U.S. Sues to Stop Proposed Merger of Sysco, US Foods

The U.S. government filed a lawsuit on Thursday seeking to block a merger of the nation's two largest food distributors, US Foods Inc and Sysco Corp (NYSE:SYY), which said it will fight the Federal Trade Commission (FTC) action.

Sysco and US Foods unveiled their $3.5 billion deal in December 2013. It was controversial because they are only two companies in their industry able to offer truly nationwide contracts to deliver food and other supplies to customers like hotel chains, hospitals and fast food restaurants.

The FTC announcement sent Sysco's stock price lower, with shares falling 2.8 percent at $38.79 in afternoon New York Stock Exchange trading.

"The facts are strongly in our favor and we look forward to making our case in court," Sysco Chief Executive Bill DeLaney said in a statement.

"Those of us who work in this industry every day know it is fiercely competitive. Customers of all types have access to food distribution services from a wide variety of companies."

Before Thursday's announcement, Sysco had hired law firm O'Melveny & Myers LLP as its counsel for a fight with the FTC.

The agency, which regulates business competition, said that allowing Sysco and US Food to combine would mean higher prices for restaurants, hotels, hospitals and schools that order everything from food to cleaning supplies from one vendor.

"This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline foodservice distributor," Debbie Feinstein, director of the FTC's Bureau of Competition, said in a statement.

"Consumers across the country, and the businesses that serve them, benefit from the healthy competition between Sysco and US Foods," she said.

In hopes of overcoming the FTC's concerns, Sysco and US Foods had offered to sell 11 distribution centers with $5 billion in sales. The goal of the divestitures would be to build the industry's No. 3 company, Performance Food Group, into a viable national competitor, essentially replacing US Foods.

The FTC said in its statement that the divestiture offer was inadequate.

Reuters reported earlier in the day that the FTC was expected to file a lawsuit as soon as Thursday to block the merger.

US Foods is owned by private equity companies including KKR & Co.

(Reporting by Greg Roumeliotis in New York; Additional reporting by Diane Bartz in Washington, D.C.; Editing by Kevin Drawbaugh, Soyoung Kim, Meredith Mazzilli and Eric Beech)