Chicken and eggs
Sysco’s $3.5 billion deal to buy US Foods may choke on unfavorable precedent. America’s two largest food service companies say their union would preserve local competition. But critics argue that’s beside the point, because chain customers have made their business national. Similar logic led trustbusters to nix AT&T’s $39 billion purchase of T-Mobile US in 2011.
Defining markets is central to antitrust analysis, but it can be surprisingly tricky. Drugstore mergers, for example, were traditionally judged by their effect on local competition. In 1996, though, Rite Aid’s $1.8 billion takeover of rival chain Revco was essentially blocked as harmful to insurers and others who paid for drugs in far-flung places. The relevant market became more regional than local.
A similar shift occurred in the cellphone sector. Most deals historically involved geographically distinct providers filling coverage gaps, so trustbusters focused on competition within regions. AT&T counted on that approach when it bid for T-Mobile US. But the Justice Department realized phone service had gone national, and killed the deal between America’s second- and fourth-largest operators.
The food service business may be next. It has long been fragmented, with restaurants, hotels and other customers choosing among a host of distributors. In fact, Sysco and US Foods claim that, combined, they would control only about a quarter of the $235 billion North American market.
As many customers have expanded across the country, though, so have the distributors’ services. Sysco and US Foods are among the very few that contract with national chains, whose need for consistent victuals can exclude local purveyors. Combining the top two players in that business could ring alarms for the Federal Trade Commission.
Sysco says it’s talking to the FTC, though the regulator has warned it might sue to stop the transaction. The company has options. For example, it offered to sell up to $2 billion in assets to beef up competitors. Watchdogs may also still take into account local competition in food distribution, leaving room for settlement. And the deal, Sysco insists, creates enormous efficiencies. Even so, the food distributors’ merger may prove tough for the FTC to swallow.