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H.J. Heinz Co. vowed Friday to fight the government’s decision to block its $185 million acquisition of baby food maker Milnot Holding Corp. on antitrust grounds. “We believe we should proceed with the deal, and the courts should decide the merits of it,” Heinz spokesman Ted Smyth said. “We believe the combination is the best for American consumers.” The Federal Trade Commission voted 3-2 to seek a preliminary injunction in U.S. District Court for the District of Columbia. The vote was released at 3 p.m. Friday. Heinz stock closed at $45.50, up 0.69 percent. A company source said Heinz and Milnot will urge the court to hold the preliminary injunction hearing 30 days after the FTC files its case. That would mean the trial would start Aug. 7, much faster than in most merger challenges. “We will seek to do this fairly quickly, so time alone doesn’t kill the deal,” the source said. Pittsburgh-based Heinz announced the acquisition of St. Louis-based Milnot in February. Milnot is owned by Madison Dearborn Partners Inc., a Chicago-based private equity firm with $4 billion of assets under management. Milnot’s leading subsidiary is Beech-Nut Nutrition Corp., the country’s second leading baby food maker. The FTC charged the merger would be anticompetitive because the top two surviving firms would collectively control 98 percent of the baby food market. Gerber, a subsidiary of Basel, Switzerland,-based Norvartis AG, controls 70 percent of the U.S. baby food market, while Heinz and Beech-Nut each control 14 percent. “Today’s commission action seeks to ensure that families are protected from a loss of competition that may lead to significant price increases for baby food,” said Richard Parker, the director of the FTC bureau of competition. The FTC’s challenge sends a message that the agency worries about increasing concentration in the food sector, especially in light of such recent deals as Unilever NV’s acquisition of Bestfoods, said Albert Foer, president of the American Antitrust Institute. “They are into a phase of attempting to maintain levels of competition in an aggressive way,” Foer said. The agency will file the lawsuit by Friday. The FTC said in a statement there are high entry barriers in the baby food market, noting there has been no significant entry in more than 60 years. The deal would increase the chance for collusion and eliminate head-to-head competition between Beech-Nut and Heinz in many U.S. markets, the FTC said in a statement. Heinz officials said the company would “vigorously defend” the deal as the best way to inject competition into a market Gerber dominates. Heinz said the companies are only regional players, each of which reaching less than half the country. “A strong number two competitor is clearly better for consumers than two smaller companies facing a monopoly,” Heinz said. The company source said the Heinz and Beech-Nut plan to raise the so-called efficiency defense in court. This defense is explicitly permitted under the horizontal merger guidelines, and it is applicable when the synergies from the deal are so overwhelming they eliminate the anticompetitive aspects of the merger. In this deal, the efficiencies would come because the two companies by themselves are too small to challenge Gerber. “This case fits squarely in the guidelines,” the source said. “It is the poster child for the efficiency defense.” Madison Dearborn knew it was at risk when it sold Milnot to Heinz. “Surprise is a tough word to use,” said Nick Alexos, the managing director at the firm who manages Milnot, which also owns a dairy business. “This was more of a disappointment.” The private equity firm, in fact, bought Milnot in 1999 from Ralcorp Holdings because Ralcorp didn’t believe it could sell for a higher price to Heinz due to anti-trust regulations, a banker said. Salomon Smith Barney Inc. advised Ralcorp in the sale. Madison Dearborn a year later sold the business for $185 million to Heinz in a Chase Manhattan Corp. auction. UBS Warburg LLC advised Heinz. Madison Dearborn uses Kirkland & Ellis. Rick Dagen, an attorney adviser in the FTC’s bureau of competition, is handling the agency’s case. Heinz is using Edward P. Henneberry, a partner in the Washington office of the Howrey & Simon law firm. Henneberry did not return a call. A 3-2 vote on a merger is unusual for an agency that typically votes unanimously on most deals. More unusual, however, was the makeup of the vote. Voting against going to court were Orson Swindle and Sheila F. Anthony. Swindle is a Republican known as more permissive toward industry consolidation than his colleagues. Yet Anthony is a Democrat who historically has sided with FTC Chairman Robert Pitofsky on merger questions. Copyright �2000 TDD, LLC. All rights reserved.

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