EU Clearance for Cargill's Degussa Food Ingredients Takeover

Since Cargill had recently entered the markets for lecithin, on which DFI is already a major actor, the Commission was concerned that the merger would remove effective competition on these markets and decided to open a detailed investigation.

29/03/06 The European Commission has cleared under the EU Merger Regulation the proposed acquisition of the food ingredients business of Germany’s Degussa AG by the US-based Cargill group. Degussa’s food ingredients operations are comprised of texturant and flavouring capabilities and will significantly strengthen Cargill’s portfolio of texturant ingredients and systems, emulsifiers, flavouring and health promoting ingredients. It will accelerate the company’s focus on creating value and growth for its customers.

Since Cargill had recently entered the markets for lecithin, on which DFI is already a major actor, the Commission was concerned that the merger would remove effective competition on these markets and decided to open a detailed investigation. However, in the course of this detailed investigation, the Commission found that, although barriers to entry are rather high, several producers from Brazil and India have been able to enter the markets due to their easy access to the raw material (non-GM soybeans) and their partnership with distributors established in Europe. Some of these producers are in the process of establishing their own distribution networks in Europe. Since these new competitors are often also the suppliers of Cargill and DFI, the Commission has concluded that the merged companies will have very little scope to increase prices.

Finally, the Commission has found that Cargill’s position in the non-GM lecithin market is not, on its own, as competitive as initially assumed at the beginning of the investigation.

However, the in-depth investigation has shown that the new entity would continue to face sufficient competition. Thus, the Commission has now concluded that the transaction would not significantly impede effective competition in the European Economic Area or a significant part of it, The Commission said.

On 21st October 2005, the Commission received a notification whereby Cargill intends to acquire sole control of Degussa’s Food Ingredients branch (DFI). Both Cargill and DFI produce a number of food ingredients and hold a relatively strong position in the markets for different types of lecithin.

Lecithin is mainly extracted from soybeans and used as an emulsifier by companies in the food industry such as chocolate manufacturers and bakeries, and to a lesser extent in other industries such as animal feed. As lecithin has a wide functionality beyond its emulsifying properties and carries a unique good-for-you image, the Commission had found that most buyers of lecithin could not switch to another product. The investigation also showed that, European food producers only use non-genetically modified (non-GM) lecithin as otherwise, Commission regulations 1829/2003 and 1830/2003 (see IP/03/1056) would require them to acknowledge on the label of their products that they may contain genetically modified (GM) food or food ingredients.

Cargill welcomed the decision of the European Commission noting that as this is the final stage of regulatory approval, Cargill and Degussa can now proceed with the necessary financial and legal transfers in order to complete the acquisition in the next few days.

“Today’s decision by the EC significantly progresses Cargill’s growth in the food ingredients arena and is consistent with our strategy of becoming the recognised global leader in providing food and beverage companies with innovative solutions that help them succeed,” says Warren Staley, Cargill chairman and chief executive officer. “The Degussa food ingredients operations greatly complement our existing  food ingredients business and create new opportunities for us to better support our
customers in the quest to produce even tastier, healthier and more convenient foods.”

The intended acquisition was first announced on 9 September 2005 and was given the green light by the US authorities on 17 November. On 14 December the EC opened an in-depth (Phase two) investigation into the acquisition.

Cargill said that the addition of Degussa food ingredients’ skills, expertise and facilities for the production of texturants will confirm Cargill as a major global company with a full product range of starches, hydrocolloids, soy proteins, emulsifiers, dairy and meat cultures, and a significant position in ingredients systems and blends and health promoting ingredients.  Degussa’s texturant business has 33 locations -19 of which are texturant production sites.  Eleven of the production sites are in Europe, four in the Americas, two in Asia and two in North Africa.

The acquisition will also build upon Cargill’s existing flavouring and related businesses to establish a strong position internationally, serving industries such as beverages, confectionery, dairy, savoury and pharmaceutical products. It strengthens the Cargill businesses in Europe and North America and provides a platform for further growth into the fast-developing regional markets in Eastern Europe, Asia and Latin America.