NUTRECO HOLDING NV AND HYDRO SEAFOOD GSP LTD: A REPORT
ON THE PROPOSED MERGER
On 17 July 2000 the Secretary of State for Trade and
Industry referred to this Commission for investigation and report the
proposed acquisition by Marine Harvest Scotland Ltd (MH), a subsidiary
of Nutreco Holding NV (Nutreco), of Hydro Seafood GSP Ltd (GSP) from
Norsk Hydro ASA (Norsk Hydro). The proposed acquisition forms one element
of an agreement between Nutreco and Norsk Hydro under which Nutreco will
acquire all four Hydro Seafood businesses, in Scotland (GSP), Norway
(Hydro Seafood AS) (HSF), France and Ireland respectively. The full terms
of reference are set out in Appendix 1.1.
Nutreco is an international group of companies with
substantial interests in the animal and fish feed industries and in salmon
production. It has salmon farming businesses in Scotland (Marine Harvest
(Scotland) Ltd (MH)), Chile and Canada but not yet in Norway and Ireland.
Norsk Hydro is the largest industrial group in Norway, with three core
areas: oil and energy, light metals and agriculture. It no longer regards
its salmon farming businesses, Hydro Seafood, as belonging in these core
areas and wishes to dispose of them to one purchaser.
MH and GSP are the two largest salmon farmers and suppliers
of farmed salmon in the UK, with seawater farms and primary processing
facilities (where the salmon are gutted and packed) on the west coast
of Scotland and in the western isles and Shetland. MH and GSP also have
freshwater facilities in Scotland for rearing smolts (juvenile salmon).
Nutreco’s subsidiary, Trouw (UK) Ltd (Trouw), is the UK’s largest
manufacturer of fish feeds for salmon, and trout and other farmed species.
To assess For the purposes of assessing the effects
of the effects of the merger, we had to considered how each of the relevant
markets, that is, for salmon, smolts and salmon feed, should be defined.
We find that the relevant market for salmon is that
for Atlantic farmed gutted farmed Atlantic salmon, extending across the
whole European Economic Area (EEA). This is because farmed salmon imported
from other European countries, mainly Norway, competes with that farmed
in Scotland and is regarded by many secondary processors (who turn gutted
salmon into fillets, steaks, smoked salmon and other products), wholesalers
and retailers as a substitute for Scottish salmon. Nutreco’s share
of production ofsales in this market would be 185.85 per cent following
the merger. However, there is some demand in the UK and in export markets
for specifically Scottish-grown salmon, which can command a modest premium
in these markets. We therefore find that there is a small market segment
that regards Scottish for which Scottish salmon ais a differentiated
premium product within the single, wider EEA market for farmed gutted
salmon. Following the merger, Nutreco’s UK share of Scottish salmon
production would be 46 per cent.
Smolts are raised in freshwater sites, and different
production technologies and facilities are required from those used in
salmon farming. Moreover, Government regulations prohibit the importing
of smolts into the UK, except from the Republic of Ireland. We therefore
conclude that the market for smolts is distinct from that of salmon farming
and is a UK and Republic of Ireland market. Almost all the smolts raised
by MH and GSP are used for their own salmon production and they do not
actively trade smolts in the open market. We have no expectation of adverse
effects in the smolt market as it currently operates market.
Feed is the single largest cost for Scottish salmon
farmers, representing over half of the total cost of sales. Most feed
bought by Scottish farmers is manufactured in the UK but there are some
imports, mainly from Denmark, Norway and the Faeroe Islands. Imports
have remained fairly constant at around 5 per cent over the past three
years. Salmon farmers without their own in-house feed supplier are not
prepared to risk relying on imports for the bulk of their feed supplies;
and they often need technical advice and support from their feed suppliers.
Moreover, duties and transport costs restrict trade in feed. The major
manufacturers of salmon feed also produce trout feed, which is a close
substitute on the supply side. We conclude that salmon and trout feed
constitute a single, UK, market.
Trouw supplied 48.3 per cent of UK salmon feed by volume
in 1999, and nearly 53 per cent of all UK fish feed by sales volume in
that year. The merger would not increase Nutreco’s share of the
fish feed market. But it would significantly increase Nutreco’s
share as a purchaser of salmon feed from 26 per cent to over 38.3 per
cent in 2000. Moreover, GSP’s output, and hence its demand for feed,
haves been reduced since 1998, following an outbreak of infectious salmon
anaemia in 1997 and and the subsequent forced culling of fish. As GSP’s
stock levels recover, its feed purchases can be expected to increase.
There is now significant overcapacity in the fish feed market, much of
it due to recent investment by Trouw, which has 53 about 55[48] per cent
of total UK capacity. The fish feed market is concentrated, with three
large players, Trouw, EWOS Ltd (EWOS), part of the EWOS group, and BioMar
Ltd, a subsidiary of BioMar AS (BioMar) and whose ultimate owner isa
partly-owned subsidiary of Norsk Hydro, together accounting for well
over 90 per cent of UK sales.
We expect Nutreco’s enhanced position as a feed
purchaser in Scotland arising from the merger, when added to its already
high share of the supply of salmon feed, to bring about a reduction of
competition in the supply of feed. This is because, following the merger,
we expect MH and GSP to purchase all or most of their salmon feed from
Trouw. EWOS and BioMar Ltd will therefore have reduced demand for their
feed. This will result in a reduction in their capacity utilization and
an increase in their unit costs. Trouw, by contrast, may be expected
to increase output and capacity utilization, thereby enjoying greater
economies of scale by spreading its overheads over a larger volume of
production. We expect EWOS and BioMar Ltd to become less competitive.
Moreover, competition between BioMar Ltd and Trouw would be dampened
as a result of a feed supply agreement between HSF and BioMar under which
BioMar will supply specified volumes of feed to the Hydro Seafood businesses
(which will have become subsidiaries of Nutreco) until the end of 2002.
As competition is reduced, we expect Trouw further to
enhance its position in the supply of feed still further. With the lack
of transparency in feed prices, Trouw will have considerable scope to
raise such prices to salmon and smolt producers, which they will seek
to pass on to secondary processors and wholesalers. Because farmed salmon
is an EEA market, most secondary processors and retailers will not accept
higher prices, and will switch their purchases to Norwegian salmon. But
those processors and retailers wanting only Scottish salmon will may
pay more. We expect the more powerful retailers to resist these higher
prices for Scottish salmon and to pass the extra costs back up the supply
chain to the secondary processors and the farmers, but smaller retailers
may be unable to do so, and so the price of Scottish salmon for some
consumers will rise. As the costs of independent smolt producers and
salmon farmers and smolt producers increase, some will either become
more dependent on Nutreco or go out of business, thereby further consolidating
Nutreco's position.
We considered whether the adverse effects summarized
in paragraphs 1.9 and 1.10 were outweighed by any benefits likely to
flow from the merger. We expect the merger to have detrimental effects
on employment in the medium to longer term. As to the employment effects,
wOne member of the Group considers that Nutreco’s stake in Scotland
following the merger could offer better prospects for the industry’s
continued survival in an increasingly competitive international environment
than would be the case if GSP were acquired by another company. The other
two members, however, believe that another purchaser of GSP would be
as likely to generate the claimed benefits as Nutreco. Moreover, they
consider that there is a potential risk if Scotland were to become too
dependent on one large, international company. However, we are all agreed
that the prospect of any such benefits would not be sufficient to offset
the adverse effects of the merger. We therefore expect the merger to
operate against the public interest.
We examined various behavioural and structural remedies.
We decided that behavioural remedies would not address the adverse effects
we had identified and in any case would be difficult to enforce. We considered
divestment either of feed capacity or salmon production capacity. As
to the former, dDivestment of feed capacity would have to be accompanied
by behavioural remedies (to cap output), but these would be unduly intrusive
in the operations of Nutreco, possibly compromising its efficiency. Moreover,
we decided recognized that, as the adverse effects were brought about
by the loss of an independent customer (GSP) to Nutreco’s two feed
competitors rather than to any accretion in Nutreco’s feed capacity,
divestment of feed capacity would not be an effective remedy of the adverse
effects of the merger. So far as divestment of salmon capacity is concerned,
this would not be effective unless capacity at least equivalent to that
of GSP were divested. Moreover, we think there would be great difficulties
in deciding which sites, and how much capacity, should be divested.
We therefore considered prohibition of the merger. In
addressing the adverse effects, prohibition would have two advantages.
First, it would mean that Nutreco’s existing 26 per cent ownership
of the UK customer base would not increase, thereby addressing the adverse
effect that would have been brought about by Nutreco’s enlarged
share as a purchaser of salmon feed. Second, prohibition would be more
likely to alter the dynamic of the Scottish industry, by opening up the
possibility of another substantial player, able to compete with Nutreco,
entering the market. Although consolidation may be the pattern for future
development of the Scottish salmon farming industry, this remedy recognizes
that competition would be better served by a number of large players
participants rather than a single dominant player.
Having taken all the above matters into account, we
recommend that the merger should be prohibited.
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