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H.J. Heinz Co. dropped its acquisition Friday of Beech-Nut Nutrition Corp. after a federal appeals court upheld a challenge to the $180 million deal brought by the Federal Trade Commission. In ordering the baby food deal blocked, the U.S. Court of Appeals for the District of Columbia made it more difficult for companies to use the so-called efficiency defense and strengthened the FTC’s ability to secure a preliminary injunction to stop a merger. Both aspects of the ruling are major victories for the agency. FTC Chairman Robert Pitofsky called the ruling one of the most important of his six-year tenure. “If the court began to allow 3-to-2 mergers in these circumstances, the likely consumer harm would be enormous,” Pitofsky said. The victory, however, was not complete. The appeals court said the FTC could not win just because the merger resulted in a market concentration score of 4,475, an increase of 510 points. Deals are considered anticompetitive if the score is above 1,800 and the increase is more than 100 points. The case was framed early on as a fight over the efficiency defense, which is the notion that an otherwise anticompetitive deal may be acceptable if it produces significant cost savings that are passed on to consumers. Heinz had argued during a five-day trial last summer that the merger would allow it to produce a better product at a lower cost. That would benefit consumers more than the current situation, in which neither Heinz nor Beech-Nut have enough market power to challenge Gerber Products Co., which sells 65 percent of jarred baby food. The court acknowledged the existence of the efficiency defense, noting that regulators codified the doctrine in 1997 as part of the merger guidelines. But it said Heinz failed to prove its case. “The high market concentration levels present in this case require, in rebuttal, proof of extraordinary efficiencies which the appellees fail to provide,” the unanimous three-judge panel said. The appeals court criticized the trial court for failing to quantify many of the efficiencies alleged by the companies. For instance, it said the court should have evaluated whether the merger would reduce variable manufacturing costs for the combined company, rather than just looking at the impact on Beech-Nut. It also said the trial judge failed to explain why Heinz could not achieve the efficiencies with something short of a merger. For instance, the judge never said if Heinz could achieve the same efficiencies by spending the $180 million on better recipes and more effective promotions. “The question is how much Heinz would have to spend to make its product equivalent to the Beech-Nut product and hence whether Heinz would achieve the efficiencies of merger without eliminating Beech-Nut,” the court said. “The district court, however, undertook no inquiry in this regard.” Edward P. Henneberry, a partner at Howrey, Simon, Arnold & White who represented Heinz, said the appeals court ignored all the evidence about efficiencies presented at five days of trial. “If there was any case, this was it,” he said. “We had the customer support and the efficiencies. If you can’t make it on this record, you can’t make it at all.” The FTC also prevailed in the fight over what standard it had to meet to win a preliminary injunction. The point of the injunction is to keep the companies separate during a trial before an administrative law judge, who ultimately rules on the merits of the case. The appeals court said the equities favor granting the preliminary injunction because that is the only way to preserve the status quo in the event that the FTC wins before the administrative law judge. The appeals court rejected the trial judge’s conclusion that issuing the injunction would kill the deal, saying that is not supported by the record of the case. It noted the lack of other buyers for Beech-Nut and the slim chance the company will go bankrupt any time soon. “If the merger makes economic sense now, the appellees have offered no reason why it would not continue to do so later,” the court said. David Balto, who was on the FTC prosecution team and is now a partner in the Washington office of White & Case, said this part of the ruling is important because it clarifies that the FTC is not required to show that there is a “certainty” that a deal is anticompetitive, but rather only a “probability.” George Washington University law professor William Kovacic, who co-wrote a brief supporting Heinz, said the decision is a disappointment because it essentially ends debate on these issues. “It will be a long time before merging parties try to scale this mountain again,” he said. The appeals court sent the case back to U.S. District Court Judge James Robertson, who was ordered to enter an injunction barring the parties from closing the deal. The next step would have been a trial before an administrative law judge who would have recommended to the FTC whether the deal should have remained blocked or be allowed to proceed. That process is moot now that Heinz and Beech-Nut have dropped the deal. Copyright (c)2001 TDD, LLC. All rights reserved.

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