NEW YORK (The Deal) -- A number of parties, including customers and attorneys general from nearly a dozen states, have met with Federal Trade Commission officials to complain about Sysco's (SYY) $8.2 billion planned acquisition of its next-largest food distribution rival US Foods.
Critics of the deal, who have also been joined by some public interest groups, argue that it will harm competition for food distribution to institutional users such as university cafeterias, military installations, prisons and hotels.
The companies said the combined entity would have 25% of the U.S. food distribution market. Other estimates range as high as 35%.
The real question is whether the FTC will view the deal simply as one that affects numerous local markets across the country or one that also affects a truly national market. Sysco officials have insisted that they do not compete on a national basis to win customers and that even clients such as food service giant Aramark (ARMK) enter contracts on a local basis.
The companies recognized that the FTC might identify some antitrust issues. Sysco has committed to divest assets accounting for up to $2 billion in annual revenue if regulators demand it, but the merger agreement does not obligate the company to spin off assets beyond that cap. US Foods is entitled to receive a $300 million termination fee if the deal doesn't receive antitrust approval.
The deal's critics counter that antitrust issues at the national level do exist and cannot be resolved simply by agreeing to local divestitures.
Barclays Capital analyst Meredith Adler in a February report predicted after her team spoke with a number of industry experts that Sysco would have to divest roughly 15 facilities around the country accounting for roughly $6 billion in annual revenues. Currently, the two companies combined run 253 distribution facilities with $65 billion in annual sales.
Many of the predictions of the Barclays report rely on an analysis conducted by Food & Water Watch, an advocacy organization on food and environmental issues. The organization sent a letter to the FTC predicting that the deal would harm customers in two ways. One is by trending toward a monopoly on service to customers with a nationwide presence like Aramark and Avendra LLC, which services hotels, cruise ship lines, casinos and golf resorts as well as universities and senior living facilities. The other is by reducing the number of outlets that farmers and other food vendors can sell their products to. That will give Sysco "monopsony" power, which means it will be able to force price concessions on its suppliers. The American Antitrust Institute has also expressed concerns about the deal.
Analysts' opinions on the deal aren't universal. Bob Summers of Susquehanna Financial Group, also eyeing the Food & Water Watch analysis, said that nine states would appear to be highly concentrated post-transaction but he also predicted that divestitures would total no more than $1.4 billion, well within the range Sysco deemed acceptable. The transaction "appears doable," he wrote in a March 18 alert.
One antitrust lawyer representing an opponent of the deal, who asked not to be identified, said that for companies like Aramark and Avendra, the deal would cut the number of national food distributors from three to two, leaving only Sysco and Distribution Market Advantage, a co-op of regional distributors. DMA can't be counted on to be a viable competitor over the long-run, the lawyer said, because it is already struggling to secure national accounts. Officials from Aramark and Avendra did not respond to requests for comment.
As for the monopsony power over suppliers, Patrick Woodall, research director and senior policy advocate for Food & Water Watch, said that a number of farmers and attorneys general offices from 11 states have raised concerns about the deal with the FTC. States that have contacted the FTC include Florida, Indiana, Tennessee, Massachusetts, Kansas, New York and Washington.
In a letter to the FTC in January, Food & Water Watch warned that the deal "substantially increases Sysco's market power," allowing it to exercise monopoly power and raise prices on food service operations and handing it monopsony power that would force food manufacturers to accept price cuts. "Consumers could see higher prices for food they eat away from home," the group wrote in its letter to FTC Competition Bureau Director Deborah Feinstein.
Sysco insisted it will not have power to dictate prices either to its customers or to its suppliers. "Sysco operates in a highly competitive and fragmented space," spokesman Charley Wilson said in a prepared statement. "We continually work hard to bring our customers better products and services at competitive prices. This proposed merger will allow us to take meaningful cost out of the system and thereby make Sysco more competitive, more innovative, and better differentiated - all with the goal of helping our customers succeed."