Noble split must go ahead, says CC

The Competition Commission has ruled for a second time that Noble Foods must be split up again.

It has turned down a new producer contracts deal—put forward as a way to save the giant packer which was created by the merger of Deans Foods and Stonegate.

The Commission first ruled in January, after a three month inquiry, that the coming together of the two giant packers with a combined turnover of more than £400 million was likely to create a substantial lessening of competition (SLC) across the egg industry. It said the only remedy was for a large part of the newly formed company to be sold off again.

But Noble was offered the opportunity to suggest alternatives to the enforced divestment and came up with a proposed remedy involving a new arrangement for producers on Stonegate contracts. Under the scheme Noble would agree to release any Stonegate producer to another packer which needed more eggs and to do so in three months instead of the longer notice period laid down in contracts.

The arrangement was aimed at overcoming one of the major CC criticisms of the merger—that retailers would find it difficult to switch orders away from Noble because other packers would be unable to quickly access extra supplies of eggs.

But now the CC has responded to the Noble plan—by turning it down flat. It describes the scheme as "a complex, opaque and bureaucratic exercise in managing the production base which we do not consequently regard as a practicable remedy."

In a 23 page response to the suggestion it says that as the proposal would only apply to Stonegate's external producers even if all of the company's suppliers switched the pre-merger situation would not be recreated.

"Even if a significant amount of Stonegate's suppliers were dispersed around the other competitors," it goes on, "then the pre-merger situation would still not exist i.e. a second large player to provide a strong alternative supplier for retailers' business. There would be one large player and a number of fringe competitors slightly larger than now."

It quotes one suggestion that only 15 per cent of the company's free range volume would be made available to competitors.

It says that as Noble would have the right to persuade producers to stay then it could selectively improve producer or retailer terms to prevent transfers occurring. And given the possibility that a transfer could fail producers may not wish to be associated with a proposed move "for fear of reprisals from Noble".

"The mechanism, as set out in Noble's worked example, is complex," says the CC. "This and its lack of transparency to retailers, producers and competitors would allow Noble significant ability to frustrate the mechanism to prevent either retailers or producers switching."

Other objections to the plan are that some free range producers could be asked to switch only part of their total production to a competitor which would make it unattractive to a large proportion of the producer base. And that Noble would be given an incentive to allow their least attractive producers to transfer whether because of location, quality of eggs or other factors.

Most retailers who commented to the CC on the proposal did not feel that it would be effective in addressing the SLC, says the document. In view of these issues it says officials do not consider that the proposed remedy would address the SLC effectively.

BFREPA had suggested that the arrangement would only be acceptable if it also included Deans' producers. But the CC says that even if it did it would still not be effective in addressing the SLC because it would not recreate a large second competitor.

"In order to effectively address the SLC and its adverse effects in this case," the report goes on, "a divestment of one of the businesses of Noble would be required in order to restore as far as possible the pre-merger situation. This could mean the divestment of either Stonegate or Deans or a package based on either of the two."

It says the divestment of Stonegate is "the least intrusive, least costly and therefore most appropriate remedy".

The commission guidelines suggest a maximum of six months for the initial divestiture period "in which the parties should complete the disposal of a divestiture package".

Noble has already formally responded to the criticisms of its contracts remedy.

It says the proposal is much less complex and risky than a divestment and much speedier to implement and points out that it would not lack transparency because details would be published and mechanisms would be clear.

"Retailers could organise massive switches at short notice," it says.

It sees no problem with large producers like John Bowler splitting their supply and claims the company would not have the ability to stipulate which producers transfer. It says it is unable to see what "reprisals" it could take against producers who might attempt to become involved in a transfer which fails.

It also points out that as only five retailers commented on the proposal this was "an extremely narrow sample" and that only a very limited number of producers commented.

Noble reminds the CC that it is under a duty to ensure that a remedy is not disproportionate to the perceived SLC in all circumstances. It says its remedy would be an effective remedy to any perceived SLC and that a divestment is not feasible under the conditions envisaged and would not therefore be effective. "In those circumstances," it concludes, "the duty of proportionality requires the Commission to opt for the remedy which is likely to be effective and which is far less costly".

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