SUMMARY OF ROBERT WISEMAN DAIRIES PLC AND SCOTTISH PRIDE HOLDINGS PLC: A REPORT ON THE PROPOSED MERGER

This inquiry concerns the possible acquisition of Scottish Pride Holdings plc (Scottish Pride) by Robert Wiseman Dairies plc (Wiseman). Our terms of reference, dated 30 August 1996, are set out in Appendix 1.1.

Scottish Pride was formed in 1994 to take over the milk processing activities of the former Scottish Milk Marketing Board (SMMB) as part of the deregulation of the raw milk industry. It produces fresh processed milk and cream (most of its output of which comes from a single large dairy at Govan in Glasgow), ultra-heat treated (UHT) milk and cream, and cheese. The company made a pre-tax loss of 4 million in 1995/96 on turnover of 138 million. Its sales have been falling and its financial position is weak.

Wiseman, originally a small family business, has expanded rapidly both by acquisition and organic growth and was floated on the Stock Exchange in 1994. Its principal activity is the supply of fresh processed milk and cream from dairies at Bellshill (near Glasgow), Aberdeen and Manchester and a smaller, more specialized plant at East Kilbride.

Wiseman has not made a bid for Scottish Pride but told us that it wanted to acquire the business as a going concern if cleared to do so. On 11 November 1996 Scottish Pride announced that it was at an advanced stage of negotiations for the sale of its UHT and cheese businesses to Scottish Milk Limited (Scottish Milk), the farmers' co-operative which is the successor to SMMB's raw milk supply operations. Wiseman remains interested in acquiring Scottish Pride's fresh milk processing business and indeed at the time we reported it was still possible that it might be able to acquire the whole company.

Wiseman and Scottish Pride together account for about 5 per cent of all raw milk bought by processors, and for 10 per cent of wholesale sales of fresh processed milk, in the UK. However, in Scotland they account for nearly half of raw milk purchases by processors and nearly 80 per cent of wholesale sales of fresh processed milk. It was therefore crucial for our analysis of the merger's effects on competition to assess whether the markets for raw milk and fresh processed milk in Scotland are separate from those in the rest of the UK.

As regards raw milk, the evidence indicated that the market was markedly less regional than in 1992 (the date of the MMC's last inquiry into this industry). Prices throughout Great Britain are generally set by reference to the prices of Milk Marque Limited (Milk Marque), the successor to the raw milk supply operations of the England and Wales MMB. There is also sufficient scope for raw milk to be traded between southern Scotland and northern England to ensure that the market in Scotland is part of a continuous chain of substitution linking it with the market in England.

As regards fresh processed milk, the market in Scotland has become less distinct from that in England and Wales, most markedly in the supermarket sector where the price differential which existed in 1992 has now disappeared. There is still relatively little trade between Scotland and the rest of Great Britain, however, and there is some evidence to indicate that higher wholesale prices can be charged to customers other than supermarkets in Scotland because transport costs restrict the sourcing of supplies from English-based dairies. The market therefore still has some regional characteristics.

Our assessment of the merger's effects on the public interest led us to the view that it was unlikely that Wiseman would be able to exercise monopsony power in the raw milk market. We also considered that, in the market for fresh processed milk, the UK-based national supermarket groups would prevent an enlarged Wiseman from exerting any dominance in that sector of the market. The merger would, however, harm competition in the supply to other customers in Scotland and could be expected to lead to higher wholesale prices-and, in many instances, higher retail prices-than otherwise. We judged that the merger's effects on efficiency and employment did not offset this detriment to competition and therefore concluded that the merger was against the public interest.

The best solution to this competition problem would be to maintain two substantial fresh milk processors in Scotland, and we therefore considered whether to recommend that the merger should be prohibited. We do not believe Scottish Pride can continue as an independent company, however, and after examining the position in some detail we were forced to conclude that the prospects of Scottish Pride finding an alternative buyer for its fresh processed milk business were remote. This in part reflects the fact that no other buyer could, like Wiseman, close the Govan plant and transfer production to other existing plants: another buyer would have to spend further substantial sums, either on Govan or on building a new plant. Prohibition of the merger would therefore be likely to cause disruption in the supply of a perishable product sold on a daily basis, and most of Scottish Pride's customers would probably switch in any event to Wiseman. We also rejected the idea that Wiseman might divest one or more plants as practicable remedies. This is principally because Wiseman's rationale for the merger is to transfer all production from Govan to its plants at Bellshill, Aberdeen and Manchester.

To impose fair and effective price controls on Wiseman would be difficult and would tend to rigidify the current price structure. This could well prevent natural market development and cannot in our view be justified. Instead we recommend that Wiseman should submit regular audited reports to the Director General of Fair Trading (DGFT) on its prices to the various categories of customer in Scotland. In the light of the evidence presented to us, we regard this as practical and involving limited administration, but it would give the DGFT early warning of any attempt by Wiseman to abuse its market position in relation to customers other than national supermarket groups. We believe that the possibility of a monopoly reference, with the attendant risks of divestment of one or more of Wiseman's Scottish plants, would make this reporting regime an effective deterrent against Wiseman attempting to force up prices. We also recommend that Wiseman should undertake not to acquire any other supplier of fresh processed milk in Scotland without the DGFT's prior consent.

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