Analysis to Aid Public Comment on The Provisionally Accepted Consent Order

I. Introduction

The Federal Trade Commission has accepted for public comment from Diageo plc ("Diageo") and Vivendi S.A. ("Vivendi") an Agreement Containing Consent Orders ("Proposed Consent Order"). Among other things, the Proposed Consent Order requires Diageo, as a condition to acquiring its interest in Seagram, to divest its Malibu rum business to an acquirer approved by the Commission. Diageo and Vivendi ("Proposed Respondents") have also reviewed a Draft Complaint that the Commission contemplates issuing.

The Commission and the Proposed Respondents have also agreed to an Order To Hold Separate and Maintain Assets that requires the Proposed Respondents to maintain the competitive viability of certain assets pending divestiture. The Proposed Consent Order will remedy the likely anticompetitive effects arising from the proposed acquisition by Diageo and Pernod Ricard S.A. ("Pernod Ricard") of Vivendi's Seagram Wine and Spirits business ("Seagram") in five relevant product markets in the distilled spirits industry.

The Proposed Consent Order and the Order to Hold Separate and Maintain Assets were negotiated between the Commission's staff and Proposed Respondents after the Commission, on October 23, 2001, authorized its staff to seek a court order in United States District Court to preliminarily enjoin the proposed transaction, pending a Commission determination of the legality of the proposed transaction after a full trial on the merits in Commission administrative proceedings.

II. The Parties and The Transaction

Proposed Respondent Diageo is a public limited company organized, existing and doing business under and by virtue of the laws of the United Kingdom with its office and principal place of business located at 8 Henrietta Place, London, England W1A 9AG. In the United States, Diageo's operates a distilled spirits business through a wholly-owned subsidiary corporation, GuinnessUDV North America, Inc., whose offices are located at Six Landmark Square, Stamford, Connecticut 06901.

Proposed Respondent Vivendi is a societe anonyme organized, existing and doing business under and by virtue of the laws of France, with its office and principal place of business located at 42, avenue de Friedland, 75380 Paris Cedex 08, France. In the United States, Respondent Vivendi operates a distilled spirits business through Joseph E. Seagram & Sons, Inc., a wholly-owned subsidiary corporation whose offices are located at 375 Park Avenue, New York, New York 10152-0192.

Third party Pernod Ricard is a societe anonyme organized, existing and doing business under and by virtue of the laws of France, with its office and principal place of business located at 142 boulevard Haussmann, 75379 Paris, France. In the United States, Pernod Ricard operates a distilled spirits business through Austin, Nichols & Co., Inc., a wholly-owned subsidiary corporation whose offices are located at 156 East 46th Street, New York, New York.

On December 19, 2000, Diageo, Pernod Ricard, and Vivendi entered into an agreement for Diageo and Pernod Ricard jointly to acquire Seagram. The value of the transaction is $8.15 billion. Diageo and Pernod Ricard had previously agreed that if their joint bid to acquire Seagram were successful, they would split the Seagram assets between them. Under their Framework Agreement, Diageo would pay $5 billion for its share of the Seagram assets and Pernod Ricard would pay $3.15 for the remaining share of Seagram.

Among the distilled spirits brands that Diageo and Pernod Ricard agreed would be acquired and held by Diageo were Captain Morgan Original Spiced Rum and Captain Morgan's Parrot Bay Rum. Among the distilled spirits brands that Diageo and Pernod Ricard agreed would be acquired and held by Pernod Ricard were Seagram's Gin, Chivas Regal Scotch, The Glenlivet Scotch, and Martell Cognac.

Under the terms of the proposed transaction, Pernod Ricard will acquire Seagram's Gin, Chivas Regal Scotch, The Glenlivet Scotch, and Martell Cognac brands. These are brands that Diageo should not acquire because doing so would be anticompetitive. Also, Diageo will acquire Joseph E. Seagram & Sons, Inc., which is the Vivendi entity responsible for marketing all the Seagram-owned brands in the United States. For this reason, commercially sensitive information about Seagram's Gin, Chivas Regal Scotch, The Glenlivet Scotch, and Martell Cognac - information that Diageo should not acquire for competitive reasons -- could remain with Joseph E. Seagram & Sons, Inc. and wind up in Diageo's possession.

Also, under the terms of the proposed transaction, Diageo will continue to operate, for up to one year, a "back office" administrative operation for Pernod Ricard in connection with the Seagram brands that Pernod Ricard will be acquiring. Here too, as the transaction was originally structured by the parties, Diageo could acquire and learn commercially sensitive information about Seagram's Gin, Chivas Regal Scotch, The Glenlivet Scotch, and Martell Cognac. The proposed transaction also provides that for up to one year, under a co-packing arrangement, Diageo will bottle for Pernod some of the Seagram's Gin and Scotch products sold in the United States.

III. The Proposed Complaint

According to the Draft Complaint that the Commission intends to issue, Diageo and Vivendi compete in the United States in connection with the distribution and sale of the following distilled spirits markets: (a) premium rum, (b) popular gin, (c) deluxe Scotch, (d) single malt Scotch, and (e) Cognac.

The Commission is concerned that the proposed transaction would eliminate substantial competition between Diageo and Vivendi in each relevant market, and result in higher prices. The Commission stated it has reason to believe that the proposed transaction would have anticompetitive effects and violate Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act.

IV. The Commission's Competitive Concerns

A. Premium Rum

Total United States sales at retail of all premium rum products are about $1 billion. In this market, Bacardi USA, with its Bacardi Light and Bacardi Limon products, is the largest competitor with about a 54% share, Seagram, with its Captain Morgan Original Spiced Rum and Captain Morgan's Parrot Bay Rum products, has about a 33% share, and Diageo, with its Malibu Rum, has about an 8% share. After the proposed acquisition, Diageo and Bacardi USA together would have a combined market share of about 95% in the premium rum market in the United States. The proposed acquisition will increase the Herfindahl-Hirschman Index ("HHI") (the customary measure of market concentration) in the premium rum market by about 500 points, and result in market concentration of about 4600 points.

B. Popular Gin

Total United States sales of all popular gin products at retail are about $650 million. In this market, Diageo, through its ownership and marketing of Gordon's Gin (and interest in Gilbey's Gin), is the nation's second largest competitor, with about a 34% share, and Vivendi, through its ownership and marketing of Seagram's Gin (and interest in Burnett's White Satin Gin), is the nation's largest competitor, with about a 66% share. After the proposed transaction, Diageo will have access to highly sensitive commercial business information about Seagram's Gin, its principal competitor. Were Diageo actually to acquire Seagram's Gin, it would have a market share of (or have a financial interest in) close to 100% of the popular gin market in the United States. Such an acquisition would increase the HHI by about 4500 points, and result in market concentration of about 10,000 points.

C. Deluxe Scotch

Total United States sales of all deluxe Scotch products at retail are about $450 million. In this market, Diageo, with its Johnnie Walker Black Scotch, is the nation's largest competitor, with about a 51% share, and Vivendi, with its Chivas Regal Scotch, is the nation's second largest competitor, with about a 49% share. After the proposed transaction, Diageo will have access to highly sensitive commercial business information about Chivas Regal Scotch, its principal competitor. Were Diageo actually to acquire Chivas Regal Scotch, it would have a market share of close to 100% of the deluxe Scotch market in the United States. Such an acquisition would increase the HHI by about 5,000 points, and result in market concentration of about 10,000 points.

D. Single Malt Scotch

Total United States sales of all single malt Scotch products at retail are about $250 million. In this market, Diageo, with its Oban, Lagavulin, Dalwhinnie, Cardhu, Talisker, Cragganmore, Knocando, Glenkinchie, and Glen Ord brands, is the nation's fourth largest competitor, with about a 6% share, and Vivendi, with it's The Glenlivet Scotch product, is the nation's largest competitor with about a 26% share. After the proposed transaction, Diageo will have access to highly sensitive commercial business information about The Glenlivet Scotch. Were Diageo actually to acquire The Glenlivet Scotch, it would have a market share of about 32% in the single malt Scotch market in the United States. Such an acquisition would increase the HHI by about 300 points, and result in market concentration of about 2,000 points.

E. Cognac

Total United States sales of all Cognac products at retail are about $1 billion. In this market, Diageo, with its Hennessy brand, is the largest competitor with about a 54% share, and Vivendi, with its Martell product, is the third largest competitor with about a 9% share. After the proposed transaction, Diageo will have access to highly sensitive commercial business information about Martell Cognac. Were Diageo actually to acquire Martell Cognac, it would have a market share of about 63% of the Cognac market in the United States. Such an acquisition would increase the HHI by about 900 points, and result in market concentration of about 4,600 points.

V. The Proposed Consent Order

A. The premium rum market

The Proposed Consent Order, if finally issued by the Commission, would settle all of the charges alleged in the Commission's Draft Complaint. Under the terms of the Proposed Consent Order, Diageo will be required to divest its Malibu rum business, worldwide, to an acquirer that is acceptable to the Commission.

Diageo will be required to complete the mandated divestiture within six (6) months from the date it (together with Pernod) acquires Seagram. In the event that Diageo does not complete the required divestiture in the time allowed, the Commission will appoint a trustee to sell the assets. The Proposed Consent Order empowers the trustee to sell such additional assets as may be necessary to assure the marketability, viability, and competitiveness of the businesses that are required to be divested. Pending Diageo's divestiture of the Malibu rum business to a Commission-approved acquirer, and to prevent competitive harm pending the divestiture and to ensure that the assets required to be divested will remain a competitively viable business, the Commission has appointed Theodore F. Martens of PricewaterhouseCoopers LLP as an interim monitor. Among other things, the monitor will ensure that during the period of time that Diageo will own both the Malibu and Captain Morgan rum businesses, it will manage them separately.

B. The Popular Gin, deluxe Scotch, single malt Scotch, and Cognac markets

Under the terms of the Proposed Consent Order, Diageo will be prevented from obtaining or using any commercially sensitive business information relating to Seagram's Gin, Chivas Regal Scotch, The Glenlivet Scotch, or Martell Cognac. To ensure that this will not occur, Diageo has agreed to the following procedures:

First, to ensure that Diageo will not acquire pre-existing competitively sensitive information about Seagram's Gin, Chivas Regal Scotch, The Glenlivet Scotch, and Martell Cognac, Vivendi will hire an independent consultant to identify and segregate those materials. This will prevent Diageo from seeing the competitively sensitive business information in the materials that Diageo will be acquiring.

Second, Diageo will implement a series of firewalls to keep confidential information from the back office operation it will be operating in part for the benefit of Pernod, or confidential information that Diageo will learn because of its co-packing arrangement, from getting into the hands of Diageo marketing personnel.

C. The Order To Hold Separate and Maintain Assets

Accompanying the Proposed Consent Order is an Order to Hold Separate and Maintain Assets. This order requires Diageo to preserve and maintain the Seagram Captain Morgan rum assets as a separate competitive entity pending the divestiture of the Malibu assets. This will ensure that there will be no interim harm to competition pending the divestiture by Diageo of the Malibu assets during the period (maximum of six months) that Diageo will be the owner of both Malibu Rum and Captain Morgan Rum.

The Order to Hold Separate and Maintain Assets also requires Diageo to preserve and maintain the competitive viability of the Malibu assets, pending their divestiture. This will ensure that the competitive value of these assets will be maintained after Diageo acquires the Seagram rum assets but before the Malibu Rum assets are actually divested.

VI. The Opportunity for Public Comment

The Proposed Consent Order has been placed on the public record for thirty (30) days for receipt of comments from interested persons. Comments received during this period will become part of the public record. After thirty (30) days, the Commission will again review the agreement and the comments received, and will decide whether it should withdraw from the agreement or make final the Consent Order in the agreement.

By accepting the Proposed Consent Order subject to final approval, the Commission anticipates that the competitive problems alleged in the Draft Complaint will be resolved. The purpose of this analysis is to invite and facilitate public comment concerning the Proposed Consent Order. It is not intended to constitute an official interpretation of the Proposed Consent Order, nor is it intended to modify the terms of the orders in any way.