US Foods Will Kill Sysco Deal if Court Delays Merger, Executive Says -- Update

By Brent Kendall 

WASHINGTON--A US Foods Inc. executive said in federal court Monday that his company would walk away from its planned merger with rival Sysco Corp. if the presiding judge issues an injunction to preliminarily block the deal.

David Schreibman, an executive vice president for strategy at US Foods, told U.S. District Judge Amit Mehta his company isn't willing to endure additional lengthy periods of uncertainty about its business while engaging in a protracted legal fight with U.S. antitrust enforcers.

The Federal Trade Commission, which spent more than a year reviewing Sysco's proposed acquisition of US Foods, sued the companies in February. The commission wants Judge Mehta to block the deal preliminarily while it holds a longer in-house administrative beginning in July.

"We will terminate if this court enjoins the transaction," Mr. Schreibman said.

Monday's court proceedings saw testimony from top executives at both companies attempting to rebut the FTC's case against 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.

Sysco Corp. CEO Bill DeLaney disputed government claims his company could target customers for price increases if it is allowed to acquire US Foods.

"It would be a very stupid thing to contemplate," Mr. DeLaney told Judge Mehta.

Thousands of food distributors compete 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.

Mr. DeLaney 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.

He said that if a combined Sysco-US Foods sought to raise prices after a merger, the company would feel the pain from customers, who would take their business to other distributors eager for more clients.

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.

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 plans by Sysco and US Foods 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.

Mr. Schreibman said food distributors are facing competition from cash-and-carry businesses like Restaurant Depot, where local businesses can go and buy the goods they need at a cost advantage.

On cross-examination, the FTC suggested Mr. Schreibman couldn't point to examples where US Foods had lowered its prices in bidding for business in response to cash-and-carry competition.

FTC lawyers also said both Sysco and US Foods could make significant progress on cutting costs without the merger.

Testimony in the case is expected to continue through Wednesday.

Write to Brent Kendall at [e-mail]

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