Guinness and Grand Met Merger Approval Likely to Result in Biggest Merger Divestiture Ever
The $36 billion merger between Guinness PLC and Grand Metropolitan PLC was given tentative approval by the Federal Trade Commission after the companies agreed to sell three of their top-selling premium brands of liquor. According to the FTC, Guinness and Grand Met are competitors in the sale and distribution in the United States of premium Scotch and premium gin. The Commission was concerned that the proposed merger, which will create the seventh largest food and drink company in the world, would eliminate substantial competition between the two companies and increase concentration in these already very highly concentrated markets, resulting in higher prices to consumers. The proposed settlement would require Guinness and Grand Met to divest their Dewar's Scotch, Bombay Original gin, and Bombay Sapphire gin brands, worldwide, to one or two acquirers acceptable to the Commission.
"We anticipate that this will be the largest divestiture of assets ever ordered by the FTC in a merger case and will ensure consumers the continuing benefits of competitive markets for these products." said William J. Baer, Director of the FTC's Bureau of Competition.
The FTC worked closely with the European Commission's Competition Directorate, and the Canadian Competition Bureau, as well as Australian and Mexican authorities, to achieve the necessary remedies and to assure that its settlement would be complementary to the enforcement actions already taken by the EC and contemplated by others. The agreement is the product of close coordination between the FTC and these competition authorities. Baer added, "International cooperation of this kind is increasingly important in reviewing mergers because it ensures that competition is maintained and the merging parties are not confronted with conflicting national obligations."
Guinness is a public limited company with its headquarters in London, England. It is one of the world's top-selling alcoholic drink businesses and total sales of all its products amounted to about $8 billion in 1996. In the premium Scotch market, Guinness owns and distributes Johnnie Walker Red and Dewar's White Label Scotch. In the premium gin market, Guinness owns and distributes Tanqueray gin.
Grand Met's principal place of business is in London, England. In 1996, Grand Met had total sales, for all products, of about $14 billion. Grand Met's premium Scotch brands in the United States include J&B Rare, J&B Select and The Famous Grouse. The company's premium gin brands in the United States are Bombay Original and Bombay Sapphire.
Total U. S. sales for premium Scotch are about 3.2 million 9-liter case equivalents, which represents over $600 million in retail sales. Total U. S. sales of all premium gin is about 2.2 million 9-liter case equivalents, which represents over $400 million retail sales, the Commission said.
According to the FTC's complaint detailing the charges, in the market for premium Scotch, Guinness with Johnnie Walker Red and Dewar's, is the largest competitor in the United States with about a 68 percent share. Grand Met is the second largest, controlling about 24 percent of the market with its J&B brands. Together, they would control approximately 92 percent of all United States premium Scotch sales, the complaint says. In the premium gin market, Guinness is the largest competitor in the United States with about a 58 percent share with Tanqueray. Grand Met is the third largest, with about a 15 percent share with its Bombay brands. Together, the two companies would control approximately 73 percent of all United States premium gin sales.
Entry into the relevant geographic market, the United States, would not be timely, likely, or sufficient to prevent anticompetitive effects, the complaint alleges. The effects of the proposed merger would be to eliminate direct competition between Guinness and Grand Met, increase the likelihood that the merged company would unilaterally exercise market power and increase the likelihood of collusion, the FTC charged.
The proposed consent order would resolve the charges alleged in the complaint.To resolve the Commission's concerns, the parties have agreed to divest the worldwide rights to the Dewar's Scotch brand and both Bombay gin brands. The proposed order also would require the parties to divest certain additional assets, including Scotch distilling capacity, but only if the Commission determines that the acquirer needs such assets to compete effectively. This condition is meant to ensure that there remains an uninterrupted supply of Dewar's Scotch after divestiture. Because Bombay Original and Bombay Sapphire gins are produced by an independent third party, the agreement also states that Guinness and Grand Met may be required to produce these gins for the acquirer, in England, should the third party not wish to continue to do so for the acquirer. This condition also would ensure an uninterrupted supply of the premium gins.
The consent order would require that the companies divest Dewar's, Bombay Original and Bombay Sapphire to a Commission approved buyer within six months from the date the parties signed the consent agreement. If they do not divest in the requisite time, the Commission may appoint a trustee to divest the assets.
Accompanying the proposed consent order is an Asset Maintenance Agreement which requires Guinness and Grand Met to preserve and maintain the competitive viability of all of the assets until the divestiture.
The Commission vote to approve the proposed consent agreement was 4-0 with Commissioner Mary L. Azcuenaga concurring in part and dissenting in part. In her statement, Commissioner Azcuenaga said, "I cannot support the complaint as written.
"Although at first glance the markets may sound wacky (to use the vernacular), the complaint merits our careful attention. For reasons that are not apparent, the proposed product markets exclude brands not marketed throughout the United States, if there are any, that compete head to head with the national brands.. . . and excludes domestically bottled gin brands . . . I see no reason for these seemingly arbitrary exclusions.
"More importantly, the price limitations in the product markets do not seem justifiable.As recognized in Commission precedent, competition occurs along a continuum of prices as brands compete with products above and below their prices.. . .
"Despite my disagreement with the allegations in the complaint, I find reason to believe that the merger of Guinness PLC and Grand Metropolitan PLC would violate the law on the basis of a broader market and that an order to remedy the lessening of competition in the broader market would be appropriate. The divestiture of the Dewar's Scotch and Bombay gin brands will have some remedial effect in the broader market, and for that reason, I have voted to accept the order for public comment."
A summary of the proposed consent agreement will be published in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, 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 per day.
Copies of the complaint, proposed consent agreement and an Analysis to Aid Public Comment are available on the Internet at the FTC's World Wide Web site at: http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-3128; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. 971 0081)
Office of Public Affairs
William J. Baer,
Bureau of Competition
George S. Cary,
Bureau of Competition