Analysis of the Kraft Food- Cadbury Merger

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Table of contents

I.Introduction4
II.The case5
III.Analysis: competitive assessment6
1)Confectionery sector overview.7
2)Relevant product market9
3)Relevant geographic markets11
4)Unilateral Effects 11
IV.Our results: pro-collusive effects and efficiency gains.14 V.Conclusions15
Bibliography16


I.Introduction
Kraft is a worldwide food and beverage company active in more than 150 countries with annual revenues of $48 billion while Cadbury is a worldwide producer and seller of chocolate and sugar confectionery products in over 60 countries. As stated by the European Commission: “Both Kraft and Cadbury are strong players in the chocolate confectionary business in the European Economic Area. With its main chocolate brands Milka, Côte d'Or and Toblerone, Kraft has a very strong presence in most Member States, with the exception of the UK and Ireland where customers' preferences remain strong for traditional British chocolate. Cadbury is the market leader in the UK and Ireland, in particular with its brand Dairy Milk, while in continental Europe it is mainly active in France, Poland, Romania and Portugal, through local brands which it previously acquired.” (European Commission, 2010) Kraft Food welcomed the merger with Cadbury with the following statement: “The combination would build on Kraft Foods' position as a global powerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands.” (Kraft Food Inc., 2010) Of course, the merger is here presented as producing gains for the vastest majority of stakeholders but it was the concern of the European Commission to verify that those gains would have not been offset by the losses it may create. In fact, the ratio laegis of the Merger Regulation is to impede those activities which can be detrimental for the society and reduce economic welfare. In this framework competition plays a major role. In fact, in the definition provided by the European Commission a merger is defined on the basis of the damage it can possibly deliver by reducing or hindering competition: “A concentration which would significantly impede effective competition, in the Common Market or in a substantial part of it, in particular by the creation or strengthening of a dominant position, shall be declared incompatible with the Common Market”. Hence, in the process of determining whether the merger Kraft Food- Cadbury could deliver efficiency and gains to the market and the society or not, competition was the starting point of the analysis elaborated by the European Commission and its preservation constitute the basis of the decision taken. In the following discussion these decisions will be investigated on the basis of the economic theory and principles studied. Before starting with the analysis a short summary of the case is offered (section II). Section III and IV focuse on the competitive assessment of the case. The analysis starts with a brief overview of the food and chocolate industry and it is followed by the descriptions on the relevant product market, the relevant geographic market and with a final assessment of market power. Finally, in section V some conclusions will be drawn in the light of the economical results. II.The case

On 9 November 2009, Kraft announced a tender offer with a deadline for acceptance on 5 February 2010 to acquire the whole share capital of Cadbury. The offer was based on a mixture of cash and Kraft’s share. At the date of the notification the Board of Cadbury suggested their shareholders to reject the offer as “The Board believes that the proposal fundamentally undervalues the Group and its prospects.” (European Commission, 2010)The offer was accepted later, in January 2010, on the basis of new and better terms and by February 2nd , 2010 it was fully satisfied. According to the European Commission, the transaction constituted a concentration as described in Article 3(1) (b) of the Merger Regulation, which states:...
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