The French Competition Authority’s decision of April 17, 2014 authorized Orlait to take control of Terra Lacta’s U.H.T. milk business.

The Authority’s authorization was based on a rare application of point 51 of its merger control guidelines, which provides that, in very particular cases, contractual relations can confer control over another company. This is the case when a contract with an extremely long term leads to the other company’s management and resources coming under control.

In this case, it was intended that in exchange for Terra Lacta’s acquiring a minority interest in Orlait, Orlait would take over the commercialization and distribution of practically all the milk produced by Terra Lacta. Under the contract, which has a term of 10 years, renewable for subsequent five-year periods, Orlait obtains (i) control of the production processes and methods (determining the production volumes, choice of the portfolio of products, etc.), (ii) control of the distribution and commercialization policy (definition of the marketing strategy, order-taking from customers, transport management, etc.) and (iii) the transfer to it of a sales representative previously employed by Terra Lacta. As a result, under this contract, Orlait has control over its competitor’s business, which constitutes a notifiable merger.

The Authority then made a thorough competitive analysis and, despite Orlait/Candia’s significant reinforcement on the market of the supply of U.H.T. milk to supermarket retailers, concluded that it did not have an adverse effect on competition and therefore authorized 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 easily had access to the raw material. In addition, the Authority noted the strong bargaining power of the supermarket retailers, which have no qualms about dereferencing 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, the GUPPI, which confirm 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.