Top Sysco Executive Defends US Foods Deal in Court Testimony

By Brent Kendall 

WASHINGTON-- Sysco Corp.'s chief executive in federal court testimony on Monday disputed government claims his company could target customers for price increases if it is allowed to acquire rival US Foods Inc.

"It would be a very stupid thing to contemplate," Sysco CEO Bill DeLaney told U.S. District Judge Amit Mehta, who is considering the Federal Trade Commission's challenge to the planned $3.5 billion merger.

Thousands of food distributors compete vigorously for business from restaurants and other customers, and that competition has grown more acute since the financial crisis while industry growth has flattened, Mr. DeLaney said.

Sysco's top executive said the company's acquisition of US Foods would help it cut costs by hundreds of millions of dollars, including through increased purchasing power with food manufacturers. Reducing costs was a top priority for Sysco and the deal would allow it to compete more effectively, he said.

Mr. DeLaney said that if a combined Sysco-US Foods sought to raise prices postmerger, the company would feel the pain from customers, who would take their business to other distributors eager for more clients. Competing food distributors already were picking off some customers during the current transition period when Sysco and US Foods were trying to get their deal across the finish line, he said.

The FTC filed suit in February, asking Judge Mehta to issue a preliminary injunction blocking the deal, which would combine the nation's top two food distributors. The companies provide ingredients, paper goods and a range of other products to restaurants and other institutions that serve food.

Mr. DeLaney's testimony lasted about two hours and came at the beginning of the second week of court proceedings. The FTC presented its case to the judge last week, arguing the merger would combine the only two distribution companies that are national in scope and can offer a broad line of products to customers.

The commission said the transaction would leave both large national customers and small food service players in many local markets vulnerable to higher prices and reduced service.

The companies began presenting a defense Monday with the Sysco chief executive's testimony.

Mr. DeLaney said large restaurant chains, hospitality companies and group purchasing organizations are powerful buyers that negotiate product prices directly with food manufacturers, not Sysco. Those large customers also have leverage against Sysco, he said.

After the merger, both national and local food businesses would still have plenty of distribution choices, Mr. DeLaney said. He also said Sysco and US Foods' plans to divest 11 distribution centers to the industry's next-largest company, Performance Food Group Inc., would position that firm to be a strong national competitor. PFG landed the divested assets "at bargain basement prices," he said.

On cross examination by an FTC lawyer, Mr. DeLaney acknowledged customers had benefited from competition between Sysco and US Foods, and said Sysco had moved in some circumstances to lower its prices to keep US Foods away from some of its customers.

But Sysco also has had to take similar actions to keep from losing business to other competing food distributors, and customers have benefited from that competition, too, he said.

Testimony in the case is expected to continue through Wednesday.

Write to Brent Kendall at [e-mail]

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