Nutreco Holding NV and Hydro Seafood GSP Ltd: A report on the proposed merger

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On 17 July 2000 the Secretary of State for Trade and Industry referred to this Commission for investigation and report the proposed acquisition by Nutreco Holding NV (Nutreco) of Hydro Seafood GSP Ltd (GSP) from Norsk Hydro ASA (Norsk Hydro). The proposed acquisition forms one element of an agreement between Nutreco and Norsk Hydro under which Nutreco will acquire all four Hydro Seafood businesses, in Scotland (GSP), Norway (Hydro Seafood AS) (HSF), France and Ireland respectively. The full terms of reference are set out in Appendix 1.1.

Nutreco is an international group of companies with substantial interests in the animal and fish feed industries and in salmon production. It has salmon farming businesses in Scotland (Marine Harvest (Scotland) Ltd (MH)), Chile and Canada but not yet in Norway and Ireland. Norsk Hydro is the largest industrial group in Norway, with three core areas: oil and energy, light metals and agriculture. It no longer regards its salmon farming businesses, Hydro Seafood, as belonging in these core areas and wishes to dispose of them to one purchaser.

MH and GSP are the two largest salmon farmers and suppliers of farmed salmon in the UK, with seawater farms and primary processing facilities (where the salmon are gutted and packed) on the west coast of Scotland and in the western isles and Shetland. MH and GSP also have freshwater facilities in Scotland for rearing smolts (juvenile salmon). Nutreco's subsidiary, Trouw (UK) Ltd (Trouw), is the UK's largest manufacturer of feeds for salmon and trout.

To assess the effects of the merger, we had to consider how each of the relevant markets, that is, for salmon, smolts and salmon feed, should be defined.

We find that the relevant market for salmon is that for gutted farmed Atlantic salmon, extending across the whole European Economic Area (EEA). This is because farmed salmon imported from other European countries, mainly Norway, competes with that farmed in Scotland and is regarded by many secondary processors (who turn gutted salmon into fillets, steaks, smoked salmon and other products), wholesalers and retailers as a substitute for Scottish salmon. Nutreco's share of sales in this market would be 15.5 per cent following the merger. However, there is some demand in the UK and in export markets for specifically Scottish-grown salmon, which can command a modest premium in these markets. We therefore find that there is a small market segment for which Scottish salmon is a differentiated premium product within the single, wider EEA market for farmed gutted salmon. Following the merger, Nutreco's UK share of Scottish salmon production would be 46 per cent.

Smolts are raised in freshwater sites, and different production technologies and facilities are required from those used in salmon farming. Moreover, Government regulations prohibit the importing of smolts into the UK, except from the Republic of Ireland. We therefore conclude that the market for smolts is distinct from that of salmon farming and is a UK and Republic of Ireland market. Almost all the smolts raised by MH and GSP are used for their own salmon production and they do not actively trade smolts in the open market. We have no expectation of adverse effects in the smolt market.

Feed is the single largest cost for Scottish salmon farmers, representing over half of the total cost of sales. Most feed bought by Scottish farmers is manufactured in the UK but there are some imports, mainly from Denmark, Norway and the Faeroe Islands. Imports have remained fairly constant at around 5 per cent over the past three years. Salmon farmers without their own in-house feed supplier are not prepared to risk relying on imports for the bulk of their feed supplies; and they often need technical advice and support from their feed suppliers. Moreover, duties and transport costs restrict trade in feed. The major manufacturers of salmon feed also produce trout feed, which is a close substitute on the supply side. We conclude that salmon and trout feed constitute a single, UK, market.

Trouw supplied 48.3 per cent of UK salmon feed by volume in 1999, and nearly 53 per cent of all UK fish feed by volume in that year. The merger would not increase Nutreco's share of the fish feed market. But it would significantly increase Nutreco's share as a purchaser of salmon feed from 26 per cent to over 38 per cent in 2000. Moreover, GSP's output, and hence its demand for feed, has been reduced since 1998, following an outbreak of infectious salmon anaemia and the subsequent forced culling of fish. As GSP's stock levels recover, its feed purchases can be expected to increase. There is now significant overcapacity in the fish feed market, much of it due to recent investment by Trouw, which has about 55 per cent of total UK capacity. The fish feed market is concentrated, with three large players, Trouw, EWOS Ltd (EWOS), part of the EWOS group, and BioMar Ltd, a subsidiary of BioMar AS (BioMar) and a partly-owned subsidiary of Norsk Hydro, together accounting for well over 90 per cent of UK sales.

We expect Nutreco's enhanced position as a feed purchaser in Scotland arising from the merger, when added to its already high share of the supply of salmon feed, to bring about a reduction of competition in the supply of feed. This is because, following the merger, we expect MH and GSP to purchase all or most of their salmon feed from Trouw. EWOS and BioMar Ltd will therefore have reduced demand for their feed. This will result in a reduction in their capacity utilization and an increase in their unit costs. Trouw, by contrast, may be expected to increase output and capacity utilization, thereby enjoying greater economies of scale by spreading its overheads over a larger volume of production. We expect EWOS and BioMar Ltd to become less competitive. Moreover, competition between BioMar Ltd and Trouw would be dampened as a result of a feed supply agreement between HSF and BioMar under which BioMar will supply specified volumes of feed to the Hydro Seafood businesses (which will have become subsidiaries of Nutreco) until the end of 2002.

As competition is reduced, we expect Trouw to enhance its position in the supply of feed still further. With the lack of transparency in feed prices, Trouw will have considerable scope to raise such prices to salmon and smolt producers, which they will seek to pass on to secondary processors and wholesalers. Because farmed salmon is an EEA market, most secondary processors and retailers will not accept higher prices, and will switch their purchases to Norwegian salmon. But those processors and retailers wanting only Scottish salmon may pay more. We expect the more powerful retailers to resist higher prices for Scottish salmon and to pass the extra costs back up the supply chain to the secondary processors and the farmers, but smaller retailers may be unable to do so, and so the price of Scottish salmon for some consumers will rise. As the costs of independent salmon farmers and smolt producers increase, some will either become more dependent on Nutreco or go out of business, thereby further consolidating Nutreco's position.

We considered whether the adverse effects summarized in paragraphs 1.9 and 1.10 were outweighed by any benefits likely to flow from the merger. We expect the merger to have detrimental effects on employment in the medium to longer term. One member of the Group considers that Nutreco's stake in Scotland following the merger could offer better prospects for the industry's continued survival in an increasingly competitive international environment than would be the case if GSP were acquired by another company. The other two members, however, believe that another purchaser of GSP would be as likely to generate the claimed benefits as Nutreco. Moreover, they consider that there is a potential risk if Scotland were to become too dependent on one large, international company. However, we are all agreed that the prospect of any such benefits would not be sufficient to offset the adverse effects of the merger. We therefore expect the merger to operate against the public interest.

We examined various behavioural and structural remedies. We decided that behavioural remedies would not address the adverse effects we had identified and in any case would be difficult to enforce. We considered divestment either of feed capacity or salmon production capacity. Divestment of feed capacity would have to be accompanied by behavioural remedies (to cap output), but these would be unduly intrusive in the operations of Nutreco, possibly compromising its efficiency. Moreover, we recognized that, as the adverse effects were brought about by the loss of an independent customer (GSP) to Nutreco's two feed competitors rather than to any accretion in Nutreco's feed capacity, divestment of feed capacity would not be an effective remedy of the adverse effects of the merger. So far as divestment of salmon capacity is concerned, this would not be effective unless capacity at least equivalent to that of GSP were divested.

We therefore considered prohibition of the merger. In addressing the adverse effects, prohibition would have two advantages. First, it would mean that Nutreco's existing 26 per cent ownership of the UK customer base would not increase, thereby addressing the adverse effect that would have been brought about by Nutreco's enlarged share as a purchaser of salmon feed. Second, prohibition would be more likely to alter the dynamic of the Scottish industry, by opening up the possibility of another substantial player, able to compete with Nutreco, entering the market. Although consolidation may be the pattern for future development of the Scottish salmon farming industry, this remedy recognizes that competition would be better served by a number of large participants rather than a single dominant player.

Having taken all the above matters into account, we recommend that the merger should be prohibited.

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