SUMMARY OF NUTRICIA HOLDINGS LTD AND VALIO INTERNATIONAL
UK LTD: A REPORT ON THE MERGER SITUATION
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 production
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 prescription
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 economically 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.
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