A year ago, Performance Food Group CEO George Holm argued to the Federal Trade Commission that the merger of Sysco and US Foods would be bad for competition.
Recently, Holm has become a backer of the merger, and during hearings this week in front of a federal judge, the FTC called Holm as a “hostile witness,” and had two days of exchanges described in reports as “testy.”
Holm’s change in view is related to PFG’s agreement to buy 11 US Foods facilities from the merged company, assuming the deal is allowed to proceed.
The status of PFG is a critical element in the case between the FTC and Sysco over whether the merger of the two largest broadline distributors would harm competition. The longer-than-expected testimony of Holm, according to the Wall Street Journal, is testament to that importance.
The FTC has sued to block the merger of the two companies, which announced an $8.2 billion merger 17 months ago. The commission has sought a temporary restraining order to stop the deal, and the fate of the merger almost certainly rests with the outcome of that request.
The FTC argues that merging the two companies would harm competition because they would control three-quarters of the market for national broadline distribution services. Sysco counters that there is no such market, and that the distribution business has thousands of competitors of all sizes.
The importance of PFG is based on whether its acquisition of those 11 facilities would establish itself as a national competitor to the merged Sysco-US Foods. If it can, that helps Sysco’s case for the deal’s approval. If it can’t, that backs the FTC’s contention that the merger would hurt competition.
Many observers have speculated that a competitor to the merged Sysco-US Foods would emerge eventually, at the very least because restaurants and other foodservice companies would demand a second option. In addition, there are other regional distributors, and the fragmented market is likely to go through a period of consolidation.
Performance Food Group is in a position to emerge as that competitor, but the question is whether its emergence would be fast enough to satisfy U.S. District Judge Amit Mehta — whose interpretation of the distribution market will determine the outcome of the case.
Holm testified this week that the 11 facilities would improve his company’s reach, and, according to the Wall Street Journal, he also outlined plans to expand his company’s capacity even further.
But the FTC argues that PFG’s increased size wouldn’t be enough to establish an immediate competitive threat to Sysco–US Foods’ dominance. FTC attorneys questioned Holm about his previous comments about the merger, suggesting that it would lead to increased prices.
CT Financial News, a financial news website that has been following the case, tweeted that the consensus among observers at the hearing is that Holm’s testimony was “damaging Sysco.”
$SYY - #FTC questions PFG's Holm in closed door. Consensus in hall that testimony damaging Sysco. #antitrust #mergers #business #news
— CTFinancialNews (@ct_fin_news) May 7, 2015
Debra Bachar, president of the food industry consulting firm Blueberry Business Group Ltd., said in an interview that she doesn’t think PFG would be able to be a big national competitor immediately.
“The FTC requires that competition be in a position to compete fairly the day following the close of the merger — hence, George’s claim that PFG could hit the ground running, I don’t think that’s possible,” said Bachar, who has been following the case. “Operators in many parts of the country say they don’t know who PFG is, and I believe PFG would require a ramp-up period to mirror Sysco’s service sophistication nationally.
“I think PFG is a fine regional broadliner, but lacks the professionalization required to be a formidable Sysco competitor right now.”
The hearing is still expected to last several days. So far, only the FTC has called witnesses. Sysco is expected to call its own witnesses, which will likely include a lengthy sampling of restaurant CEOs, Sysco’s own executives and economists.
Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze
