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A federal appeals court Wednesday ordered H.J. Heinz Co. to delay its planned acquisition of Beech-Nut Nutrition Corp. until after a three-judge panel decides if the deal is anticompetitive. The decision was a major victory for the Federal Trade Commission, which sought the emergency injunction Oct. 23 after U.S. District Judge James Robertson gave the companies permission to complete the $185 million deal. It would combine the nation’s second- and third-largest makers of jarred baby food. Heinz had threatened to drop the deal if a stay was granted, but a lawyer for the company said Wednesday that it plans to move ahead with the appeal. The company said in a statement it expects to prevail, citing “significant consumer benefits” from the deal. The court is expected to issue a briefing and hearing schedule as early as today. FTC competition director Richard Parker praised the court ruling, saying the agency considers the merger “patently illegal.” “This clearly vindicates our decision to bring this challenging case,” Parker said. Judge Robertson’s decision marked the first time a federal judge ruled that the efficiencies of a merger outweighed anticompetitive harms. It also was one of the few times a judge has allowed two of the three competitors in an industry to combine. The U.S. Court of Appeals for the District of Columbia said in a three-page memorandum that it was unwilling to accept the efficiency defense. “Appellees’ claim that post-merger efficiencies will permit so much increased retail competition between the merger entity and Gerber as to outweigh any anticompetitive effects is sufficiently uncertain to give the FTC a substantial probability of success on the merits,” the court said. The court called the efficiency defense a “novel” theory that has never been supported by the U.S. Supreme Court. It also questioned whether this was the best case to test the theory, noting that the Herfindahl-Hirschman Index of market concentration is already 4,775. Deals typically are barred in industries that score above 1,800. “The merger of Heinz and Beech-Nut will increase the HHI by 510 points,” the court said. “This creates, by a wide margin, a presumption that the merger will lessen competition at the retail level.” Blocking the merger does not necessarily kill the deal, the court said. “Appellees acknowledge that there is no other alternative buyer for Beech-Nut,” the court said. “Moreover, even if the current merger plans were abandoned, the evidence does not establish that the efficiencies the Appellees urge could not be reclaimed by a renewed transaction following success on appeal.” The court cautioned that the FTC victory on the emergency stay does not mean it will prevail in the end. “The appellees’ efficiency defense may yet carry the day, but only the grant of interim relief will both afford this court an opportunity to determine whether that should be the case and protect the public interest in the event that it is not,” the court said. Heinz agreed in February to acquire Milnot Holding Corp. and its Beech-Nut unit. The deal was challenged by the FTC, which argued that it was illegal for the No. 2 and No. 3 makers of jarred baby food to merge. In an August trial, Heinz argued that the deal would reduce costs and give the combined companies enough heft to challenge Gerber, a unit of Novartis AG. Gerber controls 70 percent of the market, while Heinz and Beech-Nut have about 14 percent each. The FTC countered that Heinz and Beech-Nut compete fiercely to be the second brand on the shelf. It argued that the loss of this competition would harm consumers because the firms would reduce slotting fees and coupon programs if they were guaranteed shelf space. Judge Robertson sided with the companies, ruling Oct. 18 that the efficiencies cited by Heinz and Beech-Nut outweighed the loss of competition. He rejected the FTC’s request for a preliminary motion, but asked Heinz and Beech-Nut not to close the deal until the appeals court ruled on the government’s request for an emergency stay. Copyright (c)2000 TDD, LLC. All rights reserved.

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