After a year-long investigation into the proposed merger between national food distributors US Foods, Inc. and Sysco Corporation, the Federal Trade Commission (FTC) filed an administrative complaint on February 19, 2015, to block the deal. According to the FTC, the transaction would reduce competition in the market for broadline foodservice distribution nationally and in 32 local markets. The FTC also authorized its staff to seek a temporary restraining order and preliminary injunction in federal district court to enjoin the transaction pending the administrative trial on the merits. Eleven attorneys general have joined the FTC's preliminary injunction complaint, which has not yet been filed. The FTC vote in favor of bringing the enforcement action was 3-2.

Sysco, the largest distributor of food products in the US, is attempting to acquire the second-largest national distributor, US Foods, Inc., in a transaction valued at $8.2 billion. The FTC complaint alleges that Sysco and US Foods are each other's closest competitors in the market for broadline foodsevice distribution, which includes the warehousing, sale and distribution of food and related products, as well as customer service and value-added services. According to the FTC, broadline foodservice distribution is distinguishable from other forms of food distribution based on:

The FTC complaint alleges that the merger will harm two sets of customers:

The FTC identifies a national geographic market and 32 local markets where the transaction will substantially reduce competition. The complaint defines the local markets based on where there are local customers that could be served by either a US Foods or Sysco distribution center, noting that broadline distributors typically draw the majority of their local business from within 100 miles of distribution centers.

The complaint alleges that Sysco will have a post-acquisition market share of 75% nationally and 50% or more in the local markets, triggering a presumption of harm under the Merger Guidelines in each market. The allegations state that Sysco and US Foods compete aggressively on price and non-price factors for national and local business. The complaint quotes extensively from internal documents offering examples of head-to-head competition between the merging parties.

The FTC rejected a proposed fix through which Sysco would have sold 11 distribution centers to a smaller competitor, arguing that the proposed buyer would not be able to compete as aggressively as US Foods to replace the competition lost from the acquisition. The complaint emphasizes the importance of a national footprint and extensive distribution network in order to meet the needs of broadline foodservice customers.

In a press release highlighting the closeness of the FTC's 3-2 vote, Sysco disputed the FTC's market definition, arguing that customers have numerous alternative companies and channels from which to obtain food distribution services. The company took issue with the FTC's attempt to define a national geographic market by arguing that so-called national customers actually rely on multiple local and regional distributors. Sysco also argued that at the local level, restaurants and food operators have many competitive options, including specialty companies and club stores such as Costco.

For more information on FTC merger challenges, see Practice Note, Preliminary Injunctions in FTC and DOJ Merger Challenges and Practice Note, How Antitrust Agencies Analyze M&A.