Major food distributor, SYSCO Corporation (NYSE:SYY) has discarded plans to merge with its biggest rival, US Foods, following pressure from the government.
The merger between the two firms has been brewing for almost two years, but the dealings have been halted by a preliminary injunction issued by District Judge Amit Mehta in Washington. The injunction sought to stop the merger citing that the deal could be bad for the competition. The lawsuit was filed by the Federal Trade Commission and was based on antitrust issues.
Due to the termination of the deal, Sysco will incur some break-up costs. They include a payment of $300 million to US Foods and $12.5 million to a third party firm that had agreed to purchase 11 facilities that Synco planned to sell. Disposing the 11 units was a strategy aimed at satisfying the requirements of the US supervisory bodies.
SYSCO Corporation (NYSE:SYY) had been fighting the lawsuit since February, but the company lost that battle last week. Sysco’s chief executive Bill DeLaney said that the company has decided to move on after a careful review of the situation. He also added that the merger would have been the right strategic path were it not for the unfortunate turn of events.
Sysco also plans to spend $3 billion to repurchase shares in the next two years. The company also announced that it will keep on analyzing the advantages of buying the shares over time. Sysco lost a lot of finances from the failed merger. The company reported that it had spent more than 40% of its net profit in the 2014 financial year. More than $400 million had been spent on financing charges, integration planning, and not forgetting the legal charges in defense of the merger.
Not only has the dissolution of the merger plans come at a great cost financially, but also at a great cost in terms of its future plans. The merger would have been a great strategy towards reducing costs. The cost reduction effect would have trickled down to the customers.