A report on the proposed joint venture: Allied-Lyons PLC and Carlsberg A/S

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Summary

Merger

Allied-Lyons PLC (Allied), a national brewer with a tied estate (some 4,400 pubs after November 1992), and Carlsberg A/S (Carlsberg), a brewer without a tied estate, have agreed to merge their brewing and wholesaling activities into a joint venture through a new company, Carlsberg-Tetley Brewing Ltd (CTL), in which each will have a 50 per cent interest. Allied will continue to own its pub estate, but has entered into a seven-year supply agreement to buy all of its beer requirements from CTL, up to 15 per cent of which may be third-party brands stocked by CTL.

We have been asked to investigate the merger and report on whether it may be expected to operate against the public interest (see Appendix 1.1).

Market

The beer market has been changing and in significant respects has become more competitive since the introduction of the Beer Orders in 1989. By November 1992 the national brewers will have sold or leased free from tie some 12,000 pubs, over one-third of the pubs previously in their tied estates, and the free on-trade (ie not tied) should then account for around 49 per cent of beer consumption compared with 37 per cent in 1989. Large independent pub chains have entered the market and several companies, including one national brewer, have given up brewing to concentrate on retailing. These chains have significant buying power. The wholesale price of beer to the free on-trade has fallen in real terms over recent years.

On the other hand, at the brewing and wholesaling level, the market has become more concentrated, with the five national brewers accounting in 1991 for 78 per cent of overall production (compared with 77 per cent held by six companies in 1989) and 80 per cent of lager production. With Carlsberg, the five national brewers account for 88 per cent of lager production. While the wholesale price of beer to the free on-trade, net of discounts, has fallen in real terms, its retail price in the on-trade, free and tied, has continued to rise strongly in real terms. Although the national brewers have released from tie some 12,000 pubs, they continue to have substantial purchases tied to them through loan ties (which are increasing) and the development of long-term supply agreements with pub chains. Licensing restrictions continue to be a bar to new pub entry.

Public interest

The merger will have both positive and detrimental effects on competition. On the positive side, CTL will be a more effective brewer, with a better balanced portfolio of brands than Allied and Carlsberg separately, and able to compete more vigorously with the two biggest brewers, Bass PLC (Bass) and Courage Ltd (Courage). As Carlsberg does not have a tied estate, the merger will not increase the number of tied pubs.

Against this, Carlsberg is one of only two big brewers without a tied estate. Its main brand is within the three top-selling lager brands and it accounts for 8 per cent of lager production (although over half its sales go to national brewers-Courage and Scottish & Newcastle plc (S&N)). The merger will bring it together with Allied which has 13 per cent of lager production and 12 per cent of overall beer production. Following the merger CTL will account for 21 per cent of lager production and 16 per cent of overall beer production, and the three largest national brewers will provide some 67 per cent of lager production and 59 per cent of overall beer production. In a market that is still dominated by the national brewers, the removal of Carlsberg as an independent supplier would be detrimental to competition and adversely affect regional and local brewers and independent wholesalers, especially in respect of lager supply to the free on-trade.

We consider that the merger would operate against the public interest, unless it were to be modified to remedy the adverse effects we have found.

Recommendations

We accordingly recommend that the merger should not proceed unless the following is done:

(a) CTL undertakes not to worsen the terms of supply to Carlsberg's existing customers who are regional and local brewers or independent wholesalers;

(b) the term of the supply agreement between CTL and Allied is reduced from seven to five years; and

(c) Allied amends its tenancy or lease agreements so that its tied tenants/lessees will be free after two years to purchase half their annual lager requirements from suppliers of their own choice.

Dissent

One member dissented; in his opinion the merger would, on balance, operate in favour of the public interest, and so the question of remedies did not arise.

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