Friday, August 17, 2007

FTC Denied Injunction Blocking Supermarket Merger; Commission to Appeal Ruling

This posting was written by John W. Arden.

The Federal Trade Commission on August 16 was denied a preliminary injunction barring Whole Foods Market, Inc. from acquiring Wild Oaks Markets during the pendency of an FTC administrative proceeding.

The federal district court in Washington, D.C. issued an order, citing a 93-page opinion that is being held under seal for containing confidential business information.

In the order, Judge Paul L. Friedman instructed counsel for all parties to meet with him within two business days with agreed-upon proposed redactions. Subsequently, a redacted version of the opinion will be made public.

The FTC appealed the ruling on August 17, but has not requested a stay that would prevent the acquisition during the pendency of the appeal.

The supermarket chains agreed not to close the deal prior to noon (Eastern Time) on Monday, August 20. Absent a stay pending the appeal, the chains may close the transaction at any point thereafter.

FTC Court Challenge

On June 6, the FTC had filed a court complaint, challenging the proposed combination of the nation’s largest “premium natural and organic supermarket chains.” The agency charged that the acquisition would reduce direct competition in the market and lead to the exercise of unilateral market power, resulting in higher prices and reduced quality, service, and choice for consumers.

The federal district court issued a temporary restraining order on June 7, prohibiting the parties from consummating the deal until after a preliminary injunction hearing. Meanwhile, on June 27, the FTC issued an administrative complaint against the transaction.

The challenges were criticized in many quarters for their definition of a market of “premium natural and organic food supermarkets.” The Commission alleged that this market was differentiated from conventional supermarkets by the breadth and quality of their perishable goods; the wide variety of natural and organic products, services, and amenities; and the customer’s shopping experiences.

Critics maintained that this market definition was far too narrow because the two supermarket chains compete with other natural and organic food stores and farmers markets, in addition to traditional supermarket chains, which are adding natural and organic food brands and departments. One survey found that 74 percent of natural and organic foods are now sold through conventional supermarkets.
On the other hand, the American Antitrust Institute pointed out that the acquisition would eliminate Whole Foods’ largest competitor for natural and organic food in 28 geographic regions across the country.

Reactions of Parties

In an August 16 statement, the FTC expressed regret at the court decision, calling it a loss for both consumers and competition.

“We respect the Court’s decision, which we currently are reviewing,” said Jeffrey Schmidt, FTC Competition Director. “We brought this challenge because the evidence before us showed that the merger would most likely result in higher prices and reduced choices for consumers who shop at premium natural and organic supermarkets.”

On the other side, Whole Foods and Wild Oats felt vindicated.

“The District Court’s ruling affirms our belief that a merger between Whole Foods and Wild Oats is a winning scenario for all stakeholders,” said John Mackey, Chairman and CEO of Whole Foods Market. “We believe the synergies gained from this combination will create long-term value for customers, vendors, and shareholders as well as exciting opportunities for team members.”

Gregory Mays, Chairman and CEO of Wild Oats Markets, agreed. “We are very pleased with the court’s ruling and always had confidence that, once presented with the facts, the judge would rule in favor of this merger.”

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