On December 17, the Competition Bureau released a position statement summarizing the approach it had taken in analyzing two proposed vertical mergers (i.e., mergers between firms at different levels of a supply chain) in the pork industry. Both proposed mergers involve the acquisition of a large Western Canadian hog producer by a company that sells finished food products (pork cuts) to consumers: Olymel L.P. plans to acquire Big Sky Farms Inc. and Maple Leaf Foods Inc. plans to acquire Puratone Corporation. The Bureau decided not to challenge either merger.
The key concerns considered by the Bureau, and its conclusions about each, were:
- that Olymel or Maple Leaf may have the ability and incentive to refuse to supply its hogs to other competing sellers of pork cuts, and thereby foreclose their access to a necessary input. The Bureau determined that this ability and incentive would indeed exist, but concluded that no substantial lessening or prevention of competition would result because sufficient effective competition would remain among suppliers of pork cuts (including competition between Olymel and Maple Leaf); and
- that Olymel and/or Maple Leaf may harm other hog producers by foreclosing their access to a sufficient customer base. In particular, the Bureau was concerned that both Olymel and Maple Leaf would control a significant amount of slaughterhouse capacity in Western Canada, and may be able to harm other hog producers by refusing to purchase hogs from external suppliers, leaving the rival hog producers with no local slaughterhouse to which to sell their hogs. The Bureau concluded that each of Olymel and Maple Leaf would indeed have this ability, but that the costs of refusing to purchase hogs from external suppliers would outweigh any associated benefits, and they therefore lacked an incentive to do so.
The position statement provides insight into how the Bureau analyzes vertical mergers. Consistent with the guidance provided in the Merger Enforcement Guidelines, the position statement suggests that the Bureau’s principal concerns about such mergers will likely relate to input foreclosure (i.e., a refusal by the merged entity to supply an input to a downstream competitor) and customer foreclosure (i.e., a refusal by the merged entity to purchase inputs from upstream competitors). The statement also demonstrates that the Bureau will approach these issues carefully: although it concluded that both input foreclosure and customer foreclosure were possible in the case of these pork mergers, it also found that neither was likely to lead to a substantial lessening or prevention of competition.
John Godfrey Saxe (or, perhaps, Otto von Bismarck) once stated that “[l]aws, like sausages, cease to inspire respect in proportion as we know how they are made.” With respect to pork mergers, at least, the opposite appears to be true.