Klaus J Jacobs Holding AG and Société Centrale d’Investissements et Associés: A report on the merger situation

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This inquiry concerned the acquisition by Klaus J Jacobs Holding AG (KJJH) of Société Centrale d'Investissements et Associés (SCIA). Our terms of reference (see Appendix 1.1), dated 19 December 1996, require us to report whether the acquisition is a merger situation qualifying for investigation and, if so, whether it operates or may be expected to operate against the public interest. We have concluded that the acquisition has created a merger situation qualifying for inves-tigation.

KJJH, a Swiss holding company, owns Callebaut AG (Callebaut), a major supplier of couverture (industrial chocolate) both in Europe as a whole and in the UK. SCIA's only interest at the time of the merger was Barry SA (Barry), a French-based group with extensive inter-national interests in the processing of cocoa beans and the supply of downstream products, including couverture. Callebaut and Barry each have an operating subsidiary in the UK.

Couverture is used in the manufacture of chocolate confec-tionery, biscuits, cakes and ice-cream. Its producers fall into two broad categories: vertically integrated groups which make couverture and use it in-house in the manufacture of consumer products (producer-users), and producers which supply most or all of their output of couverture to third parties (open-market suppliers). In the UK producer-users account for about 80 per cent of the overall supply of couverture. Between them, Callebaut and Barry have about 15 per cent of the UK's overall supply of couverture but nearly three-quarters of supply to the open market.

We found that the boundaries between producer-users and the open market in the UK are blurred. The largest producer-users do not supply the open market but some others do. One factor is that open-market users are generally unwilling to buy couverture from companies which compete with them in consumer-product markets. As to whether the UK is part of a wider European market for couverture, again the position is not clear-cut. Barry established itself as a significant supplier in the UK in the late 1980s and early 1990s by importing couverture from the Continent. Imports currently account for only 4 per cent of the overall UK market, however, and consist mainly of intra-group purchases by Callebaut and by Barry. There is potential competition from continental producers but there are objective reasons for users to prefer to buy from UK suppliers.

We found that Callebaut and Barry had been active competitors and that each represented the main source of competition to the other in the UK open market. They have a reputation for quality, expertise and service backed by many years of experience. Other independent suppliers are, by comparison, small and/or young companies and a number of open-market users expressed some doubts about their quality and reliability. Most of the main producer-users, while able to match Callebaut and Barry for expertise and resources, do not supply the open market at present. The merger would fundamentally change the structure of the open market and we have considered how the situation may be expected to evolve if the merger stands.

The UK market has in recent years witnessed substantial changes in market shares and entry by new suppliers. Barry itself did not enter until the late 1980s, building up sales initially by importing and subsequently from a new factory in Chester to reach its present market share of some 25 per cent. The next two largest suppliers to the open market are both new entrants within the last ten years. One of these at least is substantially expanding its capacity. Looking ahead, we believe there will be strong competition from independent producers and from two producer-users-Premier Biscuits (Premier), part of Hillsdown Holdings plc (Hillsdown), and United Biscuits (UK) Limited, operating as McVitie's (UB/McVitie's)-which between them have significant spare capacity and have indicated a clear interest in expanding their sales in the open market. These suppliers would collectively be in a position, as regards both capacity and quality, to take advantage of users' likely unwillingness to be unduly dependent on the merged Barry Callebaut.

As to the possibility of entry by other suppliers, whether from within the UK or overseas, much would depend on the attitude of customers and on prices and profitability in the UK market. Given the extent of excess capacity, actual and expected, conditions may not be conducive to new entry. In our view, however, there are no substantial barriers to entry into the UK market.

Besides the extent of competition, there are other factors which would constrain any attempt on the part of the merged group to exploit its position. A number of the main open-market customers are large multinational or national companies, or have substantial overseas parents, and can be expected to enjoy significant bargaining power. Moreover, the pricing of couverture is relatively transparent, so that customers are able to assess the justification for price changes.

The merger is likely to lead to some cost savings and there are grounds for believing that part of the benefits will be passed on to UK customers. The loss of jobs in the UK as a result of the merger is likely to be small.

We concluded that the merger may not be expected to operate against the public interest.

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