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Two opposing views of the nature of competition in the baby food industry were presented Wednesday to a federal judge in Washington, D.C., who must decide whether to permit H.J. Heinz & Co. to acquire Beech-Nut Nutrition Corp. for $185 million. U.S. District Judge James Robertson gave little indication of how he will rule, though at times he appeared frustrated by the slow pace of the Federal Trade Commission’s case. Wednesday was the first day of a five-day hearing set to conclude Sept. 8. FTC lawyer Richard Dagen told the judge that the case rests on the harm caused by allowing the combination of the No. 2 and No. 3 U.S. makers of baby food. Heinz and Beech-Nut, a unit of Milnot Holding Corp., each have 14 percent of the market, compared with the 70 percent held by Gerber, a unit of Novartis AG. “This will eliminate competition between Beech-Nut and Heinz to be No. 2 on the shelf,” Dagen argued. “This merger is presumptively illegal under the antitrust laws.” Dagen said “the merger could allow Heinz to profitably raise prices to above-market rates. It also could lead to collusion between the two remaining baby food makers.” “This is an industry that is already prone to tacit collusion,” he said. “This will only make it worse.” Using confidential maps that were not shown to the gallery, Dagen said Heinz and Beech-Nut compete across the country for the No. 2 spot on the shelf next to Gerber. As a result, the companies offer discounts and lump-sum payments tied to sales. Supermarkets share this bounty with consumers by offering specials on Heinz and Beech-Nut products, he said. Even when Heinz or Beech-Nut lose out on a contract to be No. 2, consumers win because the firm that loses the shelf space needs to make up for that lost volume by sparking higher sales elsewhere. To do that, the manufacturer increases promotional allowances and discounts, Dagen said. For instance, Dagen said, Heinz offered the New York-based Wegmans Food Market two extra promotional periods in exchange for shelf space. Beech-Nut then matched that offer to retain the space. Gerber, fearing loss of market share, gave Wegmans an additional promotional period as well, Dagen said. “Consumers gained hundreds of thousands of dollars in discounts per year,” he said. The view from Heinz and Beech-Nut was completely different. Edward P. Henneberry, a partner in the Washington office of the Howrey, Simon, Arnold & White law firm, said the real problem with the baby food market is the lack of a viable competitor to Gerber, which he called a monopolist because of its 70 percent market share. “This is a story about two companies trying to put together a product that for the first time could provide some competition to an industry dominated by a monopolist,” Henneberry said. Heinz and Beech-Nut compete regionally despite the FTC’s claim that they compete nationwide, he said. Heinz only has a 2 percent share in markets that Beech-Nut says are its key areas, he said. Mark L. Kovner, a partner at Kirkland & Ellis, who represents Milnot, said Beech-Nut is too weak to challenge Gerber. In 1997, Beech-Nut ran an ad comparing it with Gerber. Gerber responded with a promotional campaign that reduced Beech-Nut’s market share by 20 percent and wiped out its annual profit, Kovner said. Beech-Nut today no longer runs comparative ads, he noted. Kovner also said no one else wanted to buy Beech-Nut, which has had five owners in the past 27 years. Milnot, owned by Madison Dearborn Partners, said it even offered Chase Manhattan Corp. a bonus to find a buyer other than Heinz. “Beech-Nut today is a stagnant brand unable to grow or reach its potential,” Kovner said. Previewing evidence expected to be introduced, Henneberry said Heinz has a low-cost production facility in Pittsburgh that is operating at 50 percent of capacity. Adding the Beech-Nut production to this facility would fill about 60 percent of that excess capacity, he said. This means the deal would let Heinz better utilize an existing plant and shift work out of more cost-intensive Beech-Nut facilities, he said. Heinz could use these cost savings to offer a lower-cost alternative to Gerber, whom he portrayed as a complacent giant. Copyright (c)2000 TDD, LLC. All rights reserved.

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