Nutricia Holdings Ltd and Valio International UK Ltd: A report on the merger situation

Summary of report (html format)
Full text (pdf format)

Adobe Acrobat Reader can be downloaded from http://www.adobe.com

Summary

On 31 July 1995 the Secretary of State for Trade and Industry asked us (see Appendix 1.1) to investigate and report on the acquisition on 3 February 1995 by Nutricia Holdings Ltd (Nutricia) of Valio International UK Ltd (Valio). Nutricia, a subsidiary of NV Verenigde Bedrijven Nutricia (NV Nutricia), publicly quoted in Amsterdam, is the UK holding company for Cow & Gate Nutricia Ltd (CGN) and Nutricia Dietary Products Ltd (NDP). CGN's activities include the distribution in the UK of a range of enteral clinical nutrition (ECN) products manufactured by Nutricia elsewhere in the EC. NDP's principal activity is the pro-duction and sale of specialist gluten-free and low-protein food products. Valio (renamed SHS Holdings Ltd (SHS) since the acquisition by Nutricia) was formerly a subsidiary of a dairy co-operative in Finland, which recently decided to sell the business as being no longer a core activity of the group. SHS has developed, produced and marketed a range of specialist ECN products, and has also recently manufactured specialist gluten-free and low-protein products.

The merger therefore affects the supply in the UK firstly of ECN products, increasing Nutricia's market share from 27 to 37 per cent, and secondly of specialist gluten-free and low-protein products, increasing Nutricia's market share from 44 to 88 per cent.

ECN

ECN is nutritional support administered direct to the gut (through the mouth, the nasal passage or the stomach wall). Before the merger CGN specialized in high-volume whole-protein feeds and nutritionally-complete supplements and SHS specialized in low-volume disease-specific and nutrition-specific products in which it had a high reputation as a supplier. There was concern about the effect of the change in ownership on the supply of those products even where the merger has little direct product overlap effect on competition. In our view, however, SHS's reputation is one of its attractions to Nutricia and we see no reason why Nutricia would wish to put this reputation at risk by reducing the SHS product range or quality.

The merger has increased CGN's market share of ECN products in the UK from some 27 to 37 per cent. The product overlap effect of the merger is, however, confined to five particular product areas, which account for only £3.5 million of the two companies' sales, ie about 15 per cent of their total ECN sales. In these overlap areas the combined market shares range between 37 and 91 per cent. However, this is a highly specialized market, largely dominated by knowledgeable and sophisticated buyers, mainly hospitals, which are in a strong position to consider and evaluate alternative sources of supply. There is also a degree of control over prices exercised by the Advisory Committee on Borderline Substances (ACBS). There is at least one other international supplier in each of the product areas affected and there are few patents or other significant barriers to entry. We do not therefore believe the merger will have effects adverse to the public interest in the market for ECN products.

Gluten-free and low-protein products

Gluten-free products are of considerable importance to sufferers of gluten-sensitive conditions, namely coeliacs (1 in 1,200 of the population) and sufferers of dermatitis herpetiformis (1 in 20,000 of the population). Low-protein products are equally important to sufferers of phenylketonuria (PKU). The bulk of these products are supplied on prescription, under the National Health Service (NHS), so consumer choice is not based on prices charged. Prices are, however, subject to approval by the ACBS, as a condition of products being listed for prescrip-tion by general practitioners (GPs). The ACBS, which is primarily a body of medical experts, has, since December 1992, been required to ensure that such substances are provided as econ-omic-ally as possible under the NHS. It has to date adopted price maxima based largely on the highest prices previously prevailing in the relevant product category, which are not necessarily related to cost. These price limits tend to be above the prices currently charged by most of the supplying companies.

As a result of the merger, the combined company would supply over 80 per cent of gluten-free and low-protein products in the UK. Given the importance of variety and quality of products as factors affecting consumer demand, we do not share the concerns expressed that the merged company would wish to reduce the range of products available.

However, the increase in market share as a result of the merger would, in our view, strengthen the company's ability to increase prices within the constraint of the present ACBS price cap. It would remove a source of comparative price information between major competing companies. Also, in the event of dispute and possible delisting of products, it would reduce the effectiveness of the ACBS in ensuring adequate alternative product suppliers. This would reduce the effectiveness of the ACBS in controlling prices. We have therefore concluded that the merger may be expected to result in higher prices for a number of gluten-free and low-protein products, namely bread, rolls and flour mixes. The countervailing benefits of the merger would not, in our view, offset these adverse effects and we have therefore concluded that the merger may be expected to operate against the public interest.

Recommendations

Divestment of SHS as a whole would, in our view, be disproportionate. Divestment only of the gluten-free and low-protein activities of SHS would also, in our view, not be appropriate, since it would prevent the combined company from rationalizing production of gluten-free and low-protein products, thereby producing cost savings which could be available to be passed on in lower prices in due course. In our view, the adverse effects of the merger can be effectively remedied by requiring Nutricia to undertake for a period of four years to set prices of gluten-free and low-protein bread, rolls and flour mixes at levels no higher than at present plus the annual change in the retail price index (RPI) less two percentage points. By the end of the four-year period we believe a more competitive market situation is likely to have been re-established and the price control arrangements of the ACBS would have had time to develop.

Full text

Back to the top