General Mills, Inc.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 961-0101]

General Mills, Inc.; Analysis to Aid Public Comment

agency: Federal Trade Commission.

action: Proposed Consent Agreement.

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summary: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would require, among other things, the

Minneapolis-based producer of ready-to-eat cereals to permit New

Ralcorp Holdings, Inc. to transfer to any successor party, without any

authorization or approval from General Mills, the right to manufacture

and sell cereals identical to the Chex brand products. The order also

bars General Mills from delaying production of the private label Chex

rivals. The agreement settles allegations that General Mills'

acquisition of Ralcorp's branded cold cereal business, including the

Chex line of cereals, would boost General Mills' share of the U.S.

ready-to-eat cereals market to 31 percent and that it would have

restricted the entry of new private label cereal products to compete

with the General Mills brands. The Commission had alleged that the

acquisition could have resulted in higher prices for Chex brand

cereals.

dates: Comments must be received on or before March 17, 1997.

addresses: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

for further information contact: William J. Baer, Federal Trade

Commission, H-374, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

(202) 326-2932.

George S. Cary, Federal Trade Commission, H-374, 6th St. and Pa.

Ave., N.W., Washington, D.C. 20580. (202) 326-3741.

Phillip L. Broyles, Federal Trade Commission, S-2105, 6th St. and

Pa. Ave., N.W., Washington, D.C. 20580. (202) 326-2805.

supplementary information: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for December 26,

1996), on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.''

A paper copy can be obtained from the FTC Public Reference Room, Room

H-130, Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C.

20580, either in person or by calling (202) 326-3627. Public comment is

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Section 4.9(b)(6)(ii) of the Commission's

Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis to Aid Public Comment on the Provisionally Accepted Consent

Order

The Federal Trade Commission has accepted for public comment from

General Mills, Inc. (``General Mills''), an agreement containing a

consent order. The Commission designed the agreement to remedy any

anticompetitive effects stemming from General Mills's acquisition of

the branded ready-to-eat (``RTE'') cereal business from Ralcorp

Holdings, Inc. (``Ralcorp'').

This agreement has been placed on the public record for sixty (60)

days for reception of comments from interested persons. Comments

received during this period will become part of the public record.

After sixty (60) days, the Commission will again review the agreement

and the comments received. The Commission will then decide whether it

should withdraw from the agreement or make final the order contained in

the agreement.

The Commission's Complaint charges that on or about August 13,

1996, General Mills agreed to acquire the branded RTE cereal and snack-

mix businesses owned by Ralcorp. Among the cereals that General Mills

agreed to acquire are Corn CHEX, Rice CHEX, and Wheat CHEX. The

Commission has reason to believe that the acquisition and the agreement

to acquire Ralcorp may have anticompetitive effects and be in violation

of Section 7 of the Clayton Act and Section 5 of the Federal Trade

Commission Act.

According to the Commission's Complaint, General Mills is the

second largest producer of RTE cereals and Ralcorp is the fifth largest

producer of branded RTE cereals. Ralcorp is also the largest producer

of private label RTE cereals. In 1994, the Ralston Purina Company

created Ralcorp by distributing shares of Ralcorp to Ralston's Purina's

shareholders. General Mills will not acquire Ralcorp's private label

RTE cereal business. Ralcorp will form a new entity, New Ralcorp

Holdings, Inc. (``New Ralcorp''), which will continue producing RTE

cereals.

The Commission's investigation of this matter found potential

anticompetitive problems arising from

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this acquisition. The Complaint alleges that concentration is high in

the RTE cereal market and entry is difficult and unlikely. Although

this transaction does not reduce the number of established substantial

firms in the RTE cereals market, it does increase General Mills' market

share by approximately 3 percent and thus increases overall

concentration in the market. Of particular concern is that the

acquisition agreement restricts New Ralcorp's freedom to produce and

sell private label CHEX products as well as its ability to transfer the

rights to manufacture and sell private label CHEX products to a third

party without permission from General Mills.

Under the terms of the proposed order, General Mills must, before

consummating the merger, include in its agreements with Ralcorp and New

Ralcorp provisions that will permit the transfer to any successor party

of the right to manufacture and sell private label CHEX in the United

States. These provisions will permit the successor party to sell these

private label cereals without further authorization or approval from

General Mills or Ralston Purina Company. The proposed order also

prohibits General Mills from taking any action to prevent or delay New

Ralcorp's sale of private label CHEX products in the United States.

Finally, the proposed order prohibits General Mills from enforcing any

agreement that would prevent the transfer to a successor party of the

right to manufacture and sell private label CHEX in the United States.

Presently, neither Ralcorp nor any other person produces private

label CHEX products. The proposed order will increase the likelihood

that someone will produce and sell private label CHEX in competition

with General Mills' branded CHEX products.

To reduce the possibility of competitive harm before the

Commission's entry of a final order, the interim agreement binds

General Mills to the terms of the order, as if it were final. The

interim agreement became effective on the date General Mills signed the

consent agreement.

The purpose of this analysis is to invite public comment concerning

the consent order. The Commission does not intend this analysis to be

an official interpretation of the agreement and order or to modify

their terms in any way.

Donald S. Clark,

Secretary.

Statement of Commissioner Mary L. Azcuenaga Concurring in Part and

Dissenting in Part in General Mills, Inc., File No. 961-0101

The Commission today issues for public comment a consent order

based on a complaint alleging that the acquisition by General Mills,

Inc., of the branded ready-to-eat cereal business of Ralcorp Holdings,

Inc., violates Section 7 of the Clayton Act. The order is narrow, but I

would narrow it even further. In particular, I would delete Paragraph

II(B) of the proposed order, which requires elimination of a noncompete

clause that would have prevented Ralcorp for a period of eighteen

months from introducing a new private label cereal identical or similar

to the CHEX-brand cereals being sold to General Mills.

Paragraph 14 of the complaint alleges that the noncompete clause

described in paragraph 8 would have the anticompetitive effect of

``restricting the entry of new private label cereal products into

competition with General Mills.'' That effect, of course, is precisely

the purpose of this (and every other) noncompete clause.\1\ Although

the complaint might be read as alleging that noncompete clauses are per

se anticompetitive, that interpretation would be inconsistent with the

Commission's decision a few days ago to accept for public comment an

order that in paragraph VI imposed an affirmative prohibition on

competition for six years between the merged firm and the acquirer of

certain animal health assets to be divested under the order. ``Ciba

Geigy Limited,'' (File No. 961-0055, December 17, 1996). The Ciba Geigy

decision recognizes the efficiency potential of noncompete clauses,

which, among other benefits, may facilitate an orderly transfer of

ownership and provide a brief transition period for new owners to

establish themselves in the business.

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\1\ The noncompete clause described in paragraph 8 of the

complaint prohibits Ralcorp from entering the market with a private

label, CHEX-type cereal product for eighteen months. As indicated in

the Department of Justice and Federal Trade Commission Horizontal

Merger Guidelines (April 2, 1992), a merger is unlikely to create or

enhance market power if entry is ``timely, likely and sufficient,''

and entry is deemed ``timely'' if it can be achieved within two

years. Under this standard, the noncompete clause is unlikely to

create or enhance market power.

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Although the appropriate duration of a noncompete clause may vary

depending on the circumstances of the industry and the acquisition,

using a noncompete clause for a short period to smooth a transition may

be procompetitive. I do not find reason to believe that this short-term

noncompete clause is anticompetitive, and I dissent from the order

requirement to eliminate it.

Statement of Commissioner Roscoe B. Starek, III, Dissenting in General

Mills, Inc., File No. 961-0101

I respectfully dissent from the decision of the majority to accept

for public comment a consent agreement with General Mills, Inc.

relating to the proposed acquisition of the branded ready-to-eat

(``RAE'') cereal and snack food businesses of Ralcorp Holdings, Inc.

(``Ralcorp''). My dissent rests on two grounds.

As noted in the Commission's proposed complaint, General Mills will

not acquire the private label RTE cereal or snack food businesses of

Ralcorp. Ralcorp instead will form a new entity, New Ralcorp Holdings,

Inc. (``New Ralcorp''), to hold the private label cereal and snack food

businesses that General Mills will not acquire. Under the acquisition

agreement, New Ralcorp has the right to manufacture and sell a private

label version of the Chex RTE cereal products, but is restricted from

transferring this right to a third party without permission from

General Mills. The acquisition agreement further provides that New

Ralcorp may not produce private label Chex products for a period of

eighteen months following consummation of the acquisition.

My first reason for voting against acceptance of the proposed

consent order is that the Commission lacks sufficient evidence to

support the unilateral effects theory alleged in the complaint. Second,

it is completely unnecessary--and in fact creates inefficiency--to bar

enforcement of the parties' non-compete agreement. Whatever minimal

competitive risks this transaction may raise are adequately addressed

by eliminating the restrictions on Ralcorp's ability to transfer

manufacturing and sales rights for private label Chex to a third party.

General Mills' share of the RTE cereal market will increase by

approximately three percent as a result of the proposed acquisition.

The number of competitors in the RTE cereal industry will remain the

same, and General Mills will remain the second largest RTE cereal

producer in the United States.\1\ New Ralcorp will

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immediately assume Ralcorp's position as the largest private label

cereal producer in the United States. Moreover, General Mills' post-

merger share of the RTE cereal market will be between 25 and 31 percent

(depending on whether share is measured in pounds or sales dollars),

well below levels suggested by the Horizontal Merger Guidelines as the

minimum threshold at which the Commission might reasonably presume

market power.\2\ It is hard to understand under these simple facts how

the majority determined that the proposed acquisition will enable

General Mills unilaterally to exercise market power.

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\1\ General Mills' share of branded cereals will of course

increase as a result of the transaction, but the complaint does not

allege a relevant market consisting of ``branded RTE cereal.''

Indeed, the provisions of the proposed order (which affect the

disposition of assets used in the production of nonbranded cereals)

make sense only in the context of an ``all RTE cereal'' product

market.

\2\ See U.S. Department of Justice and Federal Trade Commission,

Horizontal Merger Guidelines Sec. 2.211, 4 Trade Reg. Rep. (CCH)

para. 13,104, at 20573-9.

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Unable to presume market power, the Commission instead relies upon

a ``close substitutes'' theory of unilateral harm, notwithstanding a

paucity of empirical evidence demonstrating that Ralcorp's branded Chex

products are the closest substitutes to the branded cereals of General

Mills. Although Chex products clearly compete with the branded General

Mills RTE cereal products, consumers have a preference for variety when

they choose RTE cereals and frequently choose among the many branded

and private label cereals produced by RTE cereal manufacturers in the

United States. Not surprisingly, Judge Wood reached this conclusion in

her opinion explaining why she refused to block the acquisition of the

Nabisco RTE cereal assets by Kraft General Foods in early 1993.\3\ In

Kraft General Foods, an empirical analysis of cereal purchasing

patterns suggested--as it does in the present matter--that consumers

have many attractive alternatives from which to choose in the event

that one RTE cereal producer tries to raise prices above competitive

levels. Overall, the empirical evidence does not support the

Commission's claim, under either a ``close substitutes'' or a dominant

firm theory, that General Mills would be able unilaterally to raise the

prices of its branded RTE cereals after the acquisition.

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\3\ State of New York v. Kraft General Foods, Inc., 1995-1 Trade

Cas. (CCH) para. 70,911, at 74,039, 74,066 (S.D.N.Y. 1995).

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Even if I agreed with the majority that this consent agreement

rests upon an empirically sound theory of competitive harm, the

proposed order would bar General Mills from enforcing an arguably

procompetitive non-compete agreement that is properly limited in scope

and duration. Covenants not to compete are often included in contracts

for the sale of a business, and generally are enforceable when

ancillary to an enforceable agreement and reasonable in geographic

coverage, scope of activity, and duration. Lektro-Vend Corp. v. Vendo

Co., 660 F.2d 255, 265 (7th Cir. 1981) (``The recognized benefits of

reasonably enforced non-competition covenants are now beyond

question.''), cert. denied, 455 U.S. 921 (1982); United States v.

Addyston Pipe & Steel Co., 85 F. 271, 281-82 (6th Cir. 1898), aff'd as

modified, 175 U.S. 211 (1899).\4\ Judicial inquiry into non-compete

provisions generally focuses on whether the restriction is reasonably

necessary to protect the legitimate business interests of the party

seeking to enforce the provision. United States v. Empire Gas Corp.,

537 F.2d 296, 307 (8th Cir. 1976), cert. denied, 429 U.S. 1122 (1977);

Sound Ship Bldg. Corp. v. Bethlehem Steel Corp., 387 F. Supp. 252, 255

(D.N.J. 1975), aff'd, 533 F.2d 96 (3d Cir.), cert. denied, 429 U.S. 680

(1976).

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\4\ See also Business Elecs. Corp. v. Sharp Elecs. Corp., 485

U.S. 717, 729 n.3 (``The classic `ancillary' restraint is an

agreement by the seller of a business not to compete within the

market.'').

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The Commission has often recognized that competitive benefits can

flow from a non-compete clause in the context of the sale of a

business. The Commission's recent acceptance for public comment of a

consent agreement in Ciba-Geigy, Ltd., et al., File No. 961 0055

(consent agreement accepted for public comment, Dec. 16, 1996), is

illustrative. In Ciba-Geigy, the Commission imposed an affirmative

obligation on the newly merged entity, Novartis AG, not to compete in

the United States and Canada for six years in the sale of animal flea

control products.\5\ As the Ciba-Geigy order indicates, the Commission

clearly recognizes that non-compete clauses--even when long in duration

and broad in scope--can serve legitimate procompetitive purposes in

some circumstances by allowing an acquiring entity a brief period to

re-deploy the acquired assets in a manner that increases competition in

the marketplace. I am therefore puzzled why the Commission so hastily

condemns a non-compete provision here that is only eighteen months in

duration, limited to the manufacture and sale of private label Chex

products, and arguably necessary to protect the legitimate interests of

the contracting parties.\6\

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\5\ See Paragraph VI of the proposed order in Ciba-Geigy.

\6\ Barring enforcement of the non-compete agreement might

undermine adherence by the parties to the supply agreement, an

element of the acquisition agreement found acceptable by the

majority.

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Because I find that the facts do not support the Commission's

theory of unilateral competitive harm in this instance, and because in

any event I disagree with the Commission's decision to bar enforcement

of the non-compete provision contained in the parties' acquisition

agreement, I have voted to reject the consent agreement.

[FR Doc. 97-921 Filed 1-14-97; 8:45 am]

BILLING CODE 6750-01-M