Grocery Merger Failing the Smell Test

Germany's competition watchdog is threatening to block Germany's largest supermarket operator from buying a smaller chain.
A disagreeable union.

Karl-Erivan Haub, chief executive of Tengelmann, wants to sell the grocer's 451 Kaiser's supermarkets. Markus Mosa, head of Germany's largest supermarket operator, Edeka, would like to buy them.

Not so fast, says Germany's Federal Cartel Office agency.

The Bonn-based competition watchdog expressed significant reservations about the deal in a draft decision delivered to the two companies on Tuesday.

In a letter accompanying the nearly 260-page document, the agency made clear it will forbid the takeover in its current form.

“According to investigations up to now, the plan would lead to a further concentration of already highly dense market structures, especially in Berlin, Munich and several larger cities in North Rhine-Westphalia,” explained Andreas Mundt, the agency’s president.

The deal would also increase the purchasing power of the top echelon of Germany's supermarkets, hitting their competitors, he added. Many producers of grocery items would also lose an important alternative outlet.

Edeka and Tengelmann have until February 26 to persuade the regulator to reconsider. Only wide-ranging concessions will save the deal. The Cartel Office’s final decision on the proposed deal is scheduled for March 6.

Alain Caparros has repeatedly stated in recent months that Rewe is ready to take over chain stores from Kaiser's Tengelmann.

The main sticking point is the sale of Kaiser's stores to a third party. This would have an effect on procurement becasue a further buyer would be an alternative outlet for producers.

But it is questionable whether Edeka and Tengelmann are ready to turn stores over to third parties to save the takeover.

According to information obtained by Handelsblatt, the sites in dispute consist of about three-quarters of all the Kaiser's supermarkets owned by Tengelmann. If the antitrust agency were not to reduce the number of affected stores, the whole deal would not make sense anymore.

The sale of Kaiser's, which has been losing money for 15 years, would mean the end of an almost 150-year-long run by Tengelmann as a grocer. The company also owns the Obi building supply chain and KiK, a discount clothing retailer.

Officials at Tengelmann's headquarters in Mülheim an der Ruhr in northwest Germany said the company would evaluate the regulator's draft decision. In Hamburg, Edeka said it would not make any statement.

The head of Edeka's largest rival, Rewe, has positioned himself unambiguously. Alain Caparros has repeatedly stated that Rewe is ready to take over the Kaiser's stores from Tengelmann: “We would guarantee that all employees could keep their jobs.”

But the Cartel Office said on Tuesday that in many of the affected regional markets and municipal districts, a takeover of Kaiser's by Edeka and Rewe together with their respective discount arms Netto and Penny would reduce consumer options to only two local providers.

“In order to counteract the reservations, stores would have to be transferred not to Rewe, but to a competitor — for example, Migros — that is not part of the oligopoly identified by the antitrust agency,” said Maxim Kleine, an expert in antitrust law at the Norton Rose Fulbright law firm.

Migros, the leading grocery-store chain in Switzerland, could be interested in sites in Munich near the German-Swiss border.

The pressure is enormous.

“It will hardly be possible to find solutions in a little more than a week,” Mr. Kleine said. “But there is the possibility of withdrawing the announcement of the takeover and submitting a new proposal that takes the antitrust reservations into consideration.” That would gain time.

If there is no compromise, Edeka and Tengelmann have two possibilities. One would be to seek permission for the merger from Germany's minister of economics, Sigmar Gabriel, who has the power to override decisions by the Cartel Office.

The regulator would voice an opinion during the proceedings.

Edeka and Tengelmann made it clear early on that this option would be seriously considered. At the end of 2014, Edeka’s Mr. Mosa wrote a letter to parliamentarians in the Bundestag and argued for the takeover — including a reference to the situation of 16,000 employees at Tengelmann's Kaiser's stores.

The head of Tengelmann, Mr. Haub, pointed out that in a worst-case scenario, the supermarkets would be closed.

This particularly irritates Mr. Caparros, the managing director of Rewe. He said recently that there should finally be an end to employee anxiety. He intends to use all legal possibilities to assert Rewe's interests: “If necessary, we will conduct a sit-in in front of the ministry of ecnomic affairs.”

The other possibility Edeka and Tengelmann could pursue would be to contest a prohibition of the merger in the Düsseldorf Appellate Court. But that sort of legal proceedings can take years.

“I don't think that waiting for a judicial decision is an option for Edeka and Tengelmann,” Mr. Kleine said. “Especially in view of the economic situation of the supermarkets."

Video: Edeka’s “Supergeil” commercials went viral and won several awards. Supergeil means “super awesome.”

 

The author is an editor in Handelsblatt's companies and markets department, specializing in the trade sector. To contact the author: [email protected]