SUMMARY OF KLAUS J JACOBS HOLDING AG
AND SOCIETE CENTRALE D'INVESTISSEMENTS ET ASSOCIES: A REPORT ON THE MERGER
SITUATION
This inquiry concerned the acquisition by Klaus J Jacobs Holding AG (KJJH)
of Socit Centrale d'Investissements et Associs (SCIA). Our terms of
reference (see Appendix 1.1), dated 19 December 1996, require us to report
whether the acquisition is a merger situation qualifying for investigation
and, if so, whether it operates or may be expected to operate against
the public interest. We have concluded that the acquisition has created
a merger situation qualifying for investigation.
KJJH, a Swiss holding company, owns Callebaut AG (Callebaut),
a major supplier of couverture (industrial chocolate) both in Europe
as a whole and in the UK. SCIA's only interest at the time of the merger
was Barry SA (Barry), a French-based group with extensive international
interests in the processing of cocoa beans and the supply of downstream
products, including couverture. Callebaut and Barry each have an operating
subsidiary in the UK.
Couverture is used in the manufacture of chocolate confectionery, biscuits,
cakes and ice-cream. Its producers fall into two broad categories: vertically
integrated groups which make couverture and use it in-house in the manufacture
of consumer products (producer-users), and producers which supply most
or all of their output of couverture to third parties (open-market suppliers).
In the UK producer-users account for about 80 per cent of the overall
supply of couverture. Between them, Callebaut and Barry have about 15 per
cent of the UK's overall supply of couverture but nearly three-quarters
of supply to the open market.
;We found that the boundaries between producer-users and the open market
in the UK are blurred. The largest producer-users do not supply the open
market but some others do. One factor is that open-market users are generally
unwilling to buy couverture from companies which compete with them in
consumer-product markets. As to whether the UK is part of a wider European
market for couverture, again the position is not clear-cut. Barry established
itself as a significant supplier in the UK in the late 1980s and early
1990s by importing couverture from the Continent. Imports currently account
for only 4 per cent of the overall UK market, however, and consist
mainly of intra-group purchases by Callebaut and by Barry. There is potential
competition from continental producers but there are objective reasons
for users to prefer to buy from UK suppliers.
We found that Callebaut and Barry had been active competitors and that
each represented the main source of competition to the other in the UK
open market. They have a reputation for quality, expertise and service
backed by many years of experience. Other independent suppliers are,
by comparison, small and/or young companies and a number of open-market
users expressed some doubts about their quality and reliability. Most
of the main producer-users, while able to match Callebaut and Barry for
expertise and resources, do not supply the open market at present. The
merger would fundamentally change the structure of the open market and
we have considered how the situation may be expected to evolve if the
merger stands.
The UK market has in recent years witnessed substantial changes in market
shares and entry by new suppliers. Barry itself did not enter until the
late 1980s, building up sales initially by importing and subsequently
from a new factory in Chester to reach its present market share of some
25 per cent. The next two largest suppliers to the open market are
both new entrants within the last ten years. One of these at least is
substantially expanding its capacity. Looking ahead, we believe there
will be strong competition from independent producers and from two producer-usersCPremier
Biscuits (Premier), part of Hillsdown Holdings plc (Hillsdown), and United
Biscuits (UK) Limited, operating as McVitie's (UB/McVitie's)-which between
them have significant spare capacity and have indicated a clear interest
in expanding their sales in the open market. These suppliers would collectively
be in a position, as regards both capacity and quality, to take advantage
of users' likely unwillingness to be unduly dependent on the merged Barry
Callebaut.
As to the possibility of entry by other suppliers, whether from within
the UK or overseas, much would depend on the attitude of customers and
on prices and profitability in the UK market. Given the extent of excess
capacity, actual and expected, conditions may not be conducive to new
entry. In our view, however, there are no substantial barriers to entry
into the UK market.
Besides the extent of competition, there are other factors which would
constrain any attempt on the part of the merged group to exploit its
position. A number of the main open-market customers are large multinational
or national companies, or have substantial overseas parents, and can
be expected to enjoy significant bargaining power. Moreover, the pricing
of couverture is relatively transparent, so that customers are able to
assess the justification for price changes.
The merger is likely to lead to some cost savings and there are grounds
for believing that part of the benefits will be passed on to UK customers.
The loss of jobs in the UK as a result of the merger is likely to be
small.
We concluded that the merger may not be expected to operate against
the public interest.
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