SUMMARY OF BASS PLC, CARLESBERG A/S AND CARLESBERG-TETLEY PLC: A REPORT ON THE MERGER SITUATION

This inquiry concerns a complex transaction which is intended to lead to a merger between Bass PLC (Bass) and Carlsberg-Tetley PLC (CT). Our terms of reference are set out in Appendix 1.1. Bass is the UK's second largest brewer, having 23 per cent of the beer market and owning about 4,400 tied houses. CT is the third largest, with 14 per cent of the market but no tied estate. The merged business would become the UK's largest brewer, ahead of Scottish Courage, the beer division of Scottish & Newcastle plc (S&N). Scottish Courage has 28 per cent of the market. S&N owns about 2,700 tied houses. The fourth largest brewer is Whitbread PLC (Whitbread) with 13 per cent of the market and about 4,400 tied houses.Under agreements entered into on 25 August 1996 Bass acquired a 50 per cent stake in CT from Allied Domecq PLC (AD). The other 50 per cent is owned by Carlsberg A/S (Carlsberg). Subject to regulatory approval on terms satisfactory to Bass, Bass has agreed to merge its brewing interests with CT and acquire a further 30 per cent stake in the merged enterprise, which we have termed Bass Carlsberg-Tetley (BCT). If such regulatory approval is not forthcoming there are fallback arrangements under which Bass may require Carlsberg to buy its 50 per cent stake in CT.The beer market has changed radically since the introduction of the Beer Orders in 1989 following an MMC monopoly inquiry into the supply of beer, and continues in flux. Consumption of domestically-produced beer has been declining. The off-trade has grown relative to the on-trade and now accounts for some 28 per cent of beer sales, compared with some 17 per cent in 1985. About one-third of all pubs are now owned by brewers, compared with over half in 1991. Large retail pub chains with significant buying power have emerged, and these now own about one-third of all pubs.At the brewing and wholesaling level, the market has become steadily more concentrated. Competition is keen. The wholesale price of beer, net of duty, has fallen in real terms by 8 per cent over the last four years, while retail prices in the on-trade, net of duty, have risen in real terms by around 10 per cent.The proposed merger would lead to a reduction in the number of major brewers and would give Bass a significant increase in market power, as a result of which we expect wholesale and on-trade retail prices of beer to be higher in the longer term than would otherwise be the case. On-trade retailers and the consumer would suffer. In the short term, regional brewers and independent wholesalers could also be adversely affected because BCT might choose to lower its prices to target their markets selectively.The proposed merger would lead to some net efficiency gains which would not be achieved in the absence of the merger. But in our judgment these benefits would not be sufficient to outweigh the adverse effects we have identified.The majority of us believe that it is possible to remedy the adverse effects of the proposed merger with measures designed to counteract the increase in Bass's market power resulting from the merger. To that end we recommend a package of remedies involving a reduction in the number of Bass's tied houses to a maximum of 2,500. If satisfactory undertakings to implement these remedies cannot be obtained, we recommend that the merger should be prohibited.Professor Newbery was not persuaded that these remedies would sufficiently alleviate the adverse effects. He concluded that the merger should not be allowed to proceed.

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