Anticipated acquisition by General Mills UK Limited of Saxby Bros Limited

Affected market: Ingredient pastry

No. ME/2663/06

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 33(1) given on 27 November 2006. Full text of decision published 6 December 2006.

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

PARTIES

General Mills UK Limited (General Mills) manufactures and markets consumer food products, including the Jus-Rol frozen ingredient pastry range. Its UK turnover in the year ending 30 April 2005 was £136.5 million.

Saxby Bros Limited (Saxbys) is a wholly-owned subsidiary of Saxby Bros Holdings Limited, whose principal activity is that of a holding company. Following a re-structuring of its business in February 2005, Saxbys now concentrates solely on the manufacture and marketing of chilled ingredient pastry and un-baked goods to the retail sector. Its UK turnover in the year ending 1 April 2006 was £11.7 million.

TRANSACTION

General Mills is proposing to acquire the entire issued share capital of Saxbys for a consideration of approximately £[ ] million. The parties notified the transaction to the OFT on 29 September 2006. The administrative timetable expires on 28 November 2006.

JURISDICTION

As a result of this transaction General Mills and Saxbys will cease to be distinct. The parties overlap in the supply of ingredient pastry in the UK and post-merger would achieve a share of supply of 70 to 80 per cent. As a result, 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 arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

The majority of third parties we contacted did not raise concerns about the merger. Some third parties were concerned that the merged entity's combined brand strength post-merger may raise barriers to entry/expansion and give the merged entity the power to push through customer price increases, particularly in the retail segment. However, the majority of retail customers we spoke to consider that they still have sufficient alternative supply options open to them, including the possibility of sponsoring entry or purchasing from overseas manufacturers. Some foodservice customers also felt that there may be cost increases as a result of the merger. The concerns raised by third parties have been dealt with in greater detail.

ASSESSMENT

The parties overlap primarily in the supply of frozen and chilled ingredient pastry to the retail, foodservice and bakery/manufacturing sectors[1]. General Mills currently manufactures frozen ingredient pastry, while Saxbys currently manufactures chilled ingredient pastry. However, the parties have supplied both frozen and chilled ingredient pastry in the past. While supply side substitution between frozen and chilled ingredient pastry is relatively easy, demand side substitution is limited. Therefore, from the customers' perspective, any competition between the parties at present is limited to that of potential entry into each others sub-segment.

The parties have significant combined shares of supply in both the retail and foodservice segments (though no increment in foodservice). In both instances there are a number of other (albeit significantly smaller) competitors present. While several of the supermarkets considered they had sufficient alternatives available to them, a number of other third parties (both customers and competitors) expressed concerns about the merger, and the loss of the constraint imposed by the parties on one another.

However, barriers to entry and expansion are not considered to be significant. Existing suppliers confirmed that they hold spare capacity and there are a number of international suppliers and manufacturers of unbaked goods who would be able to supply ingredient pastry into the UK. To the extent that branding constitutes a barrier to entry in the retail segment, switching to own label ingredient pastry supply is considered to be a credible strategy and negates the need for establishing a brand. In addition, a number of potential entrants, including potential international entrants already have established brands. In the foodservice segment, third parties indicated that branding is of limited importance. The majority of supermarkets also indicated that they would consider sponsoring entry in the event of a price increase.

The supermarkets account for a significant proportion of each of the party's sales in the retail sector. There is evidence that the supermarkets have successfully negotiated lower prices in the past and have also leveraged their buyer power across the parties' portfolio of products (for example, by threatening to de-list a product line). In most instances, there are no formal contracts and switching suppliers is considered relatively easy.

Low barriers to entry and expansion, combined with the presence of strong buyer power are considered to exert a significant constraint on the parties post-merger sufficient to offset any loss of competition arising from the merger.

Consequently, the OFT does not believe 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.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTE

1. Other smaller overlaps were noted but we did not consider that these gave rise to competition concerns and they were not considered further.

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