Acquisition by W L Duffield & Sons Limited of the ruminant feed business of Bury Nutrition, part of ABNA Limited

No. ME/1518/02

A report under section 125(4) of the Fair Trading Act 1973 (FTA) on the advice of the Director General of Fair Trading, given on 20 December 2002, to the Secretary of State for Trade and Industry under section 76 of the FTA

JURISDICTION

The OFT considers that the combination of assets (including customer lists), contracts and goodwill that have been acquired by Duffield under this transaction are sufficient to constitute an 'enterprise' for the purposes of section 63(2) FTA. The combination of these assets, contracts and goodwill facilitated the seamless carrying on by Duffield of the ruminant feed business of Bury Nutrition. On that basis, the merger satisfies the share of supply test of the FTA in respect of the supply of ruminant animal feed in an area comprising the counties of Norfolk, Suffolk and Essex. This area is considered to be a 'substantial part' of the UK for the purposes of section 64(1) FTA.

THE PARTIES

W L Duffield & Sons (Duffield), a subsidiary of Duffield Mills Limited, is engaged principally in milling (including production of ruminant and monogastric feeds), grain trading and (to a limited extent) livestock farming. In the year ended 29 September 2001, Duffield reported pre-tax profits of £719,000 on a turnover of £18.9 million. Gross assets as at that date were £7.8 million.

Bury Nutrition is part of ABNA Limited (ABNA) itself a subsidiary of Associated British Foods plc. The business acquired by Duffield related to: a customer list and records together with any customer contracts and orders; and a 3-year licence for specified feed formula, relating to the supply of some 10,000 tonnes of compound ruminant animal feed in an area covered by Norfolk, Suffolk, Essex and part of Hertfordshire. Duffield also acquired certain specified office equipment. ABNA accepted a (see note 1) non-compete clause in respect of the supply of ruminant compound and blended feed into the area covered by the agreement. The consideration paid was (see note 1).

ASSESSMENT

This transaction arose following the decision by ABNA to cease production of ruminant animal feed at its mill at Bury St Edmunds (trading as Bury Nutrition) because of the increased regulatory costs of producing ruminant feed on lines that also produced mono-gastric feed containing fishmeal. Pursuant to a Sale and Purchase Agreement of 29 August 2002, Duffield acquired ABNA's business in the marketing and sale of ruminant compound feeds in Norfolk, Suffolk, Essex and part of Hertfordshire (the Affected Area).

Relevant markets

The merger therefore relates to the supply of compound feed for ruminant animals in the Affected Area. Animal feed can be segmented into that for ruminants - mainly cattle and sheep - and that for mono-gastric animals - pigs and chickens. Animal feed can be further segmented into concentrates - compounds, straights and blends - and non-concentrates. In the UK, over 80 per cent of animal feed is in concentrate form. Compounds consist of a variety of ingredients which are blended together in different proportions and, usually, extruded in pelleted form. Straights are single product feedstuffs and are either processed (oil seed cake) or un-processed (barley, maize and wheat). Blends are a loose mixture of feed raw materials (straights) which together provide a complete feed.

It is not advisable to give mono-gastric feed to ruminants and thus demand-side substitution, at this level, is unlikely. For ruminant animals, substitutes to compound feeds appear to include more traditional foodstuffs (e.g. grass and silage), blends and straights. One third party estimated that straights are only an option for around 40 per cent of farmers, given the need to grow their own cereals (to use as raw materials). The use of straights might also require investment in a mixer or hiring a mobile mixer and might not be suitable for those using automatic feeders requiring pelleted feed. On this point, however, Duffield suggested that it was possible to obtain a range of feed in pelleted form that could be fed through automatic feeders.

On the supply-side, a producer of mono-gastric feed wishing to enter into the supply of ruminant compound feed would face a number of options. It could set up separate production and storage facilities for ruminant and mono-gastric feeds; or (if using fishmeal) thoroughly clean its facilities and switch entirely over to ruminant feed; or find some alternative to using fishmeal in its mono-gastric feed. In the Affected Area, the herd is predominantly mono-gastric and thus the incentives to switch production completely to ruminant feed appear to be limited. Nevertheless, there are several small mills in this area which might suggest that a new entrant could successfully enter the ruminant feed market on a small scale if there was sufficient demand.

In terms of the appropriate geographic market, feed products are low value compared to transport costs and suppliers typically deliver to a 50-60 mile radius from a mill. However, suppliers will supply over a greater distance if there is sufficient demand. Duffield estimated that about one third of the ruminant compound feed produced at its mill near Norwich was delivered outside East Anglia - into Kent and Sussex as far as Brighton on the South Coast. Duffield believed that delivery up to 200 miles from the mill would be viable. Indeed, there is evidence of ruminant feed suppliers based in the South East and East Midlands advertising in the East Anglia for custom. This suggests that delivery over longer distances is viable and that the geographic market is wider than just the Affected Area.

On balance, demand-side substitution would tend to suggest that the supply of compound feed would be constrained by the supply of other ruminant feeds such as blends and straights. The relevant geographic market appears to be wider than just the Affected Area.

Horizontal issues

On the basis of figures published by the Department of Environment, Food and Rural Affairs (DEFRA), Duffield has estimated its share of the supply of all ruminant animal feed in the Affected Area at about 33 per cent (increment 7 per cent). However, it has also noted that its post-merger sales suggest a slightly lower combined figure of 32 per cent: it having 'lost' some 20 per cent of the acquired volume. If the market were to be limited to only ruminant compound feed then Duffield's share of supply would probably be higher, possibly as high as 50 per cent. Nationally, however, Duffield is a relatively minor player in ruminant feed with a share of less than 2 per cent. It has not been possible to identify any accurate information on the volumes supplied by competitors.

Production and supply of ruminant feed in the UK has recently been influenced, to some extent, by regulations effectively preventing the production of ruminant feed on lines also used to produce mono-gastric feed containing fishmeal. While the regulations do not specifically prohibit such 'multi-species' production, third parties tell us that the required down-time (up to a week) required to de-construct, clean and then rebuild the production line make 'multi-species' production financially impracticable. Nevertheless, Duffield believed that 3 mills in the UK had chosen to do this and switch the entire production run twice a year. In East Anglia, it has been suggested that the effect of this regulation has been accentuated by the decline in ruminant herd numbers.

These changes appear to have caused both national suppliers of animal feed, ABNA and BOCM Pauls, to reconsider the viability of their ruminant feed business within East Anglia. BOCM Pauls sold its ruminant compound feed business in Norfolk, Suffolk and Essex to Duffield in 2000 (see note 1). In addition, at least two smaller producers of compound feed in East Anglia appear recently to have received enforcement orders preventing them from manufacturing ruminant feed. Nevertheless, there appear to be several other suppliers still selling in the area. It also appears feasible for customers to switch, at least partially, some of their demand for compound feeds to other types of feed, straights or blends, for which they will have a greater choice of supplier.

The combined effects of these regulatory changes and this merger have led to a reduction in the number of suppliers of ruminant feed within the Affected Area. The issue, however, is whether the merger itself has led to a substantial lessening of competition.

While customer concerns at the increased concentration in the supply of ruminant compound feed in East Anglia are understandable, the relevant competitive constraint upon Duffield appears to come from a wider geographic area than this. Competitors from outside this area are already actively advertising for custom within East Anglia and, were Duffield to seek to increase prices, it seems clear that this competition would increase. Moreover, any such price increase might well incentivise other ruminant feed producers to begin trading product into the area. In addition, many customers (for compound feeds) will have the alternative of switching to other types of ruminant feed. The available data suggest that some customers may have already switched to alternative feed or suppliers given that the Duffield's post-merger increase in actual volumes is some 20 per cent below the volumes sold by the business it acquired.

Barriers to entry and expansion

Barriers to new entry into the production of ruminant feed are not high but comments from third parties suggest that the viability of new entry may be constrained by reducing herd numbers and the presence of existing spare capacity. However, this spare capacity suggests that the barriers to expansion by existing suppliers might be low. Indeed, Duffield's rationale for the merger is, in part, to increase the throughput, and thus economies of scale, at its own mill.

Vertical issues

There do not appear to be any significant vertical issues arising from this acquisition.

Buyer power

Customers tend to be individual farmers and, as such, would not be expected to have buyer power although there are some buying groups active in this market. Also, some farmers will have the option of on-farm production of feed as an alternative to compound feed.

Third party views

The OFT received two unsolicited comments regarding this merger and also contacted a number of customers and competitors located in the Affected Area for their views. While some customers were concerned about the increased concentration in the supply of ruminant feed in East Anglia, others believed that this was inevitable given the increased regulation imposed upon the industry. Some also mentioned the possibility of switching from compounds to other types of ruminant feed. Competitors appeared more concerned about the effects of regulation than the merger.

CONCLUSION

The consideration of the effect of this merger upon competition is complicated by increased regulation affecting the production of ruminant feed. These regulatory changes have caused both major national suppliers of ruminant compound feed to reappraise their businesses in East Anglia and sell to Duffield. It seems clear, however, that on the supply side the market is wider than East Anglia and that there are a number of other feed producers currently supplying, and more are able to supply, product into this region. There are few contracts in this market and so customers are free to seek alternative sources of supply or alternatives to compound feeds. Indeed, it would appear that some have already done so following completion of this merger.

For these reasons, I do not consider that the merger would lead to a substantial lessening of competition. I therefore conclude and recommend that you do not refer this merger to the Competition Commission.

NOTES

1. Text deleted at the request of Duffield.

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