[OFT] OFT refers frozen ready meals merger to Competition Commission

OFT refers frozen ready meals merger to Competition Commission

Ready meal79/11    12 July 2011

The OFT today referred the completed acquisition of the frozen ready meals business of Headland Foods Limited by Kerry Foods Limited to the Competition Commission for further investigation.

Before the merger in January 2011, Headland and Kerry were by far the two largest suppliers of frozen ready meals to UK retail customers such as supermarkets.

During its investigation, the OFT considered whether sales of refrigerated ready meals acted as a significant competitive constraint on sales of frozen ready meals but the evidence was insufficient for the OFT to conclude that they were.

Almost all of the merged parties’ main customers expressed strong concerns about the merger to the OFT. They were, in particular, concerned about the significant price rise that followed the merger and the lack of alternative manufacturers capable of supplying large volumes and wide ranges of frozen ready meals.

The evidence available to the OFT indicated that part of the price rise after the merger could be explained by substantial increases in raw material costs. The OFT nevertheless concluded that the balance of evidence supported the concerns expressed by customers.

The acquisition was completed in January 2011. Although Headland’s financial performance had been consistently poor over previous years, the OFT did not receive sufficient evidence to conclude that it would inevitably have exited from the market in the near future had the acquisition not taken place. As such, the merger was assessed on the basis that competition would have continued at the same level absent the acquisition.

Amelia Fletcher, Chief Economist at the OFT and Decision Maker in this case, said:

‘Significant price rises after any completed acquisition give the OFT cause for concern. In this case, the merged company’s large share in the frozen ready meals market compared with that of its competitors corroborated that concern, as did the strength of complaints from retail customers.

Though increases in raw material costs may justify part of the increase, this did not fully allay our concerns. The merger will therefore be referred to the Competition Commission for an in-depth investigation.’

NOTES

  1. The Reference Test – The OFT has a duty to make a reference to the CC if the OFT believes that a relevant merger situation has been created, or it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.
  2. Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply or acquisition of goods or services of any description, a 25 per cent share of supply or acquisition in the UK (or a substantial part thereof) is created or enhanced.
  3. The CC may extend the 24-week period within which it is required to publish its report by no more than eight weeks if it considers that there are special reasons why the report cannot be published within that period.
  4. In assessing the ‘failing/exiting firm’ defence, the OFT assesses the following three criteria:

    – whether the firm would have exited (through failure or otherwise)

    – whether there would have been an alternative purchaser for the firm or its assets to the acquirer under consideration, which would result in a less anti-competitive outcome

    – what would have happened to the sales of the firm in the event of its exit; in some occasions, the competition authorities might conclude that competition can become more fierce following the demise or exit of one of the competitors.

    They all must be met for the OFT to accept the ‘failing/exiting firm’ defence.

  5. The text of these decisions will be will be published in the mergers section as soon as is reasonably practicable.
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