Antitrust issues are increasingly a facet of investment decisions in the food and drink industry, not only for trade buyers, but also for private equity firms.
The Competition Commission's narrow product market definition in relation to eggs has fed speculation that trade buyers may be discouraged from investing in companies with similar products.
In its investigation into the merger of Stonegate Farmers and Deans Food Group, the Competition Commission concluded that there were numerous markets for shell, hard-boiled, liquid and powdered eggs. Consequently, Stonegate had to divest its parent company.
As narrow product market definitions lead to more significant product overlaps, trade buyers may perceive private equity companies to have an advantage, believing they have fewer competition law constraints regarding their acquisitions. In 2006, private equity represented 40% of food and drink merger and acquisition activity, an increase of 15% since 2005. This trend is set to continue.
Nonetheless, private equity firms will not have a straight run. The European Commission (EC) has confirmed that overlaps in private equity portfolios will be treated the same as overlaps in acquisitions by trade buyers. This brings private equity firms closer to a level playing field with trade buyers.
An acquisition by HgCapital was abandoned after the EC expressed concerns that it would lead to a 'quasi-monopoly' and impede competition, because HgCapital also owns one of the target's main competitors.
Therefore, not only trade buyers, but also private equity companies, would be wise to consider the likelihood of product overlaps when making investment decisions. Even where private equity firms hold stakes in different funds, if they have sufficient 'control' (indirect or via veto rights) over the funds, the Office of Fair Trading may take jurisdiction.
So, when should a private equity firm be concerned that the Office of Fair Trading may take jurisdiction? The answer is, where:
l A change of control occurs; and
l The target's UK turnover exceeds £70M; or
l The acquisition creates or strengthens a 25% share of supply of goods/services in the UK or a substantial part of the UK.
Time will tell if this will change the patterns of investment in the food and drink sector. FM
Kate Newton is an antitrust associate in Wragge & Co LLP's food & drink team