Completed acquisition by Long Clawson Dairy Limited of Millway Limited

Affected market: Cheese production

No. ME/3794/08

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 and rationale, jurisdiction, assessment and decision.

The OFT's decision on reference under section 22(1) given on 8 October 2008. Full text of decision published 28 October 2008.

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

PARTIES

Long Clawson Dairy Limited (Long Clawson) is a UK cheese-producing dairy with a portfolio of more than 30 products including Stilton, Shropshire Blue, and several types of blended cheese. In the financial year to 31 December 2007, Long Clawson's total turnover was £35.7 million. It currently operates three sites in the UK: Long Clawson (Head Office; production and packing of Stilton and other blue cheeses; distribution); Harby (maturation of Stilton and other blue cheeses); and Bottesford (production and packing of speciality blended products).

Dairy Crest Group plc (Dairy Crest) is a major UK chilled dairy foods company. Its portfolio of branded products includes Country Life Butter, Cathedral City, Davidstow, and Yoplait, among others. Dairy Crest operates a Stilton and speciality cheese business within its wholly owned subsidiary Millway Dairy Crest (Millway) at Hartington (Derbyshire). Millway, which is the object of the present transaction, produces Stilton (both blue and white varieties), other blue cheeses (Shropshire Blue and Dovedale), and blended cheeses. Millway's turnover for the financial year ending 31 March 2008 was £[ ] million.

JURISDICTION

As a result of the transaction described below, Long Clawson and Millway have ceased to be distinct for the purpose of Section 23 of the Enterprise Act 2002 (the Act). The transaction qualifies as a relevant merger situation on the share of supply test under Section 23 (3) of the Act as the parties' combined share of supply in the UK for Stilton cheese exceeds the 25 per cent threshold. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

TRANSACTION AND RATIONALE

On 31 July 2008, Long Clawson acquired Millway for a total consideration of £[ ]. In addition, Long Clawson is also to acquire approximately £[ ]. The transaction was notified to the OFT by way of a satisfactory submission on 14 August 2008. The OFT accepted initial undertakings from Long Clawson on 29 August 2008. The administrative deadline expires on 8 October 2008 and the statutory deadline expires on 30 November 2008.

Stilton is traditionally produced using open vats of variable sizes. By contrast, Dairy Crest, following its acquisition of Millway in 2000, invested in costly equipment (an automated coagulator) as an alternative to the traditional vats. The automated coagulator was intended to significantly increase the production capacity of Blue Stilton produced, at a consistently higher quality level and on a continuous basis. The equipment has failed to provide the expected results and since then, Millway has suffered severe quality and operational problems in the manufacture of its Blue Stilton product. As a consequence, Millway's Blue Stilton business has kept declining over the past seven years [ ].

On the basis of the above, the parties submit that Millway is no longer a viable standalone business and, absent the merger, Dairy Crest [ ]. The OFT understands that [ ].

A claim that one party will exit absent the merger is to suggest that the OFT should not benchmark its post-merger competitive effects analysis against pre-merger conditions. In order to decide whether the duty to refer applies, the OFT must consider the merger's impact relative to the future situation that would prevail absent the merger (that is, the counterfactual).

The OFT's general approach is that it relies on pre-merger conditions as the appropriate proxy for the counterfactual and will 'test' the competitive impact of any transaction against such a standard before proceeding to consider whether another counterfactual should be substituted. In general, where the merger raises no concerns relative to pre-merger conditions, nothing will turn on the OFT's adoption of its default counterfactual of pre-merger conditions and there will be no need to consider the detailed factual questions that arise under substitute counterfactuals that, for example, the failing firm defence or other exiting firm scenarios engage. Accordingly, in this case, the OFT first considered whether the merger raises concerns relative to the pre-merger conditions before considering whether a substitute counterfactual would be more appropriate.

ASSESSMENT

The parties overlap in the manufacture of Blue, White Stilton and blended cheeses. Stilton is a protected name under EC regulations, and can only be produced, with a proper licence, in three East Midlands counties. Concerns arise only in relation to Blue Stilton.

With respect to market definition, the OFT considers it possible that the relevant UK-wide market may be slightly wider than Blue Stilton, including possibly Danish Blue, supplied by Arla (and Cambozola, whose volumes are very small). However, concerns based on concentration data also arise based on candidate market shares that include Danish Blue. Moreover, in the competitive effects assessment, the OFT takes the view that these are substantially less close alternatives for supermarkets in their pricing negotiations with Stilton suppliers, than each major Stilton supplier is to another. The six largest supermarket chains together sell around [85 - 95] per cent of Stilton in the UK, and the merger combines two of the three principal suppliers to these supermarkets of standard and mature Blue Stilton pursuant to large-volume contracts: while using a range of suppliers for niche, premium supply (for example, organic Stilton), these retailers have always awarded their mainstream contracts for standard and mature Stilton to the merging parties or T&T.

Competition for the big supermarket's regular contracts for standard and mature Stilton is unlikely to be affected by four of the five other licensed Stilton dairies, who are either much smaller or niche businesses. There is one other substantial producer, Cropwell Bishop, with two national supermarket contracts for premium supply. However, the OFT considers it unsafe to rely on this rival changing its family-run premium-end business model and expanding into a mass supplier, simply in response to a 3-5 per cent price rise for non-premium Stilton, and potentially undercutting its margins on existing business. Expansion by other very small Stilton dairies or new entry by producers of other cheeses, perhaps sponsored by the supermarkets, seem even less likely to occur, at least with the speed and scale needed to defeat price rises for large-volume Stilton supply contracts in the foreseeable future.

Furthermore, the OFT considers that although Millway has been struggling recently, it is not necessarily a spent force. It still has important UK and supermarket contracts, and its market share has been adjusted to take account of its current 2008 position. Even if, for the sake of argument, Millway would not have stayed an independent competitor without the merger, it does not follow that Long Clawson, the largest competitor, is the only conceivable purchaser of the assets. The purchase by Long Clawson results in the most highly concentrated market outcome possible, as it is the largest player, and will result in the largest HHI delta. Any purchaser apart from Long Clawson (and T&T) would not raise such competition concerns.

Despite the buyer power of supermarkets in many markets, therefore, the OFT takes the view that the present merger gives rise to a realistic prospect of a substantial lessening of competition. The OFT's concerns about the horizontal effects of the merger are stronger in relation to unilateral effects. However, given its decision to refer and its more than fanciful concerns also in relation to coordinated effects, the OFT is referring the transaction to the Competition Commission on the basis of both theories of harm. Finally, no exception to the duty to refer is relevant in this case.

Consequently, 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.

DECISION

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

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