The most notable event in the M&A and merger control area in Russia in early 2011 was the completion of the acquisition by PepsiCo, Inc. (“PepsiCo”) of control over the group of companies known as Wimm-Bill-Dann for approximately $3.8 billion. This transaction, the purchase of shares of open joint stock company Wimm-Bill-Dann (“WBD”) from its shareholders, as well as the purchase of related ADRs and GDRs on foreign stock markets, was approved by FAS on January 27, 2011. In fact, FAS approved the acquisition of 100% of WBD, taking into account that PepsiCo was obliged to make a mandatory offer to the remaining shareholders of WBD to purchase their shares in accordance with the Law on Joint Stock Companies. FAS also issued two prescriptions, one in relation to the resultant entity’s juice business, and one in relation to its dairy business.
The transaction is noteworthy in the context of merger control and the Competition Law for two reasons. First, FAS approved the deal very quickly, particularly when one considers that two companies of the WBD group met the criteria to be considered strategic companies under Federal Law No.57-FZ and so the deal also required the approval of the Commission for Foreign Investments. FAS decision coincided with the start of the World Economic Forum in Davos, and the speed of the regulatory review can be explained primarily by the Russian government’s positive reaction to the deal and resultant desire that the deal close quickly.
The second noteworthy aspect was the substance of the prescriptions issued by FAS to PepsiCo. It should be noted that the transaction was potentially problematic since both PepsiCo (through its subsidiary Lebedyansky) and WBD had sizable juice businesses with an aggregate market share close to 50% at the federal level. By contrast, there was no overlap between the companies in the dairy market, since PepsiCo did not operate a dairy business in Russia prior to its acquisition of WBD and indeed was acquiring WBD primarily for WBD’s dairy business. Despite the different situations in the two lines of business, FAS issued prescriptions in relation to them both. If issuing a prescription in relation to the juice business was inevitable (in the event that the deal was approved), since the deal was going to lead to a substantial increase in PepsiCo’s market share and a reduction of the number of independent players in the juice market (and thereby constitute a restriction of competition under Russian law), the rationale for the prescription in relation to the dairy business was not obvious.
In fact, FAS’s only written rationale for issuing the prescription to PepsiCo in relation to the dairy business was a reference to the possibility of PepsiCo’s share in the dairy market increasing as a result of its future investment into the target, which is not a compelling argument in light of the fact that WBD’s share in the federal market for any dairy product did not exceed 25%. Although WBD was included in the regional section of the Registry of Undertakings as having a market share of over 35% in the market for the procurement of raw milk in two regions (i) this fact was in no way related to or affected by the deal, and (ii) the prescription was issued to PepsiCo in relation to the entire federal market and not just the regional markets in question.
Moreover, the two prescriptions issued by FAS to PepsiCo de facto impose on PepsiCo a legal regime analogous to that applicable to a dominant entity without PepsiCo’s having established a dominant position in any market in Russia. Even if dominance is established or strengthened as a result of an M&A transaction, FAS is only entitled to issue a prescription with the objective of securing competition in the market but not to protect certain categories of parties or to obtain general control over the acquirer’s group. There are already many precedents involving companies successfully challenging FAS prescriptions in court on the grounds that they are not in compliance with this framework.