18/02/2020

First Ever Merger Prohibition Issued by Finnish Market Court — Blocks Kesko’s Acquisition of Heinon Tukku

Last May, the Finnish Competition and Consumer Authority (FCCA) opened its investigations into the merger between two Finnish broadline distributers Kesko Oyj (Kesko) and Heinon Tukku Oy (Heinon Tukku). The FCCA opened an in-depth investigation into the matter in June. The Market Court extended the investigation period first until 31 October 2019 and subsequently until 18 November 2019 when the FCCA, which does not itself have the authority to block mergers, submitted a prohibition proposal to the Market Court.

Finnish Market Court prohibited a merger for the first time in history and blocked Kesko’s acquisition of Heinon Tukku on 17 February 2020.

Definition of the Relevant Market

Kesko’s and Heinon Tukku’s businesses mainly overlap in the wholesale of daily consumer goods to foodservice customers, such as hotels and restaurants. Both the FCCA as well as the parties to the transaction agreed that the market could be further segmented into the distribution and pick-up markets. Additionally, both the FCCA and the parties agreed that the market was national in scope.

However, the FCCA and the parties disagreed on the scope of the market for the broadline distribution of daily consumer goods to Finnish foodservice customers. Therefore, the Market Court had to analyse whether the market was limited to broadline distributors as argued by the FCCA or whether specialist distributors and food manufacturers should also be included in the relevant market as proposed by Kesko and Heinon Tukku.

In defining the relevant market, the Market Court took into account various analyses presented by the FCCA and Kesko. The Market Court analysed the critical loss and transaction cost and used market surveys to assess the demand substitution and customer switching between broadline wholesalers and specialist distributors. The analyses showed that the majority of customers usually deal with only one supplier, in practice a broadline distributor, and thus centralise their purchases. The analyses also showed that, in principle, customers switched from one broadline distributor to another, not to a specialist distributor or food manufacturer. Due to these factors, amongst others, the Market Court upheld the FCCA’s market definition.

Acquisition Held to Impede Effective Competition

The Market Court held that Kesko’s acquisition of Heinon Tukku was likely to result in a significant impediment to effective competition within the meaning of section 25(1) of the Finnish Competition Act. The Market Court based its findings on, among other things, the fact that the merged entity would have had a significant market share and that Kesko and Heinon Tukku were to be regarded as close competitors. Furthermore, the Market Court noted that the transaction would affect the market structure as Kesko’s Kespro was the number one market player and there were only a limited number of other firms active in the relevant market in addition to Kespro and Heinon Tukku. In accordance with the FCCA, the Market Court found that the merged entity could profitably raise its prices.

The Market Court held that foodservice customers could not be considered to have such bargaining power that they could counter the competition concerns arising from the transaction. The Market Court also found potential market entry or efficiencies to be insufficient countervailing factors.

Competition Concerns Could Not Be Addressed by Commitments 

Kesko offered the FCCA commitments regarding setting maximum wholesale prices and the distribution system. The FCCA has, both generally and in the case at hand, stated that competition concerns arising from horizontal mergers generally always require structural commitments such as full or partial divesture of a business unit. The FCCA held that the behavioural commitments offered by Kesko were insufficient to remove the identified competition concerns. This view was also shared by the Market Court.

Unlike the FCCA, the Market Court could have ordered further commitments in addition to those offered by Kesko. However, the Market Court held that, in the case at hand, prohibition was the only way to ensure that competition on the relevant market was not impeded and, thus, historically prohibited Kesko’s acquisition of Heinon Tukku.

Prohibition Proposal Rarely Lead to Blocked Mergers  

The prohibition proposal submitted in November 2019 was only the fourth prohibition proposal to be issued since the introduction of merger control in Finland in 1998. The first prohibition proposal was made in 2000 and concerned the acquisition of joint control by Sonera Oyj in Digita Oy, a subsidiary of Yleisradio (the Finnish National Broadcasting Company). The transaction was held to lead to significant foreclosure effects and protect the dominant positions of Sonera and Digita. The transaction was, however, conditionally approved on the condition that Sonera would refrain from applying for a digital television licence. As a result, Sonera withdrew from the transaction.

The second prohibition proposal, submitted over ten years later in 2011, related to a merger between NCC Roads Oy and Destia Oy. The merger was held to impede effective competition in the asphalt mass market of the Helsinki Metropolitan Area. The Market Court set strict additional commitments, such as renting a site for competitors for the production of asphalt mass and selling asphalt mass to competitors for a fair market price. NCC Roads withdrew from the original transaction and proposed a new transaction, which was more limited in its scope and was approved by the FCCA.

In 2013 a third prohibition proposal concerning a merger between Uponor Oyj and KWH-Yhtymä Oy was issued. The FCCA was concerned that the merger would lead to significant reduction of competition on the plastic infrastructure pipe market as the merger was between two of the largest market players. As in the previous cases, the Market Court conditionally accepted the merger, requiring the merged entity to reserve production capacity for certain types of pipes for their competitors and to sell seven specified production lines. Uponor and KWH accepted the commitments, and the FCCA was satisfied with the Market Court’s decision and did not appeal it.

Prohibition Subject to Appeal 

Kesko could still appeal the Market Court’s decision by filing an appeal to the Supreme Administrative Court. The appeal must be filed within 30 days from being informed of the Market Court’s decision. 

See our blog post for further information on the role of economic analyses in merger proceedings.