More reviews, less intervention

When it came to Competition and Markets Authority (CMA) investigations, Sainsbury’s/Asda grabbed much of the attention in 2018. But, food and drink supply chain mergers were also in the CMA’s sights. Most years, the CMA looks at 3-4 food and drink mergers, but more than 10 mergers in the sector were investigated by the CMA last year.

Increased M&A could be driving greater CMA scrutiny, or retailers may have become more willing to complain about mergers that could increase supplier’s prices. It is difficult to be certain. Regardless, the CMA’s focus on food and drink is likely to continue in 2019. Already, Pepsi’s planned acquisition of Piper’s Crisps, and Lakeland Dairies’ acquisition of LacPatrick Dairies in Northern Ireland are due for CMA decisions in the next month or so.

More CMA reviews, however, have not translated into more regulatory intervention. The CMA cleared, unconditionally, all of the food and drink mergers it reviewed in 2018 with only one exception.[1] If anything, the CMA may have become more willing to clear food and drink mergers quickly, even when the new business has a very large market share.

CMA clears four food and drink mergers with high market shares in 2018

In the last 10 years, the CMA (and predecessors) scrutinised around 50 food and drink mergers. During this time, six mergers that created businesses with a market share of more than 50% were cleared unconditionally at Phase 1. Four of these six clearances were in 2018.

Two of the four clearances in 2018 involving high market shares followed fairly typical CMA reasoning. In both cases, the CMA found that high market shares masked limited competition between the merging firms due to product differences.

Arla’s acquisition of Yeo Valley, cleared in July 2018, gave it a 50-60% share in the supply of organic milk and 80-90% in organic butter. Clearance was based on the two firms not being particularly close competitors given Arla’s focus on own-label products and Yeo Valley’s on branded products.

Similarly, albeit further up the supply chain, Aviagen’s acquisition of Hubbard brought together two chicken parent stock businesses with large market shares (around 70-90%), and was cleared in February 2018. Aviagen’s focus on conventional stock, with a very limited presence in slow-growing stock, and the obverse for Hubbard, meant that the firms were not regarded as close competitors.

The other two high market share clearances, in November and December 2018, were Tayto Group’s acquisition of The Real Pork Crackling Company, which gave it more than 70% of the share of supply for branded savoury pork snacks, and Valeo Food’s acquisition of Tangerine Confectionary, which now supplies 50-60% of own-label mints.

Clearance of both transactions was a result of the CMA taking a favourable view on three issues: (i) the ability of the remaining, much smaller, competitors to provide a viable alternative for customers (primarily retailers) if the merged business sought to increase prices; (ii) retailers’ ability to use their negotiating power to prevent these suppliers from increasing prices; and (iii) consumers’ willingness to switch to other products if prices were to increase.

Competition from smaller firms

The CMA’s acceptance, in both cases, that smaller competitors represented viable alternatives for retailers contrasts with its approach at Phase 1 in most other similar cases. This includes Mueller’s acquisition of Dairy Crest’s dairy operations in 2015, Diageo’s purchase of a controlling shareholding in United Spirits in 2014, and Boparan’s purchase of Brookes and Avana from Premier Foods in 2012.

In these and other cases, the conclusion at Phase 1 was that smaller competitors did not have sufficient spare capacity, and were unlikely to be able to expand quickly enough to supply the volumes required by large retailers. As a result, smaller competitors were not viable alternatives to the merged business. As a result, Mueller, Diageo and Boparan all had to divest businesses so as to secure clearance for these transactions.

The favourable view of smaller competitors taken by the CMA in Tayto and Valeo is not, however, without precedent. When Whitby bought Dawnfresh’s scampi processing business in 2016, the CMA found that smaller competitors were expanding and there were few barriers to this given the limited cost of scampi shelling equipment and the ability to use spare capacity on existing production lines for breading seafood.

In Tayto, the CMA took comfort from smaller competitors’ expansion plans, citing one competitor’s ability to double its capacity within six months at a cost of around £1 million. In Valeo, the CMA identified seven alternative suppliers in the UK, the majority of which had spare capacity for manufacturing own-label mints.

The materiality of the increased volumes that smaller competitors could provide, which was a major stumbling block in previous cases, is not discussed in either decision but was presumably considered to be sufficient.

Retailer buyer power

The CMA’s acceptance of grocery retailers’ negotiating (or buyer) power as a constraint on Tayto’s and Valeo’s ability to increase prices has little precedent.

Retailer buyer power is one of the most common arguments put to the CMA by food and drink suppliers in merger reviews. But, before Tayto and Valeo, it had not been accepted as a reason for clearing a merger in 20 or so Phase 1 cases over the past 10 years where this argument has been made. Buyer power has either been side-stepped, as a result of clearing a transaction on other grounds, or rejected, as in Hain’s acquisition of Orchard House in 2016 and Nakano’s acquisition of Premier Food’s vinegar business in 2012. Hain and Nakano’s acquisitions were both made conditional on selling businesses so that competition could be maintained.

The CMA’s acceptance of buyer power arguments in Tayto and Valeo may have been driven by its concurrent review of the Sainsbury’s/Asda merger. It seems possible that the CMA was concerned that its consistent rejection of retailer buyer power arguments in food and drink mergers was sitting uncomfortably with potential concerns about retailer buyer power in Sainsbury’s/Asda.

Out of market constraints

Finally, in both Tayto and Valeo, the CMA cited (limited) competitive constraints on the merged businesses from suppliers of products outside the market on which the CMA’s analysis was based.

In Tayto, the CMA cited consumer willingness to switch from pork snacks to other savoury (non-pork) snacks, while in Valeo, it cited consumers’ willingness to switch from own-label to branded mints. These types of ‘outside the market’ competitive constraints have rarely been cited (or accepted) in other CMA reviews of food and drink mergers.

Have the consolidation floodgates opened?

It is probably too early to conclude that the CMA has thrown open the consolidation floodgates for the food and drink sector. The Tayto and Valeo decisions could simply be outliers where an unusual confluence of factors in each case has allowed early, unconditional clearance decisions by the CMA.

On the other hand, if they signal a willingness to take account of factors consistently rejected in past merger reviews, then the regulatory path for future food and drink mergers may have been significantly eased.

* An edited version of this post was published in The Grocer.

[1] This was Refresco’s acquisition of Cott’s non-alcoholic drinks business where Refresco sold a fruit juice production facility in Lancashire to Sunmagic so as to gain CMA clearance.