Brands must flow in water deal: The ruling on the Perrier sale imposes strict conditions on Nestle. Tim Jackson reports

TAKE a stroll around the streets of Paris this week and it is almost impossible to avoid the latest advertising campaign for Perrier. All over the city, huge billboards carry a photograph of a beautiful woman, naked from the waist up. Well, not quite naked: her nipples are obscured by what on closer inspection turn out to be metal bottle-tops, bearing the logo of the famous mineral water brand. Beneath her is a bottle-opener and a single word: Garcon]

Advertising specialists say that the technique of using both humour and sexism to sell a product is typically French. But thanks to a decision taken yesterday by the competition authorities in Brussels, Perrier is now set to become a Swiss brand. Source Perrier SA, the bottler of the water, can now be sold to Nestle, the food giant from Switzerland.

But the Fr15bn ( pounds 1.56bn) acquisition has not turned out quite the way either Nestle or Perrier had hoped. Back in March, the Swiss firm thought it had won a long and bruising battle for Perrier with the Agnelli family of Italy. It had produced what it hoped was a formula that would satisfy everybody.

The Agnellis, who had been frustrated in their attempt to win control of the bottler, would be given a handsome price for the Perrier shares they had already bought. BSN, the number-two water conglomerate in the French market, would be given a consolation prize by being allowed to buy Volvic. And Nestle would be left with an impressive hand of trump brand-names, including Perrier, Vichy, Saint-Yorre and others.

Nestle's calculations left out just one thing, however. The firm did not take account of Sir Leon Brittan, the combative competition tsar at the European Commission in Brussels. No sooner had the details of the painstakingly negotiated deal been revealed than Sir Leon's office announced that it was opening a four-month investigation into it.

Sir Leon's concern was that by eliminating Perrier as a competitor and by sharing out its most valuable brands with BSN, Nestle would be severely restricting competition in the French mineral water market. And French consumers, each of whom drinks some 77 litres of mineral water every year, would be the losers, with higher prices and less chance for new brands to come on to the market.

Yesterday, the lawyer and former British cabinet minister persuaded his colleagues on the 17- member College of European Commissioners to endorse a new policy. He approved the sale of Perrier to Nestle, but with conditions that give European competition policy a scope it has never had before.

The 1990 merger regulation (the document, drafted under Sir Leon's aegis, that is the legal basis used by Brussels to police European mergers and acquisitions) says plenty about monopoly. But it says nothing about a duopoly, in which two firms carve up a market between them, which was exactly what seemed to be happening with Nestle and BSN.

'It would simply be ludicrous if we were not able to act,' Sir Leon said yesterday. 'If Nestle had been allowed simply to buy Perrier, Nestle and BSN would between them have dominated the French market for bottled water . . . no reputable competition authority could have allowed that to happen.' So he persuaded the Commission to read the merger regulation broadly enough to include in its remit oligopolies involving more than one firm.

In an outcome that has been carefully negotiated between the Commission and Nestle, the two sides have agreed that the deal can go ahead, but only if Nestle sells to a single buyer a number of the water sources - perhaps eight - that it will own after gobbling up Perrier.

The Commission has specified some of the brands that must go, including Vichy, Pierval and Saint-Yorre, and a deadline by which a buyer is to be found. The full details have been kept secret so that Nestle cannot be held over a barrel by potential buyers.

Sir Leon claimed yesterday that by imposing these conditions - and by further insisting that the buyer be a big firm, strong enough to develop brands in an already concentrated market - he will be creating a new 'third force' in French mineral water that will ride into the market like St George, slaying the dragon of possible collusion between Nestle and BSN.

The third force will be forbidden to sell the brands back to either for at least a decade. Because they will be worth more together than apart, it will be in the buyer's interests to hold the divested brands together as a single group.

Sir Leon has already been criticised for intervening to such an extent in a single domestic market. He replies that the French authorities could have asked him to put them in charge of policing the merger, but they chose not to do this. He has also been accused of operating an industrial policy by another name - of overturning years of his own policies by trying to pick a winner. Yet there is a difference in this case: the final aim is not to create a mega-bottler, but simply to protect the water drinker.

Sir Leon claims he has been forced to take this drastic step only because the French mineral water market is effectively closed. Imports are less than 2 per cent of sales, compared with more than 50 per cent in Britain.

Of 15 attempts by outside firms to enter the market in the past five years, only four have survived; none has established a firm foothold. That is why competition from outside France could not be relied on to stop BSN and Nestle milking the French consumer, one udder each.

Some of the factors that keep foreign fizzies out of France are quite natural and reasonable. Existing brands spend a lot on advertising. French consumers, unlike those in Germany and elsewhere, refuse to drink bottled purified tap water. They insist on mineral water bottled at source, and prefer it to be French.

But in part at least the very reason that Sir Leon was forced to such extreme action in the Nestle- Perrier case is that there are deliberate barriers making it harder for mineral water to cross borders. One is the rule, actually a European-wide regulation according to EC officials, that water must be bottled at source if it is to be called mineral water. That means makers must carry bottles one by one across frontiers, instead of transporting water in bulk and bottling it more cheaply where the customers are.

Another is the distribution system in France, in which many small retailers are reluctant to give shelf space to a new brand before they are convinced it will sell. Sir Leon, and many others in Europe, have complained bitterly about exactly the same phenomenon in Japan, and have described it as a trade barrier that should be removed.

The Commission's investigators say, quite rightly, that it was not their job to look at such things; they were just vetting the Nestle- Perrier deal. But a full investigation of why nobody can export mineral water to France cannot be ruled out. 'If anyone has a complaint to make, I shall be happy to hear it,' Sir Leon told the Independent yesterday.

(Photograph omitted)