Completed acquisition by First Milk Ltd of the majority of the retailer branded cheese operations of Dairy Crest Group plc

Affected market: Cheese and milk

No. ME/2728/06

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 22 December 2006. Full text of decision published 12 January 2007.

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

PARTIES

First Milk Ltd (First Milk) is a farmer-owned cooperative that procures raw milk from its members, collects it and then delivers it to milk processors. FM is also active in the production of cheese, skimmed milk and butter through its subsidiaries [and certain businesses in which it has invested][1]. It also owns a 15 per cent stake in Robert Wiseman Dairies plc. Its UK turnover in the year to 31 March 2006 was £477 million.

Dairy Crest Group plc (Dairy Crest) is a chilled dairy food company. It has a wholly owned trading subsidiary, Dairy Crest Limited (DCL), which operates in two divisions: Foods and Dairies. The former includes spreads, cheese and fresh dairy products, whilst the latter includes liquid products, household products and ingredients. Dairy Crest's UK turnover in the year ending 31 March 2006 was approximately £1,330.9 million.

TRANSACTION

On 14 October 2006 the First Milk Cheese Company Ltd, a wholly-owned subsidiary of First Milk, acquired from DCL and Haverfordwest Cheese Limited (both wholly owned subsidiaries of Dairy Crest) certain cheese and dairy ingredients business and related assets that comprise the majority of the Dairy Crest's UK retailer branded cheese business[2] (the 'acquired business').

The parties notified the transaction on 3 November 2006. The administrative deadline is 3 January 2007 and the statutory deadline expires on 13 February 2007.

Ancillary restraints that are directly related and necessary to the implementation of the merger are excluded from scrutiny under the Competition Act 1998[3]. The OFT's approach to ancillary restraints will generally follow the European Commission's Notice on restrictions directly related and necessary to concentrations[4].

In order for restraints to be directly related, the restriction must be connected with the merger, but ancillary or subordinate to its main object. In addition, in determining their necessity to the implementation of the merger, account will be taken of whether the duration, subject matter and geographical field of operation of the restraint are proportionate to the overall requirements of the merger[5].

In this case, the parties submitted that two of the agreements implementing the transaction contain restrictions on the parties' conduct but which the parties consider to be ancillary to the main purpose of the transaction.

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Taking into account all the relevant factors - that the restrictions all directly relate to the separation of the acquired business from Dairy Crest's retained cheese business; the geographical scope is limited to the UK; and that the duration is limited - the OFT considers that the agreements are sufficiently necessary to the implementation of the merger to fall within the ancillary restraints exclusion.

JURISDICTION

As a result of the transaction First Milk 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.

THIRD PARTY VIEWS

The vast majority of third parties were not concerned by this transaction. There were only two concerns raised regarding foreclosure and the reduction in supplier choice. However these concerns have been addressed.

No concerns were raised in relation to cheese packing or whey products.

ASSESSMENT

The parties overlap in the supply of cheese, cheese packing and whey products. In relation to whey products the overlap between the parties is minimal and there are a number of other competitors present.

For both cheese and cheese packing services, the transaction has effectively transferred the share of supply accounted for by the acquired business from Dairy Crest to First Milk. As a result, both parties still remain present in these sectors post-acquisition. In addition, there continues to be a number of alternative suppliers for these products sufficient to constrain First Milk's behaviour post-acquisition.

One third party did raise concerns regarding First Milk's ability to potential foreclose the supply of raw milk following the acquisition. However, the transaction has a limited impact on the amount of raw milk procured by First Milk, and there are a number of alternative suppliers present in the sector.

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. FM owns a small cheese manufacturer, has [a 20 per cent stake in another cheese plant] and owns 40 per cent of a skimmed milk powder and butter plant.
2. The business of the sale of cheese to retail customers based in the UK for sale under those customers' own brands. This cheese is also referred to as 'own-label' cheese.
3. Schedule 1 Competition Act 1998.
4. European Commission Notice on restrictions directly related and necessary to concentrations, OJ [2005] C56/24.
5. OFT Mergers Substantive Guidance para 11.18

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