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[Federal Register Volume 66, Number 245 (Thursday, December 20, 2001)]
[Notices]
[Pages 65713-65716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31339]

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FEDERAL TRADE COMMISSION

[File No. 011 0083]

Nestle Holdings, Inc. and Ralston Purina Co.; Analysis To Aid 
Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint that accompanies the consent agreement and the terms of the 
consent order--embodied in the consent agreement--that would settle 
these allegations.

DATES: Comments must be received on or before January 11, 2002.

ADDRESSES: Comments filed in paper form should be directed to: FTC/
Office of the Secretary, Room 159-H, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580. Comments filed in electronic form should be 
directed to: [email protected], as prescribed below.

FOR FURTHER INFORMATION CONTACT: Phillip L. Broyles, Bureau of 
Competition, 600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 
326-2805.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec. 2.34 of 
the Commission's rules of practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for December 11, 2001), on the World Wide Web, at http://www.ftc.gov/os/2001/12/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. Comments filed in paper form should 
be directed to: FTC/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, NW., Washington, DC 20580. If a comment contains 
nonpublic information, it must be filed in paper form, and the first 
page of the document must be clearly labeled ``confidential.'' Comments 
that do not contain any nonpublic information may instead be filed in 
electronic form (in ASCII format, WordPerfect, or Microsoft Word) as 
part of or as an attachment to email messages directed to the following 
email box: [email protected]. Such comments will be considered 
by the Commission and will be available for inspection and copying at 
its principal office in accordance with Sec. 4.9(b)(6)(ii) of the 
Commission's rules of practice, 16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'') has issued a 
complaint (``Complaint'') alleging that the proposed merger of Nestle 
Holdings, Inc. (``Nestle''), and Ralston Purina Company (``Ralston'') 
(collectively ``Proposed Respondents'') would violate section 7 of the 
Clayton Act, as amended, 15 U.S.C. 18, and section 5 of the Federal 
Trade Commission Act, as amended, 15 U.S.C. 45, and has entered into an 
agreement containing consent orders (``Agreement Containing Consent 
Orders'') pursuant to which Respondents agree to be bound by a proposed 
consent order that requires divestiture of certain assets (``Proposed 
Consent Order'') and an order that requires Proposed Respondents to 
maintain certain assets pending divestiture (``Asset Maintenance 
Order''). The Proposed Order remedies the likely anticompetitive 
effects arising from Proposed Respondents' proposed merger, as alleged 
in the Complaint. The Asset Maintenance Order preserves competition 
pending divestiture.

II. Description of the Parties and the Transaction

    Nestle Holdings, Inc., is a corporation organized, existing, and 
doing business under and by virtue of the laws of the State of 
Delaware. This subsidiary of Nestle S.A. is the U.S. corporation that 
will be purchasing all of the outstanding Ralston shares. Nestle SA, 
the largest food corporation in the world, manufactures, distributes, 
and sells dairy products, soluble coffee, roast and ground coffee, 
mineral water, beverages, breakfast cereals, coffee creamers, infant 
foods and dietetic products, culinary products (seasonings, canned 
foods, pasta, sauces, etc.), frozen foods, ice cream, refrigerated 
products (e.g., yogurt, desserts, pasta, sauces), chocolate, food 
services, ophthalmological products, cosmetics, and pet foods. Nestle 
sells its pet food products in the U.S. through its Friskies division, 
including Alpo, Come ``N Get It, Mighty Dog, Friskies, Fancy Feast, Jim 
Dandy, and Chef's Blend. Nestle had worldwide sales of approximately 
81.4 billion Swiss francs and United States sales of approximately $7.8 
billion for all products in 2000.
    Ralston is a corporation organized, existing, and doing business 
under and by virtue of the laws of the State of Missouri. Ralston is 
the world's leading producer of dry dog and dry and soft-moist cat 
foods. The brands that Ralston manufacturers, distributes, and sells 
include Dog Chow, Puppy Chow, Cat Chow, Kitten Chow, Purina Special 
Care, Meow Mix, Purina O.N.E., Purina Pro Plan, Fit & Trim, Clinical 
Nutrition Management, Alley Cat, Deli-Cat, Thrive, Tender Vittles, 
Happy Cat, Chuck Wagon Stampede, and Main Stay. Ralston had worldwide 
sales of approximately $3 billion and United States sales of 
approximately $2.36 billion for all products for fiscal year 2000.
    Pursuant to a merger agreement dated January 15, 2001, Nestle 
agreed to purchase all of Ralston's outstanding shares of common stock 
in a transaction valued at $ 10.3 billion. Nestle intends

[[Page 65714]]

to call the merged entity Nestle Purina Pet Care.

III. The Complaint

    The complaint alleges that the market in which to analyze the 
competitive effects of the proposed transaction is the sale of dry cat 
food in the United States. Wet and dry cat foods constitute separate 
product markets. Wet cat food differs from dry cat food in production, 
ingredients, appearance, packaging, aroma, price, and convenience. 
Ralston's share of the dry cat food market across all channels of 
distribution is approximately 34%. Nestle has a market share of 
approximately 11% of the dry cat food market across all channels of 
distribution. The dry cat food market in the United States is 
moderately concentrated. The merger of Nestle and Ralston would 
substantially increase concentration in this market, raising the HHI 
level to more than 2400, an increase of more than 750 points. Entry 
would not be timely, likely, or sufficient to prevent anti-competitive 
effects in the relevant market.
    The Complaint alleges that the merger of Nestle and Ralston would 
substantially lessen competition in the dry cat food market in 
violation of section 7 of the Clayton Act, as amended, 15 U.S.C. 18, 
and section 5 of the Federal Trade Commission Act, as amended, 15 
U.S.C. 45, in the following ways, among others: (a) By eliminating 
direct competition in the sale of dry cat food between Nestle and 
Ralston; and (b) by increasing the likelihood that the combination of 
Nestle and Ralston will unilaterally exercise market power; each of 
which increases the likelihood that prices will be higher with the 
acquisition than they would be absent the acquisition.
    The Proposed Consent Order requires Proposed Respondents to divest 
the Meow Mix and Alley Cat brands of dry cat food to an up-front buyer, 
J.W. Childs Equity Partners II, L.P. (``Childs''), no later than 20 
days after the Commission accepts the Proposed Consent Agreement for 
public comment or January 31, 2002, whichever is later, to remedy the 
Commission's concerns. Childs is a Boston-based investment firm founded 
in 1995. Structured as a limited partnership, Childs has total 
committed capital of $982 million. The Commission is satisfied that 
Childs' acquisition of the divested assets will restore the competition 
lost as a result of the proposed merger of Nestle and Ralston. Childs 
has a past history of successfully developing the business of consumer 
products companies. The designated CEO of the businesses that will 
produce and sell the brands to be divested has expertise in 
manufacturing dry pet foods. Childs also owns the Hartz Mountain 
Corporation (``Hartz''), a leading manufacturer and distributor of pet 
supplies in the United States. Hartz sells its pet supplies and treats 
in the same retail outlets as the brands to be divested.

IV. Terms of the Proposed Order

    The Proposed Order resolves the Commission's antitrust concerns 
with the merger as discussed below.
A. Divestiture Provisions
    Paragraph II.A. of the Proposed Order requires Proposed Respondents 
to divest to Childs all of Proposed Respondents' rights, titles, and 
interests in and to all assets relating to the Meow Mix and Alley Cat 
brands. The Meow Mix brand includes the original Meow Mix product and 
Meow Mix Seafood Middles. Specifically, Proposed Respondents must 
divest all interests in the research, development, manufacture, 
distribution, marketing, and sales of the Meow Mix and Alley Cat brands 
of dry cat food products anywhere in the United States and Canada. 
Proposed Respondents also must divest any and all trademarks, service 
marks, trademark and service mark registrations, and pending trademark 
and service mark registrations that relate exclusively to the Meow Mix 
or Alley Cat brand of dry cat food products outside of the United 
States and Canada. Proposed Respondents must further divest all 
inventories and supplies held by, or under their control; all 
intellectual property owned by or licensed to Proposed Respondents; 
copies of all customer lists and supplier lists; all rights of Proposed 
Respondents under any contract; all governmental approvals, consents, 
licenses, permits, waivers, or other authorizations held by Proposed 
Respondents, to the extent transferable; all rights of Proposed 
Respondents under any warranty and guarantee, express or implied; and 
copies of all relevant portions of books, records, and files held by, 
or under the control of, Proposed Respondents.
    Paragraph II.C. further provides that if the Commission determines 
that Childs is not an acceptable purchaser of the assets to be 
divested, Proposed Respondents shall immediately terminate or rescind 
the sale of the assets to be divested to Childs and divest these assets 
at no minimum price to another purchaser that receives the prior 
approval of the Commission no later than 180 days from the date that 
this Proposed Order becomes final.
    Paragraph II.D. of the Proposed Order requires that Proposed 
Respondents grant a patent license to Childs for the coating applied to 
Meow Mix products. The license covers current Meow Mix products as well 
as any pet product Childs chooses to manufacture in the future. 
Paragraph II.F. of the Proposed Order requires Proposed Respondents to 
provide Childs with a supply of Meow Mix and Alley Cat products for a 
period of up to two years from the date of the divestiture. Paragraph 
II.G. requires Proposed Respondents to provide technical assistance to 
Childs, as needed, for a period of up to two years from the date of 
divestiture, which includes expert advice, assistance, and training 
relating to the manufacture of the Meow Mix and Alley Cat brands.
    Paragraph VI of the Proposed Order requires Childs, for a period of 
5 years, to obtain the Commission's approval before selling all or 
substantially all of the United States assets acquired in the 
divestiture. The Commission does not routinely require acquirers of 
divested assets to obtain approval before subsequent sales. In cases, 
however, where the proposed acquirer's current plans indicate that 
there is a high probability that the assets will be resold, possibly 
within two-five years, it is appropriate for the Commission to include 
such a provision. C.f., e.g., the Commission's final order in 
Albertson's, Inc., Docket No. C-3986.
B. Monitor Trustee Provisions
    Paragraph IV of the Proposed Order appoints a Monitor Trustee to 
monitor compliance with the terms of the Order. The Proposed Consent 
Order provides the Monitor Trustee with the power and authority to 
monitor the Proposed Respondents' compliance with the terms of the 
Proposed Consent Order, and full and complete access to personnel, 
books, records, documents, and facilities of the Proposed Respondents 
to fulfill that responsibility. In addition, the Monitor Trustee may 
request any other relevant information that relates to the Proposed 
Respondents' obligations under the Proposed Consent Order. The Proposed 
Consent Order precludes Proposed Respondents from taking any action to 
interfere with or impede the Monitor Trustee's ability to perform his 
or her responsibilities or to monitor compliance with the Proposed 
Consent Order.
    The Monitor Trustee may hire such consultants, accountants, 
attorneys, and other assistants as are reasonably necessary to carry 
out the Monitor Trustee's duties and responsibilities. The Proposed 
Consent Order requires

[[Page 65715]]

the Proposed Respondents to bear the cost and expense of hiring these 
assistants.
C. Other Terms
    Paragraphs V and VII-X of the Proposed Consent Order detail certain 
general provisions. Paragraph V authorizes the Commission appoint a 
divestiture trustee in the event Nestle fails to divest the assets as 
required by the Proposed Consent Order. Paragraph VII requires 
Respondents to provide a copy of the Proposed Consent Order to each of 
their officers, employees, and agents with managerial responsibilities 
for any obligation under the Proposed Order. Paragraph VIII requires 
Proposed Respondents to provide the Commission with periodic reports of 
compliance with the Proposed Consent Order. Paragraph IX provides for 
notification to the Commission in the event of any changes in the 
corporate Proposed Respondents. Paragraph X requires Proposed 
Respondents to grant access to any authorized Commission representative 
for the purpose of determining or securing compliance with the Proposed 
Consent Order. Paragraph XI terminates the Proposed Consent Order after 
ten years from the date the Proposed Consent Order becomes final.

V. Opportunity for Public Comment

    The Proposed Consent Order has been placed on the public record for 
thirty (30) days for receipt of comments by interested persons. The 
Commission has also issued its Complaint in this matter as well as the 
Asset Maintenance Order. Comments received during this thirty day 
comment period will become part of the public record. After thirty 
days, the Commission will again review the Proposed Consent Order and 
the comments received and will decide whether it should withdraw from 
the Proposed Consent Order or make final the agreement's Proposed 
Consent Order.
    By accepting the Proposed Consent Order subject to final approval, 
the Commission anticipates that the competitive problems alleged in the 
complaint will be resolved. The purpose of this analysis is to invite 
public comment on the Proposed Consent Agreement, to aid the Commission 
in its determination of whether it should make final the Proposed Order 
contained in the agreement. This analysis is not intended to constitute 
an official interpretation of the Proposed Order, nor is it intended to 
modify the terms of the Proposed Order in any way.
    By direction of the Commission, Chairman Muris recused.

Donald S. Clark,
Secretary.

Statement of Commissioner Sheila F. Anthony

    Yesterday, the Commission accepted for public comment a proposed 
consent agreement in this case. The evidence developed during the 
Commission's investigation unequivocally demonstrates that, absent the 
proposed relief, the acquisition by Nestle of Ralston would violate the 
antitrust laws and likely would result in harm to consumers of dry cat 
food. The parties have agreed to divest Ralston's Meow Mix and Alley 
Cat brands to J.W. Childs, a private equity investment firm. While I 
have concurred in the Commission's decision, I write separately to 
express my concerns about some aspects of the divestiture proposal.
    The assets to be divested consist of two proven cat food brands and 
little else. Standing alone, these brands do not constitute a complete, 
ongoing business. Rather, J.W. Childs will have to create a new 
competitor largely from whole cloth. In order to turn the divested 
assets into a viable business entity, J.W. Childs will need to develop, 
among other things, its own research and development program, 
manufacturing facilities, distribution system, and sales and marketing 
operations. Such a prospect is daunting even when the purchaser is a 
participant in the same or a closely related business--which is why 
divestitures of stand-alone businesses present the most successful 
formula for restoring competition.\1\
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    \1\ See, e.g., Federal Trade Commission Bureau of Competition 
Staff, A Study of the Commission's Divestiture Process (1999).
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    The risk to consumers is further heightened where, as here, the 
proposed purchaser is a financial buyer. When compared to dedicated 
industry participants, investment firms may have quite different 
incentives and goals in operating a business. For example, a financial 
buyer's business plan often involves selling the acquired business 
within a relatively short period of time.
    In the end, I am convinced that this is a rather unique situation 
and that consumers will be adequately protected by the proposed relief. 
Manufacturing and distribution in this industry segment is routinely 
and economically contracted out through ``co-packing'' arrangements. 
Moreover, this particular financial buyer, J.W. Childs, is financially 
strong, has a proven track record of good management and growth of 
acquired firms, and has some experience in the pet industry with its 
Hartz Mountain line of pet care products. These factors have led me to 
conclude that J.W. Childs is very likely to restore lost competition 
and preserve choices for dry cat food consumers.
    I wish to make it clear, however, that I remain skeptical of 
divestiture plans that require a purchaser to take brands alone, then 
build a competitive company from scratch. In addition, I will closely 
examine divestiture proposals where the buyer is a financial company. 
In most cases, I would prefer to see divested assets go to a company 
with a stronger likelihood of operating the business for the long term.

Concurring Statement of Commissioner Mozelle W. Thompson

    The Commission today has voted to accept a Consent Order that 
remedies competitive concerns in the dry cat food market stemming from 
Nestle S.A.''s (``Nestle'') proposed acquisition of Ralston Purina Co. 
(``Ralston''). Pursuant to the proposed Consent Agreement and Order, 
Ralston would divest its top-selling Meow Mix brand and its Alley Cat 
brand to investment firm J.W. Childs Equity Partners II, L.P. 
(``Childs''), owners of the Hartz Mountain line of specialty pet care 
products. For me, this decision was difficult because the continued 
competitiveness of these brands is so important to consumers.
    As always, the key issue facing the Commission in its analysis of 
the proposed remedy is whether or not the remedy will restore 
competition that would be lost as a result of the proposed merger. This 
is at its essence a factual inquiry, involving consideration of a 
multitude of factors, including the extent of the prospective buyer's 
industry know-how, its financial viability, its future marketing plans, 
and its capacity to research, develop, and make innovations to the 
relevant products.
    Our analysis here was made all the more difficult in that we were 
presented with a buyer that does not have a record of experience in the 
market in question, therefore, historical indicia of market 
competitiveness were not available for the Commission's review. As 
such, the Commission undertook an extraordinarily rigorous analysis of 
Childs and its ability to be competitive with the assets in question. 
Ultimately, my primary reservation was not about Childs' ability to be 
competitive in the dry cat food marketplace, but rather that Childs, as 
a financial buyer, might in the near term re-sell the assets in 
question to a buyer who will operate the business

[[Page 65716]]

poorly or not at all, thus defeating the purpose of the Commission's 
Order.
    These concerns are addressed in Section VI of the proposed Order, 
which provides that Childs' will not sell the acquired assets within 
five years of the date of the Order without prior approval of the 
Commission. While generally I am cautious about including lengthy 
oversight provisions in such orders, it is appropriate in this case 
because these provisions ensure that in the event of a resale by 
Childs, the Commission will be able to assure that the prospective 
buyer is committed to enhancing the assets in question, thus 
maintaining the integrity of the Commission's Order.

Concurring Statement of Commissioner Orson Swindle

    The Commission has accepted for public comment a consent agreement 
to resolve complaint allegations that the effect of Nestle S.A.''s 
(``Nestle'') acquisition of Ralston Purina Co. (``Ralston'') may be to 
substantially lessen competition in the market for the sale of dry cat 
food in the United States. To remedy these competitive concerns, the 
merging parties have entered into a consent agreement under which 
Ralston would divest its Meow Mix and Alley Cat brands to J.W. Childs 
Equity Partners II, L.P. (``J.W. Childs''), an investment firm that 
owns the Hartz line of pet care products. Because the divestiture to 
J.W. Childs is likely to replace the competition in the market for dry 
cat food that otherwise would have been lost due to the Nestle/Ralston 
merger, I have voted to accept the consent agreement for public 
comment.
    One provision in the proposed consent agreement is unusual and may 
raise concerns, however. Paragraph VI of the Proposed Consent Order 
requires J.W. Childs, for a period of five years, to obtain Commission 
approval before selling all or substantially all of the assets acquired 
in the divestiture. The Analysis to Aid Public Comment explains that 
the Commission does not routinely impose such prior approval 
requirements, but it is appropriate to do so ``where the proposed 
acquirer's current plans indicate that there is a high probability that 
the assets will be resold, possibly within 2-5 years.'' The purpose of 
the prior approval requirement is to make certain that whoever buys the 
resold assets from J.W. Childs would be a sufficient competitor to 
remedy the lessening of competition from the Nestle/Ralston transaction 
alleged in the complaint. See Paragraph VI.F. of the Proposed Consent 
Order.
    I agree that J.W. Childs warranted a hard look as a prospective 
buyer because it might resell the divested assets in the near future. 
It is possible that this close scrutiny would go for naught if J.W. 
Childs were promptly to resell the assets to a less qualified buyer. On 
the other hand, this risk is always present--even had the assets 
remained in Ralston's hands. I think that our approval of J.W. Childs 
as the buyer means that we have determined that, in spite of any 
possible resale plans, the company will develop and employ the assets 
as vigorously as Ralston would have done. Once we have made this 
determination, I question the need for imposing a prior approval 
requirement on J.W. Childs that we would not have imposed on a buyer 
that was less likely to resell the assets.
    I also think that the prior approval requirement may require that 
the Commission make a difficult determination. For example, assume that 
J.W. Childs seeks prior approval to resell the assets four years after 
the Nestle/Ralston merger has been consummated. The Commission 
presumably will have to determine whether the prospective buyer of the 
resold assets will compete as effectively as Ralston would have 
competed in the absence of the Nestle/Ralston merger. Given the passage 
of four years since the merger and the dynamic nature of markets, it 
may be difficult for the Commission to make this determination with a 
high degree of confidence.
    I welcome public comments on the prior approval provision included 
in Paragraph VI of the Proposed Consent Order, including any 
suggestions for distinguishing between situations where the additional 
relief may be justified and those where it is not.

[FR Doc. 01-31339 Filed 12-19-01; 8:45 am]
BILLING CODE 6750-01-P
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