The Coca-Cola Company and Cadbury Schweppes

Case:

Proposed merger between the Coca-Cola Company and Cadbury Schweppes Pty Ltd

Keywords:

Merger, carbonated soft drink

Reference:

ACCC decision to oppose merger 9/4/99. The parties withdrew the proposal on 2/6/99.

Industry:

Carbonated soft drink Relevant laws: Section 50 of the Trade Practices Act 1974

Summary:

On 8 June the Commission announced its view that a revised proposal by The Coca-Cola Company to buy the international Cadbury Schweppes soft drink brands was likely to breach the merger provisions of the Act.

This view was reached after extensive market inquiries.

In March 1999 the Commission had opposed the original proposal by The Coca-Cola Company to purchase those assets of Cadbury Schweppes primarily related to its beverage trade marks in Australia. This proposal envisaged that The Coca-Cola Company would retain only the Cadbury Schweppes international beverage brands (Schweppes, Dr Pepper, Canada Dry). All other assets would be divested to an undetermined buyer.

In April, after being advised of the Commission's views, the merger parties lodged a revised proposal under which The Coca-Cola Company still proposed to acquire the international beverage brands of Cadbury Schweppes. Rights to produce, sell and distribute these brands would subsequently be licensed to The Coca-Cola Company's part-owned Australian bottler Coca-Cola Amatil. Cadbury Schweppes's Australian subsidiary, Cadbury Schweppes Australia, would otherwise remain intact. In addition, it was envisaged that Cadbury Schweppes Australia would acquire ownership of all carbonated soft drink brands currently owned by Coca-Cola Amatil and not licensed from The Coca-Cola Company. These brands include Kirks, Halls, Gest, Shelleys, Ecks, Marchants and Deep Spring.

With the premium Schweppes brand in its portfolio, The Coca-Cola Company's share (through Coca-Cola Amatil) of the Australian carbonated soft drink market, in terms of value, would increase by several percentage points from about 65 per cent. (This was even after allowing for the transfer of various regional brands owned by Coca-Cola Amatil to Cadbury Schweppes Australia.)

In the short to medium term the Commission considered that The Coca-Cola Company's share was likely to increase even further, particularly in the areas outside supermarkets where carbonated drinks are sold - milk bars, vending machines, and in pubs and clubs. In these areas there is limited space and high margin premium brands like Schweppes and Coke dominate.

However, second tier brands, like those Coca-Cola Amatil were to sell to Cadbury Schweppes Australia, had very limited turnover in these channels. Cadbury Schweppes Australia's ability to compete effectively and vigorously would become increasingly marginalised.

In these circumstances Cadbury Schweppes Australia's post-merger portfolio was likely to have a limited effect in constraining the price and output decisions of The Coca-Cola Company. The Commission considered that, should the merger proceed, it was likely that prices would rise in the carbonated soft drink market. This was a concern given that Cadbury Schweppes Australia, and the Schweppes brands in particular, had been a significant force in constraining prices, maintaining service levels and generating innovation in the carbonated soft drink market.

A number of overseas competition law enforcement authorities have been scrutinising the proposed Coke/Schweppes merger. The merger does not apply in the United States or France, where there has been a history of competition concerns with soft drink acquisitions, nor in South Africa. On 24 May 1999 the merger parties announced that they were revising the international transaction to exclude more than 20 European countries, following regulatory resistance in a number of these jurisdictions.