(Reuters) - Lawyers for Sysco Corp, the No. 1 U.S. food distribution company, told a judge that competition from regional rivals would prevent the company from raising prices if it is allowed to buy US Foods Inc, the market’s No. 2 player.
The Federal Trade Commission sued in February to temporarily stop Sysco’s $3.5 billion bid for US Foods while an internal FTC judge heard the case. Closing arguments in a mini-trial for that preliminary injunction wrapped up late Thursday.
The FTC had argued that Sysco and US Foods were the sole national food distribution companies and thus would be able to raise prices for hotel chains and hospital group purchasing organizations which have nationwide contracts. The FTC said Sysco and US Foods together had 75 percent of that market.
But Sysco’s lawyer, Richard Parker, argued that the company’s offer to sell 11 distribution centers to the nation’s No. 3 Performance Food Group would effectively create a new national competitor. Alternatively, customers could opt to break up their national contracts and instead set up regional contracts with smaller food distributors, he said.
Arguing for the FTC, Stephen Weissman disagreed, citing the additional costs of setting up the smaller contracts.
Judge Amit Mehta, who will decide the case, seemed skeptical of the regional option.
“Regionalizing is not a fair alternative,” he said during the afternoon hearing. “Why should that group of customers have to incur the costs of regionalizing? ... There is a reason for them to sole source.”
Parker, however, argued that growth by other food distribution companies meant that Sysco would have little opportunity to raise prices. And, he said, with PFG buying 11 facilities, it could immediately start bidding for big, national contracts.
“(PFG) has been schmoozing customers and he’s (PFG CEO George Holm) ready to go,” said Parker.
Sysco and US Foods, which is controlled by private equity firms KKR & Co LP and Clayton, Dubilier & Rice LLC, have defended the merger by saying that the market for food distribution is highly competitive. The merger is expected to bring $600 million in annual gains from cost cuts and other measures within three to four years after the deal closes.
The judge did not indicate when he would rule.
The case is Federal Trade Commission v. Sysco Corp, in the U.S. District Court for the District of Columbia, No. 15-00256. (Editing by Christian Plumb)