FTC Frowns on a Blending of Claussen And Vlasic by a Hicks Muse Company

A leveraged buyout firm rarely winds up on the antitrust hot seat for executing an acquisition. But private equity firms could find it harder to avoid tussling with merger regulators when they push one of their favorite plays – rolling up mature, fragmented consumer goods industries that feature brand names with leadership positions. A potentially important tipoff of hard-nosed regulatory attitudes toward LBO-driven consolidation emerged in October when the FTC challenged a deal aimed at uniting two of the nation’s best-known pickle makers, Vlasic and Claussen, in the portfolio of Hicks Muse Tate & Furst Inc. On the surface, the regulator’s opposition was somewhat surprising since the pickle industry – which is fragmented, has a lot of private labels, and manages virtually no growth – is fertile territory for a consolidation play. But antitrust experts say the bigger issue to the FTC, which voted 5-0 to block the deal, is how competition and pricing would be affected by uniting the two key brands. Moreover, the market subject to reduced competition, in the agency’s view, is not the entire pickle industry but the refrigerated pickle sector, which Claussen dominates and in which Vlasic is a far-distant second. Pinnacle Foods Corp., a Hicks Muse portfolio company that owns Vlasic, had agreed in May to acquire Claussen from Kraft Foods Inc. An FTC complaint pointed out that Claussen controls 85% of the refrigerated pickles market and Vlasic only 5% but said that Vlasic’s sliver “served as the greatest competitive constraint” on Claussen. The complaint also maintained that Vlasic’s leading share in shelf-stable pickles, while a separate market, offered consumers “sufficient substitution” possibilities and served as a “competitive constraint.” “As the two leading national pickle brands, Vlasic and Claussen have engaged in a unique rivalry that will be lost if this acquisition is permitted to go forward,” the FTC said in its complaint. Antitrust experts say that private equity firms are used to going through the antitrust review by the FTC or U.S. Justice Department in the same way that strategic buyers are screened. But they say that the issues involved in the pickle case suggest that financial buyers may have to be more careful in pushing future consolidation plays and pay more attention to such regulatory nuances as postacquisition effects on pricing and the probability that new entrants won’t be coming into a flat, unpromising market. Charles E. Biggio, an antitrust attorney at Akin Gump Hauer & Feld, says that it is unusual for the government to battle mergers in consolidating, mature industries but that regulators maintain concern because “what sets prices is the competition between them (merging firms).” “Both agencies have been focusing on the importance of brands in determining what the relative market is and in evaluating the likely potential market entry of either private-label or new brands, even when the potential entrants are large companies that are very good at branding,” he states. “They want to know what price is commanded by Brand A versus Brand B and how consumers will shift in regard to pricing,” Edward P. Henneberry, of Howrey Simon Arnold & White, says that LBO firms get the same regulatory scrutiny as strategic players. “If there is some potential for competitive overlap, it will get reviewed,” he says. In that regard, the probability that no new entrants will be coming into the market is a strike against the deal and should kindle concerns in rollups involving other industries that have run out of growth, an area unappealing to anyone but cash-flow-mind private equity firms. “There are not going to be new entries in these older, mature, no-growth businesses. The way the government is looking at it is that there is not going to be any entry, and they are going to be very concerned about taking away the only remaining competition that is in place,” Henneberry says.