A Competition Authority decision of April 17 2014 authorised Orlait to take control of Terra Lacta's ultra-high temperature processing (UHT) milk business based on a rare application of Point 51 of its Merger Control Guidelines, which provides that in certain cases, contractual relations can confer control over another company. This is the case when a contract with an extremely long term leads to a change in control of that other company's management and resources.
In exchange for Terra Lacta's acquiring a minority interest in Orlait, Orlait was to take over the commercialisation and distribution of practically all milk produced by Terra Lacta. Under the contract - which had a term of 10 years, renewable for subsequent five-year periods - Orlait would obtain:
- control of production processes and methods (eg, determining production volumes, choosing the portfolio of products);
- control of the distribution and commercialisation policy (eg, defining the marketing strategy, taking orders from customers, managing transport management); and
- the transfer to it of a sales representative previously employed by Terra Lacta.
The authority found that under this contract, Orlait gained control over its competitor's business, which constituted a notifiable merger.
The authority then made a thorough competitive analysis and, despite Orlait/Candia's significant reinforcement on the market for the supply of UHT milk to supermarket retailers, concluded that the transaction did not have an adverse effect on competition. It therefore authorised the transaction unconditionally.
The authority first checked whether the transaction could allow Orlait to increase its prices advantageously (unilateral effects). Based on a body of evidence, the authority noted that since there was excess supply on the market, competitors had easy access to the raw material. In addition, the authority noted the strong bargaining power of supermarket retailers, which have no qualms about de-referencing some producers if they increase their prices.
Finally, the parties would also face competition from foreign producers if they were contemplating increasing their prices.
The analysis was completed by an interesting use of a quantitative test which confirmed that, given the respective market shares and margin levels of Orlait and Terra Lacta, it was highly unlikely that the new entity would increase the prices of its products.
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