Completed merger between Stonegate Farmers Limited and Deans Food Group Limited

Affected market: Eggs

No. ME/2517/06

Please note that the full text of the decision can be downloaded by using the link on the right of this page. 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(1) given on 13 September 2006. Full text of decision published 3 October 2006.

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

PARTIES

Stonegate Farmers Limited (Stonegate) is active in the supply of hens' eggs which it sells in both shell (shell eggs) and processed forms (processed egg). It sources the majority of its shell eggs from independent third parties, and outsources the processing of its eggs. Whilst Stonegate has no processing capacity of its own, it operates at all stages of the shell egg supply chain, from the hatching and rearing of chicks, the collection of laid eggs through to packing and onward supply.

Deans Food Group Limited (Deans) is also active in the supply of shell eggs and processed egg. It too sources the majority of its shell eggs from third party producers and operates at all stages of the shell egg supply chain. However, unlike Stonegate, Deans has processing facilities of its own and produces all of its supplies of processed egg in-house.

TRANSACTION

The transaction was completed on 23 June 2006 by the creation of a new company, Noble Foods Limited, which acquired the majority of the shares in Stonegate and Deans. The principal shareholders in Stonegate and Deans (respectively, Mr Michael Kent and Mr Peter Deans) each acquired 50 per cent of the shareholding in Noble Foods.

The merger was notified to the OFT on 30 June 2006. The administrative target date for a decision is 15 September 2006 and the statutory deadline is 22 October 2006. The parties gave initial undertakings to the OFT on 22 August 2006.

JURISDICTION

As a result of this transaction Stonegate and Deans have ceased to be distinct. The parties overlap in the operation of a supply chain that encompasses the production, packing and supply of shell eggs and the supply of processed egg. During 2005, their combined shares of the UK supply of shell eggs and processed egg amounted to [40-50] per cent and [35-45] per cent respectively. The share of supply test in section 23 of the Enterprise Act 2002 (the Act) is consequently met. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

ASSESSMENT

The parties' commercial activities overlap in a supply chain that encompasses the production, packing and supply of shell eggs and the supply of liquid egg. For the purposes of a competition assessment in this case, the relevant geographic frame of reference is considered to be no wider than the UK.

The merger does not, in the view of the OFT, raise substantial competition concerns at the production level of the supply chain (given that the parties' combined shares of supply and the lack of third party concerns) or at the packing level (since neither party packs significant volumes for third parties). The substantial shares of supply of shell eggs to processors ([ ] per cent) do not raise concerns given that Deans' share represents its own in-house supply. The OFT does not consider that it is necessary to draw any conclusions on the impact of the merger on the supply of shell eggs to commercial customers.

The parties' combined shares of the supply in the UK of all shell eggs and shell eggs to retailers amount to [ ] per cent and [ ] per cent respectively. The OFT considers that the merger raises concerns as a result of the loss of close competition between the parties.

The views of third party commentators on countervailing buyer power are mixed. Some were unconcerned by the merger and submitted that they could constrain the merged entity's pricing behaviour by threatening to switch a proportion of their total requirement to alternative suppliers, to source from abroad or to build up smaller suppliers. Other third parties raised credible concerns that the small size of the remaining competitors post-merger constrained their ability to switch between sources of supply. It does seem to the OFT that whatever countervailing buyer power could be exercised previously has been diminished to some extent by the merger, though not necessarily in respect of each retailer that sources from the parties. Over the short to medium term at least, fewer customers can now switch significant proportions of their egg requirements than could before the merger. Overall, on the basis of the evidence before it, the OFT considers that the extent and degree of countervailing buyer power amongst customers as a whole is unclear.

In the liquid egg segment, combined shares of supply in the UK amount to around [ ] per cent. All customers were concerned at the loss of competition between Stonegate and Deans. Here too, the views of third party commentators on countervailing buyer power are mixed.

On the evidence before it, the OFT considers that it cannot accept the parties' proposition that competition concerns for the supply of shell eggs and processed egg can be offset by low barriers to entry and expansion – although the parties arguments are not without some merit. Indeed, the OFT considers that some expansion of third party suppliers in the short term will take place as a result of the merger. But on the basis of third party comment and of the overall stability of the market operators' shares of supply over a long period, the OFT does not consider on the basis of the available evidence that sufficient timely expansion could offset the loss of competition between the merging parties.

CONCLUSION

Consequently, the OFT believes 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.

UNDERTAKINGS IN LIEU

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

The OFT's Mergers Substantive Assessment Guidance states 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, and those remedies are capable of ready implementation. (see note 1)

Stonegate and Deans offered essentially behavioural undertakings to the effect that [ ].

Whilst very much welcoming the willingness of the parties to put forward remedies, the OFT does not consider that these proposals are capable of maintaining the competitive dynamic in the supply of shell eggs and liquid egg, for the reasons set out below.

The OFT's guidance states a clear preference for structural remedies. In this case, the proposed remedies raise the following serious questions: [ ].

The OFT therefore does not believe the undertakings offered are sufficiently clear cut to address the competition concerns outlined above.

DECISION

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

NOTE

1. Paragraphs 8.3 and 8.4.

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