Nestle plans to sell some subsidiaries to meet competition concerns over the Ralston Purina deal. Nestle hopes that selling assets in Spain, Greece and Italy will appease regulatory concerns that its proposed purchase of Ralston Purina would give it too much control over the pet food market. The surprise offer, reflecting the changing climate for mega-mergers, should be sufficient to win competition watchdogs' approval.


Company Profile:

Nestle


Nestle always knew that its $10.1 billion deal to acquire Ralston Purina would be scrutinized closely on both sides of the Atlantic. The acquisition would give a Nestle a powerful position in pet food enabling it to challenge Mars for global market leadership. Precisely how dominant the merged company would be depends on how the market is segmented.

In the US for instance, the merged business would have a 38% share of the cat food market and 46% share of dog food. However manufacturers tend to segment the market into wet (canned) and dry foods. Ralston for instance has a 37% share of canned dog food, while Nestle has only 5%. By contrast Ralston has a 4% share of wet cat food, while Nestle has 49%, suggesting that the merged company would still face credible competition in both categories. A further consideration is the penetration of different channels. The companies' relative strengths vary significantly between grocery and non-grocery distribution channels.

To meet the concerns of the EU Competition Commission, Nestle has offered to divest some of its own assets or sell Ralston Purina businesses in Spain, Greece and Italy. The regulator has responded favorably by delaying its ruling to consider the proposal.  The fact that Nestle has needed to make the offer at all reflects its concern about a sea change against mega-mergers in Europe and the US. Only this week, PepsiCo was forced to make concessions to the Federal Trade Commission to ensure that its takeover of Quaker Oats meets regulatory concerns.

Ultimately, it is likely that with these disposals the deal will be approved. In any case the more valuable part of Ralston in the long term may well be its Purina pet health business, which will give Nestle the opportunity to build services around its products, an opportunity now being developed by two of its competitors in other categories, Cadbury Schweppes and Unilever.

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