2 (Buy).
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