Can new contracts deal save Noble?

A new approach to producer contracts has emerged as a possible way to save the future of the threatened egg packing giant Noble Foods.

The company—created by the merger of Deans Foods and Stonegate—faces having to split apart again under a ruling from the Competition Commission.

After a three month investigation the Commission has decided that the merger of the two biggest names in the egg industry is likely to lead to a substantial lessening of competition in the egg market which could drive up prices in the shops and damage the interests of egg producers.

The CC has provisionally ruled that the only remedy is for a large part of the newly formed company to be sold off again. But Noble executives were given one last chance to change the Commission's view and it has now proposed a remedy of its own—a new arrangement for producers on Stonegate contracts.

Under the scheme Noble will agree to release any Stonegate producer to another packer which needs more eggs to fulfil a deal with a retailer.

The arrangement is aimed at overcoming one of the major CC criticisms of the merger—that retailers will find difficulty in switching orders away from Noble because other packers will be unable to quickly access extra supplies of eggs.

Noble argues that the portable contracts arrangement "would make it substantially easier for other packers to supply retailers at short notice and, more generally, would allow any retailer concerned about the size/significance of the merged firm as a supplier of eggs to reallocate a substantial proportion of its business to other packers within a short period of time."

For Noble itself the major advantage is that the company would avoid the major costs and upheaval of being split apart again only months after being created. It says that the split-up—divestment—remedy is "disproportionate" and will deprive both the company and its customers of the efficiency benefits brought about by the merger.

It has told the CC—although not made public—how much money could be saved by carrying a smaller buffer stock of surplus eggs and other cut backs. These savings would be lost under divestment, it says.

But it is also facing the fact that simply selling off Stonegate might not be sufficient. The CC has already indicated that other parts of the business may also have to go in order to remedy the imbalance in the market.

Noble argues that even if a buyer could be found a divestment would leave both Deans and Stonegate facing increased debt and higher interest payments. "Both Deans and Stonegate would have been weakened by the imposition of a divestment" it concludes.

It has spelled out in detail how its new contracts plan will operate and says it could be up and running in two weeks. It works like this:

1. A retailer wishes to switch part of its egg supply from Noble to a smaller packer with which it agrees a deal.

2. The packer contacts the necessary number of Stonegate producers to ask if they want to change packer and agrees terms.

3. The retailer gives three months notice to Noble of its intention to switch supplies.

4. The smaller packer then contacts Noble and indicates which producers are prepared to join it.

5. Noble agrees to release these producers from their existing contracts after three months and not to attempt to sign them up again for at least two years.

6. If there are any disagreements these are referred to a specially appointed arbitrator.

In an extreme case it would be possible that Noble could face losing all its Stonegate producers. On the other hand none might switch at all.

The CC has launched a further consultation process, covering the new contracts proposal. It has contacted hundreds of egg producers asking for their opinions and has had a meeting with BFREPA chairman Tom Vesey and vice-chairman John Widdowson to discuss the issue. The Association has also submitted written evidence to the enquiry team, stating that it does not believe the Noble proposal goes far enough.

"The main concern our organisation has regarding the merger of Deans Foods and Stonegate is the reduction of choice for producers when it comes to finding a market for their eggs," writes BFREPA. "We believe the behavioural remedy currently proposed by Noble Foods is insufficient to counter this concern.

"The reason for this," the submission goes on, "is that to be effective the proposal by Noble of releasing any Stonegate producer from their contracts within a 3-month notice period would require a sufficient volume of producers to switch to enable alternative packers to grow to a size where they could then be considered as effective competition to Noble. We do not believe that the remedy in its current form will lead to that happening."

The submission goes on to explain in detail that of Stonegate's estimated contracted supplies of free range and organic birds, 1.2 million are in the hands of John Bowler and unlikely to switch to an alternative packer, whilst of the remaining 800,000 birds, a significant proportion are producing speciality eggs, such as Columbian Blacktail, and are unlikely to be in a position to move.

"Of Stonegate's remaining producers," the document goes on, "it is unlikely that all of them would choose to switch or be in a position to do so because of geographical constraints resulting in no alternative packer. The reality is, therefore, that Noble's proposed remedy would have very little effect as regarding the switching of egg supplies."

But BFREPA is not dismissing the option of a behavioural remedy and has suggested to the CC that it could work but only if the contract deal includes all producers who were supplying Deans or Stonegate at the time of the merger.

"We believe this would have the effect of stimulating meaningful switching of supplies to alternative packers due to a greater number of producers being in a position to move," says BFREPA. "The wider geographical spread of available production would also assist other packers (who currently tend to have a regional bias) to source supplies."

Whilst the Noble remedy does not include any time limit within which Stonegate producers could take up the offer of the 3-month notice period, BFREPA recognises that this would be not be workable under a deal that included all producers, making it "extremely difficult, if not impossible, for the company (Noble) to market eggs effectively without the security of long-term supplies."

"For that reason," goes on the BFREPA submission, "we propose that a remedy that applies to all producers supplying either Deans or Stonegate at the time of the merger should be for a limited time period. We would suggest that period is 12 months from the date producers are notified of the change in their contractual arrangements."

BFREPA believes a remedy along the lines of that it has suggested is preferable to an order by the CC for Noble to divest assets, which, at this stage, could prove "counter productive".

"Divestment would lead to a period of instability within the egg industry and could lead to a serious weakening of Deans and Stonegate, thereby affecting their ability to operate efficiently. Ultimately this would have the potential to impact negatively on producers, retailers and consumers," concludes the document.

*The Competition Commission, which was originally due to have reached a final decision on the merger by 27 February, has announced an eight-week extension to this date whilst it considers the possible remedy options