Labyrinthine competition laws add insult to injury for brewers

Legislative pressures will give the Bass and C-T deal a rough ride, but isn’t the move just a natural consequence of the Beer Orders? By George Pitcher. George Pitcher is joint managing director of media consultancy Luther Pendragon

The lawyers who are currently drafting the terms of the proposed deal between brewery conglomerates Bass and Carlsberg-Tetley will doubtless have found time to upgrade their summer holidays.

The terms of the deal are massively complicated and, in corporate law, if there is one thing lawyers adore, it is complication. It is not so much a case of burning the midnight oil, as of the clients having money to burn at midnight.

The deal itself would be complicated in any event. But it is worth asking what has made it so densely complex that, even after months of protracted negotiation – and when Bass confirms that it wishes to purchase Allied Domecq’s half-share in the Carlsberg-Tetley brewing combine, as it did on Monday – it is still said to be a week, and maybe more, from producing a tangible proposal?

The answer must be the UK’s competition laws and regulations and the top-heavy structures implementing them. It really is extraordinary that the pressures inflicted on British brewers as a result of the Beer Orders of 1991 should have led to a rationalisation in the industry that is now hampered by the very regulators that started the process in the first place.

We should never forget that it was the then Trade & Industry Secretary Lord Young who was “minded” to accept proposals from the Monopolies & Mergers Commission to break the major brewers’ hold on their tied houses. The Government backed off when The Beerage, as it was known then, flexed its muscles, but the 1991 Beer Orders still required the brewers to shed large numbers of tied houses.

The effect was to be the closure of uneconomic locals, the conversion of many others into tenancies with Draconian leases and a significant exodus from brewing. Bass was among the shedders, closing four breweries and selling another. The industry contracted and rationalised to an extent that, by the mid-Nineties, we have fewer pubs offering ranges of beers from a more limited number of brewery consolidations. Well done, Lord Young.

To have a system of competition regulation that stands in the way of such consolidations is to add insult to the brewers’ injury. Bass is said to want to defend its competitive position in the market in the wake of Scottish & Newcastle’s acquisition of Courage last year for 443m, which made S&N a strong leader in brewing and distribution with some 30 per cent of the market. A combined Bass and C-T would amount to a market share of some 38 per cent.

I gather that, as a consequence, Whitbread has complained to the Office of Fair Trading that such a move would leave it a very distant third, with just 14 per cent of the market. Whitbread would not be complaining, of course, if it could strike such a deal and catapult itself into a dominant position beyond one-third of the total market.

But one can’t blame it for objecting. That is the way the game is played in an over-regulated market – you either build a dominant position through luck, shrewd negotiation or political favour or you complain to the authorities that someone else is doing so.

The real issue here, from which the machinations of particular parties should not distract, is that the regulators have stimulated a process of market activity and subsequently seek to stand in its way, as though they had nothing to do with its genesis. It’s like selling tickets to a party and then questioning their validity at the door.

The regulators will be blissfully unaware of their dual roles in cause and effect. But if the “cause” end of the regulatory equation was burdensome enough in commercial terms, then the “effect” end is nightmarish. At its simplest, Allied will sell its 50 per cent share in C-T for 200m. Bass will then buy Carlsberg’s share in C-T in a contra deal for 20 per cent of the enlarged brewing business.

In the event of regulatory objections, Carlsberg will buy a majority stake in the combined brewing business, making C-T, say, 85 per cent owner, with Allied retaining a 15 per cent stake. That’s only the beginning – then there is the question of where Allied buys the beer for its thousands of pubs.

This autumn’s Queen’s Speech should herald a Bill that will tackle anti-competitive practices, as set out in the 1989 White Paper. It should also erase the abuse of market power, as detailed in a Government statement of April 1993, by updating the Fair Trading Act (1973), the Competition Act (1980) and the Restrictive Practices Act (the Companies Act may also be amended).

It is dearly to be hoped that this legislation will address the de-mands of a free market, which the brewery sector has been denied for so long.

It would be an enormous relief to the market and a boost to the economy if it did. But a general election will be along just in time to screw it all up. Lawyers can breathe easy for a few years yet.

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Tom Fishburne is founder of Marketoon Studios. Follow his work at marketoonist.com or on Twitter @tomfishburne See more of the Marketoonist here

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