Sysco-US Foods Merger Hinges on Interpretation of Marketplace

WASHINGTON--A federal judge on Tuesday indicated that how he interprets the food distribution marketplace will be the key factor in deciding whether to block the planned merger of rivals Sysco Corp. and US Foods Inc.

U.S. District Judge Amit Mehta heard opening statements for an expected seven days of hearings on the Federal Trade Commission's challenge to the merger, a rare event in which the government and companies face off in court over the details of a planned tie-up.

The proposed deal would combine the companies that distribute ingredients and supplies to restaurants, schools and other customers that serve food.

The FTC sought to portray the two as in a distinct league from other industry participants such as regional, local and specialty food distributors. Those smaller operations can't replace competition that will be lost by the merger, and both large national customers and local food-service businesses will be harmed if Sysco and US Foods combine, FTC lawyer Stephen Weissman told the judge.

Lawyers for the companies said the market was large and sprawling, with more than 15,000 businesses of all shapes and sizes competing to distribute food to restaurants and other customers. Restaurants use a variety of different types of suppliers and would take their business elsewhere if a combined Sysco-US Foods raised prices after the merger, Sysco lawyer Richard Parker said.

Judge Mehta interrupted the lawyers on several occasions, with questions and observations about the case. The judge noted the FTC's case against the merger is built in part on distinguishing between different modes of distribution for food supplies. And he wondered how he was supposed to factor in wholesale cash-and-carry stores such as Restaurant Depot, where restaurants and other businesses can go and buy the goods they need at competitive prices.

"Really that seems to me where the rubber meets the road," he said.

The judge suggested the case presented unique issues and was more difficult to analyze than some other recent merger cases because Sysco and US Foods sell so many different types of products and services.

Judge Mehta also asked lawyers for the companies whether there were at least some large national food service customers who required nationwide distribution networks offered by Sysco and US Foods, but not by other distributors. The companies' lawyers said the FTC misunderstood how such large customers do business.

Tuesday's session was held in open court, but because both sides relied upon confidential business material in their presentations, the lawyers sometimes spoke in code, referring only generally to detailed business documents that were being shown to the judge but not the audience.

The FTC is asking Judge Mehta to issue a preliminary injunction blocking the deal while it holds a more detailed in-house trial in July. The judge's ruling, however, is likely to be crucial to whether the merger survives.

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