Sysco Corp (SYY.N) will be left with a bill of around $1 billion if the U.S. government kills its $3.5 billion merger with US Foods, regulatory filings show, underscoring the perils of doing deals that have a good chance of being blocked by antitrust regulators.
Sysco, the biggest U.S. food distributor, has spent more than $400 million so far on a combination of integration planning, financing charges and on defending the transaction in court, based on a Reuters analysis of its filings. To put that into context, Sysco’s net profit for its fiscal year ended June 28, 2014 was $932 million.
If the Federal Trade Commission, which filed a lawsuit to block the merger in February, eventually has its way, Sysco will have to pay US Foods, its No. 2 rival, $300 million as a termination fee. Separately, up to $25 million would go to Performance Food Group, which has agreed to buy assets to be divested as part of the Sysco-US Foods deal.
Furthermore, if the deal does not close by Oct. 8 or is terminated by then, Sysco would likely incur another $265 million in losses, which includes the cost of redeeming $5 billion in bonds set to be used for the acquisition, as well as associated financing costs that have not been booked yet on its balance sheet, filings show.
Even a successful deal would come at a hefty price, as prolonged delays led to higher financing charges and legal advisory fees to fight the government in court. The company had forecast it would close the transaction in the third quarter of 2014 when it announced the deal in December 2013.
Arguments between the FTC and Sysco on whether the deal is legal will conclude with closing arguments on May 28. It is not known when the judge will rule.
MORE AGGRESSIVE STANCE
The potential $1 billion in costs if the merger fails to be completed underscores the dangers that companies face when they decide to go forward with an aggressive deal at a time when the U.S. government is taking a more active stance in stopping deals that reduce competition significantly in an industry.
Comcast’s (CMCSA.O) $45 billion bid for Time Warner Cable (TWC.N), which would have married the two largest U.S. cable operators, collapsed in April due to regulatory opposition.. Comcast spent $336 million on the abortive bid, filings show, but it did not have to pay a break-up fee.
“Mergers can be expensive. They’re an investment in a business’ future success and can help transform an industry,” said Sysco spokesman Charley Wilson. He declined to comment on the deal’s prospects.
Sysco and US Foods, which is controlled by private equity firms KKR & Co LP (KKR.N) and Clayton, Dubilier & Rice LLC, have defended the merger by saying that the market for food distribution is extremely competitive, and that the merger would allow it to capture $600 million in synergies annually three to four years after the deal closes.
The FTC says that merging the two biggest U.S. food distributors would give Sysco 75 percent of the market for customers like hotel chains which want nationwide contracts for a broad range of goods, from onions to napkins to cleaning supplies. That dominance of the market would allow Sysco to raise prices, the FTC argues.
The perception that regulators have become tougher could also make sellers more reluctant to accept takeover offers from big rivals, forcing buyers to either offer a substantial premium or big regulatory break-up fee to convince unwilling targets, dealmakers said. [ID: nL1N0XL13B]
The FTC declined comment for this story.
But the top antitrust official at the Justice Department, which shares jurisdiction with the FTC and also reviews mergers to ensure they comply with antitrust law, recently expressed frustration with aggressive deals.
“There are some ideas that should never get out of corporate headquarters,” Bill Baer said in April at a meeting of the American Bar Association antitrust section.
“It wastes the time of my people. Basically at the end of the day it’s an embarrassment for companies to get out there and invest in something, get its shareholders all excited and then have to pull out at the last minute,” he said.
Sysco has spent roughly $100 million so far to finance its planned takeover, filings show. Most of the costs were incurred after October, when the company replaced a bridge loan facility with long-term financing for the merger, issuing $5 billion in bonds. Sysco paid roughly $80 million in interest on the debt in the last two quarters.
It spent another $258 million on integration planning and to hire advisers to defend the deal, the filings show. Sysco also spent a further $53 million to allow the two companies’ computer systems to communicate with each other, officials said.
Legal expenses for an antitrust review can easily top $1 million dollars a month if a deal goes to litigation, and could exceed $10 million for the duration of a trial, according to a senior litigator who asked not to be named.
It is unclear whether the prolonged struggle over the deal has led to some less discernible costs for Sysco. Often the management of a company can get distracted by such events or miss out on other possible acquisitions.
Source: Reuters
