Anticipated acquisition by John Thompson Limited of the Northern Ireland compound animal feed business and assets of AB Agri Limited

Affected market: Animal feed

No. ME/3637/08

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 22(1) given on 24 June 2008. Full text of decision published on 2 July 2008.

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.

PARTIES

John Thompson Limited (Thompson) is a subsidiary of Barnett & Hall Holdings Ltd (BHH), a joint venture between W&R Barnett Ltd (WRB) and Origin Enterprises Plc (Origin). Thompson is active in the production and distribution of animal feeds and distribution of fertilisers on behalf of third party manufacturers and importers.

AB Agri Ltd (AB Agri) is a subsidiary of Associated British Foods. AB Agri produces and distributes animal feeds and feed micro-ingredients to farmers and purchases grain and oilseeds from them. It has facilities in the UK and China and produces animal feeds at a plant at Knockmore, Northern Ireland. AB Agri also distributes fertilisers in Northern Ireland. The turnover of the business and assets being acquired was approximately £40.5 million for the financial year to September 2007.

TRANSACTION

Thompson proposes to acquire the Northern Ireland compound animal feeds business and assets of AB Agri (the AB Agri Business) by way of an asset purchase agreement. The AB Agri Business will comprise the feed production operations, blending operation and assets of AB Agri located at Knockmore, Northern Ireland, together with certain associated brand names, and customer lists, but will not include the land and buildings on which the AB Agri Business is currently located.

The parties notified the transaction to the OFT on 28 April 2008. The OFT's administrative deadline is 25 June 2008.

JURISDICTION

As a result of this transaction Thompson and the AB Agri Business will cease to be distinct. The parties overlap in the manufacture and distribution of certain types of animal feeds and in the distribution of fertiliser in a substantial part of the UK (Northern Ireland) and 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 OFT sought the views of a large number of third parties, although relatively few responses were obtained. Of the responses, approximately half had concerns, focusing largely on vertical issues, although there were some concerns regarding the horizontal concentration in relation to compound animal feed.

ASSESSMENT

The parties overlap in the supply of animal feed and the distribution of fertiliser. However, given the low market share of the parties and the highly fragmented market in relation to fertiliser distribution, the OFT did not undertake a detailed investigation of this market on the basis that no competition concerns arise there.

In relation to animal feeds, the OFT considered whether animal feeds could be considered as one distinct market or a number of separate markets based on animal and/or feed type. The parties submitted that all ruminants and monogastric animals should be considered together, as well as all feed types. However, the OFT found that, with the exception of ruminants, there is little demand side substitution between feed for different animals, and third parties suggested that switching production between feed types for different animals is not straightforward, The OFT therefore considered feed for ruminants, pigs and poultry to comprise three different markets.

The OFT also found that there are some impediments to switching between different types of feed, particularly when farming systems are designed to accommodate pelleted compound feed. The OFT took a cautious approach, and considered compound feed separately from other feed types, on the basis that if there are no competition concerns in relation to compound feed (where the parties shares were highest), there cannot be competition concerns in relation to other feed types. Consistent with the views of both the parties and third parties, the OFT found the geographic market to be the north of Ireland (Northern Ireland and the north of the Republic of Ireland).

The parties have a low market share in relation to each distinct market for animal feed (excluding a large contract to supply poultry feed to Moy Park, for which the parties merely act as a toll manufacturer). In each market, a number of competitors will remain post-merger, many of whom are at least as strong as the parties and have capacity to expand (in relation to pig feed, the market also has one particularly strong supplier, which appears to be the strongest constraint on each of the merging parties). Third party evidence suggested that switching between suppliers is straightforward. Given these factors, it appears that there will be sufficient remaining constraints on the merged entity such that the loss of competition between the parties is unlikely to be significant.

While there are some features of the various markets for animal feed that may support coordination, a number of factors count against this: asymmetry of shares of supply, substantial spare capacity, declining demand for compound animal feed, different currencies used within the geographic market, and possible buyer power. There was no evidence in this case that the merger will increase the ability or incentive for coordination in any of the markets assessed.

Finally, the OFT considered whether vertical concerns would arise as a result of Thompson's parent companies being active in the supply of raw materials to animal feed manufacturers. There were complaints over the possibility of both input and customer foreclosure. It was submitted that Thompson and AB Agri together represent a significant amount of the market and that the loss of AB Agri as a customer would mean that other suppliers of animal feed would, for example, be unable to import raw materials at a minimum efficient scale. However, the OFT found that any exclusionary effect from the loss of AB Agri as a customer will not be significant, nor allow the merged entity to deprive upstream suppliers of significant economies of scale.

In relation to input foreclosure, the parties do not overlap in the supply of raw materials, so the ability of the parties to foreclose will not change. Should they have any existing ability to do so, it seems unlikely their incentive to do so would increase with the increment from the merger representing a small increase in overall raw materials.

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.

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