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TheStreet Open House

Sysco-US Foods Merger Under Fire From Teamsters

WASHINGTON (The Deal) -- A major union representing workers at Sysco Corp. (SYY) and US Foods  said Thursday the merger partners have underestimated the market share the combined company would have if their $8.2 billion combination is cleared by the Federal Trade Commission.

Representatives for the International Brotherhood of Teamsters, which represents 11,500 drivers and warehouse workers for the firms, said in many markets the merged company would have 70% of the market for distributing food to restaurants and institutional clients.

"This merger … will not only result in significant job loss for our members but major operating problems for Sysco and US Foods customers resulting from a virtual market monopoly in every market in the continental U.S.," said Steve P. Vairma, Teamsters International vice president and director of the union's warehouse division.

The Teamsters' estimate surpasses those of many Wall Street analysts and even other antitrust watchdogs that have criticized the deal. The American Antitrust Institute, for instance, has estimated the combined market share to be 54% of the broadline market.

The companies, on the other hand, have said they hold only 25% of the U.S. food distribution market.

The union conceded that it doesn't have the confidential revenue data the companies must submit to help the FTC measure the competitive impact of the deal and instead used surveys of available floor distribution space in the broadline food distribution business and of the number of employees employed by the firms and their competitors as proxies for revenue data. The antitrust lawyer who helped them in the analysis, Baker & Miller PLLC partner and former Department of Justice antitrust chief Don Baker, insisted that even with 5% to 10% divergence from the FTC's measurement, the market concentration measures would generate major concern at the FTC.

The Teamsters found that the merged company would hold 60% in metro Chicago, 70% in Los Angeles and Southern California, more than 70% in metro Philadelphia, 75% in the midwestern region around Denver and 80% in Minneapolis-St. Paul.

If corroborated by the FTC, the market shares estimated by the Teamsters would obligate the agency to require sizable divestitures for which there may not be viable buyers, the Teamsters warned.

Sysco has pledged to divest operations with annual revenues totaling up to $2 billion if required by the FTC.

The competing numbers point to a lengthy review that will force the companies to close later than their third-quarter 2014 prediction and creates a high likelihood that the deal will be challenged in court by the FTC, the union argued.

The deal was announced in December, and the FTC issued a second request for information extending its review of the deal on Feb. 18.

Baker predicted that an FTC decision on the deal before Christmas is unlikely. The Teamsters insisted that divestitures aren't an obvious option to solving the competitive problem because in most cases there is only one other major player in the market. So a divestiture in most cases would still reduce the number of players in a market to two from three.

Divesting to smaller regional players and new entrants to a particular market doesn't fix the competitive problems either, the union argued, because customers can easily escape from their contacts.

"With 70% of volume going to customers with at-will contracts, there's nothing for a competitor to effectively buy from Sysco-US Foods other than hard assets like distribution facilities, trucks, etc.," Vairma said. "Institutional contracts have many escape provisions for customers — breach of contract clauses, early termination windows. Neither Sysco nor US Foods can divest their true product offerings — catalogues, services or pricing to a third party."

Previous mergers, many carried out by Sysco and US Foods, have shown that it takes years to build market share, Vairma said.

"No one in the industry has ever bought a facility, loaded it with product and then taken significant market share overnight," he said. Expectation that a divestiture buyer could build market share instantly "would essentially be a science experiment" by the FTC, he said.

As a result, even if the deal isn't challenged it can't be resolved until Christmas because of the complexity of working out divestitures, Baker said.

Sysco is being represented in the antitrust review by Wachtell, Lipton, Rosen & Katz partners Joseph Larson and Damian Didden. US Foods is being represented by Simpson Thacher & Bartlett LLP partner Joseph Tringali and associate Evan Cohen. Absent divestitures, the combined company would run 253 distribution facilities with $65 billion in annual sales. Sysco officials said the deal would allow $600 million in annual cost savings within three to four years.

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