NEW YORK (The Deal) -- Sysco (SYY) chief executive Bill DeLaney is gearing up for a big court fight over the Federal Trade Commission's lawsuit to block his company's $8.2 billion deal to buy rival broadline food distributor US Foods.
Although Sysco and US Foods clearly understood their deal carried antitrust risk, they had been optimistic about getting federal approval because in recent years a handful of transactions that appeared to be presumptively anticompetitive were cleared by regulators after the parties showed that their customers were being serviced by a variety of competitors.
Those deals included the Office Depot (ODP) merger with OfficeMax in 2013, cleared after the FTC found that the office supply business is no longer dominated by specialized bi- box retailers but has competition from general retailers and online providers. Another was the commission's 2012 unconditional approval of Express Scripts' (ESRX) $28 billion purchase of rival pharmacy benefits manager Medco Health Solutions. In the Medco deal, the FTC found that despite the already high market shares held by the big three pharmacy benefit managers, which included the merging parties and CVS Health (CVS), there was also new competition from a growing number of health plan-owned PBMs and smaller stand-alone PBMs.
Given those FTC approvals, it's understandable why DeLaney was taken aback by the government's challenge to his transaction. Like the OfficeMax and Medco transactions, acquiring US Foods would combine his firm with a very similar, very large competitor. But also like those deals, his customers were being served by numerous competitors with different business models, sizes and geographic footprints than his company's. When the FTC announced its challenge to the US Foods deal on Feb. 19 he accused the commission of disregarding "the existence of myriad local suppliers, including broadline companies, specialty companies, cash-and-carry, and club stores with whom Sysco and US Foods compete on a daily basis."
Bruce Sokler, chairman of the antitrust section at Mintz, Levin, Cohn, Ferris Glovsky and Popeo, said he's not surprised by DeLaney's frustration. Transactions between close competitors these days are likely to fall into a gray area when it comes to predictability. "The regulators' views on markets are evolving and they have been demonstrating a decided willingness to take fresh looks," he said. "That the Office Depot/OfficeMax deal would have had a different result 15 years ago shows that."
However, the regulators' willingness to rethink how they decide which companies are considered part of any given market doesn't always work in favor of merging parties, Sokler noted. AT&T (T) learned that lesson the hard way when the Department of Justice scotched the company's plan to acquire T-Mobile US (TMUS) in 2011, in large part because the DOJ found there was a national market for wireless service. Previously, wireless deals had been judged based on how they affected competition in individual local markets.
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