Baby Food Deal Is Dropped

Chalk up a victory for antitrust tradition over new doctrine in the aborted acquisition of baby food producer Milnot Holding Corp. by H.J. Heinz Co. The deal, which would have cut the number of American baby food makers to two from three, was scrubbed in late April following an adverse decision by the U.S. Court of Appeals for the District of Columbia and a nearly year-long battle to get the deal to completion. The court ruling could have a significant impact on acquisitions in other concentrated industries. In the final analysis, the appeals panel did not accept the merger partners’ argument that the efficiencies created by the merger were preferable to taking out one of the three largest competitors. The case was one of the first to reach the courts on the issue of using operational efficiencies to counter market concentration, as allowed in the merger guidelines followed by the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) in administering competition laws. Heinz and Milnot’s Beech-But brand are virtual also-rans in the baby foods market, which is dominated by Nestle SA subsidiary Gerber Products, which has a two-thirds market share. The $185 million deal was held up last year by the FTC but the U.S. District Court in the District of Columbia rejected the agency’s request for an injunction based on the partners’ efficiency argument that when combined they would form a stronger competitor against Gerber. Acting on the FTC’s appeal, the appeals court overturned the lower court and granted the restraining order, claiming that Heinz and Milnot had not persuaded it that the efficiencies were more important than the reduction in the ranks of competitors. Among other things, Heinz says that its Pittsburgh baby food plant operated under capacity and that the Beech-Nut plant in Canajoharie, N.Y., was inefficient. Harry Davis of Schulte Roth & Zabel says he thinks that Heinz and Milnot, owned by buyout firm Madison Dearborn Partners, delivered “a fairly powerful showing that the number two and number three companies combined would be a better competitor.” “I think this will affect how businesspeople will consider transactions,” he says. “As of now increased concentration, if it’s dramatic, will trump any efficiencies that result. There’s a real risk that the agencies and the courts will continue to look at concentration.” Shirley Johnson, chair of the national antitrust and trade regulation practice at Greenberg Traurig in Washington, says she thinks that the two companies may have made a mistake by not linking efficiencies to consumer benefits. “They did not say that prices were not going to be raised or that there would be consumer benefits,” she says. “There was nothing to show that competition would be increased.” The court decision could have a spillover into such industries as airlines, where merger activity is continuing after there has been significant concentration and reduction in the ranks of competitors. Heinz, which has a billion-dollar worldwide business in baby foods, says it was reviewing its options on the U.S. operation. A spokesman for Milnot did not return phone calls seeking comment on whether a new buyer will be sought for Beech-Nut.