FTC to Challenge DGF Stoess's Proposed Acquisition of Leiner Davis

The Federal Trade Commission has authorized its staff to seek a preliminary injunction to block the proposed $170 million acquisition of Leiner Davis Gelatin Corporation and Goodman Fielder USA, Inc. by Deutsche Gelatine-Fabriken Stoess AG (DGF Stoess). The transaction, if consummated, would eliminate strong, head-to-head competition between DGF Stoess and Leiner Davis, and the two firms combined would account for more than 50 percent of the U.S. market for pigskin and beef hide gelatin. These gelatin products are used primarily by the food industry as an ingredient in edible products and by the pharmaceutical industry to produce capsules and tablets.

"This transaction raises serious antitrust concerns," said FTC Bureau of Competition Director Joseph J. Simons. "The results of this acquisition would be higher gelatin prices and a U.S. gelatin market dominated by a single gelatin supplier."

DGF Stoess, headquartered in Eberbach, Germany, is the world's largest producer of gelatin. The company produces gelatin at eight manufacturing plants around the world, two of which are located in the United States.

Goodman Fielder is a diversified food products company based in Sydney, Australia. Leiner Davis Gelatin, a subsidiary of Goodman Fielder, is the second-largest producer of beef hide and pigskin gelatin in the world. Leiner Davis also owns and operates eight gelatin manufacturing plants around the world, with one plant located in the United States.

According to the FTC, beef hide and pigskin gelatins constitute the relevant market in which to assess the competitive effects of DGF Stoess's proposed acquisition of Leiner Davis. Other types of gelatin are more expensive than pigskin and beef hide gelatins and are not considered to be economically viable substitutes. Non-gelatin products, such as various starches and gums, cannot replicate the performance of pigskin and beef hide gelatins.

Although there are numerous gelatin producers worldwide, the vast majority are extremely small and are not a viable option for customers in the United States. Moreover, gelatin producers around the world are production-constrained, with most firms' plants running at or near capacity, and any significant expansion in plant capacity would take substantial time to complete. In addition, limitations on the availability of raw materials (beef hides and pigskins) further constrain the ability of gelatin producers to expand production. Cows and pigs are slaughtered based on the demand for meat, not for gelatin, and beef hides and pigskins are used for a variety of end uses in addition to gelatin. Beef hides and pigskins are thus a finite resource.

The Commission's Complaint

The FTC's complaint will allege that DGF Stoess's proposed acquisition of Leiner Davis increases the likelihood of anticompetitive activity in the U.S. gelatin market by, among other things, removing Leiner Davis from the market, and eliminating substantial direct competition between DGF Stoess and Leiner Davis.

To remedy to the significant antitrust concerns raised by the proposed transaction, DGF Stoess has proposed to divest one of Leiner Davis's eight plants. This proposed divestiture, however, would fall short of replacing the competition of either Leiner Davis or DGF Stoess in the relevant market, the Commission contends.

The Commission vote authorizing staff to seek a preliminary injunction to block the proposed transaction was 4-0, with Chairman Timothy Muris not participating.

The FTC will argue in court for a preliminary injunction on the grounds that the transaction as structured would violate federal antitrust laws. If the court grants the FTC's motion, the Commission will have 20 days within which to determine whether to issue an administrative complaint. The complaint seeking a preliminary injunction will be filed in the U.S. District Court for the District of Columbia.

Copies of the complaint seeking a preliminary injunction will be available upon filing from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580; Electronic Mail: antitrust@ftc.gov; Telephone: (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.