Sysco Holds to Quick Wrap-up of Antitrust Issues for US Foods Deal

WASHINGTON ( The Deal) --  Sysco  ( SYY) continues to predict it will close its $8.2 billion acquisition of privately held US Foods in the third or fourth quarter but a debt offering the company is putting together to fund the deal gives the company plenty of leeway for a drawn-out battle with the Federal Trade Commission over antitrust issues.

On Tuesday Sysco issued a revised prospectus for a roughly $5 billion debt issuance that will help fund the deal. The specific size of the offering remains to be determined but another term of the offering gives the company roughly a year to close the deal before the money would have to be returned to investors if the deal isn't consummated. The offering due to close sometime next month.

The company has maintained that it will resolve competitive concerns raised by the FTC relatively soon and will be able to complete the transactions, which will join the country's two largest distributors to restaurants and institutions such as hospitals, military bases and university food service operations.

The deal is also being investigated by several states attorneys general and is being opposed by some consumer and antitrust watchdogs as well as the International Brotherhood of Teamsters, which represents 11,500 drivers and warehouse workers for the merging companies. The Wall Street Journal noted the antitrust hurdles in a report Tuesday.

According to the prospectus for the debt offering, if the merger is terminated or does not close by Oct. 8, 2015, Sysco will be required to redeem the notes at 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest from the date of initial issuance.

A Sysco spokesperson declined to comment on either the implications of the redemption deadline or the Journal article.

Sysco said it intends to use the offering's proceeds to pay the $490 million cash portion of the merger consideration, to refinance approximately $4.22 billion of US Foods debt, to unwind cash flow hedges of $133 million that it entered into in contemplation of assuming or refinancing the US Foods debt and to repay some portion of Sysco's outstanding commercial paper and to pay expected future costs of approximately $45.6 million related to the merger.

Critics of the deal have predicted a tough antitrust review since the deal was announced in December. The FTC on Feb. 18, issued a second request for information extending its review of the deal.

Sysco has pledged to divest operations with annual revenues totaling up to $2 billion if required by the FTC. The deal's critics and some industry analysts have predicted the size of divestitures needed to resolve competition concerns is much higher, perhaps as much as $6 billion, and still might not fix the competitive problems created by the merger.

US Foods is entitled to receive a $300 million termination fee if the deal doesn't receive antitrust approval.

In a call with analysts last month, Teamsters officials said the companies have underestimated the market share the combined company would have post merger. The union said the merged company would have as much as 70% of the market for distributing food to restaurants and institutional clients in some areas and will result in significant job loss for union members. It will also result in a virtual market monopoly in every market in the continental U.S. that will create operating problems for Sysco and US Foods customers, a union official said at the time.

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

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 distribution market.

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