The Federal Trade Commission today announced a proposed consent order with Nestle Holdings, Inc. (Nestle) and Ralston Purina Company (Ralston) that will permit Nestle to complete its $10.3 billion acquisition of Ralston, while remedying the potential anticompetitive impacts identified in the overlapping markets for dry cat food in the United States. Under the terms of the order, Nestle would be required to divest both Ralston's Meow Mix and Alley Cat brands to J.W. Childs Equity Partners II, L.P. (Childs) within 20 days of the Commission's approval, or January 31, 2002, whichever is later. In addition, Nestle would be required to relinquish all international trademarks related to Meow Mix and Alley Cat, and would be required to co-pack both brands for Childs for a set period of time.
"Without the terms provided by this consent order, Nestle would acquire, among other things, Meow Mix, the best-selling dry cat food brand in the country, and as a result would have nearly a 45 percent share of the U.S. dry cat food market across all levels of distribution," said Joe Simons, Director of the FTC's Bureau of Competition. "The order will ensure that Childs becomes a strong competitor in the market for dry cat food, to the benefit of consumers nationwide."
Parties to the Transaction
Nestle is a subsidiary of Nestle S.A., a Swiss corporation with its headquarters in Vevey, Switzerland. The largest food corporation in the world, it manufactures, distributes, and sells dairy products, soluble coffee, roast and ground coffee, mineral water, beverages, breakfast cereals, coffee creamers, infant foods and dietetic products, culinary products such as seasonings and canned foods, frozen foods, ice cream, refrigerated products, chocolate, food services, and pet foods. The company sells its pet food products in the United States through its Friskies Pet Care Division, including Alpo, Come N' Get It, Mighty Dog, Friskies, Fancy Feast, Jim Dandy, and Chef's Blend. In 2000, Nestle had total worldwide sales of 81.4 billion Swiss francs and U.S. sales of approximately $7.8 billion. Nestle Holdings, Inc., a subsidiary of Nestle S.A., is the U.S. corporation that will purchase all outstanding Ralston shares.
Ralston is a Missouri corporation with headquarters in St. Louis, Missouri. Founded in 1894, it is the world's leading producer of dry pet foods. The brands it manufactures and sells include: Dog Chow, Puppy Chow, Cat Chow, Kitten Chow, Purina Special Care, Meow Mix, Purina O.N.E., Purina Pro Plan, Fit & Trim, Alley Cat, and Deli-Cat. Ralston also produces other pet products such as litter box filler, liners, and deodorizers. It sells its products in all channels of distribution, including grocery, mass merchandisers (e.g., Petco and PetSmart), club stores, pet specialty retailers, and wholesalers. In fiscal year 2000, Ralston had total sales of approximately $2.36 billion.
Childs, the proposed up-front purchaser of the assets to be divested by Nestle, is a Boston-based investment firm founded in 1995. Structured as a limited partnership, it has $728.8 million in capital and $367 in remaining equity commitments. Childs has a history of successfully developing the business of consumer products companies. In 2000, Childs acquired Hartz Mountain, a leading manufacturer and distributor of pet supplies in the United States.
The Commission's Complaint
The complaint states that the market in which to analyze the competitive effects of the proposed transaction is the sale of dry cat food in the United States. The complaint contends that the U.S. market for dry cat food is moderately concentrated and that the post-merger environment would be highly concentrated.
According to the Commission's complaint, the merger of Nestle and Ralston would substantially lessen competition in the dry cat food market in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act in the following ways, among others: 1) by eliminating direct competition in the sale of dry cat food between Nestle and Ralston; and 2) by increasing the likelihood that the combination of Nestle and Ralston will unilaterally exercise market power. Each of these results increases the likelihood that prices will be higher in the post-acquisition environment.
Terms of the Consent Order
Under the terms of the proposed consent order, Nestle would be required to divest Ralston's Meow Mix (i.e., Meow Mix and Meow Mix Seafood Middles) and Alley Cat brands to Childs no later than 20 days from the date that the Commission accepts the consent agreement for public comment, or January 31, 2002, whichever is later. The divestitures include all inventories and supplies related to these brands, all intellectual property held or licensed by the respondents, copies of all customer and supplier lists, all contractual rights, and other related approvals.
Also, within 180 days from the date the Ralston assets are divested, Nestle would be required to divest all international trademarks related exclusively to the Meow Mix or Alley Cat product lines outside the United States and Canada.
Other critical provisions of the proposed order relate specifically to the transfer of intellectual property and know-how necessary for Childs to successfully manufacture and market the brands it obtains. First, Nestle would be required to grant a patent license to Childs for the coating currently applied to Meow Mix products, as well as any pet product Childs chooses to manufacture in the future.
Second, for up to two years after the Ralston assets are divested, Nestle would be required to provide Childs with a supply of Meow Mix and Alley Cat products. This supply agreement will allow Childs time to implement its own plans to manufacture the two products or to enter into a co-packaging agreement with a third party. Further, during the time covered by this co-packing agreement (up to two years), Nestle would be required to provide Childs with technical assistance, as needed, including expert advice, assistance, and training related to the manufacturing of Meow Mix and Alley Cat brand dry foods.
The proposed order also contains terms to appoint a monitor to ensure Nestle's compliance with its commitments. The proposed monitor would be responsible for ensuring that Nestle: 1) provides a transitional supply of Meow Mix and Alley Cat products to Childs; 2) provides technical assistance and administrative services to Childs; and 3) during the transition, maintains a "firewall" between its employees that receive Childs' confidential information and Nestle employees operating the competing Nestle businesses.
The proposed order contains an Order to Maintain Assets that would require Nestle to maintain the assets to be divested pending their sale to Childs and to execute an agreement giving the monitor trustee all rights and powers necessary to satisfy its responsibilities regarding the transaction.
If Nestle fails to divest the assets as required by the order, the Commission could appoint a divestiture trustee to ensure that the divestiture takes place. If the Commission determines that Childs is not an acceptable purchaser of the assets to be divested, the sale would immediately be terminated or rescinded and the assets would be sold to another Commission-approved buyer within 180 days of the order becoming final.
Finally, Childs is required, for a period of five years, to obtain the Commission's approval before selling all or substantially all of the United States assets acquired in the divestiture. As stated in the Commission's Analysis Of Proposed Consent Order To Aid Public Comment, the Commission does not routinely require acquirers of divested assets to obtain approval before subsequent sales. However, in cases where the proposed acquirer's current plans indicate that there is a high probability that the assets will be resold, possibly within two to five years, it is appropriate for the Commission to include such a provision.
The terms of the order would terminate 10 years from the date on which the proposed consent order becomes final.
The Commission vote to accept the consent order and place a copy on the public record was 4-0, with Chairman Timothy Muris recused and Commissioners Sheila Anthony, Mozelle Thompson, and Orson Swindle issuing separate statements.
Commissioner Anthony's statement set forth her concerns about certain aspects of the divestiture proposal. She explained that the assets to be divested consist of little more than the two dry cat food brands, Meow Mix and Alley Cat, and expressed concern that the proposed buyer, J.W. Childs, a private equity investment firm, would "need to develop, among other things, its own research and development program, manufacturing facilities, distribution system, and sales and marketing operations." She added that along with the risk associated with building a business virtually from whole cloth, "[t]he risk to consumers is further heightened where, as here, the proposed purchaser is a financial buyer. When compared to dedicated industry participants, investment firms may have quite different incentives and goals in operating a business. For example, a financial buyer's business plan often involves selling the acquired business within a relatively short period of time."
She explained that her concerns were overcome in this case by factors relating to the nature of the dry cat food business and J.W. Childs' overall financial strength, "proven track record of good management and growth of acquired firms," and "experience in the pet industry with its Hartz Mountain line of pet care products." She concluded by stating that as a general matter she "remains skeptical of divestiture plans that require a purchaser to take brands alone, then build a competitive company from scratch" and "will closely examine divestiture proposals where the buyer is a financial company."
Commissioner Thompson noted that analysis of a potential buyer of assets to be divested is essentially a factual inquiry. In this particular case, the prospective buyer was subject to extremely close scrutiny due to its lack of experience in the market in question. Pursuant to the Commission's analysis, Commissioner Thompson's primary concern was whether or not the proposed buyer - a financial firm - would re-sell the divested assets in the short term to a buyer who would operate the business poorly or not at all, thereby defeating the intent of the Commission's Order. These concerns were resolved by inclusion of a prior approval provision in the proposed Consent Order. While Commissioner Thompson generally is cautious regarding the use of lengthy oversight provisions in consent orders, he believes that the use of a prior approval provision is appropriate in this instance to ensure that the integrity of the Commission's Order is maintained.
Commissioner Swindle's statement concerned the "unusual" requirement that J.W. Childs, a financial buyer, obtain prior approval before reselling the divested assets to another company. Because the Commission "determined that, in spite of any possible resale plans, [J.W. Childs] will develop and employ the assets as vigorously as Ralston would have done," Commissioner Swindle "questioned the need for imposing a prior approval requirement on J.W. Childs that we would not have imposed on a buyer that was less likely to resell the assets." In addition, given that the prior approval requirement lasts for five years and that markets are dynamic, Commissioner Swindle stated that the Commission might not be able to determine with a "high degree of confidence" whether the "prospective buyer of the resold assets will compete as effectively as Ralston would have competed in the absence of the Ralston/Nestle merger."
The proposed agreement will be published in the Federal Register shortly and will be subject to public comment for 30 days, until January 11, 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.
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 complaint, proposed consent agreement, and an analysis to aid public comment, as well as the Commissioners' statements, are available from the FTC 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: email@example.com; 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. 011-0083)
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