The Australian Competition & Consumer Commission (ACCC) has expressed preliminary competition concerns about Saputo's proposed acquisition of the Tasmanian-based cheese business of competitor Lion Dairy & Drinks.
On 26 April, Saputo announced it had entered an agreement with Lion Dairy & Drinks to acquire its speciality cheese business for $280 million on a cash-free and debt-free basis, to be paid in cash and available credit. The business's revenue was $192 million for the 2018 calendar year and employs around 400 people. Saputo said the acquisition would “further diversify its product offering”.
The agreement would see Saputo acquire Lion’s Tasmanian cheese processing plants, located in Burnie and King Island, as well as Lion’s cheese brands, including South Cape, King Island Dairy and Tasmanian Heritage.
It currently owns a milk processing plant in Smithton, Tasmania. In Australia, Saputo produces dairy products including cheese, fresh milk, butter, cream and milk powder. Saputo’s Smithton processing plant produces bulk milk powder, and bulk butter and cream.
The ACCC said the proposed acquisition would combine processing plants of the second and third biggest buyers of raw milk in Tasmania, which currently compete separately with the biggest buyer, Fonterra.
“We are concerned that combining these two operators may lead to Tasmanian dairy farmers being paid lower prices for their raw milk,” ACCC deputy chair Mick Keogh said.
The statement of issues said: “The market for the acquisition of raw milk in Tasmania is already concentrated. The proposed acquisition would combine processing plants of the second and third largest acquirers of raw milk, and significantly increase Saputo’s market share. Lion currently appears to offer a competitive alternative to the other processors on price and non-price terms.”
Keogh said: “If Saputo acquires the Burnie and King Island Lion plants, we will be left with a structure where two companies, Fonterra and Saputo, buy more than 80 per cent of the raw milk produced in Tasmania.
“Each would have a market share several times bigger than the next largest buyer of raw milk, Mondelez-Cadbury.”
The ACCC said some farmers told the commission Lion has been offering competitive contract terms, including better prices for winter milk and an option to fix the price of a percentage of their milk for up to three years.
It is investigating whether these features may be lost after the proposed acquisition.
“While other processors will remain in Tasmania, the ACCC’s preliminary view is that the proposed acquisition may decrease the intensity of competition for raw milk resulting in lower farmgate milk prices or less advantageous terms of supply being offered to farmers,” the statement of issues said.
No impact on cheese supply
The ACCC has also examined the impact of the proposed acquisition on the supply of cheese. Saputo’s cheese brands include Coon, Sungold and Devondale. The ACCC’s preliminary view is that the proposed acquisition is unlikely to raise competition concerns in this area, it said.
“Lion focuses on premium speciality cheeses, and Saputo focuses on everyday cheeses. Our initial analysis suggests that a combined Saputo-Lion would face continued competition from a range of suppliers, including domestic cheese producers, supermarket private labels, and cheese importers,” Keogh said.
The ACCC invites submissions by 22 August 2019. The ACCC’s final decision is scheduled for 26 September 2019.
Saputo released a statement acknowledging ACCC's statement of issues and that its final decision is due on 26 September. It would “continue to work closely with Lion Dairy & Drinks and the ACCC with a view to securing the ACCC’s approval as soon as practicable,” the statement said.