CELEX: 31994M0400
Language: en
Date: 1994-04-28 00:00:00
Title: COMMISSION DECISION of 28.04.1994 declaring a concentration to be compatible with the common market (Case No IV/M.400 - ALLIED LYONS / HWE-PEDRO DOMECQ) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31994M0400

COMMISSION DECISION of 28.04.1994 declaring a concentration to be compatible with the common market (Case No IV/M.400 - ALLIED LYONS / HWE-PEDRO DOMECQ) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 126 , 07/05/1994 P. 0000

 COMMISSION DECISION of 28.04.1994 declaring a concentration to  be compatible with the common market (Case No IV/M.400 - ALLIED  LYONS / HWE-PEDRO DOMECQ) according to Council Regulation (EEC)  No 4064/89  (Only the English text is authentic)  The paper version of the decision is available through the  sales offices of the Office of Official Publications of the  European Communities. PUBLIC VERSION MERGER PROCEDURE ARTICLE 6(1)(b) DECISION Registered with advice of delivery To the notifying parties Dear Sirs, Subject : <ind> Case No IV/M.400 - ALLIED LYONS/HWE-PEDRO  DOMECQ  <ind>  <ind> Notification of  24.03.1994 pursuant to Article 4  of Council Regulation No 4064/89  1. <ind> The above mentioned notification concerns the proposed  acquisition by Allied Lyons plc of sole control of the Hiram  Walker Europa/Pedro Domecq group, currently jointly controlled  by Allied Lyons plc and a Dutch holding company G. Carrizuelo  Investment BV, which is in turn controlled by Mr. Mora  Figueroa.  2. <ind> After examination of the notification, the Commission  has concluded that the notified operation falls within the  scope of the application of Council Regulation n* 4064/89 and  does not raise serious doubts as to its compatibility with the  common market.  I   THE PARTIES   <ind> Allied Lyons PLC (Allied)  3. <ind> Allied Lyons plc is a group of companies based in the  UK with interests in North America and in the whole of Europe.   The principal activities of the group are food manufacturing  (tea, coffee, bakery), brewing, wines and spirits and in  retailing in the UK (pubs, franchises, off-licences).  As far  as wines and spirits are concerned, Allied owns a wide range of  products, principally whisky, gin, liqueurs, cognac and  fortified wines and holds a portfolio of famous brands.  This  spirits and wines business is managed by its subsidiary, Hiram  Walker Group limited.   <tab> Hiram Walker Europa (HWE)  4. <ind> HWE was formed in 1968 by Hiram Walker Gooderham &  Worts Limited and the Mora Figueroa family.  In 1986, Allied  Lyons acquired joint control of this group together with Mr  Mora-Figueroa.  HWE is currently jointly controlled by Allied  and Grupo Carrizuelo Investment BV (Carrizuelo), which is owned  by [Deleted as a business secret.].  <ind> HWE owns and distils the whisky brand Doble V and is the  importer of some Allied brands into Spain.   <tab> Pedro Domecq  5. <ind> Controlled by HWE, Pedro Domecq is a producer and  distributor of spirits and wines, and more specifically  brandies, anise, sherry, whisky and light wines.  <ind> As a producer, Pedro Domecq, through Destilerías y  Crianza del Whisky SA, has de facto control of the DYC brand of  whisky.  <ind> As a distributor, Pedro Domecq distributes in Spain  HWE's whisky, imports in Spain other Allied's brands and  exports large volumes to Mexico.  <ind> In Spain, Pedro Domecq's products are distributed by two  subsidiaries : Commercial Domecq and Terry Distribuidora SA  (Tedisa), previously owned by Allied  and transferred to Pedro  Domecq in 1992.   <tab> Mr Mora-Figueroa  6. <ind> As a partner of Allied in HWE, Mr Mora-Figueroa is the  chairman of HWE and the managing director of Pedro Domecq.  He  has no other interests in the spirits and wines business except  through the HWE/Pedro Domecq group.  II   THE OPERATION  7. <ind> Under the proposed operation, Allied Lyons will obtain  control of a newly formed holding company, Spain Alecq BV which  will bring together the Hiram Walker Europa/Pedro Domecq group  of companies.  <ind> Carrizuelo, and indirectly Mr Mora-Figueroa, will retain  a 27% interest in Spain Alecq.  Carrizuelo will have therefore  certain minority protection rights but will not keep joint  control.  As a result of these transactions, Allied will obtain  sole control of HWE and the Pedro Domecq group through Spain  Alecq NV  <ind> Moreover, Carrizuelo will have the option to sell its  retained 27% interest in Spain Alecq to Allied for a six year  period.  <ind> Lastly, Allied will seek to purchase the remaining  shareholdings held by minorities in the HWE/Pedro Domecq  group.  III   CONCENTRATION  8. <ind> The notified operation constitutes a concentration  within the meaning of Article 3 of Regulation n* 4064/89.  The  move from joint control to sole control is a concentration  because it will bring about a lasting change in the nature of  control held by Allied.  After completion of the proposed  operation, Allied will acquire sole control of the HWE/Pedro  Domecq group, currently jointly controlled by Allied and Mr  Mora-Figueroa.   IV   COMMUNITY DIMENSION  9. <ind> The aggregate worldwide turnover of the parties  exceeds 5,000 million ECU.  The aggregate Community wide  turnover of each party exceeds 250 million ECU.  They do not  achieve more than two-thirds of their turnover in one and the  same Member State.  The operation has therefore a Community  dimension.  V   COMPATIBILITY WITH THE COMMON MARKET  A <tab> MARKET DEFINITION   <tab> a) <tab> Relevant product markets  10. <ind> Although Allied Lyons has a wider portfolio of  spirits and wines (including gin, rum, port and table wine),  the only product categories where both Allied Lyons and  HWE/Pedro Domecq are present in the European Community are the  following : whisky, sherry and brandy.  With respect to brandy,  the overlapping activities of the parties are marginal.  The  Commission will therefore focus on the effects of the  transaction on the whisky and sherry sectors.   <tab> Whisky  11. <ind> Whisky is usually distilled from maize, barley or  rye.  The most important types of whisky (Scotch, Irish,  Bourbon and Canadian) vary in certain respects but have in  common a cereal as primary product and the very typical  flavour, irrespective of all differences arising from the type,  specialities of the brands and the age of the whisky [See  Commission decision of 13.12.1985 on the case IV/30.570 - sole  distribution agreements for whisky and gin.].  As a result,  consumers usually regard whisky as distinct from other  spirits.  12. <ind> Although a further segmentation within the whisky  market can also be made mainly on the basis of origin (Scotch,  Irish, Bourbon and Canadian), a certain degree of  substitutability can be found to exist between these types.  In  any event, a more precise definition of the market is not  required in this case as most of the whisky traded in the  geographic area affected by this operation is Scotch or Scotch- based.   <tab> Sherry  13. <ind> Sherry is a special type of fortified wine which is  strictly defined by the area in which it is produced, namely  the Jerez region of Spain.  There are, however, wines of a  style similar to sherry which are considered as sherry-style  wines and which are produced in other countries (UK, Cyprus,  Australia and South Africa), usually known as British sherry,  Cyprus sherry, etc... and elsewhere in Spain (such as  "montilla", produced in Montilla, near Córdoba).  14. <ind> Numerous factors enable to distinguish Jerez sherry  from sherry-style wines.  First of all, "sherry", which is the  English name for Jerez, refers to a fortified wine produced in  the Jerez region of Spain.  Similar wines from Spain outside  the Jerez region are prevented by the Spanish authorities from  making any reference to sherry.  With respect to other sherry- style wines, produced outside Spain, the term sherry cannot be  used in the EC without the designation British or Cyprus.   Nonetheless, the issue of the use of the word sherry will be  reviewed in 1996, at which time it is possible that the terms  British sherry and Cyprus sherry will be prohibited in the EC.   The origin is therefore an important factor of distinction  between the different products.  15. <ind> Secondly, there is a considerable price gap between  the Jerez sherry and sherry-style wines.  Prices vary according  to quality and reputation.  Premium brands, namely the Jerez  brands, are much more expensive than the British sherry brands.   In particular, in the two countries that will be subject to  examination, the UK and Ireland, prices range from £ 5 for a  bottle of Jerez to £ 3 for British sherry, and from IR£ 6.5 to  IR£ 3.5 respectively.  16. <ind> Thirdly, consumers habits  confirm the distinction  between the Jerez sherry and sherry-style wines.  In the UK and  the Republic of Ireland,  which will be defined below as the  geographic affected markets, expensive sherries, namely Jerez,  are often used for special occasions (mainly Christmas) while  cheap sherries, namely British, are bought for everyday use.   Moreover, over the last ten years the sales of sherry in the UK  and in Ireland have been decreasing regularly whereas the sales  of British sherry have remained relatively steady.  The parties  state that this shows that British sherry has been gaining in  market share at the expense of Jerez sherry.  This could be  true if all sherries were substitutable.  However, this could  also mean that these two products are subject to different  consumer demand trends.  In this respect, the Jerez sherry has  suffered from having a less fashionable image and from failing  to attract young drinkers although it has kept a loyal customer  base who would not easily switch to British sherry.  17. <ind> Origin, prices, demand trends, consumer habits in the  UK and in Ireland are several factors which seem to distinguish  Jerez sherry from sherry-style wines.  Nonetheless, the  question whether they constitute two distinct product markets  can be left open because the operation does not lead to the  creation or the strengthening of a dominant position, even in  the narrowest market of Jerez sherry.   <tab> b) <tab> Geographic reference markets   <tab>  <tab> Whisky  18. <ind> Allied Lyons produces Scotch whisky under its own  brands in Scotland and sells it worldwide.  HWE/Pedro Domecq  distils grain spirit in Spain and blends it with Scottish malt  whisky bought in bulk from Allied's plants in Scotland.   <ind> Although markets for spirits are undergoing a process of  internationalisation, they have traditionally been and in some  cases remain mainly national, in particular because of the  different consumer preferences and distribution networks.  This  seems to be particularly true in Spain, where traditionally  legal requirements and import restrictions operated as a strong  barrier and resulted in imported whisky being sold at a price  that was usually double the price of Spanish products.  19. <ind> The situation seems to have changed significantly in  recent years.  Legal restrictions to imports have disappeared  and excise duties and VAT rates have been reduced and, although  demand for whisky in Spain has increased as a whole, sales of  Spanish whisky have doubled since 1983 but total sales of  Scotch have multiplied by four.  However, the fact that  consumer preferences in Spain are different from those observed  in other countries together with the fact that the two Spanish  brands of whisky (Doble V from HWE and DYC from Pedro Domecq)  are still very successful in Spain lead to the conclusion that  for the purposes of this transaction it is the Spanish market  for whisky that should be analysed.  Nevertheless, the question  whether Spain constitutes a distinct geographic market can be  left open since the operation does not lead, in any event, to  the creation or strengthening of a dominant position in this  market.   <ind>  <tab> Sherry  20. <ind> Sherry from Jerez is only produced in Spain and then  exported worldwide.  However, different factors tend to show  that very often sherry markets remain mainly national.  In  particular, the fact that sherry producers appoint one  distributor per country on the basis of exclusive distribution  arrangements and that consumer preferences vary from country to  country.  In addition, trade for sherry seems to be only one- way (from the source to the final destination) since inter- state trade of sherry does not seem to be very frequent.  21. <ind> As a result of the above, the effects of the present  transaction in the sherry market will be analysed at national  level mainly in the UK and in the Republic of Ireland.   However, the question whether they constitute two distinct  geographic markets can be left open since the operation does  not lead to the creation or strengthening of a dominant  position in any of them.  B <ind> ASSESSMENT OF DOMINANCE   <ind> a) <ind> Integration of Allied Lyons / HWE / Pedro  Domecq group  22. <ind> Before the completion of the proposed concentration,  the parties are to a considerable extent vertically integrated    23. <ind> On the one hand, Allied Lyons uses HWE/Pedro Domecq  as its distributor in the countries where Pedro Domecq is  active as a distributor, namely Spain and Mexico, where Allied  Lyons has no activity as a spirits and wines distributor.  Long  John, Allied Lyons' less important whisky brand in terms of  market share (0.6% of the Spanish market) is currently  distributed in Spain by Larios.  [Deleted as a business  secret.].  <ind> On the other hand, HWE/Pedro Domecq's brands are  distributed by Allied Lyons through its own vertically- integrated distribution structure in certain countries where  Pedro Domecq does not have its own distribution network.  This  is the case in Italy, the UK, the Netherlands, Argentina,  Portugal, Denmark and Brazil.  24. <ind> As far as sherry is concerned, Allied Lyons  distributes Pedro Domecq's brands in the UK.  In the Republic  of Ireland , Pedro Domecq's sherry brands are distributed by a  third party, Fitzgerald, owned by Pernod-Ricard.  25. <ind> As a result of the above, despite marginal exceptions  (Long John or sherry in Eire), most of Allied Lyons' brands are  distributed by Pedro Domecq and vice versa.  After the  operation, there will not be any substantial change in this  vertical integration.   26. <ind> Besides, HWE and DYC already rely on Allied Lyons for  the production of their brands Doble V and DYC.  As a matter of  fact, these two "Spanish whiskies" are produced from a blend of  bulk Scotch whisky source from Allied Lyons and a locally  distilled grain spirit.   <tab> b) <tab> Dominance  27. <ind> Taking into account the market definitions given  above, the only markets where the combination of the activities  of the parties will lead to a significant increase of their  market presence after completion of the operation are as  follows :  <tab> Affected <tab> <tab> Allied Lyons (92) <tab> <tab>  HWE/Pedro Domecq <tab> Total Country <tab> + product <tab> Vol. <tab>  Val. <tab> Vol. <tab>  Val. <tab> Vol. <tab> Val. Spain (whisky) <tab> 16% <tab> [1] <tab> 30.8% <tab> [2] <tab>  46.8% <tab> [3] UK (Jerez Sherry) <tab> 26.9% <tab> [4] <tab> 2.2% <tab> [5]  <tab> 29.1% <tab> [6] Ireland (Jerez Sh.) <tab> 47.3% <tab> [7] <tab> 10.8% <tab> [8]  <tab> 58.1% <tab> [9]   <ind> [1] <ind> Between 15% and 20%  <tab> [2] <ind> Between 20% and 25%  <tab> [3] <ind> Between 35% and 40%  <tab> [4] <ind> Between 25% and 30%  <tab> [5] <ind> Less than 5%  <tab> [6] <ind> Between 30% and 35%  <tab> [7] <ind> Between 50% and 55%  <tab> [8] <ind> Between 5% and 10%  <tab> [9] <ind> Between 60% and 65% All figures have been deleted for business secret reasons and  replaced by ranges.    <ind>  <ind> (NB: Market shares are of retail sales.   Consequently, they should be regarded as estimates of  "intermediate" sales.)   <ind> The market shares in those markets characterised by the  existence of heterogeneous products due to brand image, etc,  are better represented by value data, and not volume.  This is  particularly true for whisky in Spain.  28. <ind> Furthermore, these market shares are to be considered  with respect to the total volume and/or value of each affected  market.  <tab> Affected market <tab> <tab> Year 1992 Country <tab> Product <tab> Volume (1) <tab> Value (2) Spain <tab> Whisky <tab> 9312 <tab> [Business secret] UK <tab> Sherry <tab> 2880 <tab> [Business secret] Ireland <tab> Sherry <tab> 74 <tab> [Business secret]   <tab>  <tab> (1) Thousands of 9 litre cases  <tab>  <tab> (2) Million ECU  <tab>  <ind> (sources : International Wine and Spirit Record  for volumes; Allied estimates for values)  29. <ind> These figures show the small value of the Jerez  sherry market in Ireland in volume or value terms, whereas the  sherry market in the UK and the whisky market in Spain are of  greater significance.  As a matter of fact, within the EU,  Spain holds, in terms of volumes, the second rank for sales of  whisky, just behind the UK.  30. <ind> The market trends for these two products should also  be taken into account.  Whisky consumption in Spain has  increased more than three-fold over a 10-year period.  The  dynamic growth of whisky in Spain is expected to continue  although at a lower rate (3 to 5% per annum).  On the contrary,  sherry consumption has declined by 30% in the UK and Ireland  over the last 10 years.  31. <ind> Despite strong positions in the affected markets, the  parties will not hold a dominant position in these markets  because of the absence of high barriers to entry and the  presence of strong competitors and powerful purchasers.   <ind> Low barriers to entry  32. <ind> Concerning whisky, any supplier can source bulk  whisky (malt or blended) directly from one of the many blenders  in Scotland, Ireland or even America.  Furthermore, stocks of  mature whisky are currently available on the market.  <ind> Concerning sherry, the product is to be produced and  delivered from the Jerez region in Spain.  This does not  constitute a barrier to access to supplies because there are  many producers of sherry in this area from whom a  wholesaler/retailer can purchase sherry.  Besides, excess  stocks of sherry are currently available on the market.  <ind> The access to the products is therefore possible for any  wholesaler/retailer who would like to enter the market or to  increase his sales in Spain or in the UK and Ireland.  33. <ind> Material aspects such as Member States' requirements  for labelling, for using national language or bottling (bottle  sizes for spirits are harmonised throughout the EC) do not  constitute significant barriers to entry.  34. <ind> With respect to transport costs, their significance  varies, as to the product and the area where it is shipped.  <ind> Transport costs from Scotland to Spain for Scotch whisky  are not significant.  The total cost of transport from a bonded  warehouse located in Scotland of one case of 12 x 70 cl bottles  of whisky represents some 3% of the price to retailers in  Spain.  Because of the relatively high level of prices of  whisky, transport costs do not constitute a barrier to entry.  <ind> On the contrary, transport costs for Jerez sherry  shipped from the Jerez region of Spain to the UK and Ireland  are more significant.  From Spain to the UK, the transport  costs of one case of 12 x 75 cl bottles of sherry represents on  average 8% of the price to retailers.  From Spain to Ireland,  it reaches on average 12%.  Nonetheless, it has to be taken  into account that the most important share of this transport  cost is generated not from the shipping from Spain to Ireland  but from the delivery from the distributor to the  wholesaler/retailer.  <ind>  The breakdown of the transport costs is on average as  follows :   <tab> From Spain to distributor <tab> From distributor to  wholesaler / retailer To the UK <tab> 4,2% of the price to distributors <tab> 4,0% of  the price to wholesalers / retailers To Ireland <tab> 5,3% of the price to distributors <tab> 7,5%  of the price to wholesalers / retailers   <ind> Taking into account this breakdown, the level of  transport costs from Spain, the only area where Jerez sherry is  available, to the UK or Ireland is not a real barrier to entry.   On the contrary, the level of transport costs in Ireland for  the delivery of products from the distributor to the  wholesaler/retailer is relatively high.  The relevant level of  trade to enter this market is however the first one, namely,  from Spain to Ireland.  In this respect, the fact that Jerez  sherry is only produced in Spain implies that all producers  selling in Ireland will have to bear the same costs.   Consequently, as far as producers are concerned, transport  costs do not constitute a barrier to entry.  35. <ind> The parties are producers and distributors to  wholesalers and retailers.  At this level of trade, duties and  VAT do not constitute a barrier to entry because they are paid  only when the goods are released for consumption in a domestic  market.  The EC system of registered "bonded" warehouses  enables producers to supply spirits and wines free of tax from  their own bonded warehouse to others.  At the same time,  wholesalers and large retailers may decide to purchase abroad  when the national distributor's prices are higher.  In  particular, some Spanish suppliers have acquired whisky from a  distributor in The Netherlands.  [Business secret].  The tax is  payable by the retailer where the goods leave the bonded  warehouse for the supermarket/shop shelves.  At this level of  trade, duties and taxes do not therefore constitute a barrier  to entry.  36. <ind> Although most of the commercial relationships between  distributors and producers are based on exclusive distribution  arrangements on a national basis covered under the EC  Commission Regulation for exclusive distribution n* 1983/83,  distributors are free to sell goods elsewhere on request.  Any  wholesaler/retailer who would intend to enter the market or  increase his sales would not be therefore prevented to do so by  these agreements.  As it was stated above, retailers do source  outside their own country from foreign distributors.  From a  demand point of view, exclusive distribution arrangements  between producers and distributors do not therefore constitute  significant barriers to entry.  <ind> With respect to new producers, exclusive distribution  arrangements do not constitute a high barrier to entry because  a lot of independent distribution companies are available both  in Spain in the UK and Ireland.  37. <ind> In such markets where brands play a major role, the  impact of advertising on the market is proportionally greater.   With  respect to the effects of advertising expenditure on  sales, the following facts are to be taken into account.   <ind> As far as sherry in the UK and Ireland is concerned, the  decline in sherry drinking is partly due to a low level of  marketing investment which has probably contributed to maintain  the less fashionable image of sherry.  This shows that an  appropriate advertising campaign by a competitor would enable  it to revive the image of sherry and to gain market share, in  particular amongst young consumers.  <ind>   <ind> In Spain, a significant correlationship has been found  between the advertising expenditure and sales each year for  three standard trade marks of Scotch whisky (Ballantine's, J&B  and Johnnie Walker Red Label), which would tend to show that,  at least in this expansion period, any brand could be  introduced in the Spanish market, provided that an adequate  advertising campaign is carried out.  Within these three  brands, the Johnnie Walker Red Label evolution is the most  interesting.  In a period of five years, the owner of the  brand, thanks to a significant advertising expenditure, was  able to stop the decline of sales and to regain market shares.   <ind> Through the correlation found, it can be calculated that  in order to achieve [Business secret] cases of 9 litres of  yearly sales (more than any of the existing brands), it would  be necessary to spend [Between 25% and 30%] in advertising.   Some of the main competitors of the parties have sufficient  resources to enable them to spend these amounts, and they would  then be able to sell into the Spanish market if prices rose.   Advertising cannot therefore be considered as a possible  barrier to trade even in a special market as Spain.   <ind> Presence of competitors on the market  38. <ind> From a demand point of view i.e. wholesaler/retailer  trade level, there are many alternatives in the market were  Allied Lyons would try to use its new position after the  operation to increase prices or reduce discounts.  <ind> As a matter of fact, several producers with famous  brands, wide portfolios and a similar distribution organisation  are active in the affected markets :   <ind>  <ind> In Spain, the future Allied Lyons/HWE-Pedro  Domecq group will face competition from strong international  producers such as IDV, United Distillers or Seagram which have  respectively a market share by volume for whisky of around 24%,  10% and 7%.  Moreover, these competitors own famous brands such  as J & B, Johnnie Walker or Chivas.   <ind>  <ind> In the UK, the main competitors in the sherry  market are IDV (19%) and González Byass (11%).   <ind>  <ind> In Ireland, the main competitors for sherry are  Williams and Humbert (15%), Gónzalez Byass (8%), Seagram (8%)  and IDV (5%).  Strength of purchasers  39. <ind> The main purchasers of both whisky and sherry are  powerful wholesalers or retailers such as Continente or Pryca  in Spain; Sainsbury or Tesco in the UK and Quinnsworth or  Dunnes Stores in the Republic of Ireland.  These purchasers  have considerable bargaining power especially with respect to  prices and discounts, given their possibilities to obtain  supplies from alternative sources (see point 38 above).   <tab> Conclusion  40. <ind> Having regard to the degree of integration attained  by the parties prior to the concentration, the combined effect  of low barriers to entry and the existing activity of strong  competitors and powerful purchasers in the affected markets  leads to the conclusion that the proposed operation will not  lead to a situation of dominance.  VI    ANCILLARY RESTRAINTS  41. <ind> The deed of warranty, undertaking and covenant signed  by the parties provides that, during a period of three years  after the completion of the operation and a period of three  years after completion of the sale - if applicable - by  Carrizuelo of shares in Spain Alecq BV :   <tab> 1. <ind> the  seller will not directly or indirectly  carry on any business in the same sector as Spain Alecq BV   <tab> 2. <ind> the  seller will not canvass the custom of any  person, firm or company who has within one year prior to  completion been a frequent customer of any member of the  HWE/Pedro Domecq Group.   <tab> 3. <ind> the seller will not induce any present employee  of any member of the HWE/Pedro Domecq Group to become one of  his employees.   <tab> 4. <ind> the  seller shall not adopt, use or carry on  business in the spirit and wine sector under any name  incorporating the trade marks or any name substantially of  confusingly similar to any of the marks owned by the HWE/Pedro  Domecq Group.   <ind> These agreements are directly related and necessary to  the implementation of the concentration and are therefore,  ancillary within the meaning of the Regulation.  42. <ind> For the above reasons, the Commission has decided not  to oppose the notified operation and to declare it compatible  with the common market. This decision is adopted in application  of Article 6(1)(b) of Council Regulation No 4064/89.  For the Commission,