Tomkins Plc and Kerry Group Plc: A report on the merger situation

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On 22 April 1998, the Secretary of State for Trade and Industry asked us (see Appendix 1.1) to investigate and report on the acquisition by Tomkins plc (Tomkins) of enterprises previously under the control of Kerry Group plc (Kerry). This transaction followed shortly after the acquisition by Kerry of the Dalgety Food Ingredients business of Dalgety plc (Dalgety) of which those enterprises formed part.

Before the merger, Tomkins, primarily through its subsidiary, Rank Hovis Ltd (RH), produced some 24 per cent of flour milled in the UK; the assets acquired from Kerry were primarily those of Spillers Milling which produced some 11 per cent of flour milled in the UK. Over half of RH's output is used by other subsidiaries of Tomkins, particularly in baking bread. The Spillers Milling mills acquired, however, only supplied the free market in flour (which excludes such in-house use of flour by the vertically integrated companies), to which it was the leading supplier. After the merger, RH accounts for about 39 per cent of supply to the free market. A number of bakers, including some large plant bakers and retail bakers, expressed concerns to us that the merger could result in higher prices of flour par-ticularly to independent bakers, and weaken their ability to compete with the bakery activities of the major vertically integrated millers.

We have concluded that the merger has given rise to a significant increase in con-centration in the supply of flour, particularly of free flour including free flour supplied to bakers. In our view, Spillers Milling had made an effective contribution to competition in the free flour market, and would in future have been an effective competitor nationally had it been acquired by a person other than Tomkins; the merger has therefore removed a signifi-cant national competitor from the market and reduced competition in the supply of free flour. We do not believe that competition from other millers, from new entrants or from imports will be sufficient to safeguard against that loss of competition. We also do not believe that the countervailing power of buyers of flour following the merger is likely to provide sufficient safeguard to maintain adequate competition in the industry.

Following the merger, the leading two suppliers would account for about 60 per cent of the output of flour in the UK, and also for about 55 per cent of production of bread. Spillers Milling was the largest non-vertically-integrated supplier of flour, and the only such supplier with national coverage. The merger has also in our view increased the dependence of the non-vertically-integrated bakers on the major integrated millers, weakening the position of those non-vertically-integrated bakers, and adversely affecting competition in the supply of flour-using products, in particular bread.

The reduction in competition in supply of free flour may, in our view, be expected to result in higher prices for free flour than would otherwise be the case and in higher prices and less choice of flour-using products, particularly bread, than would otherwise be the case. We have therefore concluded that the merger may be expected to operate against the public interest.

It is our view that the adverse effects we have identified arise from the impact of the merger on the structure of the industry, and we therefore believe that only structural reme-dies, that is divestment of capacity, would be appropriate. We considered whether divestment of all six mills would allow Spillers Milling to be reconstituted as a third force in the indus-try. However, Spillers Milling already differs significantly from the enterprise as it existed under Dalgety. It no longer has access to some of the former research and development facilities of Dalgety, Kerry has itself retained one of the former Spillers Milling mills, and there has been some loss of staff and customers since the acquisition by Tomkins. It is not therefore in our view likely to be possible to reconstitute Spillers Milling as it existed under the ownership of Dalgety or Kerry. More importantly, divestment of all six mills could reduce Tomkins' share of supply of free flour by more than is necessary to remedy the adverse effects identified. We do not believe it appropriate therefore to divest all six Spillers Milling mills. A divestment of four of the six mills would in our view reduce RH's share of the supply of free flour to a level at which we think it is unlikely that RH could exert price leadership in the market and the adverse effects we have specified would not be expected to arise.

We have recommended that Tomkins should be required to divest four of the six mills acquired, at Avonmouth, Liverpool, Newcastle and Tilbury, which currently produce hard flour for breadmaking about which we are most concerned, to a purchaser approved by the Director General of Fair Trading. Tomkins should also undertake that it will not, for a period of one year after the date of divestment, increase production of hard flour at the Spillers Milling Cambridge mill (which currently produces mainly soft flour) above the level of the 12 months to April 1998.

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