On March 4, the Competition Council (the CC) decided to allow JSC “Dobeles dzirnavnieks” to acquire the Lithuanian grain processing company AB “Baltic Mill”, which owns several grain processing and food production companies in the Baltic States, such as JSC “Rīgas dzirnavnieks” in Latvia and others. Although the merger of JSC “Dobeles dzirnavnieks” and JSC “Rīgas dzirnavnieks” will significantly reduce competition in several markets of flour, oatmeal and other products, the CC decided to allow the merger, considering the high possibility of JSC “Rīgas Dzirnavnieks” to go bankrupt and exit the market if another company will not take it over.
The CC concluded that the merger of JSC “Dobeles dzirnavnieks” and JSC “Rīgas Dzirnavnieks” is likely to create significant barriers to effective competition in the rye and wheat flour markets for both final consumers and industrial customers, as well as oatmeal, flour mix, pasta from common wheat flour and porridge markets for end consumers. As a result of the merger, the competitive pressure on JSC “Dobeles dzirnavnieks”, which was previously created by its closest competitor JSC “Rīgas Dzirnavnieks”, will significantly decrease in the mentioned markets. This will create a dominant position for the merged entity in these markets, including a significant reduction in effective competition. At the same time, the CC established that JSC “Rīgas dzirnavnieks” is in financial difficulties. The company has a high probability of leaving the market if the merger is not implemented.
The European Commission's Guidelines on the Assessment of Horizontal Mergers (Horizontal Guidelines) state that an otherwise problematic merger is nevertheless compatible with the common market and may be authorized if one of the parties to the merger is a bankrupt undertaking or part of a group of undertakings. In order to apply the protection of a failing company under competition law in the context of a merger, the European Commission considers three criteria to be particularly important: 1) the failing company could be pushed out of the market in the near future if another company does not take it over; 2) there is no alternative acquisition that is less anti-competitive than the notified merger; 3) if the merger did not take place, the assets of the insolvent company would inevitably leave the market.
When requesting additional information, the CC assessed the compliance of the acquired company JSC “Rīgas Dzirnavnieks” with these criteria and established that all three criteria specified in the Competition Law are met. First, JSC “Rīgas Dzirnavnieks” is in financial difficulties and there is a possibility to leave the market if another company does not take it over. This was indicated not only by the financial indicators but also by the bankruptcy probability forecasting models used by the CC. Second, there is no alternative acquisition that is less anti-competitive than the notified merger. Merger negotiations were held with several market participants, but they did not result in a transaction for various reasons. Third, it was expected that JSC “Rīgas Dzirnavnieks” would leave the market, as it is unlikely that investors or another potential buyer would express a desire to take over its assets.
In addition to the three criteria set out in the Horizontal Guidelines, the CC also compared hypothetical scenarios in the absence of the merger and in the event of the merger. The CC concluded that the competitive pressure exerted so far on JSC “Rīgas Dzirnavnieks” by JSC “Dobeles dzirnavnieks” would further decrease without receiving the respective investments. Thus, if the merger were not allowed, the competitive structure would be equivalent to that of a merger, as the merging parties are the closest competitors in several markets. By prohibiting the merger, JSC “Rīgas Dzirnavnieks” would leave the market, and JSC “Dobeles dzirnavnieks” would take over most of its share as its closest substitute. Thus, considering the mentioned specific circumstances, the CC decided to allow the merger to ensure the continuation of the operations of JSC “Rīgas Dzirnavnieks” in the market.
In order to prevent a significant reduction of competition as a result of a merger, merger transactions that comply with the criteria specified in the Competition Law require the permission of the CC. Thus, the CC ensures state control over the concentration of markets so that no structural changes occur that result in consumers suffering in the long run because they have limited choice or must purchase goods and services at an uncompetitive price.