Sysco’s “Fix-it-First” Foray Fails To Forestall Food Fight With FTC

By Allison F. Sheedy

The U.S. Federal Trade Commission announced yesterday that it is challenging the merger of the nation’s two largest food distributors, US Foods, Inc. and Sysco Corporation.

By a split vote, the FTC decided to file an administrative complaint and to authorize its staff  to go to federal court to seek a temporary restraining order and a preliminary injunction to prevent the parties from consummating the merger, pending the administrative proceeding.

The two Republican appointees on the FTC voted against the action.  The decision of the three Democratic appointees to challenge the merger was hardly unexpected.  The two foodservice giants had been in discussions with the FTC for more than a year trying to convince the consumer protection watchdog that their proposed deal would not pose competitive problems.

As this blog discussed earlier this month, Sysco had made efforts to address the FTC’s concerns.  After reaching impasse with FTC staffers early this year, Sysco tried to craft its own structural remedy and unilaterally announced plans to sell 11 US Foods distribution centers in the West and Midwest to a smaller competitor, Performance Foods Group (“PFG”), if the FTC approved the deal.  As we observed, so-called “fix-it-first” remedies have never been particularly effective when negotiating with the FTC.  And, at least for now, Sysco’s attempt has failed.  However, it is likely that this proposed “remedy” may become an important issue in the federal court action.

The FTC’s administrative complaint seems purposefully crafted to render any structural remedy—whether the divestiture the companies have already agreed to, or otherwise—insufficient for the deal to pass muster.  Deal speculation has long identified the issue of whether there is a “nation-wide” geographic market as a critical element of the deal analysis—as Sysco and US Foods are the only truly national players.  But the complaint alleges not only a national market for foodservice distribution, but 32 local markets.  Sysco’s proffered divestiture addresses only seven of the 32 local markets, and, according to the complaint, does nothing to prop up PFG as a national broadline foodservice distributor.  This pleading suggests that FTC staff views this as an unfixable deal.

Whether this fighting stance stems from the agency’s tense and long negotiations with Sysco, or simply reflects the FTC’s policy positions is immaterial.  The FTC appears prepared to litigate for now.  Of course, the parties could always agree to settle their dispute later for a greater divestiture package than Sysco has previously offered.

Unilateral fix-it-first remedies have faced mixed results in FTC actions.  The issue is whether merging parties can successfully argue that the sufficiency of a remedy proposed (and contractually agreed upon) by a litigating party should be assessed independently and on its merits.  While such proposed remedies may undercut the effectiveness and negotiating leverage of the FTC (the agency most opposed to fix-it-first remedies), the ultimate question is the competitive impact of a particular deal upon the marketplace and consumers.  The FTC’s challenge to the merger of Sysco and US Foods is likely to write the latest chapter in the story of whether this developing strategy can save mergers.

– Edited by Gary J. Malone