Anticipated acquisition by The Coca-Cola Company of a minority interest in Fresh Trading Limited

Affected market: Non-alcoholic drinks

No. ME/4091/09

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, jurisidction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 26 May 2009. Full text of decision published 11 June 2009.

Please note that the square brackets indicate figures or text which have been deleted or replaced in ranges at the request of the parties or third parties for reasons of commercial confidentiality.

PARTIES

The Coca-Cola Company (TCCC) is a global manufacturer of non-alcoholic beverages including a range of carbonated soft drinks (its brands include Coca-Cola, Diet Coke, Sprite, Fanta, Dr Pepper and Schweppes branded products including lemonade and tonic water), still drinks (for example, Oasis, Powerade and Vitamin Water) and fruit juices/nectars (for example, Minute Maid and Five Alive).

Fresh Trading Limited (Fresh Trading) is a manufacturer and distributor of the non-alcoholic beverages 'Innocent' (a smoothie) and 'This Water' (a fruit juice/nectar). In 2008 Fresh Trading's UK turnover was [over £70] million, of which smoothie sales accounted for around £[ ] million.

TRANSACTION

On 30 March 2009 TCCC, through its indirect wholly-owned subsidiary company European Refreshments, entered into an Investment Agreement to acquire an [15-20] per cent shareholding in Fresh Trading for approximately £30 million (the Transaction). As a part of the Transaction TCCC will appoint a director [to Fresh Trading's Investment Board].

The parties notified the Office of Fair Trading (OFT) of the Transaction via a Statutory Merger Notice on 8 April 2009. The extended statutory deadline in this case is Tuesday 26 May.

JURISDICTION

The parties submitted that TCCC will at the very least acquire the ability materially to influence the policy of Fresh Trading for the purposes of the Enterprise Act 2002 (the Act). The OFT agrees with this assessment and considers that the Transaction will give TCCC material influence over Fresh Trading. 

As a result of the Transaction TCCC and Fresh Trading will cease to be distinct for the purpose of the Act. The UK turnover of Fresh Trading exceeds £70 million, so the turnover test in section 23(1)(b) of 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

During the course of the investigation the OFT received comments and evidence from a wide range of third parties including major supermarket operators, foodservice companies, small independent retailers, retailers operating in the on-trade channel, wholesalers and competitors. Some of these retailers had a Coca Cola chiller from which they sell TCCC products while others did not.

Almost all of the third parties were not concerned about the proposed Transaction. Two were concerned about the possibility of foreclosure following the Transaction, which has been discussed in some depth above.

Two retailers were concerned about the possible loss of negotiating strength when dealing with Fresh Trading after the Transaction, although one told the OFT that this was unlikely at a minority shareholding level. On this point, the OFT does not consider that the proposed Transaction materially increases TCCC's or Fresh Trading's market power in any beverage category, and the expansion of TCCC's product portfolio following the Transaction has been discussed above.

ASSESSMENT

The Transaction which the OFT has investigated is an acquisition of a minority shareholding (of [15-20] per cent) by TCCC in Fresh Trading. The OFT considers that the Transaction will give TCCC material influence over Fresh Trading and that a relevant merger situation will arise as a result.

The parties supply non-alcoholic beverages. Both supply fruit-based beverages (Innocent smoothies and This Water for Fresh Trading and Minute Maid and Five Alive for TCCC) and, in addition, TCCC supplies carbonated soft drinks and still drinks. The OFT has not found it necessary to conclude on the market definition in this case. It has examine the merger on a variety of narrow product markets including smoothies, chilled 100 per cent fruit juices and chilled 100 per cent fruit juices and nectars. It has also, where appropriate, used the categories carbonated soft drinks and still drinks. All products have been examined on the UK-wide geographic scope.

The possibilities of unilateral effects or vertical issues do not arise as a result of the Transaction (given that there are no or little overlaps between the parties in each beverage segment) and no third parties were concerned about these. Following third party complaints, the focus of the OFT's investigation in this case has been whether there is a realistic prospect of a substantial lessening of competition arising through conglomerate effects - either as a result of tying and bundling or as a result of portfolio effects.

The OFT does not consider that the Transaction (which is one of a minority shareholding) will materially affect TCCC's incentive to tie or bundle either its own less popular brands or Fresh Trading's brands to its strong brands (in carbonated soft drinks, for example). The OFT especially considers that the incentives between the parties are not closely enough aligned for them to undertake a tying or bundling strategy since:

• the Transaction is one of a minority shareholding and therefore TCCC would only receive a minority fraction of the benefit which accrues to Fresh Trading through the strategy
  
  
• Fresh Trading does not (and will not) have any shareholding in TCCC and therefore will not have the incentive to engage in foreclosure behaviour to the benefit of any TCCC brand, and
  
  
• TCCC's products are distributed by CCE/CCHBC who would not wish to forgo profits to increase Fresh Trading's profits (and vice versa).

Given this finding on the parties' incentive to foreclose, the OFT has not found it necessary in this case to conclude on either parties' ability to do so (including the ability to leverage the presence of Coca-Cola branded chillers).

Similarly for portfolio effects, the OFT has found that the Transaction will not materially strengthen TCCC's portfolio advantage. As with the case for tying and bundling, the OFT does not consider that the incentives that the parties' will face after the Transaction will be sufficiently aligned for them to foreclose rivals. Therefore, the OFT has not found it necessary to conclude on either party's ability to engage in foreclosing behaviour after the Transaction.

The OFT does note, however, that other suppliers, namely PepsiCo and its distributor Britvic, also have a portfolio of strong brands and that a significant proportion of different beverages relevant to this case are not purchased together indicating that customers may not value the ability to purchase a wide portfolio of products from a single supplier sufficiently highly to enable foreclosure through portfolio effects to be successful. This is unlikely to change after the Transaction.

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

115. This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

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