Anticipated merger between First Milk Limited and Milk Link Limited

Affected market: Procurement and supply of raw milk, production and supply of cheese, production and supply of other dairy products

No. ME/3352/07

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 and decision.

The OFT's decision on reference under section 33(1) given on 12 December 2007. Full text of decision published 20 December 2007.

Please note that square brackets indicate text or figures which have been deleted or replaced with a range at the request of the parties and third parties for reasons of commercial confidentiality and clarity.

PARTIES

First Milk Limited (First Milk) is a farmer-owned co-operative with around 2800 members. It procures raw milk from its members and supplies the majority to third party processors. It also processes some raw milk itself to produce cheese and other dairy products. First Milk has a 15 per cent stake in Robert Wiseman Dairies plc (Wiseman), a producer of fresh milk, and a 40 per cent share in Westbury Dairies, a joint venture with Milk Link Limited and Dairy Farmers of Britain Limited. [see note 1] First Milk's UK turnover was £484 million in the year ended 31 March 2007.

Milk Link Limited (Milk Link) is a farmer-owned co-operative with around 1650 members. It procures raw milk from its members and processes the majority itself to produce cheese and other dairy products. It also supplies some raw milk to third party processors. Milk Link has a 20 per cent share in Westbury Dairies, which as noted above is a joint venture with First Milk and Dairy Farmers of Britain Limited. Milk Link's UK turnover was £492 million in the year ended 31 March 2007.

TRANSACTION

First Milk and Milk Link propose to merge under the process set out in section 51 of the Industrial and Provident Societies Act 1965, with their members becoming members of a new combined co-operative. The parties filed a satisfactory submission on 12 October 2007. The administrative deadline is therefore 7 December 2007.

JURISDICTION

As a result of this transaction First Milk and Milk Link will cease to be distinct. The UK turnover of both First Milk and Milk Link 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 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.

THIRD PARTY VIEWS

Third party views were mixed. Some third parties raised concerns. The majority of third parties did not express concerns.

ASSESSMENT

First Milk and Milk Link overlap in (i) the procurement and supply of raw cows' milk, (ii) the production and supply of cheese, (iii) cheese packing, and (iv) the production and supply of other dairy products such as butter and skimmed milk powder.

The parties have a joint share of the procurement of raw milk in Great Britain of [20-30] per cent. On the evidence available, the OFT has no unilateral effects concerns: the principal constraints on the merged firm preventing it from unilaterally withholding raw milk and raising price are the substantial supply options open to customers to switch to, notably the other large co-operative, Dairy Farmers of Britain, direct supply from farmers and also from a number of smaller co-operatives and milk brokers. Nor could the OFT identify a sufficiently persuasive and substantiated theory that this particular merger of two co-operatives at the raw milk level would materially increase the risk of coordinated effects at any level of the supply chain.

In relation to cheese, the parties have a combined share of UK retail sales of cheddar – including two similar hard territorial cheeses, Red Leicester and Double Gloucester – of [30-40] per cent. On the evidence available, the OFT concludes that the lack of brand loyalty and associated premium pricing of branded products suggest that branded and own-label cheeses of this type constrain one another, and that the case for a market of 'British-origin' cheddar is not compelling. Although the parties have a significant share of total sales, the OFT believes the merged firm would find it unprofitable to reduce output and raise price given the ability and incentive for rivals with spare capacity in the UK and Ireland to expand output. The OFT also ruled out coordinated effects concerns resulting from the merger given the resulting structure of supply and presence of a substantial number of rivals with spare capacity.

No material issues are raised in respect of cheese packing, considered in more detail above, or in respect of other dairy products. The OFT also found that the merger did not give the parties the ability and incentive to pursue a foreclosure strategy due to the availability of sufficient alternative sources of supply of raw milk and the geographically separate location of the parties' milk fields.

Consequently, the OFT does not believe that it is or may be the case that the merger 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 not be referred to the Competition Commission under section 33(1) of the Act.

NOTE

1. See the OFT decision of 7 April 2005 regarding the completed acquisition by First Milk Limited of a 15 per cent stake in Robert Wiseman Dairies plc, and the OFT decision of 26 February 2004 regarding the completed acquisition by Milk Link Limited, First Milk Limited and Dairy Farmers of Britain Limited of assets of United Milk Limited, namely the Westbury milk processing plant.

Back to top