Completed acquisition by Dairy Crest Group plc of certain assets of Arla Foods UK plc

Affected market: Fresh processed milk

No. ME/2622/06

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 26 October 2006. Full text of decision published 8 January 2007.

Please note that square brackets indicate figures or text which have been deleted, amended or replaced with a range for reasons of commercial confidentiality.

PARTIES

Dairy Crest Group plc (Dairy Crest) is active in the production and supply of milk and other dairy products in the UK. Its turnover in the year ended 31 March 2006 was approximately £1,424 million.

Arla Foods UK plc (Arla) is also active in the production and supply of milk and other dairy products in the UK. Arla was established in October 2003 as a result of the merger between Arla Foods plc and Express Dairies plc. Arla is 51 per cent owned by Arla Foods amba, a Danish/Swedish cooperative. Its turnover in the year ended 30 September 2005 was around £1.32 billion.

TRANSACTION

On 19 August 2006 Dairy Crest acquired various assets pertaining to Arla's doorstep and depot-based middle ground milk business[1]. The assets include dairies at Liverpool and Nottingham, 77 depots and all collection sites located in England and Wales, delivery vehicles, stocks, personnel, brands, contracts and goodwill (the acquired business) [2]. The UK turnover of the acquired business was approximately £[ ] million for the year ended September 2005.

Arla has retained a number of larger middle ground milk customers as well as the milk supply contracts it currently has with national multiples (the retained business). These customers will be serviced from Arla's dairies, whereas the customers transferred to Dairy Crest were, prior to the transaction, predominantly serviced from Arla's depots.

The transaction was notified to the OFT on 30 August 2006. The administrative deadline in this case expires on 27 October 2006 and the four month statutory deadline expires on 18 December 2006.

JURISDICTION

As a result of this transaction Dairy Crest and the acquired business have ceased to be distinct. The UK turnover of the acquired business exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

Pursuant to section 27 of the Act, the OFT may, for the purposes of a reference, treat successive transactions between the same parties within a two year period as having occurred simultaneously on the date on which the latest of them occurred.

On 29 October 2005, Dairy Crest acquired the Express Foodservice Business in London from Arla (the Foodservice acquisition). Dairy Crest submitted details of the transaction to the OFT on 2 November 2005, and on 28 November 2005 the OFT announced that this transaction did not qualify for investigation under the mergers provisions of the Act because neither the UK turnover test nor the share of supply test was met.

The Express Foodservice Business supplied milk, cream and other products to foodservice businesses (coffee bars, hotels, caterers), wholesale traders and bottled milk buyers in the South of England. Dairy Crest acquired these customers, as well as one depot and various vehicles.

The OFT has exercised its discretion under Section 27(5) of the Act to aggregate the acquisitions of 29 October 2005 and 19 August 2006 and treat them as having occurred simultaneously on 19 August 2006.

THIRD PARTY VIEWS

In addition to issuing a public invitation to comment, the OFT also contacted a large number of different customers and competitors during the course of its investigation. Of those contacted, approximately a quarter responded, with the majority indicating that they were unconcerned by the transaction. However, a small number did raise concerns regarding the number of supply options available post-merger. These concerns have been evaluated above. A number of respondents also raise general concerns regarding competition in the sector which were not specific to the merger.

DEFRA considered that the merger would not give rise to concerns in the doorstep segment due to the lack of competition between the parties and the availability of alternative sources of supply, such as supermarkets. In respect of the middle ground DEFRA felt that despite the merged entity's somewhat high share of final sales in the Midlands, the market will still remain competitive as result of the buyer power held by larger middle ground customers; the number of alternative suppliers for smaller customers; the increasing growth of Wiseman in the segment; low barriers to entry; and Arla's ability to continue supplying wholesalers and retail chains.

ASSESSMENT

There is minimal overlap between the parties' doorstep activities and this segment will continue to face competition from other market segments such as the national multiples. No competition concerns are therefore considered to arise in the doorstep segment.

With respect to middle ground customers, small middle ground customers will still enjoy the benefit of a range of different suppliers, including wholesalers, buying groups and smaller dairies. Large middle ground customers who are supplied direct from the dairy (as opposed to depots) will still be able to source their fresh milk from both the parties as Arla will continue to be present in this sub-segment.

A small number of customers expressed concerns that the merger would reduce the number of suppliers able to bid for their contracts post-merger. These customers tended to require large volumes, delivered from depots in small drops on a daily basis. However, consistent with the CC's findings in Arla/Express, the OFT believes that wholesalers provide and will continue to provide a sufficient constraint on the merged entity's behaviour post-merger. For those customers with a preference for a national contract, the weight of evidence available suggest that there are credible alternative supply options available in the form of the other large processors and milk consortia.

We also considered the possibility that the merger would strengthen or facilitate more perfect, durable or complete coordination. While the milk sector does appear to be susceptible to coordination, it is in the OFT's judgment unduly speculative, on the evidence available, to conclude that the merger itself has or may be expected to significantly strengthen or increase the degree, durability or scale of coordination.

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.

NOTES

1. Prior to the transaction, this business was conducted by Arla's subsidiary, Express Limited.
2. Dairy Crest has also acquired certain non-liquid milk products that will be sold through the depot infrastructure.

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