Slovak Antimonopoly Office Prohibits a Merger in the Bakery Industry

Slovak Antimonopoly Office prohibits a merger in the bakery industry

The Slovak Antimonopoly Office prohibited the concentration of two bakery producers (Agrofert/Euro Bakeries), arguing that it would give Agrofert a dominant position which would significantly distort effective competition on the relevant bakery products markets in Slovakia. This is the first time since 2006 that the Antimonopoly Office prohibited a concentration in Slovakia. Earlier this year, the same concentration was approved by the Czech Competition Authority, subject to remedies.

Factual background By its decision No. 2012/FH/3/1/029 of 29 June 2012, the Antimonopoly Office of the Slovak Republic (“AMO”) prohibited the concentration of undertakings Agrofert Holding a. s., Czech Republic (“Agrofert”) and Euro Bakeries Holding, a. s., Czech Republic (“Euro Bakeries”) resulting from the agreement from 29 September 2011 between Agrofert as a purchaser and European United Bakeries S.A. (Luxembourg), the parent company of Euro Bakeries, as a seller (the “Agreement”). AMO found that the merger would create a dominant position of Agrofert which would significantly distort effective competition on relevant markets of production and sale of fresh bread, general fresh bakery products and other general fresh sweet and salty bakery products in the territory of the Slovak Republic. This first-instance decision is not yet valid because Agrofert submitted an appeal. During the proceedings, United Bakeries withdrew from the Agreement, declaring the missing AMO clearance to be the main reason. Summary of the Decision

Agrofert is a holding company (approx. 200 trading and manufacturing businesses) active predominantly in the Czech Republic and Slovakia (but also in other countries such as in Hungary) in agriculture, food and chemical industry. Its activities on the Slovak bakery and pastry markets are carried out through three separate companies of which Penam Slovakia, a.s. (“Penam”) is the most important. AMO has identified Agrofert as the largest pre-merger player on the Slovak bakery and pastry market; this pre-merger market was characterised by a rather wide gap between two leading undertakings (Agrofert and Euro Bakeries) and the rest. Euro Bakeries, itself also a holding company active on the bakery and pastry markets primarily in the Czech Republic and Slovakia, carries out its activities in Slovakia through two companies: Prvá Bratislavská Pekárenská a.s. and Peza a.s. AMO has identified Euro Bakeries as the second largest pre-merger player on the Slovak bakery and pastry market. According to Agrofert, there are no relevant differences between individual bakery products and so there is a high level of substitution between them from thecustomer’s perspective. . In addition, Agrofert stated that bakery and confectionary can be substituted easily in terms of the price too, when a higher price of one type of bakery products (such as cereal products) will immediately lead to increase in demand for other type of bakery products (non-cereal). Therefore, Agrofert argued in favour of one relevant product market for confectionary and easily substitutable general bakery products and separate relevant product market for frozen pre-baked products. Taking into account the level of demand substitutability and also a certain supply substitutability, AMO came to a different conclusion, identifying three separate relevant product markets, namely: (i) production and sale of fresh bread (excluding breads suitable for toasting); (ii) production and sale of

fresh standard bakery products (rolls, buns, kaiser rolls); and (iii) production and sale of other fresh sweet and salty bakery products. AMO also found Agrofert to be the largest undertaking on each one of the above three relevant markets, both pre- and post-merger, with its pre-merger market shares ranging between 20 and 40% (between 2009 and 2011), and its post-merger market shares ranging between 40 and 50%. In its comments on AMO’s conclusions, Agrofert strongly opposed these findings, claiming, among other things, that (i) they are based on incomplete and unreliable data, i.e. mainly on data provided to AMO by the 17 biggest bakery and pastry producers in Slovakia; (ii) AMO, when defining markets and establishing market shares, has completely ignored other bakeries active on the Slovak market (according to Agrofert’s own estimates, there are about 320-340 bakeries in Slovakia rather than 17 biggest producers considered by AMO); (iii) AMO has not included frozen pre-baked bakery products ('bake-off' products) nor exports and imports into the relevant product markets. As to the relevant geographical market, the AMO held that it covers the territory of the Slovak Republic. It was determined from Agrofert’s and Euro Bakeries’ positions on the relevant product markets and on potential effects of the notified concentration on effective competition on the relevant markets that activities of the parties to the concentration overlap in the territory of the western and central Slovakia. The second main issue disputed between Agrofert and AMO was the countervailing buyer power of international and national supermarket chains (the “Supermarkets”). Agrofert maintained that the Supermarkets are the most significant distribution channel of both undertakings (approx. 79% of distribution), exert decisive countervailing buyer power that prevents the future merged entity from behaving independently from its customers. It also argued that, due to significant spare production capacity on the market, the likelihood of merger parties finding an alternative distribution channel was incomparably smaller than the Supermarkets’ possibility of finding alternative suppliers.

However, AMO rejected these arguments and maintained that since Agrofert and Euro Bakeries were main pre-merger bakery products suppliers to international Supermarkets, the Supermarkets’ post- merger supplier choice would be almost completely eliminated, so diminishing their countervailing buyer power. To substantiate its findings of Agrofert’s post-merger dominance, AMO has also pointed out that (i) Agrofert’s production capacity is many times greater than the individual production capacities of its closest competitors and that (ii) unlike other locally active competitors, Agrofert is capable of ensuring effective Slovakia-wide supplies of fresh bakery products. Having said that, the AMO held that the notified concentration of Agrofert and Euro Bakeries will create Agrofert’s dominant position, resulting in the creation of important barriers for effective competition on the relevant product markets as defined above. Agrofert’s dominant position also consists in its ability to behave independently towards its subscribers and competitors on the relevant products markets. Comments

This is the first time since its Tesco/Carrefour decision from 2006 that the AMO prohibited a concentration in Slovakia. The same concentration was notified to the Czech competition authority where it was approved on condition Agrofert will sell four of its bakeries. In Slovakia, Agrofert refused to submit the remedies for the notified concentration as it disagreed with AMO’s findings including definition of the relevant markets. In its extensive reasoning, the AMO used only the HHI analysis and did not apply other available econometric analysis, such as the SSNIP test when defining the relevant markets.

Source: Michal Miko, Jakub Berthoty, The Antimonopoly Office of the Slovak Republic prohibits a merger in the bakery industry (Agrofert/Euro Bakeries), 29 June 2012, e-Competitions, N°49560, www.concurrences.com For further information contact Michal Miko ([email protected]).