Egg firms may have to unscramble merger

The merger of Britain's two biggest egg suppliers is set to be blocked after the Competition Commission concluded that it would drive up prices in the shops and damage the interests of egg producers.

Deans Food Group and Stonegate Farmers, two family-owned companies, announced their merger in June last year, creating a single company with sales of £400m, a workforce of 2,500 and control over 60-70 per cent of the UK egg market.

The merger was referred by the Office of Fair Trading to the Competition Commission in September and after a four-month investigation the commission has provisionally ruled that it will lead to a "substantial lessening of competition" which can only be remedied by divestment of either the Deans or the Stonegate business. The commission said that behavioural undertakings would not be sufficient to address the adverse effects on competition resulting from the merger.

Deans is roughly three times the size of Stonegate with sales of £314m. Its smaller rival has a turnover of £103m. Together the two companies would have a commanding hold over the supply of both fresh eggs to retailers and liquid egg to food manufacturers. The UK consumes about 10 billion eggs a year.

The inquiry chairman, Dame Barbara Mills, said some retailers had told the commission that their ability to switch to alternative suppliers would be much reduced as they would be unable to provide sufficient numbers of eggs and would have difficulty increasing production capacity within a reasonable timescale. "Given these factors, we think it is likely that the merged company would be able to increase prices to its customers. Ultimately these price rises could feed through to the consumer," she said.

The commission also concluded that the market power of the merged company would enable it to cut the price it paid to egg producers and tie them into long-term supply contracts, further damaging competition.

Deans, which has headquarters in Tring, Hertfordshire, and Stonegate, which is based in Lacock, Wiltshire, had argued that the bargaining power of their customers and their ability to switch to smaller suppliers or imports would be sufficient to preserve competition.

Michael Kent, chief executive of Deans, said: "These findings are only provisional. Even if they were correct we do not accept that divestment is an appropriate remedy. We will be challenging the findings over the next two to three weeks and working towards a more satisfactory outcome."

The commission is inviting comments on its provisional conclusions by 27 January and will make a final ruling in the following month. If it sticks to its findings then the merger, constructed as an equally and jointly-owned company, will have to be unravelled.