STATES OF AMERICA
In the matter of
GENERAL MILLS, INC., a corporation.
File No. 961-0101
AGREEMENT CONTAINING CONSENT ORDER
The Federal Trade Commission ("Commission"), having initiated an investigation of the acquisition by General Mills, Inc. ("GMI"), of the branded cereals and snack mix businesses of Ralcorp Holdings, Inc. ("Ralcorp"), and it now appearing that GMI, hereinafter sometimes referred to as "proposed respondent," is willing to enter into an agreement containing an order to cease and desist from certain conduct, and providing for other relief:
IT IS HEREBY AGREED by and between proposed respondent, by its duly authorized officers and attorney, and counsel for the Commission that:
IT IS ORDERED that, as used in this order, the following definitions shall apply:
IT IS FURTHER ORDERED that:
IT IS FURTHER ORDERED that:
IT IS FURTHER ORDERED that respondent shall notify the Commission at least thirty (30) days prior to any proposed change in the corporate respondent such as dissolution, assignment, sale resulting in the emergence of a successor corporation, or the creation or dissolution of subsidiaries or any other change in the corporation that may affect compliance obligations arising out of the order.
IT IS FURTHER ORDERED that, for the purpose of determining or securing compliance with this order, respondent shall permit any duly authorized representative of the Commission:
IT IS FURTHER ORDERED that this order shall terminate twenty (20) years from the date this order becomes final.
Signed this _____ day of _______________, 19____.
UNITED STATES OF
In the Matter of
GENERAL MILLS, INC., a corporation,
File No. 961-0101
This Interim Agreement is by and between General Mills, Inc., a corporation organized and existing under the laws of the State of Delaware ("General Mills") and the Federal Trade Commission, an independent agency of the United States Government, established under the Federal Trade Commission Act of 1914, 15 U.S.C. 41, et seq. (the "Commission").
WHEREAS, General Mills has proposed to acquire Ralcorp Holdings, Inc.'s ("Ralcorp") branded ready-to-eat ("RTE") cereal and snack businesses pursuant to an Agreement and Plan of Merger dated August 13, 1996 ("the proposed Acquisition"); and
WHEREAS, the Commission is now investigating the proposed Acquisition to determine if it would violate any of the statutes the Commission enforces; and
WHEREAS, if the Commission accepts the Agreement Containing Consent Order ("Consent Agreement"), the Commission will place it on the public record for a period of at least sixty (60) days and subsequently may either withdraw such acceptance or issue and serve its Complaint and decision in disposition of the proceeding pursuant to the provisions of Section 2.34 of the Commission's Rules; and,
WHEREAS, the Commission is concerned that if an understanding is not reached during the period prior to the final issuance of the Consent Agreement by the Commission (after the 60-day public notice period), there may be interim competitive harm, and relief resulting from a proceeding challenging the legality of the proposed Acquisition might not be possible, or might be less than an effective remedy; and
WHEREAS, the entering into this Interim Agreement by General Mills shall in no way be construed as an admission by General Mills that the proposed Acquisition constitutes a violation of any statute; and
WHEREAS, General Mills understands that no act or transaction contemplated by this Interim Agreement shall be deemed immune or exempt from the provisions of the antitrust laws or the Federal Trade Commission Act by reason of anything contained in this Interim Agreement.
NOW, THEREFORE, General Mills agrees, upon the understanding that the Commission has not yet determined whether the proposed Acquisition will be challenged, and in consideration of the Commission's agreement that, at the time it accepts the Consent Agreement for public record comment, it will grant early termination of the Hart-Scott-Rodino-waiting period, as follows:
Dated: December 24, 1996
UNITED STATES OF
In the Matter of
GENERAL MILLS, INC., a corporation.
Pursuant to the provisions of the Federal Trade Commission Act and the Clayton Act, and by virtue of the authority vested in it by said Acts, the Federal Trade Commission ("Commission"), having reason to believe that respondent General Mills, Inc., subject to the jurisdiction of the Commission, has agreed to acquire the branded ready-to-eat cereal and snack mix businesses from Ralcorp Holdings, Inc., in violation of Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45, and that the acquisition, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its complaint, stating its charges as follows:
I. Respondent General Mills, Inc.
1. Respondent General Mills, Inc. ("General Mills"), is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware. General Mills' headquarters, office and principal place of business is located at Number One General Mills Boulevard, Minneapolis, Minnesota 55426. In fiscal year 1996, General Mills had sales of approximately $5.4 billion.
2. Respondent General Mills is, and at all times relevant herein has been, engaged in the sale of branded ready-to-eat ("RTE") cereals to retail grocery stores, grocery wholesalers, and others throughout the United States. General Mills's primary RTE cereals include Cheerios, Total, and Wheaties. General Mills is the nation's second largest producer of RTE cereals, measured based on pound sales or dollar revenues. General Mills's revenue from the sale of RTE cereals worldwide was $2.75 billion in fiscal year 1996.
II. Ralcorp Holdings, Inc.
3. Ralcorp Holdings, Inc.("Ralcorp"), is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Missouri. Ralcorp's headquarters, office and principal place of business is located at 800 Market Street, Suite 2900, St. Louis, Missouri 63101. In fiscal year 1995, Ralcorp had sales of approximately $1 billion.
4. In 1994, the Ralston Purina Company created Ralcorp, as a wholly owned subsidiary, and then distributed Ralcorp's shares to Ralston Purina's shareholders. As part of the creation of an independent Ralcorp, Ralston Purina entered into a technology license authorizing Ralcorp to use certain identified technology in the production of branded and private label RTE cereals.
5. Ralcorp is, and at all times relevant herein has been, engaged in the sale of branded and private label RTE cereals to retail grocery stores, grocery wholesalers, and others throughout the United States. Ralcorp's primary RTE cereals include Corn CHEX, Rice CHEX, and Wheat CHEX. Ralcorp is the nation's fifth largest producer of branded RTE cereals and the largest producer of private label RTE cereals. Ralcorp's revenue from the sale of RTE cereals was $585.5 million in fiscal year 1995. Its revenue from branded RTE cereals was more than $311 million for the same year.
6. General Mills is, and at all times relevant herein has been, engaged in commerce as "commerce" is defined in Section 1 of the Clayton Act, as amended, 15 U.S.C. 12, and is a corporation whose business is in or affecting commerce as "commerce" is defined in Section 4 of the Federal Trade Commission Act, as amended, 15 U.S.C. 44.
IV. The Acquisition
7. On or about August 13, 1996, General Mills and Ralcorp entered into an agreement for General Mills to acquire Ralcorp's branded RTE cereal and snack mix businesses. In exchange for these businesses, General Mills agreed to give Ralcorp's shareholders General Mills' common stock and to assume certain Ralcorp debt. The total value of this consideration is approximately $570 million.
8. General Mills will not acquire Ralcorp's private label RTE cereal business or other non-cereal or snack mix businesses. Ralcorp will form a new entity, New Ralcorp Holdings, Inc., ("New Ralcorp") to hold the businesses that General Mills will not acquire. As a result of the acquisition agreement, New Ralcorp acquired the right to manufacture and sell private label CHEX products, but was restricted from transferring this right to a third party without permission from General Mills and Ralston Purina Company. The agreement also restricts New Ralcorp from producing private label CHEX products for a period ending eighteen months after consummation of General Mills' acquisition of Ralcorp's branded RTE cereal and snack mix businesses.
V. Trade and Commerce
9. The relevant line of commerce (i.e., the product market) in which to analyze the effects of the proposed transaction is the sale of branded and private label RTE cereals.
10. The relevant section of the country (i.e., the geographic market) in which to analyze the effects of the acquisition is the United States.
VI. Market Structure
11. The sale of RTE cereals in the United States is highly concentrated, whether measured by the Herfindahl-Hirschman Index (commonly called the "HHI") or by four-firm concentration ratios.
12. The post acquisition HHI for the sale of RTE cereals in the United States measured based on dollar revenues would increase by approximately 223 points, from 2,317 to 2,540. Measured in pounds, the post acquisition HHI for the sale of RTE cereals in the United States would increase by 158, from 2,103 to 2,261. Post acquisition General Mills' market share in dollars would be almost 31 percent. Its share in pounds would be almost 27 percent.
VII. Entry Conditions
13. Entry of new RTE cereal producers into the relevant markets is difficult, and would not be timely, likely or sufficient to prevent anticompetitive effects.
VIII. Effects of the Acquisition
14. The effects of the acquisition, if consummated, may be substantially to lessen competition in the RTE cereal market in the United States in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45, by increasing the likelihood of the unilateral exercise of market power and simultaneously restricting the entry of new private label cereal products into competition with General Mills.
IX. Violations Charged
15. The acquisition agreement, entered into between General Mills and Ralcorp for General Mills to acquire Ralcorp's branded RTE cereal and snack mix businesses, violates Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45, and would, if consummated, violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45.
WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this ______ day of _____________, 19____, issues its Complaint against Respondent General Mills.
By the Commission.
ANALYSIS TO AID PUBLIC COMMENT
The Federal Trade Commission has accepted for public comment from General Mills, Inc. ("General Mills"), an agreement containing a consent order. The Commission designed the agreement to remedy any anticompetitive effects stemming from General Mills's acquisition of the branded ready-to-eat ("RTE") cereal business from Ralcorp Holdings, Inc. ("Ralcorp").
This agreement has been placed on the public record for sixty (60) days for reception of comments from interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreement and the comments received. The Commission will then decide whether it should withdraw from the agreement or make final the order contained in the agreement.
The Commission's Complaint charges that on or about August 13, 1996, General Mills agreed to acquire the branded RTE cereal and snack-mix businesses owned by Ralcorp. Among the cereals that General Mills agreed to acquire are Corn CHEX, Rice CHEX, and Wheat CHEX. The Commission has reason to believe that the acquisition and the agreement to acquire Ralcorp may have anticompetitive effects and be in violation of Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act.
According to the Commission's Complaint, General Mills is the second largest producer of RTE cereals and Ralcorp is the fifth largest producer of branded RTE cereals. Ralcorp is also the largest producer of private label RTE cereals. In 1994, the Ralston Purina Company created Ralcorp by distributing shares of Ralcorp to Ralston Purina's shareholders. General Mills will not acquire Ralcorp's private label RTE cereal business. Ralcorp will form a new entity, New Ralcorp Holdings, Inc. ("New Ralcorp"), which will continue producing RTE cereals.
The Commission's investigation of this matter found potential anticompetitive problems arising from this acquisition. The Complaint alleges that concentration is high in the RTE cereal market and entry is difficult and unlikely. Although this transaction does not reduce the number of established substantial firms in the RTE cereals market, it does increase General Mills' market share by approximately 3 percent and thus increases overall concentration in the market. Of particular concern is that the acquisition agreement restricts New Ralcorp's freedom to produce and sell private label CHEX products as well as its ability to transfer the rights to manufacture and sell private label CHEX products to a third party without permission from General Mills.
Under the terms of the proposed order, General Mills must, before consummating the merger, include in its agreements with Ralcorp and New Ralcorp provisions that will permit the transfer to any successor party of the right to manufacture and sell private label CHEX in the United States. These provisions will permit the successor party to sell these private label cereals without further authorization or approval from General Mills or Ralston Purina Company. The proposed order also prohibits General Mills from taking any action to prevent or delay New Ralcorp's sale of private label CHEX products in the United States. Finally, the proposed order prohibits General Mills from enforcing any agreement that would prevent the transfer to a successor party of the right to manufacture and sell private label CHEX in the United States.
Presently, neither Ralcorp nor any other person produces private label CHEX products. The proposed order will increase the likelihood that someone will produce and sell private label CHEX in competition with General Mills' branded CHEX products.
To reduce the possibility of competitive harm before the Commission's entry of a final order, the interim agreement binds General Mills to the terms of the order, as if it were final.
The interim agreement became effective on the date General Mills signed the consent agreement.
The purpose of this analysis is to invite public comment concerning the consent order. The Commission does not intend this analysis to be an official interpretation of the agreement and order or to modify their terms in any way.
STATEMENT OF COMMISSIONER MARY L. AZCUENAGA
CONCURRING IN PART AND DISSENTING IN PART
in General Mills, Inc., File No. 961-0101
The Commission today issues for public comment a consent order based on a complaint alleging that the acquisition by General Mills, Inc., of the branded ready-to-eat cereal business of Ralcorp Holdings, Inc., violates Section 7 of the Clayton Act. The order is narrow, but I would narrow it even further. In particular, I would delete Paragraph II(B) of the proposed order, which requires elimination of a noncompete clause that would have prevented Ralcorp for a period of eighteen months from introducing a new private label cereal identical or similar to the CHEX-brand cereals being sold to General Mills.
Paragraph 14 of the complaint alleges that the noncompete clause described in paragraph 8 would have the anticompetitive effect of "restricting the entry of new private label cereal products into competition with General Mills." That effect, of course, is precisely the purpose of this (and every other) noncompete clause.(1) Although the complaint might be read as alleging that noncompete clauses are per se anticompetitive, that interpretation would be inconsistent with the Commission's decision a few days ago to accept for public comment an order that in paragraph VI imposed an affirmative prohibition on competition for six years between the merged firm and the acquirer of certain animal health assets to be divested under the order. Ciba Geigy Limited, (File No. 961-0055, December 17,
1996). The Ciba Geigy decision recognizes the efficiency potential of noncompete clauses, which, among other benefits, may facilitate an orderly transfer of ownership and provide a brief transition period for new owners to establish themselves in the business.
Although the appropriate duration of a noncompete clause may vary depending on the circumstances of the industry and the acquisition, using a noncompete clause for a short period to smooth a transition may be procompetitive. I do not find reason to believe that this short-term noncompete clause is anticompetitive, and I dissent from the order requirement to eliminate it.
1. The noncompete clause described in paragraph 8 of the complaint prohibits Ralcorp from entering the market with a private label, CHEX-type cereal product for eighteen months. As indicated in the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (April 2, 1992), a merger is unlikely to create or enhance market power if entry is "timely, likely and sufficient," and entry is deemed "timely" if it can be achieved within two years. Under this standard, the noncompete clause is unlikely to create or enhance market power.
DISSENTING STATEMENT OF COMMISSIONER ROSCOE B. STAREK, III
In the Matter of
General Mills, Inc.
File No. 961 0101
I respectfully dissent from the decision of the majority to accept for public comment a consent agreement with General Mills, Inc. relating to the proposed acquisition of the branded ready-to-eat ("RTE") cereal and snack food businesses of Ralcorp Holdings, Inc. ("Ralcorp"). My dissent rests on two grounds.
As noted in the Commission's proposed complaint, General Mills will not acquire the private label RTE cereal or snack food businesses of Ralcorp. Ralcorp instead will form a new entity, New Ralcorp Holdings, Inc. ("New Ralcorp"), to hold the private label cereal and snack food businesses that General Mills will not acquire. Under the acquisition agreement, New Ralcorp has the right to manufacture and sell a private label version of the Chex RTE cereal products, but is restricted from transferring this right to a third party without permission from General Mills. The acquisition agreement further provides that New Ralcorp may not produce private label Chex products for a period of eighteen months following consummation of the acquisition.
My first reason for voting against acceptance of the proposed consent order is that the Commission lacks sufficient evidence to support the unilateral effects theory alleged in the complaint. Second, it is completely unnecessary -- and in fact creates inefficiency -- to bar enforcement of the parties' non-compete agreement. Whatever minimal competitive risks this transaction may raise are adequately addressed by eliminating the restrictions on Ralcorp's ability to transfer manufacturing and sales rights for private label Chex to a third party.
General Mills' share of the RTE cereal market will increase by approximately three percent as a result of the proposed acquisition. The number of competitors in the RTE cereal industry will remain the same, and General Mills will remain the second largest RTE cereal producer in the United States.(1) New Ralcorp will immediately assume Ralcorp's position as the largest private label cereal producer in the United States. Moreover, General Mills' post-merger share of the RTE cereal market will be between 25 and 31 percent (depending on whether share is measured in pounds or sales dollars), well below levels suggested by the Horizontal Merger Guidelines as the minimum threshold at which the Commission might reasonably presume market power.(2) It is hard to understand under these simple facts how the majority determined that the proposed acquisition will enable General Mills unilaterally to exercise market power.
Unable to presume market power, the Commission instead relies upon a "close substitutes" theory of unilateral harm, notwithstanding a paucity of empirical evidence demonstrating that Ralcorp's branded Chex products are the closest substitutes to the branded cereals of General Mills. Although Chex products clearly compete with the branded General Mills RTE cereal products, consumers have a preference for variety when they choose RTE cereals and frequently choose among the many branded and private label cereals produced by
RTE cereal manufacturers in the United States. Not surprisingly, Judge Wood reached this conclusion in her opinion explaining why she refused to block the acquisition of the Nabisco RTE cereal assets by Kraft General Foods in early 1993.(3) In Kraft General Foods, an empirical analysis of cereal purchasing patterns suggested -- as it does in the present matter -- that consumers have many attractive alternatives from which to choose in the event that one RTE cereal producer tries to raise prices above competitive levels. Overall, the empirical evidence does not support the Commission's claim, under either a "close substitutes" or a dominant firm theory, that General Mills would be able unilaterally to raise the prices of its branded RTE cereals after the acquisition.
Even if I agreed with the majority that this consent agreement rests upon an empirically sound theory of competitive harm, the proposed order would bar General Mills from enforcing an arguably procompetitive non-compete agreement that is properly limited in scope and duration. Covenants not to compete are often included in contracts for the sale of a business, and generally are enforceable when ancillary to an enforceable agreement and reasonable in geographic coverage, scope of activity, and duration. Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 265 (7th Cir. 1981) ("The recognized benefits of reasonably enforced non-competition covenants are now beyond question."), cert. denied, 455 U.S. 921 (1982); United States v. Addyston Pipe & Steel Co., 85 F. 271, 281-82 (6th Cir. 1898), aff'd as modified, 175 U.S. 211 (1899).(4) Judicial inquiry into non-compete provisions generally focuses on whether the restriction is reasonably necessary to protect the legitimate business interests of the party seeking to enforce the provision. United States v. Empire Gas Corp., 537 F.2d 296, 307 (8th Cir. 1976), cert. denied, 429 U.S. 1122 (1977); Sound Ship Bldg. Corp. v. Bethlehem Steel Corp., 387 F. Supp. 252, 255 (D.N.J. 1975), aff'd, 533 F.2d 96 (3d Cir.), cert. denied, 429 U.S. 680 (1976).
The Commission has often recognized that competitive benefits can flow from a non-compete clause in the context of the sale of a business. The Commission's recent acceptance for public comment of a consent agreement in Ciba-Geigy, Ltd., et al., File No. 961 0055 (consent agreement accepted for public comment, Dec. 16, 1996), is illustrative. In Ciba-Geigy, the Commission imposed an affirmative obligation on the newly merged entity, Novartis AG, not to compete in the United States and Canada for six years in the sale of animal flea control products.(5) As the Ciba-Geigy order indicates, the Commission clearly recognizes that non-compete clauses -- even when long in duration and broad in scope -- can serve legitimate procompetitive purposes in some circumstances by allowing an acquiring entity a brief period to re-deploy the acquired assets in a manner that increases competition in the marketplace. I am therefore puzzled why the Commission so hastily condemns a non-compete provision here that is only eighteen months in duration, limited to the manufacture and sale of private label Chex products, and arguably necessary to protect the legitimate interests of the contracting parties.(6)
Because I find that the facts do not support the Commission's theory of unilateral competitive harm in this instance, and because in any event I disagree with the Commission's decision to bar enforcement of the non-compete provision contained in the parties' acquisition agreement, I have voted to reject the consent agreement.
1 eneral Mills' share of branded cereals will of course increase as a result of the transaction, but the complaint does not allege a relevant market consisting of "branded RTE cereal." Indeed, the provisions of the proposed order (which affect the disposition of assets used in the production of nonbranded cereals) make sense only in the context of an "all RTE cereal" product market.
2 See U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines 2.211, 4 Trade Reg. Rep. (CCH) 13,104, at 20573-9.
3 State of New York v. Kraft General Foods, Inc., 1995-1 Trade Cas. (CCH) 70,911, at 74,039, 74,066 (S.D.N.Y. 1995).
4 See also Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 729 n.3 ("The classic 'ancillary' restraint is an agreement by the seller of a business not to compete within the market.").
5 See Paragraph VI of the proposed order in Ciba-Geigy.
6 Barring enforcement of the non-compete agreement might undermine adherence by the parties to the supply agreement, an element of the acquisition agreement found acceptable by the majority.