Elders IXL Ltd and Scottish & Newcastle Breweries PLC: A report on the merger situations

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Summary

The merger situation

During the winter of 1987 and in 1988 Elders IXL Ltd (Elders) acquired a substantial shareholding in the United Kingdom brewer Scottish & Newcastle Breweries PLC (S & N). Elders, a conglomerate based in Australia which had acquired another United Kingdom brewer, Courage, in 1986 and also owns brewing companies in Australia and Canada, made a full bid for S & N in October 1988. The Secretary of State for Trade and Industry referred this bid, `the merger in contemplation', to the Commission on 9 November 1988 to determine whether it gave rise to effects which would be adverse to the public interest (see Appendix 1.1 for the terms of reference).

On the day the merger reference was announced Elders acquired a further substantial block of shares taking its total holding to 23.6 per cent. The Secretary of State made a second reference, `the merger in being', on 7 December (see Appendix 1.1 for the terms of reference).

We have considered the extent to which Elders' shareholdings, by far the largest individual shareholding in S & N, enable it to control or materially to influence the policy of S & N. We have decided that while Elders would not be able to control S & N it could use its shareholding materially to influence the policy of the company. We have therefore to consider the public interest in relation to both the `merger in contemplation' and the `merger in being'.

The public interest issues

We have been concerned in this case with a proposed, strongly contested, merger between two of the six largest United Kingdom brewers which, through their integrated businesses, supply some 75 per cent of the beer in the United Kingdom. We have seen the report of a different Commission group on the Supply of Beer, which was delivered to the Secretary of State during the later stages of the present inquiry. We have, however, been able to reach our conclusions on the basis of the evidence presented in the current inquiry.

Elders considered that as Courage is mainly based in the South of England there would be no real reduction in competition from the merger. It argued that the enhanced range of the new group, together with the size of its tied estate, comparable with that of Bass, the United Kingdom's largest brewer, would enhance competition. Elders also stressed that the larger grouping would be better placed to compete with the continental brewers and to export beer.

S & N is a major supplier of beer to the `free' trade to many parts of the United Kingdom including the South of England. Courage is also a major competitor for this trade. Elders plans to rationalise the production, distribution and wholesaling activities of the two companies. We consider that the loss of the independence of one of the major suppliers to the market would reduce consumer choice and competition and thus be detrimental to the public interest, which requires that competition, particularly for the business of free public houses, should be maintained and enhanced.

The brewers own relatively few of the public houses in Scotland and Bass and S & N together supply 80 per cent of the beer. We consider that the merger would reinforce the duopoly and thus increase the difficulty of new entry into the Scottish market. It would also remove the possibility of Courage entering the market on its own.

We do not agree with Elders that the merger, by creating a competitor of the same size as Bass, would be pro?competitive. On the contrary, we consider that the creation of a second large group, which together with Bass would supply over 40 per cent of the market, would result in reduced competition and increased difficulty of supply for other brewers and distributors.

We cannot in mitigation of these adverse effects place sufficient weight on Elders' view, which S & N denies, that the merger would significantly improve the prospects of exporting beer from the United Kingdom. Neither do we believe that, given the wide range of ales and lagers that are required by the consumer in the United Kingdom, the existing British brewers will be severely disadvantaged after 1992 when competing with continental lager brewers in supplying the British market.

S & N suggested that the gearing and other aspects of the finances and management control of Elders would be detrimental to the success of the new group if the merger was allowed. In view of our adverse findings in relation to competition, we have not taken these matters into account. We have noted, however, that Elders' policies might result in the sale of certain of S & N's subsidiary companies which would affect the spread of interest which attaches to S & N's position as an independent company directly managed in Scotland.

Conclusions and recommendations

We have found that the merger in contemplation may be expected to have serious adverse effects on competition in the brewing industry and that there are no benefits to offset the detriments. We have therefore recommended that the merger should not be allowed.

We have found that the Elders shareholding in S & N, with the ability to materially influence its policy, would be capable of being used in a way that would influence the management of S & N. It would be detrimental to the public interest for a major brewery company to need to pay close attention to the wishes of one of its major competitors. We have therefore recommended that Elders should be required to reduce its shareholding in S & N to 9.9 per cent within a period of 12 months.

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