Sysco Corporation has terminated its merger agreement with US Foods, days after the U.S. District Court in Washington, D.C., granted the Federal Trade Commission's request for a preliminary injunction to block the proposed Sysco-US Foods merger. This action also terminates an agreement with Performance Food Group (PFG) to purchase US Foods facilities in 11 markets.
Under terms of the merger agreement, the termination of the transaction requires Sysco to pay break-up fees of $300 million to US Foods and $12.5 million to PFG.
"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," said Bill DeLaney, Sysco president and chief executive officer. "We believed the merger was the right strategic decision for us, and we are disappointed that it did not come to fruition. However, we are prepared to move forward with initiatives that will contribute to the success of Sysco and our stakeholders."
DeLaney underscored Sysco's confidence in its existing business with a collective focus on the highest levels of customer service and satisfaction, growing the business, reducing costs and generating substantial value for Sysco's shareholders.
"Everything starts with the customer," DeLaney said. "Our vision remains clear: to be our customers' most valued and trusted business partner. If our customers succeed, then we succeed. Our relentless focus on providing exceptional customer service and differentiated solutions to help our customers grow is unwavering."
"We also will continue to drive earnings through commercial and supply chain initiatives, including category management and revenue management in our core business, as well as pursuing cost-saving opportunities," he said. "We are confident in our ability to achieve these initiatives because of our success to date in transforming nearly all aspects of our business, standing up several commercial and functional capabilities, and taking out or avoiding more than $750 million in annual product and operating costs."
Sysco continues to generate strong and stable cash flow. "We have improved our discipline and efficiency in how we manage our substantial cash flow, and we are committed to grow our free cash flow over time as we move forward," DeLaney said. "We will continue to make prudent investments in our business. We also remain committed to growing our dividend because we know that's important to our shareholders. And, we will continue to look for strategic acquisitions that will enhance shareholder value over time."
Sysco's Board of Directors has authorized the company to spend an additional $3 billion to buy back shares (approximately 13 percent of current outstanding shares at recent prices) over the next two years. The share repurchases will be in addition to the amount normally purchased to offset benefit plans and stock option dilution. The company intends to fund these purchases from new borrowings and cash flow from operations. The intent is to repurchase approximately $1.5 billion in shares in each of the next two years and, as part of the first year's purchases, the company expects to put in place an accelerated share repurchase program. Sysco will continue to assess the merits of repurchasing shares over time.
"While we are very comfortable leveraging our balance sheet to enhance returns to our shareholders, we remain committed to maintaining a solid investment-grade credit rating and a strong balance sheet," DeLaney said. "A strong balance sheet provides the capacity and flexibility to continue to pursue strategic opportunities as they may arise. While we anticipate the possibility that our credit rating may be downgraded as a result of this new share repurchase program, we are comfortable operating our company with higher levels of debt."
Sysco also will begin the process of redeeming the $5 billion of merger-related debt under the mandatory redemption provisions contained within those notes. This process is expected to take no more than 40 days.
Following a June 23, 2015 ruling by the U.S. District Court for the District of Columbia granting the Federal Trade Commission request for a preliminary injunction, Sysco and US Foods abandoned their proposed merger, and the Commission has now dismissed its administrative complaint.
In light of those events, FTC Chairwoman Edith Ramirez issued the following statement: “The parties’ decision to abandon their merger following the federal district court decision in favor of the FTC is a good outcome,” said FTC Chairwoman Ramirez. “This proposed merger between the country’s two largest foodservice distributors would have likely increased prices paid by restaurants, hotels, cafeterias, and hospitals across the country for food products and related services, and ultimately the prices paid by people eating at those establishments. The FTC is committed to maintaining vigorous competition in markets like this one that directly impact prices consumers pay for everyday purchases.”
In February 2015, the Commission challenged Sysco’s proposed $8.2 billion merger with rival US Foods, alleging that the deal would significantly reduce competition in broadline foodservice distribution, both nationwide and in a large number of local markets. The complaint alleged that the merged entity would account for 75% of the sales to national customers of broadline services, where the merging parties are the only firms with a truly national footprint that allows them to compete to serve customers, such as restaurants, group-purchasing organizations (GPOs), and foodservice companies, with locations nationwide. No other company could offset the competition that would have been lost to this merger.
Broadline distributors offer extensive product lines, including national-brand and private-label food products, and provide frequent and flexible delivery, high levels of customer service, and other value-added services such as order tracking, menu planning, and nutritional information.
In his 128-page opinion preliminarily stopping the deal, District Court Judge Amit Mehta ruled that “because the proposed merger would eliminate head-to-head competition between the number one and number two competitors in the market for national customers, the merger is likely to lead to unilateral anticompetitive effects in that market.”
The court also rejected the parties’ argument that their agreement with the country’s third-largest broadline distributor, Performance Food Group, to divest 11 distribution centers, would offset the significant competitive harm likely to result from the merger.
