With a tough underlying market and in the face of pressure from the multiples, food and drink manufacturers are struggling to deliver growth and increasingly turning to mergers and acquisitions as a way to create shareholder value.
The attractions are obvious. Combining businesses that operate in the same categories creates opportunities for cost savings or “synergies”. But the OFT has moved the bar in recent years and is scrutinising these transactions more closely. Its concern is that such deals can reduce choice for consumers and enable manufacturers to hike prices through market dominance. As consumers, we want competition among manufacturers and low prices in store. Yet we also want strong British manufacturers. Are these objectives mutually exclusive?
The regulator seems to think so. On 13 February, the OFT referred the potential merger of Britvic and AG Barr to the Competition Commission as it “could not rule out the possibility of higher prices post-merger”.
Britvic and AG Barr were not amused. “Here we are, two British companies trying to strengthen ourselves against a vast US corporation [Coca-Cola] and being thwarted by the OFT,” said Gerald Corbett, Britvic chairman. While both parties believe their case is strong, they need to await the results of the Commission’s enquiry - so the merger is off for the time being.
In 2011, Princes was forced to dispose of its Fray Bentos business, acquired from Premier Foods, as the OFT said the merger “would lead to competition concerns in relation to the supply of canned pies in the UK”.
We applaud its objectives, but wonder if it is being too purist and question the proportionality applied to its conclusions.
An over-cautious approach risks hampering the development of a strong and vibrant UK food industry. For example, we suspect the efficiencies Princes would have enjoyed may have enabled it to reduce the price of its canned pies to better compete with chilled and frozen. The UK is in danger of becoming less attractive to food and drink companies. We would encourage the OFT not to be too purist. The retailers are more than capable of looking after themselves.
Shaun Browne is MD of McQueen