On 26 October 2005, the Office of Fair Trading referred the acquisition by HJ Heinz Company of HP Foods Group to the Competition Commission for an in-depth merger control review. Heinz’s acquisition of HP had already been completed on 16 August. The OFT has no ability to block a merger and its remit is merely to determine whether the Competition Commission should conduct a full investigation, yet OFT investigations and decisions are within themselves relatively extensive and detailed. The text of the OFT’s decision on this transaction was published on 8 November. The Competition Commission then published a Statement of Issues on 7 December, which sets out potential issues only, none of which is certain to lead to adverse conclusions in the final Competition Commission report.
The Competition Commission is obliged to reach its decision and publish its report by 11 April 2006. It has three options: to clear the merger; to clear the merger subject to conditions, which would probably involve Heinz undertaking to divest parts of the business which are sensitive in competition terms; or to block the merger. Outright blocks are rare and it has provisionally cleared the merger in the report published on 22 February inviting responses from the main parties and other interested parties on the findings by 15 March. The word “merger” in this area of law covers many types of transactions (including majority share acquisitions) which the business community may not always describe as mergers.
So what are the problem products and the main issues?
The merger control process assesses whether the products of the different parties to a merger are competitive and whether bringing those products together would allow the acquirer (here, Heinz) to acquire an unfair pricing advantage vis-à-vis the consumer. The main sticking point in relation to this acquisition is whether tomato ketchup is an effective competitive substitute for brown sauce so that (pre-merger) an increase in the price of, say, ketchup would simply mean that consumers switched to brown sauce. Heinz is strong in ketchup and HP in brown sauce and, if they were on the same market in competition terms, Heinz would post-merger arguably enjoy a stranglehold over the price set to the consumer in relation to two key everyday consumer products, since it could keep the price for both products high and the consumer would have nowhere to go.
In its 8 November decision, the OFT identified four areas of arguable competitive overlap between Heinz and HP:
- Tomato ketchup. HP supplies a ketchup under its Daddies brand.
- Brown sauce. The only overlap within brown sauce is in sales to foodservice customers, since Heinz does not have a branded brown sauce product, but the key issue here relates to potential overlap between ketchup and brown sauce within a broader sauce market.
- Barbeque sauce.
- Tinned baked beans and pasta. HP baked beans are currently licensed to Premier Foods, but this licence is expected to expire simultaneously with the implementation of the acquisition of HP by Heinz.
On the market definition point, the OFT suggested that both ketchup and brown sauce could be arguably placed within a market for “thick, cold, table sauces”. These words would indicate that the two products could be seen as forming part of a product market which does not include thin sauces (such as Tabasco or Worcestershire sauce) and which only involves sauces which are (i) consumed cold rather than heated and (ii) used as flavouring for food after and not during preparation of the meal. This market would not include sauces linked to any one type of food (compare mint sauce, apple sauce and horseradish sauce) or to any one group of foods (such as meat or salads). The outcome of the Competition Commission’s investigation is likely to depend on whether it agrees with this assessment and whether, as a result, it feels Heinz should make any divestments and whether such divestments should include HP Brown Sauce.
On the divestment point, it is interesting to note (from the OFT decision) that Heinz clearly tried to allay the OFT’s concerns, and thereby to prevent a reference to the Competition Commission, by offering potential pre-reference divestments to the OFT. The OFT would have accepted the divestment package, were it not for the fact that Heinz retained HP Brown Sauce (despite apparently agreeing to offload Daddies Brown Sauce) and as a consequence did not meet the concern re the potential ketchup/brown sauce overlap.
The merger control repercussions of the Heinz/HP deal go beyond the sauce and beans markets. There are important incidental issues highlighted by the OFT which are relevant to a consideration of market definition and of the competitive impact of the transaction. First, is it possible to segment the market by customer category according to retail customers on the one hand and foodservice customers on the other? And, second, are branded goods and own-label (i.e. supermarketbranded) goods sufficiently close substitutes for the purpose of product market definition? Also, as part of this second question, would own-label goods provide an effective competitive constraint on a merged Heinz/HP? These are important issues for the assessment of market definition in any food-related merger control or competition law case. It is by a clear definition of the relevant market that the authorities establish whether a company has a strong market share and whether as a consequence a company could feasibly implement pricing and promotion policies which go beyond the competitive norm.
The Competition Commission has provisionally concluded that “the acquisition may not be expected to result in a substantial lessening of competition within the markets for the supply of tomato ketchup, brown sauce, barbecue sauce, tinned baked beans and tinned pasta products in the UK.”
It has provisionally found that there was very limited, if any, competition between Heinz and HP products in the supply to retail customers, so in spite of the increased size of the merged company it does not expect a substantial loss of competition or an increase in prices to result from the merger.
It has found that ketchup and brown sauce were in separate markets for a number of reasons; these included their characteristics and uses, which differed in the customer profiles and the usage on different host foods of the two products.
Conclusion – competition law implications for the food and grocery sector
Interestingly, the Competition Commission has also raised the issue of whether, post acquisition, Heinz will have a significantly greater negotiating position in relation to the retailers. In other words, would Heinz be able to negotiate harder for shelf-space advantages and/or promotions in relation to an enhanced range of must-stock products to such a degree that it would acquire an unfair advantage vis-à-vis either the retailers or its own competitors at the supply level? The provisional findings report – which is of course not the final decision on the transaction – suggests that Heinz/HP would not have a stronger bargaining position simply by virtue of its enhanced range. This would be a positive assessment for suppliers. The provisional findings also cover broader grocery/retailer industry issues such as the interaction between retail and foodservice supply and the relationship between branded and own-label goods without drawing a firm conclusion.
In summary, the primary transactional question regarding the completed acquisition by Heinz of HP is whether the merger control process will require divestments and whether these potential divestments would include the on-sale of a major brand such as HP Brown Sauce. It also covers the broader commercial relations between suppliers and retailers under general competition law. Products involved in this acquisition are very prominent household names and the Competition Commission's findings may have an impact on the competition law position of the suppliers of other high-profile products in the food and general consumer goods industry. Based on the provisional findings, the potential outcome is that there may be no divestments required and that the view of suppliers' market position could prove to be more permissive than might have been expected.
This article first appeared in our Food industry law bulletin March 2006. To view this publication, please click here to open a new window.