Commission, May 16, 2012, No M.6286

(1)

Südzucker, the notifying party, is a German food company active in the areas of sugar production and marketing, food additives, frozen food, portioned food articles, bioethanol production and fruit juices concentrates and preparations. The sugar segment covers white sugar production from beet as well as the refining of raw cane sugar and marketing of sugar and by-products. Südzucker produces sugar in 29 beet sugar factories and three refineries in Germany, Belgium, Bosnia-Herzegovina, France, Poland, Austria, Slovakia, the Czech Republic, Hungary, Moldova and Romania.

(2)

ED & F Man (‘EDFM’) is primarily a commodity trading company. Its product portfolio comprises sugar, liquid by-products of sugar production such as molasses (liquid-products segment), coffee, tropical oils and biofuels.

(3)

Südzucker and EDFM are designated hereinafter as the ‘Parties’ while Südzucker is the ‘notifying party’.

(4)

On 19 September 2011, the Commission received a formal notification pursuant to Article 4 of the Merger Regulation by which Südzucker would acquire 24,99 % of EDFM’s share capital (the ‘proposed transaction’).

(5)

Pursuant to paragraph 54 to 57 of the Jurisdictional Notice sole control may be acquired de jure by a minority shareholder if it obtains the ability to exercise decisive influence over the other undertaking’s strategic commercial behaviour. The Subscription Agreement and the Articles of Association grant Südzucker special veto rights over strategic decisions, in particular over the annual budget, business plan and appointment of directors. Therefore, the proposed transaction would confer to Südzucker sole control over EDFM.

(6)

The proposed transaction thus constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

(7)

Based on its investigation in phase I, the Commission raised serious doubts as to the compatibility of the proposed transaction with the internal market and adopted a decision to initiate proceedings pursuant to Article 6(1)(c) of the Merger Regulation on 9 November 2011.

(8)

On 14 February 2012, the Commission adopted a Statement of Objections (‘SO’) pursuant to Article 18 of the Merger Regulation. On 28 February 2012, Südzucker responded to the Statement of Objections.

(9)

On 5 March 2012, an Oral Hearing providing the possibility for the notifying party to exercise its right of defence took place. SFIR, as a third party, also attended the Oral Hearing.

(10)

On 24 January 2012, Südzucker offered a first set of commitments. Following the Statement of Objections and the results of the market test, commitments were modified and an updated version of the commitments was submitted to the Commission on 16 March 2012. On 30 March 2012, the Parties offered certain clarifications and improvements in the final set of commitments.

(11)

Therefore, on 16 May 2012 the Commission adopted a conditional clearance decision pursuant to Article 8(2) of the Merger Regulation.

(12)

Südzucker is the largest European sugar producer and EDFM is the second largest sugar trader worldwide. EDFM is also active in the production of sugar in Europe via two refineries; the Brindisi refinery in the South of Italy, a joint-venture with SFIR and the DAI refinery in Coruche (Portugal). Their activities overlap or may overlap in the following categories: (i) the supply of white sugar in Italy and Greece, (ii) the supply of preferential raw cane sugar in the EEA, and (iii) the supply of molasses in several Member States, mainly in Central Europe.

(13)

Irrespective of the precise market delineation, the proposed transaction does not raise competition concerns in the supply of preferential raw cane sugar, molasses, and supply of white sugar in Greece. However, the proposed transaction raised competition concerns in the supply of white sugar in Italy.

(14)

Sugar (the proper term being sucrose) is the most common sweetener. It can be found in many natural foods (e.g. fruits and vegetables) but can only be extracted from sugar beet, which is grown in Europe and elsewhere and processed into sugar locally, or from sugar cane which is grown in more tropical climates.

(15)

Currently, 80 % of world sugar production is based on cane. While most of the sugar consumed in the EU is still beet sugar. However, since the 2006 EU sugar regime reform a bigger percentage of EU production is based on raw cane sugar.

(16)

The supply of sugar is regulated by the Common Market Organisation whose principles are set up in Regulation (EC) No 1234/2007. The sugar regime was established in 1967 to ensure a fair income to Community producers and to stabilise the market. EU producers could sell sugar at guaranteed prices, i.e. intervention prices which in the period 1996-2006 were significantly higher than the world market price. Production quota distributed amongst Member States kept the overall production within certain limits. Import levies were applied on external production and sugar surpluses were exported subsidised with export refunds.

(17)

Following a negative WTO ruling condemning in particular the export subsidies, the sugar regime was reformed in 2006 in order to increase the competitiveness in the sugar sector, stabilise the markets, guarantee the availability of sugar supplies and improve the market orientation of the sector by reducing some of the regulatory barriers.

(18)

The main features of the 2006 sugar reform were: (i) significant reduction of the overall European sugar beet production through massive quota renunciation, (ii) abolition of intervention prices (iii) tariff-free market access for the Least Developed Countries (‘LDC’) and for the African, Caribbean, Pacific (‘ACP’) countries as from 1 October 2009 on, (iv) suspension of export refunds for sugar as from September 2008, (v) only limited out-of-quota exports permitted, and (vi) establishment of a temporary restructuring fund to fund compensatory payments for voluntary production quota renunciations.

(19)

The quota renouncements led to a significant reduction of the number of Member States producing sugar thereby resulting in increased EU-wide trade and competition across borders. Furthermore, a large number of EU Member States, including Italy, have become EU sugar deficit countries with consumption exceeding domestic beet production.

(20)

Since the reform of the EU sugar industry was initiated from 2006/07 onwards, it was expected that EU domestic demand of approximately 16,7-17,1 million tonnes per annum would be covered by Member State beet quota sugar production of 13,3 million tonnes, with the remainder covered by imported sugar from traditional preferential trade partners. However, between then and now this has not been the case notably because expected imports from LDC/ACP-countries have been below the Commission’s expectations, with the result that quota stock levels have progressively fallen.

(21)

At the moment, raw cane sugar for refining may be imported into the EU from third countries under the following customs schemes: (i) Sugar imports from ACP/LCP countries (Everything But Arms initiative and Economic Partnership Agreements), (ii) CXL quotas, (iii) exceptional tariff rate quotas (TRQs), and (iv) other sugar import custom schemes.

(22)

The access to raw cane sugar from ACP/LDC countries or under CXL quotas is crucial and strategic for EU sugar producers since it is the only raw cane sugar that can be imported without prohibitive duties and quantities into the EU. However, in 2010, only 2,55 million tonnes of preferential raw cane sugar (including raw sugar from ACP/LDC countries and raw sugar under CXL quotas) were imported into the EEA. This is less than what was necessary to close the gap with European demand.

(23)

Furthermore, the 2006 sugar reform has led to a reduction of the number of players, thus reinforcing the pre-existing concentration trend in the EU sugar sector. The EU leading sugar producers trend towards vertical and horizontal integrations is still present on the market.

(24)

With respect to the relevant product market, the market investigation confirmed in respect of Italy previous Commission decisions defining separate product markets for the supply of white sugar to industrial processors and the market for the supply of white sugar to retailers.

(25)

The market investigation revealed that switching production from white sugar sold to industrial processors to white sugar sold to retailers may not be economically viable as claimed by the notifying party since this may require significant investments and would also imply the risk of losing customers. From a demand side perspective there is also limited substitutability between products sold to retail and industrial customers.

(26)

In relation to the relevant geographic market, contrary to what the notifying party submitted, the market investigation confirmed that the geographic market for the supply of white sugar is national. Customers and competitor across Italy confirmed both previous Commission’s decisions and national competition authorities’ decisions.

(27)

On the demand side, (i) industrial customers in the vast majority of cases buy from suppliers based in Italy, have national contracts and do not source directly from abroad; (ii) the few large players which do buy transnationally from trans-European players have to pay ‘Italian’ prices for their Italian purchases; (iii) industrial customers buy nationally, because security and regularity of supply and thus closeness to storage facilities are crucial factors for industrial processors and retailers; and (iv) while customers multisource they rarely switch their main supplier. These demand-side characteristics mean that suppliers who want to compete successfully in the overall market for industrial customers in Italy need to have access to an established customer base, possess a developed distribution and logistics network and dispose of good knowledge of local and national market conditions.

(28)

On the supply-side, (i) producers of beet sugar in Italy are constrained by non-tradable fixed production quotas which are set on a national basis; (ii) the large quantity of imports in Italy is the direct consequence of the quota system which limits beet sugar production in Italy and does not as such indicate competitive pressure exercised upon Italian producers by foreign players; (iii) foreign producers operate in Italy mainly through joint ventures with well-established Italian players; this tends to show that the Italian market has characteristics distinct from other markets in Europe; otherwise the big European producers would simply sell directly into Italy and not engage in joint venture agreements which force them to share profits; (iv) in recent years Südzucker’s strategy in Italy has been to compete with low prices and thus markedly different from its strategy in Germany or France where it maintained high prices; in a market wider than national transnational arbitrage would have defeated such separate strategies; (v) internal documents of the Parties indicate national marketing strategies per Member State; (vi) internal documents of the Parties indicate sales programs and price-setting at a national level; (vii) market boundaries along national borders are both reflected and reinforced by non-compete clauses based on Italy as reference territory in joint-venture agreements; and (viii) a submission by the Bundeskartellamt also points towards national market definition for Germany, with arguments which are similarly relevant and coherent for the Italian market.

(29)

In addition, price differences between Italy and Germany/France are not arbitraged away as should be expected to happen in the same geographic market and significant divergences in market shares from one Member State to another, even when those Member States are neighbouring, point towards the existence of national markets because of national supply and production strategies.

(30)

The supply of raw cane sugar is an upstream market to the production and supply of white sugar in the EU. Both Parties are active in the supply/delivery of raw cane sugar to European refineries (upstream) and in the production and supply of white sugar into the EEA (downstream).

(31)

In line with the findings in the ABF/Azucarera decision (Case COMP/M.5449), it was considered that the supply of raw cane sugar represents a separate relevant product market to be distinguished from the one for sugar beet. However, it cannot be excluded that a further distinction should be made between preferential raw cane sugar (including raw cane sugar from ACP/LDC countries, CXL and TRQ quotas and schemes) and other schemes.

(32)

With regard to the relevant geographic market, the market for the procurement of preferential raw cane sugar covers at least the ACP/LDC countries and could also comprise the main countries providing raw cane sugar under CXL and TRQ preferential quotas and duties such as Brazil, Cuba and Australia. However, the question whether the market could be even wider – eventually worldwide – can be left open as in any event the proposed transaction does not raise serious doubts irrespectively of the exact scope of the relevant geographic market.

(33)

Molasses is a by-product of the sugar refining process, and is not subject to a regulatory regime. There are two types of molasses, derived from either sugar cane processing (cane molasses) or sugar beet processing (beet molasses).

(34)

The market investigation did not confirm the argumentation of the Parties that the relevant product market for molasses encompasses the supply of both beet and cane molasses, irrespective of the end-use application. However, the question of whether the market for molasses has to be further delineated can be left open as no competition concerns would arise irrespective of the precise market definition.

(35)

In relation to the relevant geographic market, the notifying party is of the opinion that the market for molasses is at least EEA-wide. The market investigation was not conclusive with respect to the geographical scope of the market. Although it provided some indications that the market could — at least for beet molasses — be narrower than the EEA-wide scope as submitted by the notifying party, it also clearly shows that, from a customer perspective, national borders are not relevant when looking for supplies. However, while the market investigation showed that the market may be EEA wide, for the purpose of the decision, the question of the precise scope of the geographic market definition for molasses can be left open as no competition concerns would arise irrespective of the market definition retained (i.e. EEA-wide markets or national).

(36)

The Commission carried out a thorough investigation as to the structure and the functioning of the supply of white sugar markets, the supply of raw cane sugar and the supply of molasses concerned by the proposed transaction. As a result, the Commission found that the proposed transaction is likely to result in a significant impediment of effective competition through non-coordinated effects and creation of dominant position in the market for the supply of white sugar to industrial processors in Italy.

(37)

Südzucker is the most important player on the Italian market for the supply of white sugar to industrial processors. EDFM controls jointly with SFIR the sales of white sugar from the Brindisi refinery to industrial processors which is also an important player on the same product market in Italy.

(38)

Moreover, Südzucker and EDFM are geographically close competitors. Contrary to their competitors, they both have storage facilities and make sales of white sugar to industrial processors and to retailers in the whole territory of Italy.

(39)

Following the proposed transaction, the Parties would have high combined market shares of at least [50-60] % in the market for sales of white sugar to industrial processors in Italy with a significant increment added (conservatively estimated at [10-20] %).

(40)

Therefore, in an already concentrated industry, further consolidation takes place which further eliminates competition between two close competitors and creates a market leader unmatched by its competitors.

(41)

The proposed transaction would bring together the two most dynamic and fastest growing players in Italy. Südzucker and EDFM are the two competitors that can most easily adapt their quantities/sales in the Italian market.

(42)

Post transaction, Südzucker and EDFM would have the incentive and the ability to withdraw quantities and raise prices in Italy.

(43)

Moreover, the market investigation demonstrated that notwithstanding the fact that some market players are well established in terms of infrastructure, customer relationships or specific partnership with a sugar supplier, competitors would have limited ability, but no incentive and no intention to increase supply in case of price increase on the Italian white sugar market.

(44)

It was concluded that competitors, established in Italy or outside Italy, face capacity constraints and therefore are unlikely to increase supply if prices increase, and therefore to counteract such market behaviour by the post-merger entity as explained above.

(45)

On the basis of the facts that the Italian sugar market is a deficit country and the Italian sugar prices are high as compared to the sugar prices in other Member States of the EU, the security of supply is crucial for the customers in terms of both quantity and quality.

(46)

The market investigation showed that Italian sugar customers do not consider themselves to detain important buyer power vis-à-vis their sugar suppliers and are not likely to have possibilities of switching sugar suppliers.

(47)

Therefore, it was concluded that no countervailing buyer power can be attributed to Italian sugar customers in the relationship with their sugar suppliers and they do not constitute in this sense competitive pressure on the Italian sugar producers/suppliers including the Parties.

(48)

The market investigation did not confirm the notifying party’s view that there are no relevant barriers to enter this market.

(49)

Competitors claimed that the Italian market is characterised by relatively high market entry barriers, the access to input being the main market entry barrier in a deficit market environment. The market investigation also confirmed that the sugar market necessitates local knowledge, distribution channels and high investments costs.

(50)

Moreover, the market investigation did not reveal any entity interested in entering the market for supply of white sugar to industrial processors in Italy. To the contrary, the Italian white sugar market is rather characterised by market exits due to scarcity of essential input.

(51)

Therefore, it was concluded that entry in the relevant market is not likely and timely.

(52)

The Parties’ combined market shares remain below [30-40] % in the market for the supply of white sugar to retailers.

(53)

The market investigation demonstrated that the proposed transaction does not significantly impede effective competition in the market for the supply of white sugar to retailers in Italy.

(54)

The market investigation confirmed that EDFM has no sales of white sugar in Greece. With respect to the likelihood that EDFM could have constituted a potential competitor in Greece, there is no evidence at all that EDFM is likely to enter the Greek white sugar market in the near future.

(55)

Despite the genuine scarcity of preferential raw cane sugar available for the EEA and despite the fact that EDFM is an important independent player on this market, the proposed transaction is unlikely to have an impact on the other players given (i) the low quantities and percentage of Parties’ preferential raw cane sugar currently delivered to third Parties, (ii) the presence of a wide number of already vertically integrated players, (iii) the decreasing role of EDFM as an -independent trader over the last years (iv) the presence of alternative well-establish traders, in particular for the supply of CXL sugar that could readily replace EDFM in case it would stop supplying its current quantities to third party refineries and (v) the potentially low demand from Südzucker in DFQF (duty-free-quota-free) raw cane sugar for its refineries.

(56)

Therefore, it is concluded that the merged entity will have neither the ability nor the incentive to foreclose access to preferential raw cane sugar input to its competitors in the downstream market for the production of white sugar. In addition, given the high percentage of Parties’ captive sales and the scarcity of preferential raw cane sugar, the merged entity will have neither the incentive nor the ability to foreclose access to EEA customers of preferential raw cane sugar.

(57)

The Parties’ activities overlap with respect to the supply of molasses to both fermentation and farmers/animal feed customers. Depending on the geographic market definition, affected markets would arise at both the EEA and national levels.

(58)

Should the market be defined as EEA-wide, the combined entity will hold a market share of [30-40] % on the overall molasses market (i.e. comprising beet and cane molasses) for all applications. In case the market was to be delineated according to the molasses application, the proposed transaction thus brings no important change to the market structure for the highly volatile demand for molasses in animal feed. With respect to the supply of molasses to the fermentation industry, the post-merger entity will have a combined market share of around [40-50] % (Südzucker [20-30] % and EDFM [10-20] %). However, no substantiated concerns were expressed with respect to the impact of the proposed transaction for fermentation customers during the market investigation.

(59)

In Austria, the Parties’ activities overlap only with respect to the supply of molasses to compound feed producers. During the market investigation, compound feed manufacturers indicated that the proposed transaction will not affect their access to molasses or the price of it. Given the importance of fermentation customers as a stable and reliable source of demand, it is unlikely that the merged entity would be in a position to behave independently from its customers and competitors.

(60)

In the Czech Republic, Südzucker and EDFM are not closely competing with each other. Moreover, EDFM’s lack of dedicated molasses storage capacity in the Czech Republic limits its ability to play an important role in the market other than that of distributing the product.

(61)

In Belgium, Südzucker and EDFM supply different customers. Südzucker supplies primarily the fermentation customers. The market investigation confirmed that fermentation customers have alternative suppliers and know-how to organise alternative supplies from third parties or source directly from countries of origin outside the EEA. In animal feed, EDFM has similar market shares to other traders in the market. During the market investigation no substantiated concerns were expressed by any customer group.

(62)

In France, EDFM’s presence is very limited ([0-5] % of overall molasses sales), which adds to Südzucker’s modest [20-30] % market share.

(63)

In Germany, Südzucker and EDFM account for only a small percentage of the molasses sold for animal feed production. With respect to molasses supplied to the fermentation industry, the Parties are both present (Südzucker [20-30] % and EDFM [10-20] %) and face competition of comparable strength. During the market investigation, all the fermentation customers confirmed that they currently multisource their molasses needs and in case the merger entity were to request a higher price for molasses they would look for alternatives suppliers.

(64)

In Slovakia, Südzucker and EDFM are not closely competing to each other. The Parties’ activities primarily overlap with respect to the supply of molasses to farmers who confirmed during the market investigation that it is easy to switch away from molasses to other feed components.

(65)

In light of the above elements, it is concluded that the proposed transaction is not likely to lead to competition concerns with respect to the supply of molasses in the EEA or at national level.

(66)

In order to remove the identified competition concerns arising from the proposed transaction, the Parties proposed commitments under Article 8(2) of the Merger Regulation. The final commitments accepted as addressing the competition concerns identified by the Commission were submitted on 30 March 2012.

(67)

The final commitments consist of (i) the Divestiture by EDFM of all the shares currently held in Brindisi by EDFM corresponding to the […] % of the outstanding shares of Brindisi, and (ii) the transfer of the economic benefit of the Raw Cane Contracts. EDFM also undertook certain guarantees with respect to the Raw Cane Contracts.

(68)

Therefore, the Parties undertake, on top of the divestment of the shares of EDFM in Brindisi, the obligation to transfer the economic benefit of the Raw Cane Contracts to the new purchaser, while remaining free to choose the means of such transfer ensuring that Brindisi remains the final beneficiary of the current quantities and prices of the Raw Cane Contracts.

(69)

The final remedy package therefore removes competition concerns identified in a clear-cut way, as it provides (i) the divestiture of EDFM’s current participation in the Brindisi refinery, and (ii) the transfer of the economic benefit of the Raw Cane Contracts.

(70)

For the reasons mentioned above, the decision concludes that the proposed concentration will not significantly impede effective competition in the Internal Market or in a substantial part of it.

(71)

Consequently the concentration should be declared compatible with the Internal Market and the functioning of the EEA Agreement, in accordance with Article 2(2) and Article 8(2) of the Merger Regulation and Article 57 of the EEA Agreement.