Entanglements and Concentrated Markets Require Divestiture in Dairy Industry
On July 6, 2016, Danone S.A. (Danone) agreed to acquire The WhiteWave Foods Company (WhiteWave) for $12.5 billion.
WhiteWave is the leading manufacturer of fluid organic milk in the United States and one of the top purchasers of raw organic milk. Danone is the leading US manufacturer of organic yogurt (Stonyfield). Nearly 90 percent of the raw organic milk used by Danone to manufacture organic yogurt is supplied via a strategic agreement by CROPP Cooperative (CROPP). As of 2009, the strategic supply agreement between Danone and CROPP also includes Danone providing CROPP with an exclusive license for the production and sale of Stonyfield branded fluid organic milk.
WhiteWave and CROPP are the two largest purchasers and top competitors for purchasing raw organic milk from farmers in the Northeast US. Additionally, WhiteWave, CROPP and Danone-CROPP are the only nationwide competitors for the sale of fluid organic milk to retailers and have a 91 percent share of nationwide branded fluid organic milk: Horizon (WhiteWave), Organic Valley (CROPP) and Stonyfield (Danone-CROPP).
After the Danone-WhiteWave deal was announced, organic farming groups protested that the acquisition would result in less competition to buy organic raw milk from dairy farms in the Northeast because Danone-Whitewave would no longer be incentivized to compete aggressively with CROPP for the purchase of raw organic milk. The groups argued that the reduced competition would drive wholesale raw milk prices below a competitive level and even below cost. Organic food advocates also raised competitive concerns about placing the two top nationwide organic milk brands in the same hands.
On April 3, 2017, US Department of Justice (DOJ) announced a proposed settlement that requires divestiture of Danone’s Stonyfield Farms business to an independent buyer approved by DOJ.
In a complaint filed with the proposed settlement, DOJ alleges that CROPP and WhiteWave would have been able to reduce competition between them for milk purchases from dairy farmers in the Northeast US. The proposed divestiture is designed to solve that problem by “sever[ing] Danone’s and CROPP’s strategic partnership thereby eliminating the entanglements between CROPP and the merged firm.”
DOJ alleged that through years of operational cooperation, Danone and CROPP depended on each other for supply and revenue. The long-standing relationship between Danone and CROPP has also included the sharing of competitively sensitive information. These allegations supported the decision to require divestiture of the entire Stonyfield Farms business.
Further, the DOJ’s complaint alleges that downstream markets for fluid milk are transparent, in that competitors can observe each other’s customer relationships from the farm to the retail level. Companies can identify their rivals in each competitive interaction, which supports DOJ’s allegation of potential coordinated effects from an increase in concentration.
WHAT THIS MEANS:
DOJ will remedy harms to sellers–in this instance, dairy farmers–when it believes that a transaction will substantially lessen competition in markets that they sell to. This is most likely to be the case in agriculture where geographic markets are narrow.
The proposed settlement follows the Federal Trade Commission’s (FTC) guide on Negotiating Merger Remedies and its Merger Remedies Study, which we previously covered. The DOJ and FTC are more likely to accept a divestiture package when it includes an autonomous, on-going, operable business unit. Here, DOJ required divestiture of the entire Stonyfield Farms business, which included products outside of milk, such as yogurt. The DOJ remedy went beyond simply ending the Danone-CROPP relationship.
In industries with few players, merging parties should expect concerns about coordinated effects to be a focus of the government’s investigation.