The companies overlap in markets across the country and antitrust enforcers have been increasingly willing to put roadblocks in front of deals in which a handful of national players compete against many local players - as many as 15,000 local and regional food distributors are estimated to operate in the U.S.
Because of the expected depth of the review that is likely to be conducted by the Federal Trade Commission, the companies aren't planning to close until the third quarter of 2014 and have made contingencies for significant divestitures. Terms of the deal call for Houston-based Sysco to pay $3 billion in common stock and $500 million in cash for US Foods and to assume or refinance $4.7 billion of net debt.
The companies said the combined entity would have 25% of the U.S. food distribution market. Other estimates range as high as 35%.
The merger agreement shows that the companies recognize some antitrust risk. Generally the agreement obligates each party to take all actions necessary to resolve regulators' objections, but Sysco is not required to divest assets of Sysco or US Foods exceeding $2 billion in annual revenue. To protect itself from the possibility that regulators could block the deal, US Foods negotiated the right to receive a $300 million termination fee if the deal doesn't receive antitrust approval.
"It looks like you're building in some level of divestitures," Guggenheim Securities analyst John Heinbockel remarked to company officials during a conference call after the deal's announcement Monday.
Sysco CEO Bill DeLaney said they were "just using a round number" in setting the $2 billion cap, and the figure was not an estimate for the extent of divestitures regulators ultimately will require.
"We obviously have to go through discussions with regulatory authorities," said Sysco CFO Chris Kreidler, noting that revenue and other projections the company made regarding the deal do not reflect any divestiture predictions. "We've not built in anything in our models in terms of divestitures," he 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 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.
--Written by Bill McConnell In Washington