OFT considers Diageo divestment remedy in whisky merger
79/13 25 November 2013
The OFT is considering an offer from Diageo plc (Diageo) to sell most of its Whyte & Mackay business to address competition concerns regarding bottled blended Scotch whisky, arising from its completed acquisition of United Spirits Limited (United Spirits).
Diageo and United Spirits are both suppliers of spirits in the UK and across the world. In the UK, United Spirits' subsidiary, Whyte & Mackay, is primarily active in the supply of whisky but also owns and distributes other spirits, including vodka.
The parties are major suppliers of bottled blended whisky to retailers with Whyte & Mackay also being an important supplier of own-label blended whisky. A number of retailers expressed concerns to the OFT about possible price rises for bottled blended whisky sold in the UK as a result of the merger.
The OFT's investigation found that there is substantial competition in the retail sector between Bell's whisky, a Diageo label, and Whyte & Mackay's own-label and branded blended whisky. After analysing evidence including data on consumer switching between brands, economic modelling and internal documents, the OFT found the merger may lead to a substantial lessening of competition in the supply of blended whisky to retailers.
The OFT considered to what extent other manufacturers of blended whisky were capable of competing with the merged business. The evidence showed that other manufacturers did not have, and could not quickly reach, sufficient capacity to offset the loss of competition likely to result from the merger.
Chris Walters, OFT Chief Economist and Decision Maker in this case, said:
'These companies are two of the leading suppliers of blended bottled whisky in the UK, especially to supermarkets and other large retailers.
'Our investigation considered a wide range of evidence and we concluded that the likely loss of competition could give rise to higher prices for retailers, and ultimately consumers.
'We are now considering Diageo's offer to sell the bulk of the Whyte & Mackay business with the exception of two malt distilleries, to address our concerns.'
While the undertakings in lieu are being considered, the OFT's duty to refer the merger to the Competition Commission is suspended.
- Prior to the merger, Diageo and Whyte & Mackay both manufactured and supplied branded malt and blended whiskies, and supplied branded vodka, rum, liqueur and pre-mixed drinks in the UK.
- The Reference Test - the OFT has a duty to make a reference to the Competition Commission if the OFT 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 within any market or markets in the United Kingdom for goods or services.
- Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply or acquisition of goods or services of any description, a 25 per cent share of supply or acquisition in the UK (or a substantial part thereof) is created or enhanced.
- In this case the OFT has found that the merger may lead to a substantial lessening of competition in the supply of bottled blended whisky to retailers. The OFT did not find that the merger may lead to a substantial lessening of competition in the supply of bottled blended whisky to the on-trade (bars, pubs and restaurants), nor did it find such competition concerns in the supply of malt whisky, the supply of vodka or the bulk supply of whisky.
- Undertakings in lieu of reference (UIL) - under section 73 of the Enterprise Act 2002 the OFT may, instead of making a reference to the Competition Commission, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned, or any adverse effect which has or may have resulted from it or may be expected to result from it, accept appropriate undertakings from the parties concerned as it considers appropriate. The OFT is required to consult publicly on draft provisional undertakings prior to taking any decision to accept such undertakings.
- Up-front buyer requirement - the OFT considered in this case that a necessary condition for ensuring that undertakings in lieu of a reference will resolve its concerns is that the divestiture should be agreed up-front to a suitable buyer approved by the OFT. This means that the OFT consults publicly on the suitability of the proposed buyer, as well as all other aspects of the draft undertakings, during the public consultation period.
- The divestment of Whyte & Mackay would include the entirety of the Whyte & Mackay business with the exception of (1) the Dalmore and Tamnavulin malt distilleries (including assets used to run those distilleries), (2) the Dalmore and Tamnavulin brands and maturing inventory from these distilleries as well as associated management and operations; (3) the management and staff for each distillery as well as any supply arrangements specifically associated with either production at the sites and (4) sale of product from the sites. As such the proposed undertakings in lieu of a reference will cover all of Whyte & Mackay's blended Scotch whisky brands including Whyte & Mackay as well as Whyte & Mackay's private label operations. Whyte & Mackay will retain its malt distilleries at Jura and Fettercairn and the Invergordon grain distillery.
- The text of this decision will be placed in the mergers section as soon as is reasonably practicable.
- In April 2014, the Competition and Markets Authority (the CMA) will become the UK's lead competition and consumer body. The CMA will bring together the existing competition and certain consumer protection functions of the Office of Fair Trading and the responsibilities of the Competition Commission, as amended by the Enterprise and Regulatory Reform Act 2013. The CMA, which is a non-Ministerial government department, was established on 1 October 2013 but will not be taking on responsibility for cases or other work until 1 April 2014. See the CMA's homepage for more information.
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