After a long running battle with the courts, US food group Heinz has given up its bid to buy rival baby food brand Beech-Nut. The companies made a shared statement that they had decided to call off the deal, just a couple of hours after the US Court of Appeal imposed a preliminary injunction against Heinz’s efforts to acquire Milnot, the manufacturer behind the Beech-Nut brand. The deal would have seen the second and third largest baby food makers merge to become a more significant threat to sector leader Gerber, a unit of Switzerland’s Novartis AG.
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The industry has been split on the impact of the merger. The parties involved argued that the combined force of the two groups would have given them the strength and resources to innovate in product development and cut costs to provide a more efficient challenge to Gerber, which enjoys a massive 65% market share.
It was on these grounds that Heinz and Beech-Nut applied to merge in a US$185m deal. Their theory was that the merger would increase competition in the sector even though it would reduce the number of serious players.
But not everyone agreed. This decline in the number of players was the sticking point for the Federal Trade Commission (FTC), which voted 3-2 to mount a legal challenge to block the merger five months after the initial announcement.
The FTC claimed the deal would change the market from a three-player to two-player arena and give Heinz and Gerber the chance for “coordinated anticompetitive interaction.” The commission argued that the US baby food market is already highly concentrated and would become more so with the merger. In addition, entry barriers in the US baby food market are high, with no significant new players entering the market for more than 60 years.
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By GlobalDataThis is the crux of the matter: is it more conducive to competition (and of ultimate benefit to consumers) to have a large number of smaller companies active in a sector or a smaller number of more powerful players? If Heinz and Beech-Nut had merged, the new entity would have remained significantly smaller than Gerber but, so they claim, it could have “enhanced competition by creating a stronger, national challenger.”
The case proceeded through the US appellate process and yesterday the US Court of Appeals dealt the merger a death blow by overturning a lower court’s order and upholding to FTC’s challenge. Some say the speed with which Heinz and Milnot announced they would not contest the appeals court ruling indicates their suspicion that this would be the outcome. Others might suggest that the merger was simply not worth pursuing if it meant a long and expensive court battle with dubious prospects of success.
In any case, the US legal system has ruled against the creation of a virtual duopoly in favour of what some call the existing monopoly. The case is likely to set a precedent for pending merger reviews, such as United Airlines’ proposed buyout of US Airways.
just-food.com US correspondent Pam Ahlberg recently wrote a feature outlining the complexities of the Heinz/Beech-Nut case. It has now moved into the member’s archive. To read it, click here.
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