Anticipated acquisition by HJ Heinz of HP Foods Group

Affected market: Processed foods

No. ME/2003/05

Please note that the full text of the decision can be downloaded by using the link on the right . What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment, undertakings in lieu and decision.

The OFT's decision on reference under section 22 (1) given on 26 October 2005. Full text of decision published 8 November 2005.

Please note square brackets indicate information excised or replaced by a range at the request of the merging parties or third parties for reasons of commercial confidentiality.

PARTIES

HJ Heinz Company (Heinz) is a US-based company with global operations in the branded foods sector; its shares are quoted on the New York Stock Exchange. Heinz's UK activities include the manufacture and marketing of sauces and condiments, frozen foods, soups, beans and pasta, infant foods and seafood.

HP Foods Limited, HP Foods Holdings Limited and HP Foods International Limited (HP) are companies which, prior to the transaction, were ultimately owned by Groupe Danone SA (Danone), a company incorporated in France. HP's principal UK activities include the manufacture and marketing of sauces and condiments, herbs, spices and seasonings, food oils and dry side dishes. HP's UK turnover for the year ended 31 December 2004 was around [  ].

TRANSACTION

On 16 August 2005, Heinz acquired the entire issued share capital of HP from Danone. The administrative deadline in this case expires on 26 October 2005.

JURISDICTION

As a result of this transaction Heinz and HP have ceased to be distinct. The UK turnover of HP exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

Third party views have been referenced in the relevant sections of the economic assessment.

ASSESSMENT

Heinz and HP both supply branded tomato ketchup, branded barbecue sauce and branded tinned baked beans and pasta products to retail customers in the UK; there is no overlap in the supply to retail customers of branded brown sauce, since Heinz only supplies brown sauce to food service customers.

Supermarkets are active in the supply of own label products in respect of each of the product overlaps. However, there is mixed evidence whether, and if so how and to what extent, supermarket own-label products constrain suppliers of branded products, in particular where the brands in question are well-known and supported by significant television advertising campaigns.

The merger reduces the number of suppliers of branded ketchup to retail customers from two to one. However, the constraint exercised by HP/Daddies ketchup on Heinz tomato ketchup is likely to be limited, both in terms of price and innovation; conversely, evidence suggests that Heinz does constrain HP/Daddies. It does not appear that own label tomato ketchup would provide a sufficient constraint on the price of Daddies tomato ketchup post merger. This merger may therefore result in a substantial lessening of competition in supply of tomato ketchup to retail customers.

In light of the evidence available to us, we are of the view that Heinz tomato ketchup imposes a material constraint on HP brown sauce. There is little evidence that the reverse is also the case. Moreover, it is relevant to note that prior to the acquisition, Heinz was a credible entrant into the brown sauce segment. In our view the merger eliminates the competitive constraint imposed by Heinz on HP in the brown sauce segment; this may result in a substantial lessening of competition.

The parties are the leading suppliers of branded barbecue sauce to retail customers; the merger gives rise to a combined share of supply of [more than 60] per cent in this segment (increment [20-30] per cent). There is insufficient evidence that own label is capable of providing an effective competitive constraint post merger; the merger may therefore lead to a substantial lessening of competition in this segment.

Heinz and HP are the two leading tinned baked bean and pasta products brands, with a combined share of supply of around [more than 60] per cent; bringing the two brands under common ownership may lead to a substantial lessening of competition, although own label may provide some competitive constraint on the merged entity.

UNDERTAKINGS IN LIEU

Where the duty to make a reference under section 22(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from the parties concerned such undertakings as it considers appropriate for the purpose of remedying, mitigating or preventing the substantial lessening of competition (SLC) concerned or any adverse effect which has or may result from it.

The OFT's guidance on undertakings in lieu of reference state that undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut. 

The parties offered a comprehensive package of undertakings at the issues meeting on a 'without prejudice' basis. [details of the package of undertakings, consisting inter alia of divestment(s) and licensing arrangement(s), excised for reasons for reasons of commercial confidentiality].

Considering separately each of the areas in which a potential SLC was identified, we reached the following conclusions. [  ] would in principle remedy the SLC identified in respect of tomato ketchup. The undertaking to [  ] would in principle be an appropriate remedy for the SLCs [in respect of barbecue sauce, tinned beans and pasta products].

However, the undertaking to [  ] for brown sauce would be insufficient to remedy the competitive harm that would result from the combination of the Heinz tomato ketchup and HP brown sauce brands. This is because the potential SLC results from the price constraint Heinz's strong tomato ketchup brand strength imposes on HP brown sauce. As noted above, Daddies branded brown sauce constitutes a relatively small part of HP's total share of brown sauce sales. Therefore, the remedy [involving Daddies] does not replicate the constraint that Heinz tomato ketchup imposed on HP brown sauce pre-merger. Therefore the proposal fails to address all of the competition concerns identified above. The competition concerns that remain may be sufficient to give rise to a substantial lessening of competition in the brown sauce segment.

Consequently, the OFT believes that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore be referred to the Competition Commission under section 22(1) of the Act.

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