Ireland: Food For Thought: Consolidation In Irish Food And Drinks Markets Continues In 2011 Increased Scrutiny From European Commission And NCAs Expected

The 2009 acquisition by Kerry Group plc of Irish competitor, Breeo Foods, remains the leading Irish merger between competing suppliers in the food sector. In overturning the Irish Competition Authority's prohibition decision, the Irish High Court landmark judgment included a number of important statements in respect of market definition, retailer brands and countervailing buyer power in retail markets.¹

A number of those themes have since been developed by the Irish Competition Authority ("CA") as consolidation in the Irish food and drink supply chain has continued. Three mergers between competing food suppliers were notified to the CA in 2010, with the pace of consolidation increasing in 2011, during which, more than ten mergers between competing food suppliers were notified to the CA. This short article reviews some of the highlights from 2011 and briefly considers the outlook for the food sector in 2012.

Irish Highlights

The first merger of 2011 was triggered by the battle for Northern Foods plc when Greencore Group plc ("Greencore") notified its offer for Northern Foods plc to the CA.² The activities affected by the proposal were primarily 'food to go' ("FTG") products, chilled ready meals and chilled sauces.

Although the CA did not consider it necessary to come to any definitive conclusion as to the relevant product markets, the case team undertook a relatively in-depth analysis of the competitive effects of the transaction on the narrowest possible product and geographic markets. The case team considered five candidate product markets:

• the supply of manufactured sandwiches to the retail sector
• the supply of meal salads to the retail sector
• the supply of chilled ready meals ("CRM") to the retail sector
• the supply of chilled sauces to the retail sector
• the supply of manufactured sushi to the retail sector.

The CA reviewed each market on a national basis. On four out of the five markets, the post merger market share was not significant. On the market for sushi, however, the CA estimated the post merger market share to be between 55- 65%. Notwithstanding this finding, the CA concluded that the combined entity would not be in a position to raise prices. The CA's published decision points to two reasons:

• first, all retailers contacted by the CA expressed no concerns about the transaction, and
• second, a recent entrant in the market was held to be a creditable alternative to the post merger entity.

Ultimately the analysis on sushi became irrelevant for the parties as Northern Foods was acquired by Boparan³ and Greencore acquired UK competitor, Uniq, where there was no overlap in sushi.⁴

Narrow market definitions and high market shares were also a feature of the CA's decision on Glanbia Foods' acquisition of the Limerick-based liquid milk business of Kerry Group. The decision is also noteworthy as the parties were not under a statutory obligation to notify the CA as the financial thresholds were not satisfied by the parties.⁵

The CA reviewed six potential candidate markets. Four of those products markets were assessed by reference to provincial or regional markets; one market was assessed on a national basis; and one market was assessed on an island of Ireland basis i.e. the analysis included suppliers in Northern Ireland.

On a number of the candidate markets the post merger market share was extremely high. In the retail liquid milk market for County Dublin, for example, the post merger market share was between 70-80%. In relation to a retail cream market in County Dublin, the post merger market was even higher at between 75-85%.

Again, notwithstanding the apparently high market shares, the CA held that the transaction would not lead to increased prices:

• first, the increment in share was low;
• second, the results of the CA's retailer survey showed that retailers were unconcerned about the effects of the transaction on prices of liquid milk or cream; and
• finally, the presence of retailer brands and the competitive pressure they exert on traditional manufacturer brands was also noted.

These cases once again underline the importance for parties to consider the competitive effects of a transaction on narrow product and geographic markets, even if the parties may not consider these markets appropriate from a commercial perspective. This analysis should be undertaken well in advance of the parties notifying the CA.

In addition to the two cases referred to above, since 2010, the CA has reviewed mergers involving the following segments of the food sector in Ireland:

• chicken products⁶
• alcoholic beverages/non-alcoholic beverages⁷
• home-baking/cooking ingredients⁸
• snack foods⁹
• biscuits¹⁰
• flavours/flavour ingredients¹¹

This growing bank of merger decisions will be useful for companies and advisers considering transactions in the food sector.

Recent UK Experiences

The CA is not alone in dealing with consolidation and developments in the food sector. The UK's Competition Commission ("CC") recently concluded that Kerry Group's completed acquisition of the frozen ready meals business of Headland would not lead to a significant lessening of competition in any UK market.¹²

The CC concluded that the post merger market share was between 40-50% of the fresh ready meals market in the UK

and that Kerry and Headland were each others closest competitors. Notwithstanding the relatively high post merger market share, the CC concluded that spare capacity, expansion of existing capacity and imports would constrain Kerry in the future. Furthermore, at the time of CC's review, customers had already switched suppliers or delisted a number of lines resulting in the loss of nearly £40-50 million of business. The CC concluded that customers had a number of reasonable options which could be successfully deployed to counter any attempt to increase prices, enabling it to conclude that the transaction would not result in higher prices.

Comment and Outlook for 2012

The CA continues to test the effects of a merger on the narrowest possible market definition. It is important for companies to be mindful that their understanding of the 'markets' in which they operate may be approached in a somewhat different manner by the CA. The selection of cases reviewed demonstrates that narrow market definition is not in itself a barrier to obtaining merger control approval. It is, however, critical for parties to consider a number of alternative market definitions and to test the effects of a transaction on those market definitions in advance of progressing commercial negotiations. This is equally the case where the parties fall below the financial thresholds of a mandatory filing and there is no mandatory obligation to make a notification.

This series of food and drink mergers also demonstrates that high market shares are not a barrier to obtaining approval by the CA where customers, primarily large retailers, express no reservations or concerns about the transaction, or where it is easy for existing competitors to expand production or new entry is easy. It will not be sufficient for parties simply to make these assertions and rely solely on precedents; in each case evidence will need to be adduced in support of arguments on retailer buyer power and ease of entry and expansion.

The food sector is also likely to come under increased scrutiny from the European Commission which recently set up a Food Task Force which will sit within DG Competition. The Directorate's Management Plan for 2012 reveals that during the year it will publish a comprehensive report on European Commission Network (ECN) enforcement and market monitoring activities in the food sector, which has been prepared within the ECN Food Subgroup.¹³ This report will no doubt generate further food for thought for companies operating in the sector.

Footnotes

1 See http://www.arthurcox.com/whats-new/publications/briefing-EC-Comp-Group-Competition-Authority.htm for additional information on Kerry/Breeo

2 See decision: M/11/001 – Greencore/Northern Foods

3 See decision M/11/009 – BH Acquisitions/Northern Foods

4 See decision M/11/023 –Greencore/Uniq

5 If parties to a transaction satisfy the thresholds set out in s18(1) of the Competition Act 2002, there is a mandatory obligation to notify and obtain approval from the CA prior to implementation. S18 (3) of Competition Act 2002 permits parties to notify and obtain approval from the CA where the financial thresholds are not satisfied. Merging parties should consider the merit or otherwise of a so-called "voluntary" notifications in situations where they fall below the financial thresholds but, pre-merger, are significant competitors.

6 See Decision M/10/018 – Moy Park/O'Kane

7 See Decision M/10/024 – Gleeson/Gilbeys

8 See Decision M/10/031 – CapVest/Origin Foods/Maiden

9 See Decision M/11/021- Intersnack/Largo Food

10 See Decision M/11/028 – Valeo Foods/Jacob Fruitfield

11 See Decision M/11/032 - Kerry/Cargill

12 Competition Commission report on the completed acquisition by Kerry Foods Limited of the frozen ready meals business of Headland Foods Limited (December 2011)

13 http://ec.europa.eu/atwork/synthesis/amp/doc/comp_mp.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.