Completed acquisition by Cott Beverages Limited of Macaw (Holdings) Limited

Affected market: Soft drinks

No. ME/1954/05

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, assessment, undertakings in lieu and decision.

The OFT's decision on reference under section 22(1) given on 28 November 2005. Full text of decision published on 12 December 2005.

Square brackets indicate information replaced by a range at the parties' request.

PARTIES

Cott Beverages Limited (Cott) is the UK subsidiary of Cott Corporation. It supplies own label and branded soft drinks, both carbonated and still, to multiple grocery retailers, independent cash and carry retailers and wholesalers.

Macaw (Holdings) Limited (Macaw) was a privately owned UK soft drinks manufacturer with a turnover of £[CONFIDENTIAL]. It supplies multiple grocery retailers with soft drinks, both carbonated and still.

TRANSACTION

On 10 August 2005, Cott acquired 100 per cent of the shares of Macaw for £75.7 million.

A satisfactory submission was received on 5 September 2005 after 5pm. Cott gave initial undertakings under section 71 of the Enterprise Act 2002 (the Act) on 14 November 2005. The statutory deadline for deciding whether to refer the merger to the Competition Commission is 3 January 2006 and the OFT's administrative deadline is 30 November 2005.

JURISDICTION

As a result of this transaction Cott and Macaw have ceased to be distinct enterprises. Since the parties' combined share of supply of own label carbonated soft drinks (CSDs) is 57 per cent (increment 21.3 per cent), 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.

ASSESSMENT

The parties overlap in the supply of dilutes, still drinks and CSDs. The OFT does not believe that there is a realistic prospect that the merger will result, or has resulted, in a substantial lessening of competition in the dilutes, still drinks and branded CSDs segments, nor in the procurement of inputs for these products, and therefore the investigation focused on the supply of own-label CSDs.

Cott submits that branded and own label CSDs should be considered under the same frame of reference. Nonetheless, a number of factors suggest that these two product groups should be considered separately. From the demand perspective, third party comments were consistent to the effect that customers are not likely to switch from own label to branded CSDs following a small but significant non-transitory price rise and the parties did not provide any convincing evidence to suggest otherwise. At the wholesale level, grocery retailers do not choose between the different categories of CSDs, but tend to offer a full range of branded products and to have own label options available. On the supply side, major branded CSD suppliers do not serve the own label segment and it seems unlikely that they would do so for strategic reasons, even though the production processes of both products are identical.

The limited level of import activity and the fact that competitors and customers tend to be active nationally suggest that Great Britain is the most appropriate geographic frame of reference.

The merger causes a loss of rivalry between two out of the four main competitors in this sector; the combined market share, the HHI and the increase in HHI are all high. The merger may give rise to competition concerns and the evidence made available to the OFT is not enough to suggest that there are sufficient competitive constraints to prevent the merger from resulting in a substantial lessening of competition.

First, the main grocery retailers do not seem to have other alternative sources of supply of own label CSDs besides the merged entity, Princes and Silver Spring. Bid evidence indicates that other suppliers of own label CSDs are generally not invited to bid for the large supermarket contracts and seem to be capacity constrained; Cott has not provided enough evidence that these suppliers are credible alternatives and internal documents from Macaw suggest that in their perception the number of alternative suppliers is limited.

Second, it is not clear that there is sufficient spare capacity to facilitate switching should the prices of the merged entity be higher than they would have been but for the merger. The parties' estimates of spare capacity conflict with the figures obtained by the OFT from competitors themselves as well as with the general perception of market participants – both competitors and customers – that available capacity is limited.

Third, comments from third parties consistently indicated that new entry and expansion will not be timely, likely or sufficient to resolve the above concerns. The main reasons for this seem to be the low margins obtained from the production of own label CSDs, the decline in prices in the last few years, and the fact that supermarkets tend not to offer long term contracts, which makes investment risky. The evidence available to the OFT therefore indicates that entry and expansion might not be sufficient, timely or likely to defeat any attempt to increase prices. In addition, the flow of exit from the market in the recent past does not suggest the sector is attractive to new entry. Cott did not provide sufficient evidence to suggest otherwise. Furthermore, as seen in the discussion regarding the most appropriate frame of reference against which this case should be analysed, competitors in neighbouring markets do not seem to be interested in supplying own label CSDs, and imports are uneconomical.

Fourth, while on the face of it the UK shares of purchasing of own label CSDs of the largest four grocery retailers would suggest that they have sufficient negotiating strength to discipline supplier pricing, there are good reasons to believe that this may not be case, discussed in more detail above. The buyer power of smaller retailers is far less clear, and the available evidence does not indicate that these suppliers could resist an attempt to increase prices higher than they otherwise would have been absent the merger. There is therefore insufficient evidence to conclude that countervailing buyer power would discipline supplier pricing post-merger, in particular for smaller retailers.

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.

UNDERTAKINGS IN LIEU

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

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.

The parties offered an undertaking [CONFIDENTIAL].

The OFT does not consider that this undertaking is capable of restoring the competitive dynamic in the supply of own-label CSDs that existed partiers pre-merger. In addition, [CONFIDENTIAL]. As such, the proposed undertakings are not clear cut and it is not obvious that they would resolve the competition concerns identified, and the duty to refer remains.

DECISION

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

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