The Australian Competition and Consumer Commission will not oppose The Manildra Group’s proposed acquisition of assets of Weston Bioproducts and the Narrandera Flour Mill from George Weston Foods Ltd.
The decision has been made on the basis of an undertaking signed by Manildra to divest Weston Bioproducts' Queensland and Western Australian assets, and to submit to a price monitoring regime.
"The ACCC found that the divestiture of these two plants is necessary to maintain competition in the markets for starch and starch sugars in Australia", ACCC Chairman, Professor Allan Fels, said today.
Starch and starch sugars are key inputs in the confectionery, brewing, food and paper industries.
"Price rises in input goods such as these make their way down to price rises at the retail level and its consumers who end up out of pocket", Professor Fels said.
The court enforceable undertaking consists of two main elements:
- the divestiture of two of Weston Bioproducts' facilities, Moorooka in Queensland and Henderson in Western Australia. The ACCC must approve the purchaser or purchasers of the assets which account for approximately 8 per cent of starch production in Australia. With further investment, the Queensland plant could also manufacture starch sugars
- a price monitoring regime which requires Manildra to submit to a confidential independent audit every six months for 36 months enabling the ACCC to examine any cost or price changes that occur in the industry.
The ACCC aims to lock a competitive constraint into the market by requiring that the two plants are divested to a purchaser, or purchasers, which will compete independently of Manildra and the other producer in the market, Penfords. Manildra will retain the Narrandera flour mill and GWF's Altona plant in Victoria after the acquisition.
GWF is a publicly listed company, manufacturing a wide variety of food products. Weston Bioproducts is a division of GWF which produces gluten, starch and starch sugars. GWF has manufacturing facilities in most states of Australia and in New Zealand.
Manildra is a privately owned company which manufactures a wide range of products including flour, wheat starch, gluten, and starch sugars. It has manufacturing facilities for these products in Australia and overseas.
The merged firm's major competitor in the market will be Penford, a supplier of specialty starches. Penford's plants in Sydney and Tamworth produce corn and wheat starch, and gluten. Penford also produces varieties of starch sugars.
In the two other markets affected by the acquisition, flour and gluten, the ACCC found that:
- the proposed acquisition would not substantially lessen competition in the market for flour given the presence of other flour producers and the fact that the Narrandera flour mill is mainly used as an in-house provider of flour
- domestic prices of gluten would be constrained by actual and potential import competition. Gluten is an internationally traded commodity and imports already compete in the Australian market.
"This decision reaffirms the ACCC's position that it is unlikely to oppose a merger proposal where products are internationally traded such that imports exercise a credible competitive constraint on domestic prices", Professor Fels said.
The ACCC also noted the relationship between prices of gluten and starch, and their relationship with starch sugars, as a constraint on the pricing of each product. Flour is processed into gluten and starch, and starch can be further processed into starch sugars. Therefore, prices and demand for one product can influence the price and demand for the others. This limits a company's ability to use market power to charge higher prices for these products.
Market inquiries revealed that customers were already investigating the possibility of importing unmodified starch were Manildra to raise prices.
Manildra and GWF's customers include major global corporations in the paper, brewing, confectionery and food industries which the ACCC believes are well positioned to seek alternative sources of supply should Manildra attempt to raise prices. These customers have also developed innovative purchasing methods; both Nestle and Cadbury have conducted on-line bidding processes to purchase glucose.
The ACCC also considered the role of international markets in its investigation. Manildra competes globally, deriving more than half of its revenues from exports, and faces competition by international companies with substantial production capacities. Manildra expects that the acquisition will lead to efficiencies enabling it to continue to compete internationally. Pricing pressure from competitive international gluten markets is expected to play a role in restraining prices domestically.
The ACCC believes that the undertaking ensures that prices for starch and starch sugars will continue to face competitive constraints.
"It is vital that Australia remain a low cost producer of these products, particularly given the large number of industries, companies and jobs which depend on supplies of starch and starch sugars at competitive prices", Professor Fels added.
The undertaking will appear on the ACCC's public register in due course.