Monopoly Clampdown A Failed Supermarket Deal

Germany's antitrust agency, fearing that supermarket giants have become too powerful, has blocked a merger between the country's largest, Edeka, and a failing one, Tengelmann. Critics argue it has missed its mark.
Down for the count? Mr. Haub, CEO of Tengelmann, suffered a major setback in his bid to sell Tengelmann's supermarket chain.

When the 345-page decision by the Federal Cartel Office finally reached the headquarters of Tengelmann Group, it was met with consternation and disbelief.

One of the oldest supermarket chains in Germany has failed to secure its future. About 16,000 jobs in Germany could now be at risk.

It marks a bitter defeat for Tengelmann and chief executive Karl-Erivan Haub, who represents the fifth generation of his family to manage the company. The antitrust agency's decision bars Mr. Haub from selling the 451 Kaiser's Tengelmann supermarkets to Edeka, Germany's largest supermarket chain.

In the grounds for its decision, the Cartel Office argued that if Edeka owned even more supermarkets, there will be too little competition for customers in some cities in Germany where the two chains already have a stranglehold. The competition watchdogs suspect that this would likely lead to higher prices.

"I have rarely seen a merger case in which the prospects of reaching an agreement were so low," Andreas Mundt, the president of the Federal Cartel Office, conceded. The talks never even reached the point of becoming negotiations, he added. "The parties were extremely far apart."

Concentration is not especially high in an international comparison. A look at the pitched battles of Edeka and Rewe show just how tough the competition has been. Justus Haucap, Institute for Competitive Economy

His view of the situation is clear: There is too much concentration in the food retail sector, and the four big players – Edeka, Rewe, Aldi and the Schwarz Group, which owns the chains Lidl and Kaufland – are already too strong.

According to Mr. Mundt, eight retail chains controlled 70 percent of the market in 1999 – compared to four chains that control 85 percent of the market today.

Critics argue this analysis misses the mark. Not only has Germany long been controlled by discount retailers like Aldi and Lidl that force prices to be held down, but the increasing role of online platforms is another aspect that has routinely been missed from the cartel authorities' calculations.

"The concentration is not especially high in an international comparison. A look at the pitched battles of Edeka and Rewe show just how tough the competition has been," said Justus Haucap, head of the Düsseldorf-based Institute for Competitive Economy and a former head of Germany's monopoly commission, an independent advisory panel to the government. "Add to that the strong role played by discounters, who dictate prices for the market."

Complaints about the Cartel Office's decisions are also coming from other sectors. Media companies and telecoms firms that have also faced its wrath argue that anti-trust authorities have failed to move with the times. Matthias Döpfner, head of German media group Axel Springer, which was barred in 2006 from buying television rival Pro Sieben Sat1, complained of double standards.

"Google, with a market share of 90 percent, faces no restrictions," Mr. Döpfner argued last week at an international cartel conference in Berlin.

Deutsche Telekom chief, Timotheus Höttges, had similar complaints, arguing that free messaging services like Whatsapp will cost the global telecommunications industry as much as €40 billion in lost revenue by 2016. Because companies like Whatsapp and Facebook have low revenues and offer their services for free, they have escaped the eye of anti-trust authorities. Some experts including Mr. Haucap argue this needs to change.

Meanwhile the bricks-and-mortar industries, including supermarket chains, are struggling to hold onto market share.

Taking on the big supermarkets. Cartel office head Andreas Mundt.

 

Wednesday's decision marked the second time the Cartel Office has thwarted the two supermarket chains' plans to merge. Tengelmann had recently resubmitted its bid, including spinning off about a third of its stores, in the hopes of meeting the anti-trust authorities' concerns.

What happens next for the supermarket chain is unclear. Holding onto its supermarkets is not an option for Tengelmann, which also owns a chain of hardware stores and clothing discounters, even though the traditional company began its business with grocery stores.

The grocery division, known as Kaiser's Tengelmann, has been losing money for the last 15 years, unlike its more profitable hardware chain OBI and textile discounter KiK. The supermarkets are simply too small to compete with bigger players in the industry. Kaiser's Tengelmann has seen its market share decline to only about 1 percent today.

Mr. Haub recently closed 27 stores and laid off 350 employees. While grappling with the cartel office, he even threatened to shut down the remaining stores if the agency refused to approve their acquisition by Edeka.

But now that the deal has fallen through, shutting the entire operation is hardly an option for someone who hopes to derive at least some profit from his assets. Mr. Haub is also loathe to gain the reputation of maliciously destroying jobs.

It remains our goal to avoid breaking up the chain at all costs, which would lead to the loss of many jobs. Tengelmann Spokesman

Germany's strong labor unions wouldn't go without a fight either. The Ver.di service workers' union is increasing pressure on the company.

"Ownership creates obligations," said a union representative, who declined to be named. "And Mr. Haub needs to examine how all potential solutions will affect the employees."

Tengelmann, at any rate, still hopes to sell its supermarkets as a package deal, despite the high hurdles created by the Cartel Office.

"It remains our goal to avoid breaking up the chain at all costs, which would lead to the loss of many jobs," a company spokesman said defiantly after the ruling.

All of this suggests that Tengelmann is on the verge of filing an appeal against the Cartel Office. The company has indicated as much. Edeka also said in a statement it intends to "determine next steps as soon as possible."

The case could eventually reach Germany's highest court, but such an appeal can take years – years that Kaiser's Tengelmann may not have. Even if Mr. Haub continues to support the money-losing division, the business is headed toward stagnation. Without investments, the stores will fall into decline and employees will gradually drift away from the chain.

This isn't exactly what a bright future looks like.

 

139 -WTB 2013

 

For the Cartel Office, it was the procurement market where some of the biggest concerns lay.

Edeka, said Mr. Mundt, spends €25-30 billion on the products it purchases from manufacturers, and could have greater bargaining power if the merger went through. A takeover of Kaiser's Tengelmann would have increased its purchases by another €1-2 billion. "That makes a difference," he said.

Mr. Haucap said that this, too, has been overestimated by the anti-trust authorities. "Negotiating power is not just about market share, at least not in the food market."

It is also extremely difficult for a new player to enter the market, he explained, because there are no new retail spaces. "We are talking about a cemented market in the food retail sector, which is why we have to be very careful here," he said.

In the end the deal failed despite compromise proposals offered by both Edeka and Tengelmann. The two companies offered to sell about 100 branches in the Munich/Upper Bavaria region and in Berlin to third parties, but even that wasn't enough for the Cartel Office.

In a counter-proposal, it said that Edeka could acquire no more than a third of the 451 Tengelmann supermarkets. That offer made the deal pointless for German market leader Edeka.

There is some precedent for prospective partners getting their mergers approved in court, but the amount of time it takes could sound the death knell for the deal itself.

In 2007, the Swiss company Sonova (previously Phonak) wanted to acquire Danish hearing aid maker GN Store Nord. When the Federal Cartel Office thwarted the plans and prohibited the merger GN sued. The case was eventually taken to Germany's highest court which in 2010 declared the Cartel Office ban to be illegal. Because of the protracted litigation, the companies abandoned their merger plans. GN was unsuccessful when it sued for €1.1 billion ($1.19 billion) in damages.

The second route the companies can go is known as ministerial approval. The economy minister could overrule the Bonn-based competition authority, but only if it considers the economic benefits to outweigh the costs to competition. Experts say this is unlikely.

"I'm afraid the Edeka and Tengelmann will go to court and will also petition for ministerial approval," said cartel law expert Maxim Kleine of the law firm of Norton Rose Fulbright. "I think the former is not very promising and the latter is simply wrong."

In the Kaiser's Tengelmann case, the companies are arguing the failed merger could result in the loss of 16,000 jobs. Alain Caparros, the CEO of competitor Rewe, challenged this argument on Tuesday, when he warned politicians against paving the way for the merger plans.

It would be a "huge disaster" if Economy Minister Sigmar Gabriel "were to become the best man at this dubious wedding," Mr. Caparros said.

Mr. Gabriel has also made it clear that he would be unwilling to provide ministerial approval in the case. Besides, ministerial approval can also be contested. "We will utilize all legal options to protect our interests," Rewe CEO Caparros said.

 

Kirstin Ludowig covers companies and markets for Handelsblatt in Düsseldorf. Miriam Schröder of Handelsblatt and Christopher Cermak of the Handelsblatt Global Edition in Berlin also contributed to this story. To contact the author: [email protected]