On 17 February 2020, the first ever prohibition in a merger control case in Finland took place. The Market Court prohibited Kesko Oyj from acquiring Heinon Tukku Oy because the concentration would lead to a significant impediment of effective competition – the test applied in Finland – in the market for broadline distributors’ delivery sale of daily consumer goods to foodservice customers. The Market Court held that the competition concerns could not be removed even with commitments.
Background
Kesko is the sixth largest Finnish company and the third largest retail operator in northern Europe. Its shares are listed on Nasdaq Helsinki. It operates e.g. in the grocery trade, and through its Kespro business unit it provides services for foodservice customers and is engaged in wholesale trade of daily consumer goods. Heinon Tukku is a daily consumer goods wholesaler whose main customers are active in the foodservice sector.
Kesko submitted its merger control notification to the Finnish Competition and Consumer Authority (FCCA) in May 2019, after months of prenotification discussions with the authority. The FCCA opened an in-depth investigation (Phase II) into the proposed acquisition in June 2019. The investigation included two extensions to the Phase II deadline by the Market Court – an action that the FCCA has asked for relatively rarely until recently (see in more detail here) – the second of which was granted despite Kesko’s objection. The FCCA found in its investigation that the transaction would lead to a dominant position in the market for broadline distributors and that the concentration would significantly impede effective competition in the sale of daily consumer goods to foodservice customers. Consequently, on 18 November 2019, the FCCA asked the Market Court to prohibit the acquisition.
The decision of the Market Court
The Market Court seems to have assessed the matter thoroughly in its decision of nearly 200 pages. While describing the previous phases of the case takes up half of that, the reasoning of the Market Court is still a hefty 100 pages. The Market Court started its assessment by first determining the relevant markets, then assessing whether the concentration would significantly impede effective competition, and lastly considering whether the concentration could still be approved conditionally or is prohibition the only possible outcome.
In its assessment of the relevant markets, the Market Court sided with the FCCA, finding that the relevant product market is the broadline distributors’ delivery sale of daily consumer goods to foodservice customers. The relevant geographic market was found to be national.
While the exact market share figures have not been disclosed in the public version of the decision, the Market Court found that the combined market share of the parties to the concentration is in the range of 40-50 per cent. According to the Court, this would lead either to a dominant position or to a position where the concentration could significantly impede effective competition, especially taking into account that the market shares of the next two broadline distributors are considerably smaller. The Court also found that the evidence indicates that the parties to the concentration are close competitors. In its overall assessment, the Market Court found that the market for broadline distributors’ delivery sale of daily consumer goods to foodservice customers is especially vulnerable to the negative effects on competition brought by the concentration.
After finding that the concentration would significantly impede effective competition, the Market Court assessed whether there were any balancing factors (e.g. countervailing buyer power or potential competition) or efficiency gains that could have mitigated the negative effects to competition brought by the concentration, but did not find such factors or efficiency gains sufficient.
Finally, the Market Court considered whether the concentration could be approved conditionally. During the FCCA’s investigation, Kesko had proposed some behavioural remedies but the FCCA had stated that in this case solving the competition concerns requires a structural remedy (divestment). In Kesko’s view, it is not possible to propose structural remedies in this case. Because Heinon Tukku delivers products from all of its wholesale shops and central warehouse, a divestment, according to Kesko, would mean essentially the same as not acquiring Heinon Tukku. The Market Court found the behavioural remedies offered by Kesko insufficient to remove the competition concerns and consequently concluded that the concentration could not be approved even conditionally.
The FCCA commented on the Market Court’s decision in a press release promptly after the decision had come out, naturally stating that it was pleased with the decision. The FCCA believes that the decision will have a positive effect on competition benefitting both the Finnish foodservice industry and consumers at large. Kesko, on the other hand, is obviously disappointed.
The decision of the Market Court may be appealed to the Supreme Administrative Court. Kesko has stated that it is reviewing the decision and considering whether to appeal. The deadline for the appeal is 18 March 2020.
Final remarks
The role of economists in competition cases, including merger control cases, has increased during the recent years and is expected to remain important also in the future. Also in the case at hand economics played a big role. Both the FCCA and Kesko relied heavily on economic arguments. Kesko submitted expert economic opinions and had economists as its witnesses in the Market Court. As far as can be understood from the public version of the decision, the Market Court seems to have given deserved attention to the parties’ economic argumentation and assessed it thoroughly.
Since the entry into force of the merger control rules in Finland in autumn 1998, this was only the fourth time the FCCA has proposed to prohibit a concentration, the other proposals being from 2000, 2011 and 2013. In each of the three previous cases, the Market Court approved the concentration subject to conditions. It remains to be seen whether the decision in Kesko / Heinon Tukku marks the beginning of a new era or whether it is merely a rare exception – and what the Supreme Administrative Court has to say about it as the final instance if the decision is eventually appealed there.
Dittmar & Indrenius has not represented any party in this matter.