Completed acquisition by NBTY Europe Limited of Julian Graves Limited

Affected market: Retailing of nuts, seeds and dried fruit through specialist stores

No. ME/3887/08

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 22 given on 24 March 2009. Full text of decision published 9 April 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

NBTY Europe Limited (NBTY) is a subsidiary of NBTY Inc, a vertically integrated manufacturer, marketer and distributor of a broad line of nutritional supplements in the United States and worldwide. NBTY is the holding company for most of the European activities of NBTY Inc and is a retailer of vitamins, minerals, food supplements (VMS), nuts, seeds and dried fruit (NSF), and ancillary items. 
 
NBTY's retail operations in the UK include Holland & Barrett (H&B), a health food products retailer with 522 stores in the UK, and GNC, a specialist retailer of sports nutrition supplements and other VMS, with 31 stores in the UK. NBTY's turnover was approximately £[ ] million in the year ending 30 September 2008, of which approximately £[ ] million was generated in the UK.

In addition, NBTY is a vertically integrated manufacturer and supplier of VMS. NTBY also owns its own packaging operation at which it packs the majority of NBTY's own label NSF range.

Julian Graves Limited (JG) is a large independent specialist natural food and ingredients retailer. It has approximately 350 retail stores in the UK. JG's turnover was approximately £[ ] million in the year ending 31 March 2008, of which approximately £[ ] million was generated in the UK.

JG has its own packaging facility and most of its bulk commodity products are packaged in house. JG also operates a wholesale business selling JG branded products to garden centres and holiday destinations, and also supplies bulk foods and other products to smaller independent retailers.

TRANSACTION, PROCESS AND TIMING

The transaction concerns the completed acquisition by NBTY of Julian Graves, which took place on 16 September 2008.

The OFT became aware of the transaction through its own initiative via its Mergers Intelligence Unit.The OFT sent a preliminary inquiry letter to NBTY on 26 September 2008.

On 13 October 2008, the parties signed initial undertakings pursuant to section 71 Enterprise Act 2002 (the Act) to 'hold separate' both businesses.

The OFT did not receive a satisfactory submission from the parties until 8 December 2008. As a result the statutory and administrative deadlines were extended (pursuant to section 25 of the Act) while NBTY compiled the requisite information for its submission.

The statutory deadline under section 24 of the Act is Tuesday 28 April 2009. The administrative target date for the OFT to announce a decision in this case is Friday 20 March 2009.

JURISDICTION

The transaction has resulted in two enterprises ceasing to be distinct under section 23(1) of the Act.

Given that the acquired business, JG, has UK turnover in its last financial year of approximately £[ ] million, the turnover test in section 23(1)(b) of the Act is not met.

However, the OFT believes that it is or may be the case that the share of supply test in section 23(2)(b) of the Act is met and, therefore, that a relevant merger situation has been created. This is because the parties' combined share of supply in the UK of health food products through specialist retailers has been estimated to be approximately [70-80] per cent (increment approximately [20-30] per cent) measured by number of outlets or [60-70] per cent (increment [10-15] per cent) by sales.

The parties contested the assertion of jurisdiction by the OFT for a number of reasons.

First, they noted that the share of supply test would not be met in relation to 'the sale of NSF' by all retailers which, they claimed, was the competitive lens that concerned the OFT in its investigation. The OFT does not necessarily dispute this. However, the share of supply test need not relate to an economic market, and the Act does not require the basis on which jurisdiction is asserted and the substantive competitive assessment to be linked.

Second, they argued that JG was not a 'specialist retailer' of 'health food products'. However, this statement is contradicted by: the inclusion of JG within a table of 'UK: leading specialist health food retailers' in the Mintel Report; JG's description of itself as an 'independent specialist natural food and ingredients retailer' on its own website; and by the overall weight of evidence received by the OFT during its investigation on the characterisation of JG, as discussed in detail in the remainder of this decision.

Third, they stated that the [70-80] per cent figure was incorrect given that the Mintel table was not intended to be exhaustive (it only included 'leading' retailers) and did not form any proper basis for the OFT's finding. The OFT accepts that the Mintel table may not be exhaustive (see below) but considers that it is appropriate for the OFT to have regard to recognised industry categorisations when applying the share of supply test and determining whether it is or may be satisfied.

Fourth, they argued that, if the OFT intended to proceed on the basis of considering the number of stores operated by health food retailers, it should take account of independent retail outlets that constitute the majority of 'specialist' health food retailers. The parties estimated that there are 1,825 such outlets. It is more difficult for the OFT to determine whether all of these independent retail outlets should necessarily be regarded as 'specialists' in health food, and therefore falling within the share of supply test as set out above. However, even if they were all to be included, the parties would still have approximately a [25-30] per cent share of supply by outlets (increment approximately [10-15] per cent) after the merger. As such, the share of supply test would also appear to be met if independent health food retail outlets were included.

Fifth, they argued that the OFT would be unreasonable in including JG as a 'health food store in the UK' but excluding other retailers that they claimed sell much more extensive and specialised ranges of 'health foods' as defined by the Mintel Report. The parties cited Boots as the 'obvious example' of such a store. The OFT fully accepts that there are other retailers (including Boots and the supermarkets) that sell 'health foods'. However, it does not accept the parties' argument that 'there is in reality no difference between the purchase of NSF products in H&B or JG and in the supermarkets (or, for example, Marks & Spencer or Boots)'. The OFT does not believe that, as discussed further in this decision, the retail proposition offered by H&B and JG should be regarded as identical to that offered by the supermarkets or pharmacies. As such, it does not believe that Boots and the supermarkets should be categorised as 'specialist health food retailers' for the purposes of the share of supply test. It notes that this view was apparently shared by the authors of the Mintel Report.

Therefore, notwithstanding the parties' arguments, the OFT considers that it is reasonable for it to assert jurisdiction on the basis of the parties' share of supply in the UK of health food products through specialist retailers. In this regard, as discussed previously, it notes that this categorisation has been used in a specialist industry report which, although not decisive, lends support to the OFT's view that this description of goods is reasonable and appropriate.

The OFT believes that the share of supply test may also be met in two further ways.

• First, as discussed in greater detail further below, the transaction raises significant competition concerns in relation to the supply of NSF. While the OFT did not consider it necessary to come to a firm conclusion on the precise scope of the relevant product market but rather focused on the closeness of competition between the parties, the results of the critical loss analysis undertaken by the OFT indicates that the most appropriate candidate product market in this case would appear to be no wider than the supply of NSF through specialist retailers. On this basis, as already discussed above, and even if independent health stores were to be included, the parties' share of supply would be above 25 per cent.
  
  
  While, as noted above, the Act does not require the basis on which jurisdiction is asserted and the substantive competitive assessment to be linked, and indeed the OFT is always careful not to conflate the two, it nevertheless makes intuitive sense that the share of supply test should be met when the competitive lens through which the transaction is considered raises unilateral effects concerns. The OFT considers that it would be very unusual if the share of supply test were not to be met in circumstances where unilateral effects concerns arise.
  
  
• Second, the parties' share of supply of VMS in the UK is above 25 per cent. Based on data from a 2008 TNS report and data provided by JG, the parties' combined share of supply (by value) would be [25-30] per cent (increment [0-5] per cent). 

The OFT further notes that, whilst the parties made extensive submissions on how the share of supply test should be applied, the Act is clear that the OFT, in determining whether the share of supply test is met, may apply such criterion (whether value, cost, price, quantity, capacity, number of workers employed or some other criterion, of whatever nature), or such combination of criteria, as it considers appropriate (section 23(5) of the Act). Further, section 23(6) and (7) of the Act provide that the OFT may treat goods as being of different forms of supply when the transactions concerned differ as to their nature, their parties, their terms or their surrounding circumstances and the difference is one which, in the opinion of the OFT, ought for the purposes of that subsection to be treated as a material difference. The OFT considers that the sale of health food products or NSF through 'specialist' retailers should be treated as a particular form of supply for these purposes.

For all of these reasons, the OFT therefore believes that it is or may be the case that a relevant merger situation has been created. The Act is clear that, to the extent that there is genuine uncertainty on the existence of a relevant merger situation, this question is in any event one for resolution by the CC on the basis of a detailed investigation where the duty to refer would otherwise be met. 

ASSESSMENT

The parties are the two largest high street specialist retailers of health natural food products in the UK, and they overlap specifically in the supply of NSF and VMS products.

The OFT considers that, as a result of the merger, there is a realistic prospect of a substantial lessening of competition arising in a large number of the local areas where the parties are both present in relation to the supply of NSF. In addition, it may be the case that there is also a realistic prospect of a substantial lessening of competition at the national level although the OFT has not needed to conclude on this point.

Despite the possibility that barriers to entry in the supply of NSF may be low in any given individual local market, the OFT was not convinced that other NSF retail outlets, including supermarkets, would be able to enter either nationally or in a sufficient number of local markets to constrain the parties post-merger. In addition, the OFT did not receive sufficient evidence to conclude that expansion by retailers, in particular supermarkets, would be sufficiently timely and likely to offset any consumer harm that may arise as a result of the merger.

Finally, the OFT considers that although JG may have been struggling financially prior to its acquisition by NBTY, it does not meet the OFT's criteria of a 'failing firm'. In particular, the OFT notes that there were at least two other credible bidders (private equity firms) for the JG business that would have created a substantially less anti-competitive outcome on the basis that they were not trade buyers, and therefore not close competitors to JG.

Therefore, assessed against the appropriate counterfactual of pre-merger conditions, 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 - that is, in relation to the supply of NSF in a number of local areas in the UK.

DECISION

The OFT has therefore decided to refer the completed acquisition by NBTY of Julian Graves to the Competition Commission pursuant to section 22 of the Act. 

Back to top