On 31 March 2015, the German Federal Cartel Office (“Bundeskartellamt”, BKartA) announced that it has blocked the proposed takeover of approximately 450 Kaiser’s Tengelmann supermarket branches by EDEKA, the leading German food retail player 1. The BKartA has taken into account a multitude of sales-side local markets for food retail and a number of buying markets, where suppliers face significant buyer power from the leading supermarket players EDEKA, REWE and the Schwarz Group (Lidl and Kaufland). EDEKA and Tengelmann have applied for special authorisation by the Federal Minister of the Economy (“Ministererlaubnis”) on the basis of overriding public interests; as they argue the transaction will prevent job cuts.
- The BKartA defined a product market for food retail trade, which comprises all distribution channels and includes hard discounters as well as shops with a full range of branded products. In a later stage of the proceedings, it was prepared to include organic supermarket chains, too. For determining relevant geographic markets, the BKartA reviewed actual alternatives for consumers at the Kaiser’s sites in question, and in cities of more than 500,000 inhabitants, it also prepared analyses of the situation in the boroughs and urban districts concerned.
Kaiser’s has a market share on the national level of less than 1%, but its branches are concentrated in Berlin, in the Munich region and in parts of Northrhine-Westphalia.
- In its review, the BKartA found that Kaiser’s had market shares in the relevant local markets ranging from 10% to slightly below 30%. It also had a network of sites which would be of high value for a buyer. Competitive pressure on EDEKA, in the past exercised by Kaiser’s, would significantly decrease, both in markets where EDEKA and where its competitor REWE were leading. The BKartA also found significant barriers for market entry caused by zoning rules, which limit new sites for food retail, and by landlords which prefer to lease existing sites to EDEKA and REWE, and not to small or medium-sized players in the food retail business.
- The prohibition has also been based on 11 buying markets, including, among others, milk, chocolate, sparkling wine and frozen pizza. Kaiser’s, one of the very few companies which procures branded articles independently from the leading players EDEKA, REWE and Schwarz, would have disappeared after the merger. EDEKA and Kaiser’s, to a large extent, buy the same articles. The merger would affect local suppliers in the Berlin and Munich areas even more and would also weaken other smaller players which cooperate in purchasing with Kaiser’s currently.
The BKartA has also pointed to its findings in August 2014 that EDEKA abusively used its buyer power to force suppliers to grant additional discounts (see our article of 12 August 2014) and to the results of its sector inquiry into the food retail sector, which was closed in September 2014.
- In December 2014, the BKartA issued a preliminary injunction (“Einstweilige Anordnung”) to forbid the parties from implementing changes in their purchasing organisation, their network of branches, warehouses and butcheries. Those changes, according to the BKartA, were intended to facilitate post-merger integration and would have seriously affected the resources and competitiveness of Kaiser’s. According to the BKartA, these measures anticipated completion of the transaction and it therefore prohibited them by interim measures 2.
- In its report on the case, the BKartA states that it would have cleared the takeover by EDEKA of 170 branches of Kaiser’s, which would not have caused concerns. The parties, according to the BKartA, have offered the divestment of branches which would not have reduced the increase in market share for EDEKA, or branches which had been closed down already or were earmarked to be closed down. If the divestments had created or strengthened an important competitor with a full range of branded products in the cities and urban districts concerned, and no more than one or two per region concerned, the BKartA could have cleared the transaction (or its remainder), and the concerns regarding purchasing markets could have been removed, too.
The EDEKA/Kaiser’s case is highly important for a major industry sector, food retail, and also for the food industry itself. It is noteworthy that the prohibition has been based on purchasing markets too, where the market share increment for EDEKA is limited on the national level.
The case also shows that the BKartA is highly determined to assess possible consequences under the new standard for blocking a merger, “significant impediment of effective competition”, instead of the dominance test. Earlier prognoses that it will continue with its former practice and that the amendments to the law may only be pertinent in rare cases of non-coordinated effects in oligopolies may not entirely come true.
Second, the BKartA demonstrates its tough stance on what it considers attempts to complete a merger before clearance.
Last, the decision emphasises that the BKartA is willing to clear mergers with conditions and obligations and thereby reward credible attempts to propose remedies, but that the parties are responsible for proposals and that it will scrutinise such proposals very critically.
The outcome of the special authorisation procedure is open. At an earlier stage, EDEKA was frank that it would close branches and facilities which were double in order to make the merged entity more competitive. Lastly, the CEOs of EDEKA and Tengelmann have urged the Federal Minister of Economy, Mr. Sigmar Gabriel, in an apparently highly emotional letter to clear the way for the transaction. It is also open to debate whether the matter, when the Minister of the Economy refuses a special authorization, will be fought in court.