Resolving the competitive concerns detailed in late October when the Federal Trade Commission authorized its staff to seek a preliminary injunction enjoining the transaction, the FTC today announced a proposed consent order with Diageo plc (Diageo) and Vivendi Universal S.A. (Vivendi) regarding Diageo's and Pernod Ricard S.A.'s (Pernod) joint purchase of Vivendi's Seagram Spirits and Wine Business (Seagram). The proposed consent order would allow the transaction to proceed with certain conditions.
Under the terms of the proposed order, Diageo would be required, within six months of the acquisition of Seagram, to divest the Malibu rum business worldwide to a Commission-approved buyer, and would agree not to obtain or use any commercially sensitive information regarding four other brands Pernod will acquire. Those brands, which compete directly with other brands marketed by Diageo in the United States (including Gordon's Gin, Classic Malt Scotch whiskies, Johnnie Walker Black Scotch, and Hennessy Cognac), are Seagram's Gin, Chivas Regal Scotch whisky, The Glenlivet Scotch whisky, and Martell Cognac. On October 23, 2001, the Commission authorized the staff to seek to enjoin the proposed acquisition in United States District Court. The Commission did not file that action in anticipation of the resolution of the matter by the proposed consent order announced today.
"The proposed merger would have consolidated the second- and third-largest sellers of rum in the United States, leading to substantial concerns that the transaction would be anticompetitive. These concerns led the Commission to authorize the staff to seek a preliminary injunction enjoining this transaction," said FTC Bureau of Competition Director Joe Simons.
"The consent order announced today addresses those concerns and also will ensure that competitively sensitive information regarding several key brands that Diageo should not acquire for competitive reasons is not transferred to Diageo."
Parties to the Proposed Transaction
Diageo, a United Kingdom public limited company, has its principal U.S. place of business in Stamford, Connecticut. It is the third-largest seller of rum in the United States, following Bacardi U.S.A. (Bacardi) and Seagram, and markets its products under brand names including Malibu. Malibu is the country's leading coconut-flavored rum.
Vivendi, a French societe anonyme, has its principal U.S. place of business in New York, New York. Seagram is the second-largest seller of rum in the United States, marketing its products under brand names including Captain Morgan Original Spiced Rum and Captain Morgan's Parrot Bay. Captain Morgan Original Spiced Rum is a vanilla-flavored rum, and Parrot Bay is a coconut-flavored rum.
Pernod, a French societe anonyme, has its principal U.S. place of business in New York, New York. Pernod does not currently market or sell any rum products in the United States.
The Proposed Transaction
The proposed $8.15 billion joint acquisition of Seagram from Vivendi by Diageo and Pernod, which the companies announced on December 19, 2000, would consolidate the number two and three sellers of rum in the United States. Bacardi, based in Puerto Rico, is the industry leader in this country. Under their Framework Agreement, Diageo would pay $5 billion for its share of the Seagram assets and Pernod would pay $3.15 billion for the remaining share.
Through the proposed transaction, Diageo and Pernod agreed to acquire the following significant brands: Captain Morgan Original Spiced Rum and Captain Morgan's Parrot Bay Rum (to be held by Diageo); and Seagram's Gin, Chivas Regal Scotch whisky, The Glenlivet Scotch whisky, and Martell Cognac (to be held by Pernod). Also, Diageo would acquire Joseph E. Seagram & Sons, Inc. (JES), the Vivendi entity responsible for marketing all Seagram-owned brands in the United States.
Under the transaction agreed to by Diageo and Pernod, Diageo would acquire competitively sensitive information about Seagram's Gin, Chivas Regal Scotch whisky, The Glenlivet Scotch whisky, and Martell Cognac, which were marketed by JES. In addition, under the terms of the originally proposed transaction, for up to one year, Diageo would continue to operate a "back office" administrative operation for Pernod in connection with the Seagram brands Pernod would be acquiring. This arrangement also allegedly would provide Diageo with competitively sensitive information about the four brands going to Pernod (that Diageo for competitive reasons should not acquire). Finally, Diageo and Pernod agreed that Diageo would bottle some of the Seagram products to be acquired by Pernod that were sold in the United States under a "co-packing" agreement. This arrangement also could provide Diageo, a direct competitor, with competitively sensitive information about those brands.
FTC's Anticompetitive Concerns
According to the Commission, the transaction as originally proposed would have violated Section 5 of the FTC Act and Section 7 of the Clayton Act by eliminating substantial competition between Diageo and Vivendi in each relevant market, including: 1) premium rum; 2) popular gin; 3) deluxe Scotch whisky; 4) single malt Scotch whisky; and 5) Cognac, with the result being higher prices for U.S. consumers of these products.
Specifically, the Commission contends that through the transaction as proposed, Diageo and Bacardi together would control 95 percent of all U.S. premium rum sales. Also, Diageo would have access to highly sensitive business information about Seagram's Gin, Chivas Regal Scotch whisky, The Glenlivet Scotch, and Martell Cognac, products with which Diageo is in significant competition. The Commission also contends that if Diageo were to acquire these brands, it would maintain (or have a financial interest in) virtually all popular gin sales, virtually all deluxe Scotch whisky sales, 32 percent of all single malt Scotch whisky sales, and 63 percent of all Cognac sales in the United States.
The Proposed Consent Order
The consent order reached with the Commission would address the anticompetitive effect in five relevant product markets within two main categories: 1) the U.S. premium rum market; and 2) the popular gin, deluxe Scotch, single malt Scotch, and Cognac markets in the United States.
First, the order would address FTC's concerns by requiring Diageo to divest its Malibu rum business worldwide, to a Commission-approved acquirer. A Commission-appointed monitor trustee will ensure that during the time Diageo will own both the Malibu and Captain Morgan rum brands, they will be separately managed, as well as help assure that the Malibu business will remain competitively viable and marketable pending their sale. Diageo would be required to complete this divestiture within six months of the date it (together with Pernod) acquires Seagram. In the event that Diageo does not complete the required divestiture in the time allowed, the Commission could appoint a divestiture trustee to oversee the sale of these and any additional assets that may be necessary to complete the divestiture.
Second, the order would prevent Diageo from obtaining or using any competitively sensitive business information related to Seagram's Gin, Chivas Regal Scotch whisky, The Glenlivet Scotch whisky, or Martell Cognac. To ensure that it does not, Diageo has agreed to not acquire pre-existing competitively sensitive information about the four brands; Vivendi has hired independent consultants to segregate business information that should go to Diageo from the business information that should go to Pernod; and Diageo would implement a series of "firewalls" to keep confidential information from the operations it will be conducting in part for the benefit of Pernod from reaching Diageo marketing personnel.
The proposed order also contains an Order to Hold Separate and Maintain assets, under which Diageo would be required to preserve and maintain the Seagram Captain Morgan rum assets as a separate and competitive entity pending the divestiture of the Malibu assets. The goal is to ensure that there will be no interim harm to competition during the time that Diageo owns both the Captain Morgan and Malibu brands. Similarly, Diageo would be required to hold separate and maintain the Malibu rum assets to maintain the brand as viable and competitive until it is divested.
The Commission vote to accept the proposed consent order and place a copy on the public record was 5-0. The order will be subject to public comment for 30 days, until January 21, 2002, after which the Commission will decide whether to make it final. Comments should be sent to: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580. The Commission worked together with the Canadian Competition Bureau and the European Commission in the analysis of this transaction.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
Copies of the proposed consent agreement and an analysis of the agreement to aid in public comment are available from the FTC's Web site at www.ftc.gov. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: firstname.lastname@example.org; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
(FTC File No. 011-0057)
Office of Public Affairs,
Bureau of Competition,