Acquisition by Lactalis McLelland Limited of Lubborn Cheese Limited

Affected market: Manufacture of cheese products

No. ME/4163/09

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

The OFT's decision on reference under section 22(2)(a) given on 6 August 2009. Full text of decision published 25 August 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

Lactalis McLelland Limited (Lactalis) is part of a global dairy group owned by B.S.A. International, S.A. It employs 38,000 people and owns 127 industrial sites worldwide. Lactalis supplies a range of 'hard' and 'soft' cheeses to the UK including Président, the 'Seriously' brand, Orkney Cheddar, Salakis, Galbani, Societe and Dolcelatte. Lactalis also supplies own-label cheeses to supermarkets.

Lubborn Cheese Limited (Lubborn) is a producer of soft cheese in the UK, mostly of Somerset-branded produce out of its creamery in Somerset. Its range encompasses Somerset Brie, Organic Somerset Brie, Somerset Camembert, Somerset Goats Cheese, Somerset Rustic, Channel Islands Brie and 'Capricorn' Goats Cheese. Turnover for the year ended 31 March 2008 was £11.6 million.

TRANSACTION

On 3 June 2009, PricewaterhouseCoopers LLP (PwC) were appointed receivers and managers of Dairy Farmers of Britain (DFoB). The shares in Lubborn were held by a DFoB subsidiary, Dairy Farmers of Britain Processing Limited (DFoBP).

On 6 June 2009, following a bidding process, Lactalis and DfoBP, through PWC, completed the acquisition by Lactalis of Lubborn. The transaction consisted of the sale of the entire issue capital of Lubborn for the sum of   [ ].

The OFT's statutory deadline under section 24 of the Act for deciding whether to refer the merger to the Competition Commission is 5 October 2009. The OFT's administrative target date to announce its decision is 14 August 2009.

JURISDICTION

As a result of this transaction Lactalis and Lubborn have ceased to be distinct. The parties overlap in the supply of soft cheese in the UK. Their combined share of supply is above 25 per cent and therefore the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

The OFT received comments and views from a number of third parties, including competitors and customers. These are referred to above as appropriate but the OFT notes that the majority of third parties did not raise any concerns regarding the merger (with the exception of concerns raised by two competitors over conglomerate effects, which are discussed above).

ASSESSMENT

The transaction concerns the acquisition by Lactalis of Lubborn, both suppliers of soft cheese (Brie, Camembert, Goats cheese) to supermarkets, wholesalers and food services customers in the UK. Pre-merger Lactalis supplied Continental soft cheese and Lubborn supplied British soft cheese in the UK.

The OFT examined whether British origin soft cheese is in the same market as Continental (imported) soft cheese, and whether Brie, Camembert and Goats cheese are in the same product market.

According to Lactalis, Continental and British soft cheeses were in separate markets and so there was no horizontal overlap as a result of the merger. However, third parties' views were mixed. The OFT's critical loss analysis was inconclusive and the evidence on promotions was also mixed, with some evidence pointing to separate markets and some evidence pointing to British and Continental soft cheese belonging to the same market.

Without prejudice to the precise market definition, the OFT has examined the merger on both scenarios, namely considering British and Continental cheese separately and together, and has concluded that in either case there is no realistic prospect that the merger may be expected to result in a substantial lessening of competition in the supply of soft cheese in the UK.

Taking British soft cheese to be in the same market as Continental soft cheese, the parties' combined market share for Brie and Camembert is over [40-50] per cent with an increment of over [20-30] per cent. For Goats cheese, the parties' combined market share is [40-50] per cent with an increment of over [10-20] per cent. If Brie and Camembert are in separate markets, the parties' combined market share for Brie would be over [50-60] per cent with an increment of over [20-30] per cent and just under [20-30] per cent with an increment of [10-20] per cent for Camembert. Most of these shares are high enough to raise prima facie competition concerns.

The OFT considered the closeness of competition between the parties under all these different frames of reference. Based on the evidence provided by the parties and third parties, and on its own analysis, the OFT concluded that Lactalis and Lubborn are not close competitors in the supply of Brie and/or Camembert in the UK.

All customers, apart from one, stated that they considered Lubborn and Lactalis to be competing only to a limited extent due to the different provenance of their cheese. In particular, they provided evidence of switching or proposed switching away from Lubborn or Lactalis soft cheese indicating that the merging parties are not considered each other's closest competitors. Supermarkets told the OFT that if they were to switch from Lactalis, they would switch to Bongrain or Eurilait amongst others. In addition, third parties provided evidence to the OFT that if they were to switch away from Lubborn, it would be to CCL and submitted examples where such switching had already happened.

Similarly, based on the evidence provided by Lactalis and third parties and the lack of any third party concerns, the OFT concluded that the parties were not close competitors pre-merger in the supply of soft Goats cheese in the UK.

Furthermore, the OFT received no concerns from any third party regarding the possibility of coordinated effects resulting from the merger. However, the OFT has considered the three conditions referred to in the Draft Joint OFT and CC Merger Assessment Guidelines and concluded that none of the conditions was satisfied.

Following third party concerns and in light of the possibility that British and Continental soft cheese are not in the same market, the OFT investigated the likelihood of a substantial lessening of competition arising as a result of the merger from conglomerate effects - either as a result of tying and bundling or as a result of portfolio effects.

The OFT has carefully considered the arguments made by Lactalis and third parties in this case. The OFT considers that the merger does not create or strengthen the ability of Lactalis to foreclose others by tying or bundling. In particular, views from the majority of supermarkets show that the merged entity would not have the ability to tie/bundle as its products were not 'must stock' or at least there were a number of alternative products. The OFT also concluded that the proposed transaction does not create or strengthen the incentive to undertake tying or bundling. Particularly, the OFT notes that it seems unlikely that such a tying/bundling strategy would foreclose other soft cheese suppliers as they are not wholly reliant on UK supermarket sales and Lactalis would be vulnerable to the risk of supermarkets delisting other Lactalis branded products and/or switching own label accounts.

Finally, the OFT has carefully considered the possibility of the merger giving rise to portfolio effects and concluded that there was no such realistic prospect.

Consequently, the OFT does not believe 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 not be referred to the Competition Commission under section 22(1) of the Act.

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