US food distributor Sysco drops plan to merge with US Foods

29 Jun 2015 | Author: | No comments yet »

Regulators Just Effectively Killed Another Big M&A Deal.

WASHINGTON • Following a successful government lawsuit to block the deal, Sysco Corp, 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. “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. The deal’s cancellation comes just days after a federal judge granted the Federal Trade Commission’s request for an injunction on antitrust grounds. In December 2013, private equity firms KKR & Co. and Clayton, Dubilier & Rice struck a deal to sell privately held US Foods to Sysco for $3.5 billion, or an enterprise value of roughly $8.2 billion, a merger that would have combined the two largest foods distributors in the United States.

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 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. State attorneys general in California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee, North Carolina, and the District of Columbia joined the FTC in its complaint in February. The FTC was worried that that would tilt the power too heavily in favor of the foodservice distribution service companies, hurting customers like restaurants, hospitals, hotels and schools, which could have faced higher prices.

Yet Deutsche Bank analyst Karen Short argues Sysco’s shares could rise — “albeit not to the same degree that a Sysco/US Foods’ merger could” — because of the potential for buybacks. 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.

She adds that while Sysco lost time and money in attempting this merger, the company probably doesn’t have to worry about competition from a larger rival. In this respect, KKR was a leader after selling Alliance Boots to Walgreens in 2012, and Big Heart Brands, formerly known as Del Monte Foods , to J.M. The FTC’s victory with Sysco and US Foods may prove a template for regulators in defining national marketplaces that can be used to challenge overly aggressive mergers. “This is a very big win for the FTC. Sokler said Judge Mehta’s ruling will likely be cited and given respect in future FTC cases involving national markets, and possibly even in a judicial review of the regulator’s challenge to the merger of Office Depot and Staples .

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