Elders IXL Ltd and Grand Metropolitan PLC: A report on the merger situations

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Summary

On 27 April 1990, the Secretary of State for Trade and Industry asked the MMC (see Appendix 1.1) to investigate and report on merger situations concerned with the bringing together of the brewing interests and certain of the on-licensed retail interests of Elders IXL Ltd (Elders) and Grand Metropolitan PLC (Grand Met). These are:

(1) the proposed acquisition by Elders, through Courage Holdings PLC and Courage Ltd (Courage), of the brewing interests of Grand Met;

(2) the proposed acquisition by Grand Met of a 50 per cent holding in a company to be renamed Inntrepreneur Estates Ltd (IEL); and

(3) the proposed acquisition by Elders, through its 50 per cent holding in IEL, of assets of Grand Met, namely 3,565 public houses.

As part of the transaction, Grand Met Retailing (GMR) would enter into an agreement with Courage for the supply of beer to its managed houses for a period of ten years (the Beer Supply Agreement). IEL would similarly contract with Courage for the supply of beer to its public house estate also for a period of ten years (the Beer Procurement Agreement). For convenience in this summary, merger (1) is described as the merger of brewing interests and mergers (2) and (3) as the mergers of retail interests.

Beer consumption in the United Kingdom is now relatively stable. However, demand for lager has continued its advance at the expense of the demand for ale. We find little support for the parties' contention that the six national brewers' competitive position has materially changed since our report on The Supply of Beer (Cm 651, March 1989) - the `Beer report' - or is likely so to change in the foreseeable future. They still account for three out of every four barrels of beer sold in the United Kingdom.

As to the merger of brewing interests, our concern is that the loss of one of the national brewers, reducing the number to five, would significantly increase concentration. Grand Met supplied around 11 per cent of the beer market in 1989 and Courage 9 per cent; their shares of the supply of lager were 13 and 10 per cent respectively. Following the proposed merger Courage and Bass together would in our view be likely to have around 40 per cent of the market for beer as a whole and about 47 per cent of the lager market. The Government's Beer Orders following the Beer report would bring about some changes but for some years Courage would have easily the largest number of tied on-licences amongst the national brewers. Although there are some signs of change in the beer market at the retail level which may be expected to sharpen competition at the wholesale level, it is not yet clear how significant this development would be. We conclude that the proposed merger of brewing interests may be expected to operate against the public interest with the particular effects adverse to the public interest that competition for the supply of beer at the wholesale level would be reduced and result in wholesale prices being higher than they would be in the absence of the merger. We were also concerned about the increases in local concentration arising from the mergers of retail interests, which in our view would also have effects adverse to the public interest.

We recognise that benefits would arise from the mergers but they would not be sufficient to outweigh the adverse effects we have identified.

We have considered what action should be taken for the purpose of remedying or preventing these adverse effects. We recommend that Elders and Grand Met should:

(a) amend the transaction so that the merged brewing interests, immediately after the proposed merger, would have a market share of around 15 per cent of the supply of beer in the United Kingdom on the basis of 1989 sales as compared with the aggregate market share of Grand Met and Courage of around 20 per cent;

(b) release from the IEL tie by 1 November 1992 1,067 more full on-licensed premises than the number required by the Tied Estate Order;

(c) reduce the period of exclusive supply of beer under the beer procurement and supply agreements so that IEL and GMR would be released totally from such exclusive supply by the end of the fifth year of the agreements; and

(d) reduce to 25 per cent by 1 November 1992 the proportion in any Petty Sessional Division (PSD) of full on-licensed premises in their ownership and also tied to Courage for the supply of beer.

We believe that for the purpose of our recommendations it is necessary to look at the transaction as a whole. We therefore further recommend that if satisfactory undertakings implementing our recommendations cannot be obtained, the mergers of the parties' brewing and retailing interests should not be allowed.

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