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Legal Updates / 19.02.2020

Kesko/Heinon Tukku merger blocked in first ever merger control prohibition decision

In the first ever merger control prohibition decision by the Market Court in Finland, the proposed horisontal merger between two daily consumer goods wholesale businesses Kesko Corporation (“Kesko”) and Heinon Tukku Oy (“Heinon Tukku”) was prohibited on 17 February 2020.

The Finnish Competition and Consumer Authority (the “FCCA”) made a proposal to the Market Court on 18 November 2019 to prohibit the proposed acquisition of Heinon Tukku by Kesko. According to the FCCA’s proposal, which was upheld by the Market Court, the merger would significantly impede effective competition in the broadline distribution of groceries to foodservice customers.

Kesko is a major Finnish retailing conglomerate, and its Kespro business unit provides services for foodservice customers and is engaged in wholesale trade of daily consumer goods. Heinon Tukku is a daily consumer goods wholesale business whose main customers are active in the foodservice sector. Foodservice customers include for example restaurants, hotels, catering businesses, service stations and kiosks.

The FCCA opened an in-depth investigation into the merger on 17 June 2019, and the Market Court extended the processing times of the FCCA twice.

Kesko disputed the FCCA’s definition of the relevant product market and found the relevant market within which Kesko’s market power was assessed to be too narrow. According to the FCCA, both Kesko and Heinon Tukku are distributors offering a broad range of products and serving foodservice customers nationally. Two large and three smaller distributors operate in the same market as the parties, according to the FCCA. In addition to these distributors, a large number of smaller specialist suppliers are active in the supply of specific product categories. Undertakings manufacturing daily consumer goods also supply products to foodservice customers. In contrast with Kesko’s view, the FCCA found that the specialist suppliers and manufacturers did not impose a significant competitive constraint on the broadline distributors from whom customers procure most, approximately 70–80 percent, of their purchases. The FCCA’s investigation also indicated that prior to the merger, Kesko and Heinon Tukku have been competing closely for the same customers.

According to the FCCA, the merged entity would have a dominant position in the market for delivery sales by broadline distributors to foodservice customers in Finland, and the merger would significantly impede effective competition by creating or strengthening such position. The FCCA found that the merged entity would have a market share of up to 60–70 percent in the relevant market. The FCCA, accordingly, concluded that Kesko would have been able to increase its prices to the detriment of foodservice customers and – eventually – consumers. The Market Court found that even by a conservative estimate, the combined market share of the parties (some 40-50%) would be significantly higher than the market shares of the largest competitors. On this basis, the merger would either create a dominant market position or significantly impede effective competition within the meaning of the Competition Act.

The FCCA and the Market Court concluded that the remedies submitted by Kesko were insufficient and found that the proposal to prohibit the merger was the only option available. Kesko did not offer any structural remedies, such as divestments, but only certain behavioural remedies relating to pricing and transport arrangements to alleviate the competition concerns identified by the FCCA.

The decision is notable, since this is the first prohibition decision based on only the fourth prohibition proposal by the FCCA since the introduction of the merger control regime in Finland in 1998. In other cases, the mergers which have been proposed by the FCCA to be prohibited have eventually been approved conditionally by the Market Court (some mergers have also been abandoned by the parties in whole or in part).

The decision by the Market Court may be appealed to the Supreme Administrative Court. Kesko has publicly announced that it is considering an appeal.

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