Completed acquisition by Genus plc of Local Breeders Limited

Affected market: Bovine genetics

No. ME/3608/08

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, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 14 May 2008. Full text of decision published on 28 May 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

Genus plc (Genus) is active in the supply to farmers of products and services used in animal, principally bovine, genetics. It operates in three main areas (1) the production of bovine semen from its own stud bulls; (2) the distribution of bovine semen worldwide; and (3) the provision within the UK of artificial insemination (AI) services on cattle. In the financial year ending 31 June 2007, Genus' reported worldwide turnover was £234 million.

Local Breeders Ltd (LB) was a distributor of bovine semen and a supplier of AI services on cattle in a specific regional area in the UK comprising the South West of Wales (Dyfed). Prior to its acquisition by Genus, LB sourced its supplies of bovine semen primarily from one of Genus' competitors, Alta Limited (Alta). In the calendar year ending 31 December 2006, LB's turnover was £650,000.

TRANSACTION

Genus (through its subsidiary, Genus Breeding Limited (GBL)) acquired the business and assets (including premises, employees and customer lists) of LB under a Business Transfer Agreement that was both executed and completed on 10 August 2007. The parties to the agreement were GBL, LB and LB's sole shareholder, Mr Mervyn James. The consideration paid by GBL for the acquisition was £355,000.

On 22 August 2007, an article on the merger was published in the Western Telegraph newspaper, a paid-for newspaper distributed in Pembrokeshire, South Ceredigion and West Carmarthenshire. On 4 September 2007, LB wrote to its 667 customers to inform them of the recent merger. There is no evidence that the merger was reported in any publication other than the Western Telegraph newspaper or that mention was made of the acquisition on Genus' corporate website. [see note 1]

On 22 November 2007, the OFT was made aware of the merger by a third party. The OFT subsequently wrote to Genus requesting details of the merger on 29 November 2007.

Genus argued to the OFT that notice of material facts about the merger had been made public, within the meaning of section 24 of the Enterprise Act 2002 (the Act), by, at the latest, 4 September 2007 (the date of LB's letter to its customers). As a result, Genus considered that the merger had ceased to be a relevant merger situation capable of being referred to the Competition Commission (the CC), and by extension reviewed by the OFT, by 4 January 2008.

Notwithstanding its view on the application of section 24 of the Act, Genus ultimately agreed to assist the OFT with its substantive assessment of the impact of the merger, whilst maintaining its position that the OFT no longer had jurisdiction to review the merger.

Under section 22(1) of the Act, the OFT is under a duty to make a reference in completed mergers where it believes that 'it is or may be the case that a relevant merger situation has been created and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition …'. In making a decision on reference, the OFT's assessment therefore includes deciding whether it is or may be the case that 'two or more enterprises have ceased to be distinct enterprises at a time or in circumstances falling within section 24' (section 23(2)(a)). The statutory context of the Act means that, in the very rare cases where there is genuine uncertainty on the existence of a relevant merger situation, this question is one for resolution by the CC on the basis of a detailed investigation where the duty to refer is met.

The OFT believes in this case that it is or may be the case that a relevant merger situation has been created for the purposes of the four month time limit imposed by section 24 of the Act. The OFT considers that the publication of the article in the regional Western Telegraph newspaper and the letter to LB's own customers were, either individually or collectively, insufficient for material facts about the merger to have been made public (that is, 'so publicised as to be generally known or readily ascertainable' [see note 2]) by 4 September 2007. In making this assessment, the OFT considers that:

• the definition of 'made public' in the Act is to be assessed from the perspective of the OFT, acting reasonably and diligently in the context of its duties under the Act [see note 3]
• given the regional nature of its circulation, it cannot be said that publication of outline details of the merger in the Western Telegraph was sufficient for the merger to have been 'so publicised as to be generally known or readily ascertainable'; in addition, the OFT considers it was unclear from the article whether the merger was anticipated or completed with the result that it did not include all material facts, [see note 4] and
• the fact that a target company's customers have been informed about a merger is, whilst potentially of relevance to the assessment of substantive concerns, insufficient for the merger to be necessarily regarded as having been 'so publicised as to be generally known or readily ascertainable'.

By way of guidance, the OFT considers that material facts (which include whether the merger had actually completed) would have been made public for the purposes of section 24 of the Act where those facts had been publicised in the national or relevant trade press and where the acquiring party had itself taken steps to publicise the transaction at large, normally by publishing and prominently displaying on its own website a press release about the transaction.

On the basis of the considerations outlined above, the OFT considers that, for the purposes of section 24 of the Act, the merger had not been made public until receipt by the OFT of information from a third party on 22 November 2007. For this reason, the OFT considers that the statutory deadline, as extended under section 25(2) of the Act, expires on 14 May 2008.

JURISDICTION

As a result of this transaction, Genus and LB have ceased to be distinct. The share of supply test in section 23 of the Act is met on the basis of the parties' overlap in the supply of professional AI services on cattle in South West Wales (Dyfed) for which they will have a combined share of supply in excess of 25 per cent. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

Customers did not raise concerns on the merger and overall were content with the functioning of the market.
 
Two competitors raised some issues with regard to their perception of Genus' commercial policies and behaviour. These issues, which the OFT does not consider to be merger-specific, have already been addressed above.

ASSESSMENT

The parties overlap in (a) the UK distribution of bovine semen bought by dairy farmers for the purposes of breeding genetic specifications into their dairy cattle, and (b) the supply of artificial insemination (AI) services on cattle in the Dyed area.

As far as the distribution of bovine semen is concerned, LB was a very small operator on a UK-wide basis, and therefore the OFT does not consider that the acquisition has had any material impact on the UK distribution market.

With regard to the supply of professional AI services, Genus will continue to face competitive constraint from three other suppliers: two sole traders and a larger new entrant, Alta Cymru – a UK subsidiary of a global operator in animal genetics, Alta, Inc. The OFT believes that Alta Cymru's entry into the market occurred as a result of the acquisition of LB by Genus. Third party comment indicates that as a result of this entry (and the fact that LB had not been a particularly strong constraint on Genus for some time) post-merger competitive conditions are, if anything, keener than those that prevailed prior to the merger.

Particularly given the absence of any restrictions that might provide a material barrier to Alta Cymru's expansion, the OFT considers that Alta Cymru poses as much of a constraint on Genus as did LB pre-merger. Further, the OFT believes that further constraint is posed on incumbent AI service providers by the prospect of new entry and by farmers' ability to switch or threaten to switch either to undertaking AI procedures on cattle themselves (DIY) or to natural insemination by the farm bull.

No customers raised any concerns regarding the acquisition, and overall were content with the functioning of the market. Two competitors raised concerns about the acquisition, [  ] in Dyfed. In particular, [X] and [Y] raised issues regarding their perception of Genus' commercial policies and behaviour post-merger. However, these issues were, on further investigation, not considered to be merger-specific. The OFT has ruled out the prospects of vertical foreclosure concerns on the basis that the OFT does not believe that the merger provides Genus with the ability and incentive to foreclose other providers of bovine semen.

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. See http://www.genusplc.com/
2. Section 24(3) of the Act.
3. Section 5 of the Act describes positive functions for the OFT in relation to the acquisition of information. See also Enterprise Act 2002 Explanatory Notes to section 24, which state, inter alia, 'the section defines the term 'made public' as having the meaning of 'generally known or readily ascertainable'. The intention is that OFT would reasonably be expected to have known or found out about the merger if it has not been notified about it.'
4. See in this respect the CC's interpretation of 'material facts' in Icopal Holding A/S and Icopal a/s: A report on the merger situation (2001) Cm5089 and Archant Limited and the London newspapers of Independent News and Media Limited: A report on the acquisition by Archant Limited of the London newspapers of Independent News and Media Limited (2004).
5. Given that LB is not active in relation to the production of bovine semen, the merger has no impact at this level of the supply chain.

Back to top