Sysco is terminating an $8.2 billion acquisition of food distribution competitor US Foods, days after a federal judge granted the Federal Trade Commission’s request for an injunction on antitrust grounds. Had the merger gone through, the new entity would have controlled roughly 75% of the foodservice marketplace.
Foods distributor Sysco said on Monday it would terminate an $8.2 billion acquisition of private equity-owned competitor US Foods, Forbes reported.
The deal’s cancellation comes just days after a federal judge granted the Federal Trade Commission’s (FTC) request for an injunction on antitrust grounds, Forbes reported.
In December 2013, private equity firms KKR & Co. and Clayton, Dubilier & Rice agreed to sell privately held US Foods to Sysco for $3.5 billion, or an enterprise value of roughly $8.2 billion, a merger that would have combined the two largest foods distributors in the United States. However, this year, the FTC objected to the merger, arguing the combined company would control roughly 75% of the foodservice marketplace, Forbes reported.
The FTC called for an injunction, stating that the merger would lead to higher prices and diminished service for the restaurants, hotels and schools that contract food distributors. State attorneys general in California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee, North Carolina, and the District of Columbia joined the FTC in its complaint this February, Forbes reported.
Last Tuesday, Judge Amit P. Mehta of the Federal District Court for the District of Columbia granted the FTC’s injunction, stating that the antitrust regulator had shown “a reasonable probability that the proposed merger will substantially impair competition in the national customer and local broadline markets and that the equities weigh in favor of injunctive relief,” Forbes reported.
In the wake of the ruling, Sysco is now moving on, as are US Foods and its private equity owners, Forbes reported.
“After reviewing our options, including whether to appeal the Court’s decision, we have concluded that it’s in the best interests of all our stakeholders to move on,” Bill DeLaney, CEO of Sysco, said in a statement. “We believed the merger was the right strategic decision for us, and we are disappointed that it did not come to fruition.”
Sysco will pay US Foods a $300 million breakup fee, and $12.5 million to Performance Food Group, the planned buyer of 11 divested US Foods distribution centers, Forbes reported.
To tide investors over, Sysco said on Monday its board has authorized a $3 billion share buyback, roughly 13% of the company’s outstanding stock, over the next 24 months. Sysco will also redeem $5 billion of merger-related debts, which had redemption provisions in the event a deal fell apart, Forbes reported.
“Sysco and U.S. Foods’ decision to abandon the transaction is a victory for both competition and consumers. The evidence shows that Sysco and US Foods were strong rivals in broadline food distribution whose combination would have harmed consumers,” Debbie Feinstein, director of the regulator’s Bureau of Competition, said in a statement.
The FTC’s victory with Sysco and US Foods may prove a template for regulators in defining national marketplaces that can be used to challenge overly aggressive mergers, Forbes reported.
“This is a very big win for the FTC. They were able to establish how to define a national market for national customers in a hotly contested case,” Bruce Sokler, chair of the antitrust section at law firm Mintz Levin, said.
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