Press Release

On Monday, 11 February 2013, the Competition Tribunal (The “Tribunal”) approved the South African leg of the global acquisition by Nestlé S.A. (“Nestlé”) of the infant nutrition business of Pfizer Inc. (“Pfizer Nutrition”). Pfizer Nutrition’s South African interests comprise, amongst other products, infant formula and follow on milks (“IFFO”) marketed under the S-26 and SMA brands. In South Africa, Nestlé is similarly involved in the manufacturing and sales of IFFO under, amongst others, the NAN, Lactogen and Pelargon brands. Nestlé is a strong market leader in the IFFO markets in South Africa.

The merger was notified to the Competition Commission (the “Commission”) on 8 June 2012. At the outset, Nestlé offered a remedy to address any change in market structure that would arise in South Africa from the global acquisition by Nestlé of Pfizer Nutrition. However, given the nature and the peculiarities of the infant milk formula market, Nestlé argued that a “transitional re-branding” remedy would be better suited in this case rather than a “full” divestiture. Nestlé argued that a “full” divestiture, would result in a dual-ownership model in terms of which the Pfizer brands would be owned and operated in South Africa by a third party but elsewhere in the world by Nestlé. This would not be ideal for, inter alia, the following reasons:

In consumer goods generally, brand reputation is extremely important to commercial success, and firms invest heavily in developing their brand reputations. But brand reputation is fragile and investments in a brand can rapidly be devalued if the quality of the brand is called into question. Accordingly, for example, if a licensee were to acquire the Pfizer brands in South Africa, and Nestlé accidentally contaminated some of its brand elsewhere in the world, that could materially damage the reputation of the licensee’s brands in South Africa as well.

A firm would have a greater incentive to invest in its own brands (and in their underlying R&D) that it could operate worldwide than in the Pfizer brands that it would own in South Africa alone.

The re-branding remedy limits potential ‘grey market sales’ and under a permanent divestiture consumers may be confused when Pfizer Nutrition’s products in South Africa and elsewhere in the world have different chemical compositions, nutritional value and taste. This may also create a potential health risk for babies who use specialty milks for a specific nutritional requirement.

The risk of the licensee “free-riding” on the efforts of Nestlé to build brand strength is greater under a permanent divestiture scenario.
After 7 months of investigation, an extensive market analysis which included broad and thorough consultation with third parties, and after considering the arguments of the merging parties, the Commission concluded that the transaction is likely to give rise to anti-competitive effects. Subsequently, and after close co-operation with Nestlé, the Commission recommended to the Tribunal that the merger be approved subject to the conditions offered by Nestlé. After a hearing where the Tribunal heard evidence from an expert witness from the Commission, a factual witness from Nestlé and from an independent branding expert, the Tribunal approved the merger subject to the conditions offered by Nestlé. The conditions state inter alia that Nestlé will divest Pfizer Nutrition’s South African business to a purchaser to be approved by the Commission, under the following licencing arrangements:

Nestlé will provide a fully paid-up exclusive 10-year licence to use the Pfizer Nutrition trademarks (brands) in South Africa. During this period, the licensee will be obliged to re-brand the Pfizer brands to a new brand of its choice;

the re-branding period will be followed by a 10-year “black-out” period in which both Nestlé and the licensee cannot use the Pfizer Nutrition trademarks (brands) in South Africa; and

after the 20-year period, Nestlé would be allowed to re-introduce the legacy Pfizer brands in the South African market, should it so wish.
The use of a transitional re-branding remedy is novel to the South African market. The Tribunal’s decision illustrates that when merging parties offer such remedies, the South African regulators are open to new and innovative remedies which will demonstrably cure a transaction’s potential anti-competitive effects identified by the competition authorities.

Shortly after the Tribunal’s decision was released, the Chairman of the Tribunal (who was not part of the panel at the hearing of the matter) in a public forum expressed his admiration at the manner in which the parties handled and presented evidence, and in particular how the teams focused on creatively solving the competition law problem (rather than getting stuck in disagreements of theories that were ultimately irrelevant to the actual outcomes). He indicated that this practical problem solving approach greatly assisted in expediting the process and assisted the Tribunal in making an informed decision.

The Tribunal’s decision is, thus, most welcome.

ENS’ ATTORNEYS AND ECONOMISTS ADVISED NESTLÉ