Tate & Lyle PLC and British Sugar plc: A report on the proposed merger

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Summary

Following the decision of Berisford International plc (Berisford) to put its subsidiary British Sugar plc (British Sugar) up for sale, Tate & Lyle PLC (Tate & Lyle) announced on 7 September its intention to make an offer for British Sugar. On 19 September 1990 the Secretary of State asked the MMC (see Appendix 1.1) to investigate and report on the proposed acquisition of British Sugar by Tate & Lyle.

The United Kingdom market for sugar is governed by a system of production quotas and price support under the European Community (EC) sugar regime which severely limits the scope for and the extent of competition between suppliers. United Kingdom production and consumption of sugar are roughly in balance; the EC as a whole is in substantial surplus. Sugar is produced in the United Kingdom by British Sugar from domestically grown sugar beet and by Tate & Lyle from imported raw cane sugar. Each produces a little over 1 million tonnes and together they account for over 90 per cent of United Kingdom consumption. Quotas effectively limit their production and prevent any new United Kingdom producer entering the market. Imports take well under 10 per cent of the market and are roughly in balance with exports. Merchants handle imports and supplies from the two companies although both sell direct, particularly to larger customers.

Under the EC sugar regime the margin for refining cane sugar is less favourable than the beet processing margin. The EC has recognised the problem and authorised the subvention of cane sugar production, though the future of the aid-which Tate & Lyle says does not go far enough-is not secure.

Given this market situation, in general Tate & Lyle is likely to be a price follower and British Sugar the dominant influence in determining the price level, as emerged during a price war between the two companies in the mid-1980s. Since then British Sugar has abandoned its aggressive price strategy and set prices close to the level at which it considers imports would be attracted. The profitability of both companies has increased substantially.

In support of the merger Tate & Lyle argued that there was at present no real competition between the two companies and that the availability of imports from other EC countries provided a safeguard against any attempt by the merged company to raise prices. We found that within the constraints imposed by the sugar regime the two companies do compete to secure attractive contracts. Discounts off list prices vary widely and customers value the opportunity to seek competing quotations. We identified a number of institutional and practical barriers to the import of EC sugar in significantly increased quantities. We also noted steps taken earlier by Tate & Lyle to deter imports. These steps were reported, together with certain marketing practices, by Tate & Lyle to the Director General of Fair Trading in mid-1990. We concluded that imports were unlikely to be an effective safeguard and that over time prices would tend to be higher as a result of the merger. The merger would also rule out for the future any prospect of greater competition in the United Kingdom market, were the sugar regime modified to allow it.

We did not think that the position of merchants would be greatly affected by the merger, nor did we identify significant adverse effects for the markets in related products or for employment. We noted some efficiency benefits.

Tate & Lyle argued that the main benefit of the merger would be to give Tate & Lyle confidence to undertake the investment needed to secure the future of cane refining and of the port refineries in the United Kingdom, which otherwise would be at serious risk, though Tate & Lyle also stressed that cane sugar refining had to be profitable in its own right. We noted a large number of uncertainties overhanging the future of the port refineries, created both by the forthcoming sale of British Sugar and by possible future developments in the sugar regime. While a merger might increase the security of cane refining and of the refineries over the next few years we do not think a merger would by itself have a significant effect on their longer-term future. We could not identify advantages here, or in prospective efficiency gains from the merger, which might offset the detriments already identified.

We therefore concluded that the merger situation may be expected to operate against the public interest. We could not find any remedies which would be effective in removing the perceived detriments were the merger to go ahead. Accordingly we recommend that the merger should not be permitted to proceed.

At a late stage in the inquiry an agreement was announced for the acquisition of British Sugar by Associated British Foods plc (ABF). Completion of the acquisition is, however, dependent on a number of conditions still to be fulfilled. Tate & Lyle has told us that its bid has not been withdrawn and that it still wishes to acquire British Sugar. Nor does the agreement affect our consideration of the issues before us. Accordingly we have completed our inquiry, and submit our report.

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