A U.S. District Court judge upheld Tuesday a preliminary injunction blocking the planned merger of food distribution companies Sysco Corp. and US Foods Inc.
District Court judge Amit Mehta ruled in favor of the Federal Trade Commission’s attempt to halt the deal, which including debt holds an enterprise value of about $8.2 billion. In February, the FTC sued to block the planned merger, saying the combined companies would hurt competition both on a national scale and in local markets where the two distributors dominate.
In the order, Mehta reportedly said that the FTC has shown there is reasonable probability that the proposed merger will substantially impair competition. His opinion was released under seal because it contained confidential business information, according to the Wall Street Journal. A redacted version will be released Friday, according to the report.
The case will move to an FTC administrative trial, scheduled to begin in July, according to Securities and Exchange Commission documents.
Debbie Feinstein, director of the FTC’s Bureau of Competition, said in a statement that the decision to allow the injunction “will preserve competition in both local and national broadline foodservice distribution markets. We look forward to proving at trial that this deal would lead to higher prices and diminished service for customers, including restaurants, hospitals, hotels and schools.”
US Foods and Sysco announced the proposed merger in December 2013, with the goal of creating synergies that would allow them to lower prices. Officials from both companies argued that there is no national market for food distribution, and that there is plenty of room for smaller and specialty distributors.
Under the deal, Sysco agreed to pay $500 million in cash and $3 billion in common stock. US Foods would become a wholly owned subsidiary.
In a statement, Houston-based Sysco officials said they respected the court’s decision, although they were profoundly disappointed in the outcome.
“We diligently pursued this transaction for nearly two years because we strongly believed the merger of Sysco and US Foods would be pro-competitive and good for customers, associates and shareholders,” Sysco president and CEO Bill DeLaney said in a statement. “Nevertheless, we certainly understood this outcome to be possible and have been developing plans for the business moving forward.”
DeLaney said the company will take a few days to closely review the court’s ruling in conjunction with US Foods and “assess our legal and contractual obligations, including the merits of terminating the merger agreement.”
US Foods president and CEO John Lederer said in a statement that the company is “ready for whatever comes next.”
“Throughout the merger review process, we’ve continued to serve our customers with the full support and dedication of our employees and by never forgetting what we’re about: delivering great food, cultivating talented food people and making it easy for our customers to work with us,” Lederer said. “We have the talent, passion and financial foundation to take this company to the next level for our customers and for our employees.”
Rosemont, Ill.-based US Foods reported a $7 million profit in its first quarter ended March 28, but it has reported net losses in each of the past five years, according to Securities and Exchange Commission filings. Some have speculated that the lengthy battle over the merger has left the company in limbo and made it a potential takeover target.
It’s not clear where the injunction leaves Performance Food Group, or PFG, a regional distributor that planned to buy 11 US Foods facilities if the merger was approved.
PFG CEO George Holm testified on behalf of the Sysco-US Foods merger earlier this year, arguing that his expanded company would become a competitor to the merged entity that would keep competition alive.
If the merger agreement terminates under certain circumstances, so does PFG’s asset purchase agreement. If the deal falls through before July 6, PFG may be entitled to a termination fee of $25 million. If the deal fails after July 6, the fee is $50 million, with Sysco and US Foods each responsible for half of that amount, according to SEC documents.
Contact Lisa Jennings at [email protected].
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