Irish Competition Authority Decisions

1. An arrangement involving a letter of agreement dated 5 October 1993, between Irish Distillers Group plc (IDG) and Cooley Distillery plc (Cooley), whereby IDG agreed to make an offer for the whole of the existing share capital of Cooley subject to certain conditions, was notified to the Competition Authority on 14 October 1993. The arrangement would have had the ultimate effect of IDG acquiring the assets and property, including the goodwill, of Cooley. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence.

2. The Authority issued a Statement of Objections to the parties on 2 December 1993 indicating the reasons why, in its opinion, the notified arrangement offended against section 4(1) of the Competition Act and did not satisfy the requirements for the grant of a licence set out in section 4(2). Both IDG and Cooley replied disputing a number of the points made in the Authority's Statement of Objections. An oral hearing was held on 24-26 January 1994 which was attended by representatives of both IDG and Cooley. The Authority refused a request by a third party to attend the hearing.

3. The notification relates to an agreement, in the form of a letter of agreement dated 5 October 1993, between IDG and Cooley, whereby IDG agreed to make an offer for the whole of the existing share capital of Cooley, subject to obtaining valid acceptances for shares representing more than 50% of such issued share capital and to certain other conditions. The letter of agreement was ´agreed and accepted for and on behalf of Cooley Distillery plc' by Dr. John Teeling and Messrs. Donal Kinsella, Paul Power and Lee Mallaghan, being directors and shareholders of Cooley. A share offer document was issued to all Cooley shareholders on 5 November 1993. It states that:

´The Boards of Cooley and IDG have reached agreement on the terms of a recommended Offer to be made by IBI Corporate Finance on behalf of IDG for all of the Issued Share Capital of Cooley.'

4. IDG is a wholly owned subsidiary of Pernod Ricard S.A. IDG is comprised of companies which are engaged inter alia in the distilling and sale of whiskey and other spirits, and in the distribution of spirits, wines and other alcoholic and non-alcoholic beverages. It also has subsidiaries engaged in other businesses including that of grocery wholesalers. It had an annual turnover of £302m in the year ended December 1992 with pre tax profits of £30.3m. Its turnover within the State was £200m. IDG produces and distributes several brands of Irish whiskey including Bushmills, Jameson, Powers, Paddy and Midleton Reserve. Its turnover from distilling and agency activities in 1992 was £139.7m. It is the major producer of Irish whiskey. Indeed, prior to the advent of Cooley, IDG was the only producer of Irish whiskey for many years. IDG which was formed in 1966 was initially made up of Power's, Jameson and Cork Distilleries. IDG acquired a minority stake in Bushmills Distillery in Northern Ireland in 1972. Bushmills became a fully owned subsidiary in 1974. IDG operates a distillery at Midleton in County Cork which distils whiskey as well as grain neutral spirit for gin, vodka and other alcoholic beverages. It operates a second distillery at Bushmills in Northern Ireland where malt whiskey is distilled.

5. IDG was acquired by the French drinks producer Pernod Ricard in 1988. Pernod Ricard was formed in 1975 as a result of the merger of France's two largest anise-based spirits producers. The group includes fifty companies in the spirits, wines and non-alcoholic beverages and products sectors. In addition to IDG, Pernod-Ricard's wholly owned subsidiaries include three Scotch whisky producers and a US based distiller. These subsidiaries produce and market whisky under the Clan Campbell, White Heather, Aberlour and Bourbon Wild Turkey labels. The group also includes amongst its brands Karinskaya vodka along with Epsom and BlackJack gins. In addition it holds concession rights in respect of Cutty Sark whisky, Stolichnaya vodka and Gilbey's gin.

6. IDG owns a minority 33.3% stake in Edward Dillon, a firm engaged inter alia in the importing and distribution of alcoholic drinks. In addition to distributing IDG products under the Bushmills brand name, Dillons distribute five scotch whisky brands and two US whiskey brands. They also distribute Zamoyski vodka and Gordon's and Tanqueray gins.

7. Cooley was incorporated on 30 September 1987 and acquired the alcohol plant owned by Ceimici Teo at Cooley, Co. Louth in November of that year. Since then it has operated a distillery at the plant producing whiskey. It also acquired the plant and certain business assets of Adam Miller & Company Ltd. and in 1989 purchased and partly refurbished the John Locke distillery premises at Kilbeggan Co. Westmeath. A pot still malt whiskey distillery was opened in 1989 and a column grain distillery came on stream in mid 1990. The development of the Cooley distillery was in large part financed by the establishment of associate companies which raised equity finance under the Business Expansion Scheme (the BES Companies).

8. In all, seven companies were launched to raise equity finance under the BES scheme for the Cooley operation. The first of these, Whiskey Manufacturing plc, was set up in March 1989 and raised £2.451m under the BES. Kilbeggan Whiskey plc raised a further £1m while the remaining five companies, (Inishowen Distilleries plc; Locke's Distillery plc; Tyrconnell Distillery plc; Brosna Whiskey plc; and Carlingford Whiskey plc), raised a further £2.496m. Essentially Cooley sold whiskey to such firms and they stored it until maturation. After a period of five years the BES companies were to sell the matured whiskey back to Cooley and distribute the proceeds to their investors. Cooley has an option to purchase such whiskey owned by the BES companies. If the option is not exercised by Cooley, then the BES companies can call on Cooley to buy the whiskey or they can sell it to any third party. Another company called Riverstown Animal Feeds plc was also established under the BES scheme. Cooley leased certain equipment to Riverstown and agreed to sell certain by-products to it, which it used to produce animal feeds. The funding raised by such companies under the BES scheme effectively provided the initial source of working capital for Cooley to produce and mature its whiskey. Changes introduced to the BES regulations in 1991 prevented Cooley and the BES companies from raising further funds from this source. As a result both Cooley and the BES companies had to rely on bank borrowings for their ongoing working capital requirements.

9. Cooley was established to produce Irish whiskey. While it also imports alcohol which it blends to vodka, gin and rum and has sold whiskey on a bulk basis, its main business is the distilling of whiskey for sale as Irish whiskey. Given the requirement to mature the product for a number of years before it can be sold as Irish whiskey, only a limited amount of Cooley Irish whiskey has come onto the market to date. Cooley's first branded whiskey was launched in September 1992 under the Tyrconnell brand name at a price of £15.50 [1] per bottle. It subsequently introduced two brands of single malt whiskey on selected markets in the early part of 1993. Its 1992 Annual Report stated that its blended whiskies were to begin entering the market in the Autumn of 1993. It also sold some of its whiskey in bulk to IDG and to overseas producers for blending with other whiskey. The distilling operations were closed down in early 1993 due to the company's financial problems. At that stage 5.8m litres of whiskey had been distilled and warehoused [2].

as at 31 December 1992.

Intangible Assets 0.09

Tangible Assets:

Land and Buildings 0.671

Plant and Equipment 2.807

Office Equipment 0.017

Motor Vehicles 0.005

3.50

Financial Assets 0.04

Total Fixed Assets 3.63

Source: Cooley Distillery plc Annual Report 1992.

10. Cooley's annual report for 1992 gives its turnover for that year as £3.6m on which it incurred operating losses of £71,000. The domestic market accounted for 70% of total turnover. Total losses up to December 1992 were £695,000. The accounts valued Cooley's fixed assets as at 31 December 1992 at £3.6m. (See Table 1). In addition stocks and debtors amounted to a further £690,000.

Tyrconnell Non Whiskey

Dunnes Stores [

Quinnsworth

Kelly's

Leyden's

McCambridge

Export

Others ]

11. A breakdown of Cooley's sales is given in Table 2. This indicates that more than one third of its sales of Tyrconnell whiskey went to export markets. All of its non whiskey products were sold on the domestic market. Its principal customers for such products included some of the major multiple and cash and carry groups.

12. IDG and Cooley are both engaged in the distilling of alcoholic drinks, notably Irish whiskey and certain other spirits including gin and vodka. [4] Whiskey is sold both as a branded product after bottling by the producer and as a bulk product. The bottled product is distributed to retail outlets in Ireland and overseas and is also sold to licensed premises for resale and consumption on such premises. Whiskey producers also buy and sell product between themselves in bulk form. Such product is blended with other whiskey as part of the production process before bottling.

13. The definition of the relevant market is particularly important in this instance. In this respect the Authority notes the views of the EC Commission which has stated that:

´A relevant product market comprises in particular all those products which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use'

in situations ranging from application of the merger control Regulation to the Notice on Agreements of Minor Importance [5].

The Authority also notes the views expressed by the US Supreme Court on the issue of market definition in Times Picayune where it stated that:

´For every product substitutes exist, but a relevant market cannot meaningfully encompass that infinite range, the circle must be drawn narrowly to exclude any other products to which, within reasonable variations in price, only a limited number of buyers will turn.' [6]

14. Some additional insights into the question of market definition are provided by the US Department of Justice merger guidelines which include guidelines on defining the relevant market in order to establish whether a merger is likely to have anti-competitive effects. These provide that:

´Specifically, the Department will begin with each product (narrowly defined) produced or sold by each merging firm and ask what would happen if a hypothetical monopolist of that product imposed a "small but significant and nontransitory" increase in price [7]. If the price increase would cause so many buyers to shift to other products that a hypothetical monopolist would not find it profitable to impose such an increase in price, then the Department will add to the product group the product that is the next-best substitute for the merging firm's product and ask the same question again. This process will continue until a group of products is identified for which a hypothetical monopolist could profitably impose a "small but significant and nontransitory" increase in price. The Department generally will consider the relevant product market to be the smallest group of products that satisfies this test. [8]'

15. The Irish Whiskey Act, 1980 sets out specific requirements which must be satisfied before a product can be described as Irish whiskey. These include inter alia a requirement that spirits be distilled in the state or in Northern Ireland from a mash of cereals and that they be matured in wooden casks in a warehouse in the State or in Northern Ireland for a period of not less than three years. Thus Irish whiskey is, to some extent, a unique product.

16. In looking at the final product market it might appear possible to consider all alcoholic drinks as substitutes for one another and consequently part of the same market. In practice, however, it appears somewhat unrealistic to regard all alcoholic drinks as perfect substitutes for each other. Personal tastes and preferences appear to be extremely important, and to lead to a fairly clear demarcation within the overall drinks market. Many drinkers will tend inevitably to consume either beer or spirits, or a category within these, or even confine themselves to a specific brand. There is, without doubt, a degree of interchangeability, over time and particularly among newer drinkers, and there is no rigid separation of the market into very small segments. Nevertheless, competition between drinks categories and brands can best be described as imperfectly competitive. Support for such a view is offered by the behaviour of the main drinks suppliers, who are increasingly involved in producing and/or distributing a wide range of drinks and who place heavy emphasis on branding products. The Authority also notes the views expressed by Werden that:

´There is always some competition from other products and consumers can do without. Thus, one should not conclude that a product or area is in the relevant market just because there is some competition or substitutability between it and products or areas for which one is trying to delineate the relevant market. [9]'

17. It seems reasonable to conclude that there are definable and separate markets for beer and spirits. Within the spirits sector there are somewhat less clearly defined markets for the major categories - whiskey, gin, vodka, rum and brandy. The Authority does not believe that other spirits could be considered to be sufficiently close substitutes for whisk(e)y to be considered part of the same product market. In other words it believes that in the event of a small increase in whisk(e)y prices relative to that of other spirits, there would be a very limited shift in consumption away from whisk(e)y to such products. Consequently the Authority does not believe that there is a single spirits market.

18. The Authority believes that in Ireland, although perhaps not elsewhere, Irish whiskey and Scotch whisky may constitute separate markets. Such a view is supported by a number of factors. In the Authority's view a small increase in the price of Irish whiskey would not lead to any significant shift in consumption from Irish to Scotch whisk(e)y. The Authority believes that the entry of a new Irish whiskey producer onto the market would have a far greater impact on the price and level of sales of IDG's products than would the entry of a new brand of imported whisky. It is relevant in this context that a number of media reports on the arrangements have indicated that the entry of Cooley would lead to a fall in Irish whiskey prices. IDG have stated that the market for whiskey in Ireland is highly brand oriented with customers specifying particular brands when buying whiskey. In addition they cited the potential harm which the release of sub-standard Cooley products could have on the image of, and demand for, Irish whiskey. The Authority accepts that any damage arising as a result of such developments would be confined to Irish whiskey and that the demand for Scotch whisky both in Ireland and overseas would not be adversely effected. This point, however, tends to reinforce the view that Irish and Scotch are not part of the same relevant product market. The Authority also notes the EC Commission decision in the case of Bells, a major Scotch whisky producer, where it found that a prohibition on exports ´affected the structure of competition on the Scotch whisky or non-Scotch whisky market', indicating that Scotch whisky constituted a separate market to other whiskeys [10]. In sum the Authority believes that the notified arrangements will mainly affect the Irish whiskey market, while noting that they may also have implications for the wider whisk(e)y market. As both IDG and Cooley are engaged in producing other spirits, i.e. vodka and gin, the arrangements also have some implications for those markets. The parties in their replies to the Authority's Statement of Objections and in their arguments at the Oral Hearing have strongly disputed the Authority's definition of the market. These points are returned to below.

19. The Authority also believes that there is a bulk whisk(e)y market which can be distinguished from the final product market. In considering the present notification the Authority is concerned primarily with the final product market for reasons which are outlined below. Various products are sold from time to time in the bulk market. These include new fillings of malt (pot still) and grain whiskey and mature malt and grain whiskey, together with blends of the two. The bulk trade is stated to be driven largely by supply and demand conditions in Scotland and is claimed to be notoriously cyclical. The bulk trade is primarily export orientated. The market is said to have been soft for the past two years with grain whiskey trading at around stg£1.50 per litre of pure alcohol and malt at around stg£3 or less.

20. According to the Checkout Yearbook 1.8m cases of spirits were sold in Ireland in 1991. Details of sales of the main categories of spirits are given in Table 3. Almost 840,000 cases of whisk(e)y were sold in 1991, with Irish whiskey accounting for almost 72% of this total. IDG accounted for 100% of the sales of Irish whiskey in both years. Imported produce accounted for 28.4% of whisk(e)y sales in 1991, down slightly on the previous year. Scotch whiskies are the main imports. Checkout reported that Scotch whisky had continued to decline during the past year, while noting that the Scotch sector was increasingly splintered, with Teachers being the leading brand. The only whiskeys sold at that time were those produced by IDG. In addition to Scotch there were also some imports of whiskey from the US and Canada, with brands such as Southern Comfort, distributed by Dillons, a company partly owned by IDG, reported to be growing in popularity. The Checkout yearbook also reported that Cork Dry Gin from Irish Distillers was the market leader in the Gin sector. Gordon's Gin which is distributed by Dillons was reported to be showing strong growth. Smirnoff which is distributed by Gilbey's was reported to have a 70% share of vodka sales.

(Cases)

Whiskey 601,630 589,127

Gin 123,982 128,637

Vodka 396,956 392,882

Whisky 238,586 241,223

Brandy 214,255 212,424

Rum 98,074 95,822

Vodka 28,951 28,852

Source: Checkout Yearbook 1993.

Note: Home produced whiskey figures include Bushmills

21. Table 4 provides some more recent figures on market share provided by IDG. The figures are broadly consistent with those given in Table 3, although they suggest that IDG's share of the whiskey and gin markets is slightly higher than the Checkout figures indicate. Cooley's whiskey sales to date have been quite small and its share of the Irish whiskey market is slight. IDG also indicated that it had 76% of the market for all whisk(e)ys, i.e. Irish and others, with Cooley having a negligible market share. Most of the remaining 24% is accounted for by various Scotch whisky producers, with US and Canadian brands having a relatively small market share. IDG accounted for over 72% of sales of gin in the Irish market. IDG claimed that its products accounted for almost 47% of total sales of spirits while Cooley accounted for less than 1%.

Irish whiskey 99.7 0.3

All Whisk(e)y 76.0 0.2

Gin 72.2 0.4

Vodka 26.5 1.4

Others 10.0 0.3

All Spirits 46.9 0.6

Note: The Cooley figures may be slightly understated as they refer only to the first nine months of the year.

22. The notification relates to an agreement, in the form of a letter of agreement dated 5 October 1993, between IDG and Cooley, whereby IDG agreed to make an offer for the whole of the existing share capital of Cooley subject to obtaining valid acceptances for shares representing more than 50% of the whole of the issued share capital of Cooley. The letter of agreement was agreed and accepted for and on behalf of Cooley by Dr. John Teeling and Messrs. Donal Kinsella, Paul Power and Lee Mallaghan, being directors and shareholders of Cooley.

23. The letter also set out a number of conditions which would have to be met prior to making the offer. These included inter alia requirements :

(i) to execute new trading agreements between Cooley and each of Whiskey Manufacturing plc, Kilbeggan Whiskey plc, Lockes Distillery plc, Carlingford Whiskey plc, Inishowen Distilleries plc, Brosna Whiskey plc and Tyrconnell Distillery plc (the "BES Companies") in terms acceptable to IDG, Cooley and the relevant BES company and to change the trading status of Riverstown Animal Feeds plc ("Riverstown") in terms acceptable to IDG, Cooley and Riverstown;

(ii) not to contravene the Irish Whiskey Act in relation to the maintenance/maturation of the whiskey in the possession or under the control of Cooley;

(iii) that Cooley and IDG enter into an Inventory Purchase Agreement in terms acceptable to both parties which will provide for the purchase of whiskey by IDG from Cooley.

In addition the agreement provides that the offer will be constructed so as to preserve the BES status of all Cooley shareholders.

24. The letter of agreement also states that:

´In signing this Letter of Agreement:

- Cooley and IDG are agreeing to use all reasonable endeavours to complete the sale as soon as possible; and

- the Directors of Cooley are agreeing to deal exclusively with IDG prior to and during the Offer period.'

The agreement is also stated to be conditional on obtaining the approval of the Competition Authority for the purchase/sale of Cooley. Schedule D of the letter provides that Cooley will continue to supply its existing customer base in the State with:

´(a) cased goods other than whiskey;

(b) bulk alcohol;

(c) The Tyrconnell.'

It also provides that Cooley will not supply any export orders from the date of the letter and will withdraw all salesmen with the exception of a representative in the North West who is described as an order taker. It goes on to state that Cooley sales levels in November/December are 3-4 times that of October noting that two products, Zara Vodka and Millars Gold were growing rapidly from a small base and that sales of those products to Dunnes and Quinnsworth could be at significant levels in December. Cooley also agree to ´attempt to minimise dry goods stock levels by placing some, although not all, of the bottles, and cutting down packaging and label orders' for Lockes and Kilbeggan.

25. A share offer document was issued to all Cooley shareholders on 5 November 1993. This states that:

´The Boards of Cooley and IDG have reached agreement on the terms of a recommended Offer to be made by IBI Corporate Finance on behalf of IDG for all of the Issued Share Capital of Cooley.'

It also states that the directors of Cooley and certain other shareholders have given irrevocable undertakings to accept the offer in respect of 3,079,330 Cooley Shares (representing 58.63 per cent of the issued share capital). These undertakings will become effective over a period of time up to June 1995. The share offer document also provides for the purchase of shares from BES investors to be spread over time so as to allow those investors to retain the shares until the 5 year period necessary for them to qualify for tax relief under the BES scheme has expired. IDG has agreed to honour Cooley's commitments to purchase whiskey currently being stored by the various BES companies. Once such purchases have been completed those companies will be wound up.

26. The offer document states that in the event of the Offer being declared unconditional in all respects, the following has been agreed:

´(i) a thirty five year lease, entered into in 1990 by Cooley, with shareholders' approval, for a warehouse at Tullamore, County Offaly will be terminated on financial terms acceptable to both parties. (The warehouse will be surplus to IDG's requirements for Cooley);

(ii) a quantity of whiskey, the purchase of which was procured in 1992 by the Directors of Cooley from a BES Company in order to facilitate the ongoing financing of Cooley, will be purchased by Cooley in accordance with the original arrangements;

(iii) within five business days thereafter, IDG will procure that Cooley purchases sufficient whiskey from the BES Companies to ensure the release of personal undertaking given to banks by the Directors of Cooley put in place at the time to facilitate the ongoing financing of Cooley; and

(iv) the directors of Cooley will enter into a covenant with IDG not to compete in whiskey manufacturing to the extent permitted by law.'

27. The agreements with the BES companies have been amended as follows. There is no further obligation on Cooley to supply raw materials to such firms and, as a result, a fixed price has been agreed for the resale of the existing stocks held by the companies. Cooley has agreed to purchase upfront sufficient stock to discharge the bank indebtedness of the BES companies. The put and call option to purchase the remainder of the stock is now on the basis of fixed prices within the limits of the BES scheme.

28. Under the terms of the arrangement IDG will effectively pay £24.5m to acquire Cooley. This consists of a payment of £9.5m to Cooley shareholders for their shares, equivalent to £1.80 per share. The shares were originally placed in different tranches at prices of 10p, 20p, 35p, 105p and 315p between 1987 and 1990. Individuals purchasing the shares would have obtained tax relief at their marginal tax rate under the BES scheme, thereby reducing the effective price of the shares considerably. In addition IDG will pay £4m to clear Cooley's outstanding debts to the BES companies and £1.5m to clear its bank debts. It will also pay £450,000 to secure termination of a long term leasing agreement for a warehouse owned by a number of Cooley directors. There are revised trading agreements whereby Cooley, under the control of IDG, will purchase the whiskey stocks held by the BES companies at a total cost of £9m. The total cost to IDG will be £24.5m which compares with IDG's 1992 pre-tax profits of £30.3m. The arrangements also provided that, in the event of the agreement not proceeding, IDG would purchase whiskey to the value of £600,000 from Cooley between October and December 1993. There have been some further purchases since then.

29. The parties stated that they were strongly of the view that the Agreement to purchase a majority interest in Cooley did not give rise to any restriction or distortion of competition in the State or in any part of the State. They argued that there was no actual or potential adverse effect on competition arising, either directly or indirectly, from the acquisition initially of a majority stake in Cooley, or the eventual acquisition of the remaining interests in Cooley, for the purpose of achieving the objectives of the transaction from IDG's standpoint. They argued that the figures on market share indicated that any effect on competition in the relevant markets due to Cooley's absence would be insignificant. They have claimed that Cooley's sales in Ireland to date have been insignificant and that it had no brands currently capable of competing in the market. They also indicated that the market for whiskey in Ireland was very much brand oriented and that customers specified particular brands when buying whiskey. The main competitors to IDG in the whiskey market in Ireland were stated to be international brands, mainly from Scotland but also from the USA and Canada.

30. The parties also submitted that the acquisition of Cooley would not increase the degree of market concentration to any significant extent and that any merger which did not increase concentration significantly or result in a concentrated market did not offend against Section 4(1) of the Competition Act. They also argued that the arrangements would not either directly or indirectly result in

- ´fixing purchase or selling prices or any other trading terms;

- limiting or controlling production (given the absence therein of Cooley), markets, technical development or investment;

- sharing markets or sources of supply;

- the application of dissimilar conditions to equivalent transactions with other trading parties thereby placing them at a competitive disadvantage;

- making the conclusion of contracts subject to the acceptance by other parties of supplementary obligations which by their nature or according to commercial usage have no connection with the subject of such contracts.'

It was also submitted that the very serious nature of Cooley's financial position established that they were not a competitor and were unlikely to become a competitor within the foreseeable future. Consequently it was argued that there would not be any diminution of competition in the market.

31. The parties argued that Cooley was in financial difficulties and that it had been for sale at various stages since 1991. They submitted a number of articles from various newspapers in support of these claims. They submitted that the working capital requirements for maturing whiskey stocks were particularly onerous. Although Cooley had made extensive use of the BES scheme to finance its operations, changes in the legislation had forced it to incur substantial borrowings and its ability to obtain additional funding was severely constrained. It was argued that to obtain markets and contracts for its new brands Cooley would have required considerable additional financial resources. In this context Dr. Teeling is reported to have stated on a number of occasions that up to £9m would have been needed. Its efforts to find a partner or to secure additional long term funding had not proved successful and, given its obligations to the BES companies, this had encouraged the directors to negotiate the current sale.

32. IDG expressed concern that the financial difficulties besetting Cooley could lead to the disposal of whiskey stocks which could be sub standard and that this would damage the image of Irish whiskey overseas, thereby having an adverse effect on IDG itself. According to IDG:

´IDG is proceeding with the proposed acquisition of Cooley in order to contain the anticipated serious adverse impact on IDG itself, to protect its extensive investment in promotion of Irish Whiskey, its existing stock inventory and the traditional image of Irish whiskey with consumers internationally.'

The Authority asked why the scheduled launch of Cooley's blended whiskey had not gone ahead. IDG's response stated that:

´Owing to Cooley's pressing financial circumstances the launch of the Locke's brand name was scheduled for the earliest date possible in the latter part of 1993....However the effective launch would have required considerable additional marketing expenditure and the deteriorating financial position of Cooley over the year made the prospects of achieving this remote. The necessary funds did not materialise and in the event agreement was reached with IDG for the purchase of Cooley's shares.'

33. IDG argued that Cooley, together with the BES companies, had accumulated substantial stocks of whiskey for which no significant market had been developed. They stated that in their view the stock was not suitable for any purpose other than sale as a bulk ingredient product due to the fact that it was not triple distilled. IDG's stated intention was that the Cooley plant should remain closed. The warehouses at Kilbeggan were stated to be surplus to IDG's needs and would be phased out. They indicated that they would respect the existing leasing arrangement for the shop, museum and restaurant facility. The operation of the old distillery visitors unit would be reviewed with the Kilbeggan Preservation and Development Association. IDG also stated its intention to phase out the rented warehouse in Tullamore. In sum the bulk of the Cooley operation, including its distilling plant, would be closed down.

34. IDG stated that it would honour the trading agreements between Cooley and the various BES whiskey manufacturing companies and would do nothing to compromise their BES structure. They also stated that the arrangements would enable Cooley and the BES companies to honour their liabilities to financial institutions.

35. The Authority received a submission prepared on behalf of some of the employees of Cooley arguing against the grant of a certificate or licence to the agreement. It stated that the takeover would recreate a monopoly. It pointed out that as the Cooley distillery was the only one in Ireland not currently controlled by IDG, any new entrant would have to build a new distillery. The time taken to build such a plant coupled with the requirement that the plant would have to operate for a number of years before any product would be ready for sale meant that it would take at least five years before any new competitor could enter the market. In addition it was suggested that entry costs were high, both because of the need to build a new plant, and because it would take several years from the time production commenced before any sales revenue could be achieved. It was argued therefore that the high level of finance required before any sales could be achieved represented a further barrier to entry.

36. The submission argued that Irish whiskey was a separate and distinct market from Scotch whisky as there was almost no cross elasticity of demand between the two products. In addition it was claimed that IDG would not purchase the company at a price substantially in excess of its book value in order to close it down unless Irish whiskey constituted a separate market. It was also claimed that gin, vodka, rum and other spirits were not substitutes for whiskey.

37. The submission rejected any claim that Cooley products were inferior, pointing out that Cooley's products satisfied all of the requirements of the Irish Whiskey Act. It stated that although the Cooley products were different they were not inferior.

38. The submission rejected the view that Cooley would have ceased operating anyway in the absence of the takeover. It was submitted that Cooley management had succeeded in September 1993 in making an arrangement, subject to final agreement with a named German distributor, to distribute Cooley's products in Germany. In addition it was claimed that similar arrangements had been entered into with an American and a French distributor, while arrangements had also been agreed with a major French supermarket chain to produce a private label whiskey. It stated that the total advance payments of £1.5m which would have been received under such arrangements would have assured Cooley's future. The submission also claimed that Cooley's blended whiskey brand ´Lockes' was scheduled to have been launched at the ANUGA drinks fair in the week beginning October 9.

39. Indeed it was claimed that the takeover was motivated by the success of Cooley. It was argued that the shareholders believed that Cooley was worth more to IDG, the existing monopolist, than to anyone else but that IDG would not be prepared to pay a premium for the business unless it was likely to succeed. It was claimed therefore that the shareholders had not had serious discussions with any other buyer or that potential bidders were aware that regardless of the price they offered, IDG would have last refusal. The submission also suggested the possibility that some of the founding shareholders may never have intended to be long-term investors but to sell at the first available opportunity once the five year period for qualification under the BES scheme had been satisfied. It was also claimed that even if the agreement did not succeed, Cooley would suffer damage as a result of the agreement as the company was at a crucial stage in its development.

40. The submission also rejected the IDG claim that the takeover was prompted by a desire to avoid having sub-standard whiskey come on the market, thereby damaging IDG's brand name products. It argued that in the event that Cooley went into receivership, IDG could have bought such products as, presumably, it would have been prepared to offer a higher price than anyone else. It also argued that IDG's brands would not have been harmed by the appearance of other products on the market.

41. The submission concluded that IDG did not wish to see a competitor to its virtual monopoly on the Irish market and that it would have been particularly concerned that, once such a competitor was established, it might be acquired by a major overseas firm which would offer real competition. It was therefore submitted that no certificate should be given. It also argued against the grant of a licence on the basis that the agreement would produce no benefits in terms of production or distribution, that consumers would not benefit and that it would permit IDG to eliminate competition in the market for Irish whiskey.

42. A Mr. Denis Buckley wrote to the Authority following a report on the RTE programme ´Marketplace'. Mr. Buckley claimed to have secured orders in France for Cooley's products. He also stated that despite his meetings with Dr. Teeling and Mr. John Harte (the marketing manager of Cooley), his orders had not been passed on to the distillery. Mr. Buckley argued that the acquisition would have detrimental long-term effects on the economy and on business development in Ireland.

43. Mr. Pat Hogan a director of the Molloy group and general manager of its liquor store outlets also wrote to the Authority. He argued that real competition was needed in the marketing of Irish whiskey on the domestic and world market. He pointed out that all the existing major Irish whiskey brands were marketed by IDG. He claimed that the Cooley brands were known to whiskey aficionados and that Cooley's Tyrconnell brand was on the market and attracting a premium price. In reply to a request for information from the Authority, Mr. Hogan indicated that the Molloy Group had been selling Cooley's Tyrconnell whiskey since early 1993 in its off licence outlets. He indicated that Cooley whiskey was available in the major population centres. He stated that as Cooley whiskey products were in their infancy, substantial sales had not been achieved but would guess that they accounted for 1% of the Group's Irish whiskey sales and 0.5% of all its whisk(e)y sales.

44. The Authority was informed by a German company, which claimed to be one of the largest spirits distributors in Germany, of its interest in securing distribution rights in Germany for Cooley whiskey and indicating that it had expressed a willingness to invest in purchasing inventory for many years in advance and in promotion of the products. The Authority also received two submissions from parties in the US. One of these, a distilling company, stated that they believed that a market existed in the US for Cooley whiskey. They stated that they had been negotiating a distribution agreement with Cooley for the US and to purchase quantities of Cooley whiskey. The other submission claimed also that markets existed in the US and that contracts for up to half of Cooley's production capacity could be secured. It also indicated that certain parties in the US had expressed an interest in purchasing the Cooley business in the early part of 1993 following reports that it was in financial difficulties. It was claimed that the Cooley directors showed no interest in this proposal.

45. All of the submissions disputed the claim that Cooley's whiskey was in any way an inferior product to those produced by IDG. Reference was made to the views expressed in the RTE programme marketplace by a well known restaurant critic that it was a good whiskey. The Authority was also referred to a review in the Sunday Telegraph of 14 March 1993 by Mr. Jim Murray. This article stated inter alia that:

´However, Cooley has a number of things in its favour. Its single malt is a delicate distillate of some finesse - the three-year-old soft and sweet, reminiscent of an eight-year-old Scottish Lowland (though the four-year-old is a bit metallic in the finish).

The grain whiskey - to go into the John Locke blend which is on the way - is among the most flavoursome and beautifully textured I have tasted. But Cooley's greatest coup is its peated Irish malt, the only new one in living memory, which is a masterpiece - though it is only 18-months old and has that time again to mature before it can legally be added to the malt or blend.'

46. The arrangements have also been the subject of considerable media attention. Writing in the Sunday Tribune of 17 October 1993, Mr. Frank Fitzgibbon, the paper's business correspondent wrote:

´How can Irish Distillers Group justify spending £22 million on Cooley, a company which has few products worth speaking of and a bleak future? And is Irish Distillers' branding so weak and anonymous that it seriously feared that world famous names like Jameson and Bushmills would be threatened by the temporary appearance of immature whiskey in some third world market?'

He went on:

´By agreeing to shell out this extraordinary sum IDG boss Richard Burrows has contributed handsomely to the John Teeling legend, illustrating the latter's ability to extract himself from seemingly terminal positions.'

47. In a report in the Irish Times on October 9 1993 it was stated that:

´This move by Irish Distillers is purely defensive, and its chief executive, Mr. Richard Burrows, said that IDG had no plans to keep Cooley trading. He added that "Cooley has no future once it has met its obligations" to the seven whiskey-maturing companies from which Cooley has already agreed to buy matured whiskey.'

The report went on to quote Mr. Burrows as follows:

´We are cleaning up what has turned into a very nasty situation, Cooley started off with a lot of enthusiasm but has now run out of cash. That could have resulted in immature whiskey coming on to the market and would have damaged the image and credibility of Irish whiskey.

Cooley has been up for sale for two years but has failed to find a buyer because people were not prepared to put cash into the company and build up a brand from scratch. Once the whiskey stocks have been run down, Cooley has no future, there has been no distilling at the company for the past eight months and we have no plans to recommence distilling...We would have preferred not to have had to spend this money.'

48. Writing in the Irish Times on October 15 1993, Mr. John Maher stated that:

´IDG had watched with mounting concern as Cooley's whiskey reached maturity and the distillery prepared to launch its product.'

The report indicates that Cooley whiskey might have been expected to retail at about two thirds the price of IDG's brands.

49. A report in the Dundalk Argus dated 15 October 1993 reported that Dr. Teeling had visited the Cooley distillery in order to meet with the workforce. Dr. Teeling reportedly claimed that he had not realised some of the pitfalls involved in setting up a distillery. Dr. Teeling is also reported to have indicated that Cooley had good responses to marketing abroad and that they had very strong contacts in France, Germany and America but that it would take three to four years to get up the necessary level of sales to make it viable. Dr. Teeling was also quoted as saying that he had not realised that IDG were planning to close the plant and indicated that while he accepted that it would not be used to produce whiskey he had asked IDG to sell it or lease if for use for other purposes so that jobs would be saved. (This point was subsequently disputed by IDG who stated that they had made it clear to the Cooley directors from an early stage of their discussions that they intended to cease distilling at the Cooley plant.) The paper also reported a spokesperson for the workforce claiming that the only reason why IDG had moved to take over the company was that it was in a position to become viable. It was claimed that a number of major distributors were being lined up including Borco in Germany. The spokesperson is also reported to have claimed that bottling of the Kilbeggan brand for the German market was to have begun the following week and that a distributor in Europe and another in America were willing to put up £1.5m to support the product.

50. The arrangements were also the subject of a report by Ms. Aileen O'Toole in the Sunday Business Post of October 17 1993. This states that:

´Cooley Distillery was finalising agreements with overseas distributors, which would have given the company a cash injection of at least £1.5 million, when Irish Distillers (IDL) announced its bid for the company.'

It went on:

´The Sunday Business Post has learned that agreements were close to completion with a large distributor, Borko, which also handles Carolans Irish cream liqueur, to market Cooley brands on the German market. A consignment of 12,000 bottles of whiskey was due to be shipped to Germany to the ANUGA fair last week but was halted because of the IDL bid.

A US company was also at an advanced stage of negotiation about a US distribution deal and talks were underway with a potential French distributor.

Together, these distributors were prepared to commit over £1.5 million to the company which would have helped the company overcome its severe cash crisis.'

The Report went on to cite Mr. Richard Burrows of IDG as indicating that he was "not aware" that the company was on the verge of signing various distribution agreements. He is also reported as stating that £1.5m was "infinitesimal" compared with what the company needed.

51. The report states that Dr. Teeling dismissed allegations of collusion with IDG. He is reported to have confirmed that funds of more than £1.5 million would have been made available to Cooley by the overseas distributors but claimed that much more would have been necessary. Dr. Teeling was also reported to have indicated that progress was being made with the development of Cooley's brands and that its Locke's brand would have been launched in Ireland by the end of the month if the IDG bid had not happened. He is reported to have claimed that IDG was aware that the Cooley brands had the potential to "wreck" its products and could have led to a drop in its whiskey prices of as much as £2 per bottle. Dr. Teeling is also reported to have confirmed that there had been several abandoned attempts by IDG to take over the company. He claimed there had been at least two other sets of negotiations but a deal had not been agreed because of the price. He stated that they had started out at £25 million but had ended up with £9.5 million [11]. The report concluded by stating that:

´Teeling explained that the primary motivation of the board was to protect the 900 shareholders who had invested in the company.

IDL, on the other hand, had to weigh up the risk of allowing Cooley to launch its whiskeys and depress prices of its own brands.'

52. The Authority issued a Statement of Objections to the parties on 2 December 1993. Both IDG and Cooley responded to the Statement of Objections. An oral hearing was held on 24-26 January 1994. The Authority refused a request by a third party to attend the hearing.

53. The parties argued that the notified arrangements lay outside the scope of section 4(1) of the Competition Act. In particular they claimed that what had been notified was not an agreement for the acquisition of Cooley by IDG, but rather was an agreement whereby IDG undertook to make an offer for the Cooley shares provided certain conditions were satisfied. They claimed that any agreement for the acquisition of the Cooley shares was in fact an agreement between IDG and the individual shareholders and that any such agreement had not been notified and was not anyway an agreement between undertakings.

54. Both parties strongly disputed the Authority's view that the relevant market was primarily that for Irish whiskey in Ireland and that for all whisk(e)y in Ireland. It was submitted that the perceptions of the parties themselves was a key factor in determining what the relevant market was. In addition they cited the EU Commission decision in the Distillers case [12] where the relevant market was found to be that for whisk(e)y. The parties, however, disagreed as to the market they were operating in. At the oral hearing Dr. Teeling claimed that Cooley saw the market as being the world spirits market, while Mr. Burrows (Chief Executive of IDG) stated that IDG regarded the market as being the world whisk(e)y market.

55. Dr. Teeling said he had to sell a ´Scotch' which had a lighter, sweeter taste than traditional Irish whiskey. He went on to state that it appeared that whiskey was becoming known as Scotch, so Cooley wanted to produce a similar product to Scotch. With the help and advice of Burns Stewart and other Scotch manufacturers, including senior Scottish consultants Cooley designed and developed their product. He claimed that the market was becoming a generic Scotch market. Scotches were becoming more and more dominant and it was what people wanted whereas traditional Irish whiskey did not satisfy that demand. He indicated that the position was different in Ireland as it had a traditional market for whiskey going back hundreds of years. In most other markets Scotch was the only whisk(e)y available.

56. Mr. Burrows indicated that if IDG were to engage only in the whiskey business, their competitive situation would be seriously damaged. If they reduced their portfolio, wholesalers and others could import products and damage IDG. Economics required white spirit to be sold in the country in which it was produced; it was difficult to make a profit on exports and money was not spent in developing outside sales. White spirits were very successful in Ireland and it was important to be able to offer and supply a range of products to retailers. Consumers had a portfolio of products which they wanted. He stated that IDG did not target white spirit at different consumers. Irish whiskey, gin and vodka were stated to be quite interchangeable between consumers at different times of the day.

57. IDG also produced a report prepared for them by the Henley Centre in support of their claim that Irish whiskey was not the relevant product market. The Report contained data from a number of market research surveys. It showed that over time there had been a reduction in consumption of brown spirits and a shift to drinking white spirits and wine. In addition it included data which showed that individuals who indicated that they had drunk Irish whiskey during the past month had consumed various other drinks including beer, wine, fruit juice and mineral water. The figures indicated inter alia that of those who had consumed Irish whiskey in the past month 52% had consumed stout in the past week while 47% had consumed fruit juice and 39% other soft drinks. In contrast only 9% had consumed scotch during the past month while 8% had consumed vodka and 7% gin. The author of the report argued that such figures indicated that Irish whiskey drinkers consumed a wider range of drinks than just Irish whiskey and that all alcoholic drinks should be considered to be part of the market.

58. The Report also included data from a second market research study. This distinguished individuals on the basis of what they drink most often among Irish whiskey, Scotch, other IDG spirits and non IDG spirits. Of those drinking Irish whiskey most often, while 47% had drunk Scotch at some time in the past, only 14% had drunk it in the past 12 months, while 31% reported drinking other IDG spirits and 27% non-IDG spirits during that time. This survey also showed that of those Irish whiskey drinkers who had drunk Scotch at some time over the previous 12 months, 77% had drunk it less often than once a month. Put another way of all those individuals in the survey who cited Irish whiskey as the drink consumed most often, less than 2% had drunk Scotch once a month or more frequently. 78% of those drinking other IDG spirits and 86% drinking non IDG spirits in the past year did so less often than once a month.

59. Cooley claimed in its submission that declining sales of Scotch occurred because its price had risen relative to that of Irish whiskey. At the oral hearing the consultant retained by IDG produced data which showed that the average price per bottle of Irish whiskey in a number of selected supermarket outlets was more than 10% higher than that of Scotch in four out of the past five years. (See Table 5). The figures also showed that the price differential narrowed sharply in 1991 but had since widened significantly in favour of Scotch. Yet IDG stated that Irish whiskey accounted for 66% of off licence whisk(e)y sales and there was no evidence that the adverse price movement since 1991 had resulted in any significant loss of market share to Scotch. In fact while the price of Irish whiskey in 1993 was 6.1% higher than in 1991, the price of Scotch in 1993 was 1.3% below its 1991 level [13]. IDG stated at the oral hearing that in the UK once the price of Irish whiskey exceeded that of Scotch by more than about 5%-7% sales dried up. In Ireland, however, a price differential of around 10% in the off licence sector appears sustainable.

1989 12.84 11.69 109.8

1990 12.67 11.18 113.3

1991 11.54 11.20 103.0

1992 12.14 10.65 114.0

1993 12.24 11.06 110.7

Notes: The average prices are for a range of Irish and Scotch whisk(e)y brands in 4 multiple supermarket chains.

Source: Report prepared for IDG by The Henley Centre.

60. Both parties argued that the relevant geographical market was not confined to the State. IDG stated that it sold its whiskey worldwide and that this was the relevant market. Similarly Cooley argued that it could never have concentrated on just selling in Ireland and that the relevant market was the world spirits market. It was also claimed that the advent of the single EU market meant that the State could no longer be considered to be the market.

61. The parties then proceded to argue that Cooley could not be regarded as a potential competitor. They stated that its financial position meant that it was not in a position to compete on the market and that it would not be able to successfully enter the market. It was pointed out that the plant had a production capacity which was relatively large compared to potential sales and that unit costs were higher than those of Scottish distilleries. It was also claimed that the cost of developing and marketing a new international spirits brand could be as high as £50m. Goodbody stockbrokers stated that its corporate finance division had made extensive efforts to find a buyer for Cooley. Beginning in late 1991 it had approached a number of leading drinks companies throughout the world but none had shown much interest. IDG had been among the firms initially approached at that stage. It had indicated its interest in acquiring Cooley but indicated it had subsequently changed its mind when it became fully aware of the level of Cooley's indebtedness.

62. At the oral hearing Mr. Burrows stated that he did not view Cooley as a competitor. When it was suggested that Cooley's whiskey stocks were over-valued at £9.5 million, Mr. Burrows confirmed that IDG planned to sell them on the bulk market over time. His view was that Scotch whisky prices were falling at present but it was extremely difficult to project price in 1995. He admitted that by comparison with comparable Scotch whisky, stocks were over valued. When it was suggested that the total cost of £24.5 million involved in the take over was a lot to pay for a plant which IDG did not want and overvalued stocks, Mr. Burrows said IDG was concerned that Cooley would continue under capitalised and that the reputation of Irish whiskey sold into key markets at home and abroad could be damaged. Mr. Burrows said IDG was concerned about the damage that might be done to it by the appearance of Cooley's products. People who were not familiar with Irish whiskey might taste Cooley product first and be disappointed and this would put them off the image of Irish whiskey for all time. The risk of allowing that to happen outweighed the opportunity of acquiring Cooley. Mr. Burrows stated that Cooley had managed to keep going in the past, in spite of being in seemingly impossible situations, and that it could not be ruled out that they would continue in some way for a number of years. He argued, however, that they would not be able to survive on a permanent basis. In the event of Cooley collapsing, the BES companies would be left with the stocks. In such a scenario, Mr. Burrows agreed that it would be reasonable to suggest that IDG would be the most likely buyers but indicated that merely acquiring the stocks would not overcome IDG's concerns and that they wanted to acquire the plant also. He stated that they had no need for the distillery but they were buying it so that nobody else could do so.

63. It was argued on behalf of IDG that a firm could only be regarded as a potential competitor if it was likely to be able to enter the market and survive on a permanent basis. It was submitted that Cooley could not survive in the market on a permanent basis given its financial position and that even though it might be able to struggle on for some time, it should not be regarded as a potential competitor. It was also submitted that Cooley could not survive unless it was purchased by a major international drinks company and that it had tried to find such a buyer for over two years but that no one other than IDG had come forward.

64. The parties referred to the report by the Henley Centre. This purported to show that Irish whiskey prices in supermarkets had fallen over the past few years and that such behaviour was not consistent with that of a firm which was sheltered from competition. It was pointed out to the parties that any fall in prices could be explained by cuts in VAT and by a reduction in bottle size and that when these factors were taken into account the price had in fact risen. The Report also included some estimates of income and own price elasticities for spirits. It argued that these showed that increases in income only resulted in a relatively small increase in consumption of spirits while increases in the price of spirits would result in a proportionately greater decline in sales thereby making it futile for IDG to attempt to raise its prices.

65. Section 4(1) of the Competition Act states that ´all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.'

66. Section 3(1) of the Competition Act defines an undertaking as ´a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' The parties to the present agreement are IDG and Cooley. They are both corporate bodies engaged in the provision of goods and services for gain and are therefore undertakings within the meaning of the Act. The notified arrangements therefore constitute an agreement between undertakings.

67. IDG submitted that the agreement they had notified was not an agreement for a merger or takeover. Their submission was that the actual takeover or merger would be effected by the individual agreements between IDG and each shareholder; and that these agreements had, firstly, not been notified, and secondly were not notifiable because the shareholders were not themselves undertakings. The agreement which had been notified had no effect on competition and therefore should be certified.

68. If IDG had in fact done what they submitted they had done, i.e. isolated arrangements peripheral to their merger with no anti-competitive effect, and notified only those, then the Authority would consider that a waste of time, and if deliberate, an abuse of its procedure. However, the agreement, the subject matter of this notification, is the agreement which binds IDG to making the takeover offer, and which specifies the terms on which that offer will be made. The agreement has no other object or effect than that the takeover should result. This was also the parties' view when they made their original notification which makes its case throughout by reference to the effect on competition of the taking over of Cooley. The letter of agreement also refers to the Competition Authority approval of the purchase/sale of Cooley as a condition precedent.

69. It was submitted on behalf of IDG that the existing mergers legislation, using competition as one criterion for permitting or disallowing a merger, and with its lower threshold was a legislative indication that mergers below the threshold were per se not anti-competitive. For the sake of clarity, the Authority states that it did not accept this submission. The Authority's consideration of mergers does not begin from a presumption about whether they are anti-competitive or not.

70. As pointed out the parties argued, both in their written response to the Statement of Objections, and in the submissions made at the Oral Hearing, that the relevant market in this instance is not that for Irish whiskey within the State, nor indeed that for all types of whisk(e)y. It was submitted that the market should be defined as being the one in which the parties considered themselves to be competing. The Authority recognises that in some circumstances the perception of undertakings concerning the market in which they are operating may affect their behaviour. It does not, however, believe that the view of the undertakings involved is the only factor which should be taken into account in defining the relevant market.

71. The parties in this instance disagreed as to what the relevant market was, IDG arguing that the relevant market was the world whisk(e)y market and Cooley that it was the world spirits market. The Authority rejects the parties' claims that the relevant geographical market is the whole world rather than the State. This claim appears to be based primarily on the fact that IDG exports much of its whiskey output and also on the fact that it would not have been viable for Cooley to sell whiskey only on the Irish market. The fact that the parties are involved in selling their products in a number of different countries does not mean that all of those countries are part of the same market. The fact is that the price of Irish whiskey and indeed other alcoholic drinks differs greatly between different countries. In large part such differences are due to differences in the amount of tax levied on alcoholic drink by the relevant national authorities. Nevertheless such price differentials could not be sustained over a prolonged period if, in fact, there was a single world market. The reality is that there are restrictions on the ability of Irish consumers to import such products from non EU countries thereby partitioning the market. Since 1 January 1994 restrictions on consumers importing alcoholic drink from other EU countries have been greatly reduced. There is no limit, for example, on the amount that individuals may import for their own personal use. Consumers still face other obstacles. In particular they must incur the financial and temporal costs involved in travelling to another country. Such costs are sufficiently high that it would require quite a sizeable price differential to exist before it would be worthwhile for consumers to do so. The one exception in this instance arises with respect to Northern Ireland as the costs involved are much lower. Nevertheless factors such as the time and cost involved in travelling to another country do fragment the market as they allow significant price differentials to persist between different countries. The fact that Jameson whiskey can be purchased in Dublin, Paris, New York and Sydney does not mean that all four cities are part of the same market. Thus the Authority concludes that the relevant geographic market is the State and not the World.

72. The parties also argued that the relevant product market was wider than that for Irish whiskey. In fact most of the evidence produced by them tended, if anything, to support the view that Irish whiskey was the relevant product market. IDG indicated, for example, that in order to compete it had to produce and market a wide range of different alcoholic drinks. If in fact all spirits were sufficiently close substitutes for one another so that they could be considered to form a single market there would appear to be little need to produce such a range of products. In addition they indicated that the economics of the business largely ruled out the possibility for exporting white spirits, indicating that market conditions in this instance are rather different to those pertaining in the whisk(e)y business.

73. Dr. Teeling told the Authority that Cooley was attempting to produce a Scotch type product because this was what consumers in international markets wanted. In terms of its taste and other characteristics Scotch was what consumers in most countries wanted. In contrast relatively little Irish whiskey was consumed and it was seen to be a different product. He also indicated that the position was different in Ireland as it had a traditional market for whiskey going back hundreds of years.

74. The market research data produced by the Henley Centre also purported to show that the market was much broader than that for Irish whiskey alone. This was on the basis of statistics which indicated that individuals who had consumed Irish whiskey in the past month had also consumed a range of other drinks during the past week or month. In the first place the study defined Irish whiskey drinkers as anyone who had consumed Irish whiskey in the past month. By so doing it included individuals who would only occasionally drink Irish whiskey but who would regularly drink something else. It is therefore not surprising that it found many so called ´Irish whiskey drinkers' had also consumed other drinks. Even allowing for this, however, the data showed that only a very small minority of such individuals had consumed other spirits during the previous month. The figures were as follows; Scotch 9%, gin 7%, vodka 8% and brandy 10%. In sum the vast majority of ´Irish whiskey drinkers' do not consume other types of spirits or even other types of whisk(e)y.

75. In contrast 52% of ´Irish whiskey drinkers' had consumed stout during the previous week, 47% fruit juice and 39% other soft drinks. The Authority does not believe that two or more products can be regarded as substitutes because they are consumed by the same individuals at different times and it does not therefore believe that fruit juice and other soft drinks are substitutes for Irish whiskey. The figures offer no support for the view that Scotch and other spirits constitute substitutes for Irish whiskey, quite the opposite in fact. Indeed this becomes clearer when one considers the statistics from the second market research study cited in the report which identified those individuals who classified Irish whiskey as the drink they consumed most often. Only 14% of such individuals had drunk Scotch in the past 12 months and less than 2% reported drinking Scotch once a month or more. 31% reported drinking other IDG spirits and 27% non-IDG spirits during that time. 78% of those drinking other IDG spirits and 86% drinking non-IDG spirits in the past year did so less often than once a month.

76. In addition the Henley Centre study indicates that in retail supermarkets the price of Irish whiskey has consistently been 10% or more above that of Scotch (see Table 5 above). It also indicated that since 1991 Irish whiskey prices had risen relative to those of Scotch. Yet there was no indication that this had led to a loss of market share. Indeed one of the parties had claimed that Scotch sales had fallen because its relative price had risen. This again indicates that Scotch is not a close substitute for Irish whiskey. The wholesale price of Irish whiskey was also stated to be 10% higher than that for Scotch, though this is not reflected in pub prices.

77. Finally the Henley Centre study included some estimates of own price elasticities to show that if IDL were to increase its prices this would be more than offset by a reduction in sales. The data, however, related to all spirits. Secondly the estimates were based on annual observations for a period of ten years, whereas a far greater number of observations would generally be required in order to obtain reliable results from such an analysis. In fact the ESRI had carried out such an exercise using data over a much longer timespan [14]. That study found, however, that due to data deficiencies caused by cross border trade in spirits in the early 1980s, the price elasticities for spirits did not make sense. The results in fact indicated a spirits own price elasticity of almost zero. Such results cast serious doubt over the reliability of the results contained in the Henley Centre study.

78. Thus contrary to the claims made by the parties, the evidence indicates that Irish whiskey drinkers do not, by and large consume Scotch or other spirits. Price differentials in off licence outlets do not indicate that Irish and Scotch are perceived as substitutes. Dr. Teeling's evidence indicates that, in contrast to other countries where consumers prefer Scotch because of its taste and other characteristics, in Ireland the opposite situation prevails. IDG conceded that it would not be possible to compete in the market by concentrating on whiskey only but that it is necessary to produce a range of different products. In addition on the supply side the economics of the whisk(e)y and white spirits businesses are rather different. Thus on the basis of the evidence submitted by the parties the Authority can see no reason to change its view that the relevant market is primarily that for Irish whiskey within the State. It recognises that the arrangement may also have implications for the broader whisk(e)y market. In addition it believes that the arrangements have effects on the white spirits market since Cooley also sells vodka and gin.

79. The Authority has given its views on mergers in a number of previous decisions. In Woodchester it stated that:

´before a merger can be found to offend against Section 4(1) of the Competition Act, it must be shown that it would, or would be likely to, result in an actual diminution of competition in the market concerned. A reduction in the number of competitors or the fact that a merger will result in the merged entity having a larger share of the market than that previously held by either of the merged undertakings individually, are not, of themselves, sufficient to establish that such a diminution of competition has occurred or would be likely to occur. [15]'

80. The Authority clarified its position further in Scully Tyrrell where it stated that:

´Among the factors which the Authority believes needs to be considered in order to decide whether a merger would result, or would be likely to result in a diminution of competition is the actual level of competition in that market, the degree of market concentration and how it is affected by the merger, the ease with which new competitors may enter the market and the extent to which imports may provide competition to domestic suppliers. [16]'

It then went on:

´The Authority believes that it would generally be accepted that a market where the four firm concentration ratio fell below 40 percent is effectively competitive....Nevertheless the Authority believes that in a highly concentrated market a merger which results in even a relatively small increase in the market share of one of the larger firms merits closer examination. It follows from this that, if the four firm concentration ratio following a merger is less than 40 percent, the Authority would regard it as unlikely that the merger could prevent, restrict or distort competition and hence offend against Section 4(1).' [17]

The Authority also indicated that it might use an alternative measure of market concentration, namely the Herfindahl Hirschman Index (HHI) which is used by the US Department of Justice to evaluate mergers.

81. In Scully Tyrrell the Authority found that the data on both the four firm concentration ratio and the HHI suggested that the arrangements merited further examination. Having concluded in Scully Tyrrell that the merger in question did not prevent, restrict or distort competition the Authority stated that:

´The present decision seeks to clarify the Authority's views in this area. In general the Authority believes that a merger per se between competitors would not prevent, restrict or distort competition and thereby offend against Section 4(1) unless the market is, or will as a result of the merger become, highly concentrated. If the market were highly concentrated following the merger the Authority believes that it would be unlikely to prevent, restrict or distort competition where

- there were no significant impediments preventing new competitors from entering the market, and/or

- there was little effective competition from overseas suppliers.' [18]

82. The figures given in Tables 3 and 4 indicate that the relevant market in this instance is highly concentrated. IDG accounts for virtually 100% of the Irish whiskey market, for 76% of the whisk(e)y market, 72% of gin sales and 46% of all spirits. Given the Authority's views in Scully Tyrrell, such a situation requires a detailed examination.

83. There are no other Irish producers of whiskey apart from IDG and Cooley. The establishment of Cooley was facilitated by the availability of a disused alcohol plant which it was able to acquire at a relatively modest price. The Authority accepts the view that, as the arrangement would bring all the existing distilleries within the State under the control of IDG, the only way for a new entrant to commence producing whiskey in Ireland would be through the construction of a new plant on a greenfield basis. The Authority considers that this would involve substantial costs. Such costs would be considerably higher than those incurred by Cooley. Dr. Teeling indicated that, in his view, such an exercise would cost £15m. In addition it accepts that the level of working capital necessary for entry is high due to the long lead time involved between the commencement of production and the availability for sale of the finished product. It believes that the start-up costs represent a significant barrier to entry in this market. It is significant in this respect that, although Cooley was able to raise a considerable amount of the finance required to enter the market, the mechanism it used to do so, namely the BES scheme, has been altered in such a way as to prevent this route being used in future.

84. The Authority also considers that the costs which would be incurred in building a distillery and in holding stocks of whiskey until maturity would constitute sunk costs, in that, if a new producer had to cease its operations, it would be unable to recoup a large part of such costs. Modern economic theories of industrial structure and performance tend to place greater emphasis on the question of whether or not costs are ´sunk', rather than on the absolute level of entry costs, in establishing whether or not such costs are likely to restrict entry. The Authority does not believe that the Irish whiskey market could be considered to be contestable. Consequently the Authority believes that there are significant impediments to entry in the relevant market.

85. The arrangements will, as pointed out lead to the elimination of Cooley from the market. It is true that Cooley's sales of whiskey to date have been relatively small. This is effectively attributable to the long lead time involved between the commencement of production and the availability of the finished product for sale. Cooley is only now an effective new entrant to the market. The Authority rejects the claim that the arrangements will have no impact on competition because Cooley's present level of sales is low. Such an argument is tantamount to a claim that the elimination of a new entrant has no impact on competition in a market. It must therefore be rejected as wrong.

86. As the Authority indicated in Nallen/O'Toole [19], competition includes potential as well as actual competition. In the Authority's view, Cooley is clearly a potential competitor in the Irish whiskey market. Given Cooley's production capacity it has the potential to capture a significant share of the Irish whiskey market. Dr. Teeling indicated that Cooley had hoped to achieve sales of 50,000 cases of whiskey per annum on the domestic market after four years, equivalent to about 8% of Irish whiskey sales in 1992. Undoubtedly the situation is complicated by Cooley's financial difficulties. Nevertheless, it is certain that if the arrangement proceeds any possibility of Cooley becoming a competitor will be eliminated, while the barriers to entry highlighted above make it unlikely that any other new entrant would emerge. In the Authority's view if Cooley were to survive this would certainly enhance competition in the whiskey market. The present arrangements would have the effect of preventing a new competitor (Cooley) entering the market and would thus effectively prevent competition, given the nature of the market. The Authority also believes as already stated that the entry of Cooley would have some effect on Irish whiskey prices and the arrangements therefore would permit prices to be higher than they might otherwise be.

87. IDG has indicated publicly that it intends to close the Cooley distillery and not to produce or market any of its products. Thus the only Irish whiskey producer not controlled by IDG and ultimately by its parent Pernod-Ricard will be eliminated. IDG has argued that Cooley's financial difficulties mean that it is unlikely to remain in business and therefore should not be regarded as a potential competitor. The Authority accepts that Cooley requires additional finance if it is to continue. Undoubtedly the conclusion of distribution agreements for major overseas markets would provide one means of securing Cooley's future. There was evidence that a number of such agreements were close to finality and a number of overseas firms have indicated to the Authority their interest in concluding such agreements with Cooley. The parties have claimed that such arrangements were not finalised and were anyway inadequate as many more would be needed to provide sufficient revenue for Cooley's survival. The Authority believes that such arrangements would have assisted Cooley in its attempts to survive.

88. An alternative would be a sale of the business or a part of it to an overseas drinks producer. While it is true that Cooley has, over the past two years, failed to attract a partner to provide the necessary funds to develop its business, the reality is that Cooley is worth more to IDG than to any other drinks producer. The failure to conclude an agreement may be due to the fact that other parties placed a lower value on Cooley than IDG and they were being asked to pay a price which they regarded as too high. This does not mean that if the present arrangement did not go ahead no other buyer would be found for Cooley and it would inevitably close. Obviously that might happen. However, in the Authority's opinion, there is a reasonable prospect that an overseas drinks producer would be interested in having an Irish whiskey operation within its portfolio of activities. If IDG were not a potential buyer, there is a distinct possibility of Cooley being acquired by another firm, albeit at a lower price. Indeed the fact that IDG is prepared to pay what appears to be an inflated price to acquire Cooley and its assets and the fact that among the reasons given by its Chief Executive for doing so is to ensure that no one else can acquire the plant, suggests that IDG at least, considers that there is a possibility of Cooley being purchased by someone else. On balance, while the Authority recognises that the survival of Cooley is by no means certain, it remains a distinct possibility and Cooley cannot therefore be dismissed as a potential competitor to IDG. (This point is returned to below).

89. Mergers which have an adverse effect on competition have been permitted under US law under the ´failing firm defence doctrine' in the US since the 1930s [20]. The US Department of Justice Merger Guidelines 1984 outline the main features of the 'failing firm' defence.

´The "failing firm defense" is a long-established, but ambiguous, doctrine under which an anti-competitive merger may be allowed because one of the merging firms is "failing". Because the defense can immunize significantly anticompetitive mergers, the Department will construe its elements strictly.

The Department is unlikely to challenge an anticompetitive merger in which one of the merging firms is allegedly failing when: (1) The allegedly failing firm probably would be unable to meet its financial obligations in the near future; (2) it would probably not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made unsuccessful good faith efforts to elicit reasonable alternative offers of acquisition of the failing firm that would both keep it in the market and pose a less severe danger to competition than does the proposed merger. [21]'

The guidelines state that the fact that an offer is less than the proposed transaction does not make it unreasonable. Indeed any offer to purchase the assets of the failing firm for a price above the liquidation value of those assets will be regarded as a reasonable alternative offer. It is also necessary to show that, in the absence of the acquisition, the assets of the failing firm would leave the relevant market. Although Cooley has failed to find any partner in recent years it is not clear that the assets would not be purchased for a price above the liquidation value but below the price which IDG is prepared to pay. In addition the arrangements will not prevent Cooley's assets leaving the market but rather will ensure that they do so. Thus while the parties submitted that the present arrangements would satisfy the failing firm defence, in the Authority's opinion, they would not do so.

90. There is undoubtedly competition in the whisk(e)y market in Ireland from imports. As noted such products account for almost 24% of that market. At the same time the Authority considers that the level of competition from imports is limited by several factors. The imports are split between several different manufacturers. While some imported brands are produced by major multinational companies, many are produced by smaller firms which would not be in a position to offer strong competition to IDG in the Irish market. The small market share accounted for by individual overseas producers relative to the very large market share held by IDG again suggests that the ability of overseas producers to offer strong competition to IDG is somewhat limited. It is also relevant that some of these competing products are distributed by a firm in which IDG is a minority shareholder.

91. In sum, given the concentrated nature of the market, the absence of any other domestic competitors, the barriers to entry which exist, the fact that other domestic firms are unlikely to enter the market and the limited competition to IDG from overseas producers, the Authority considers that the effect of the notified agreement would be to prevent, restrict or distort competition in the market for Irish whiskey and in the broader whisk(e)y market within the State. Specifically the Authority believes that the arrangements would have the effect of limiting or controlling production and markets contrary to section 4(1)(b) of the Act. It believes, for similar reasons, that the arrangements would have an adverse effect on competition in the market for certain other drinks, e.g. gin, albeit to a lesser extent. The Authority does not believe that the arrangements would have any effect on competition in the bulk whiskey market.

92. Section 4(1) prohibits an agreement which has as its object or effect the prevention, restriction or distortion of competition within the State. In Mars/HB, Keane J made clear that the term ´object or effect' in Article 85(1) of the Treaty of Rome was to be read disjunctively [22]. Thus, once it is shown that an agreement has as its effect the prevention, restriction or distortion of competition, it offends against section 4(1).

93. IDG has claimed that its decision to purchase Cooley is prompted by the fact that Cooley's adverse financial position could result in inferior Irish whiskey coming onto the market thereby harming the image of its products. Were Cooley to collapse IDG could of course seek to purchase the stocks in question from any receiver that might be appointed. Alternatively it could offer to purchase the whiskey from the BES companies. Both options would appear likely to cost IDG a lot less than the present arrangement.

94. IDG's claim that Cooley's product could harm its own appears to some degree to be based on the fact that Cooley's whiskey is double distilled while IDG's is triple distilled. Most Scotch whiskies are also double distilled. It is not clear that the difference in production methods means that Cooley's product is inferior to that of IDG. It is relevant that the Irish Whiskey Act sets out legal requirements which must be satisfied in order for a product to be described as Irish whiskey. As far as the Authority is aware, Cooley's products comply with the requirements of the Act.

95. The purchase price being paid by IDG of £9.5m for Cooley shares is considerably higher than the book value of Cooley's assets. It is relevant that IDG does not propose to utilise any of these assets but has stated publicly that it intends to close them. Thus the premium being paid by IDG cannot be explained on the basis that the assets are more valuable to it, in use at least, than their stated book value in Cooley's accounts. The Authority notes also that this agreement has been reached just at the point where Cooley's main brand, Locke's, was scheduled to be launched. Despite IDG claims that there was no market for Cooley's products, both the staff and others have claimed that distribution agreements for Cooley were close to finality for major markets in Europe and the US, a point which Dr. Teeling apparently conceded in a newspaper interview and confirmed at the Oral Hearing. The price at which IDG has agreed to purchase the whiskey currently held by the BES companies appears to be significantly higher than the prevailing price of bulk whiskey, although IDG has stated that this is the only use to which such product can be put. Again it is relevant that the terms of the letter of agreement oblige Cooley to cease supplying export orders. The claims that there was no market for Cooley's products, that the finances necessary to launch its brands were not available and that its products were inferior are in marked contrast to the submissions received by the Authority indicating a considerable degree of interest among overseas buyers in securing distribution rights for such products and the indications that Cooley was close to securing agreements which would have provided it with a sum in excess of £1.5m.

96. IDG and Cooley both submitted at the oral hearing that there could not be in their agreement an object or effect to prevent restrict or distort competition unless there was either competition or potential competition to be prevented, restricted or distorted; and they both submitted that the Authority could not correctly find that there was potential competition unless there was evidence before the Authority identifying a specific investor or investors capable of sustaining Cooley not just as a short term proposition but to be a competitor in at least the medium term.

97. For the sake of clarity the Authority is stating its position on this submission. The Authority agrees that, in finding that behaviour has the effect of preventing restricting or distorting competition or potential competition, it must see strong evidence of the potential competition which is being affected, i.e. prevented. On the other hand, in finding that behaviour has the object of preventing, restricting or distorting competition, the Authority does not consider that it has to be satisfied that, were it not for the behaviour being examined, the potential competition would successfully metamorphose into real and continuing competition. It need only be satisfied that the threat of the potential competition is sufficiently real to form the motivating force in the anti-competitive behaviour.

98. IDG in their written submission and at the oral hearing gave evidence as to what their object was in seeking to take over Cooley. They stated that they were concerned that Cooley would collapse, either now or in the near future. Since it would be unable to meet the contracts to buy back whiskey stocks from the BES companies, the bank creditors would force the BES companies to sell the stocks on the open market. This would be harmful to the image of Irish whiskey, and therefore to IDG brands which incorporated Irish as part of their brand image; therefore, IDG to protect their brand names, needed to control the Cooley stocks.

99. The Authority does not disbelieve that this is an object of the takeover. The Authority considers that the object of protecting the IDG brand names is not objectionable in itself, but does not justify behaviour which is anti-competitive. The object of protecting the image of "Irish whiskey" as inextricably identified with the style and taste of IDG whiskeys is anti-competitive insofar as it inhibits the emergence of another Irish whiskey producer, producing whiskey in another style. The Authority does not, in any case, believe that the protection of the image of IDG brands is the sole object of the takeover.

100. IDG did not give evidence of where they thought the whiskey stocks would end up but the danger posited could only happen if the buyer of the stocks, instead of using it as bulk whiskey for any non-Irish brand, bottled and sold it as Irish whiskey.

101. The takeover will involve IDG paying of the order of £24.5m in total, which will give them control of the whiskey stocks, the Cooley plant, and the Cooley brand names. IDG have said that they will not use the Cooley plant; that if they wanted to they could not, without huge expenditure, on effluent disposal; and that, although they might sell it, this would only be to a business other than a distiller. IDG do not intend to use the brand names Tyrconnel and Lockes. Under the whiskey option contracts, Cooley or their assignee would have to pay significantly more than the market price for the whiskey stocks. Richard Burrows, presenting IDG's position, was asked by the Authority to explain why, if the object was solely to control the whiskey stocks, IDG had chosen to pay a total of £24.5m for plant it would not use, brand names it would not use, and whiskey stocks which they expected would inevitably come on the market at a lower price. He stated that the risk being bought was the risk that Cooley would continue, undercapitalised, and selling whiskeys different in style to IDG brands, into IDG markets, damaging the image of Irish whiskey. Later, but in this context, he stated that this did not mean that he regarded Cooley as a competitor; it could damage IDG but that was by damage to the image of Irish whiskey and IDG brands, not by actually taking away customers. He was asked why IDG did not simply wait and buy the stocks when they, inevitably, came onto the market. He said that IDG also wanted the plant. He agreed that IDG did not need and could not use the plant, but wanted to stop anyone else using it.

102. Schedule D of the Letter of Agreement contains specific restrictions on Cooley's activities from the date of the letter. In particular it provides that Cooley will not supply any export orders from the date of the letter and will withdraw all salesmen with the exception of a representative in the North West who is described as an order taker. The requirement that Cooley withdraw all salesmen with one exception has the effect of preventing or restricting competition within the State since it impedes Cooley from obtaining new orders or new customers for its products. In addition the restriction on supplying any export orders also has the effect of restricting or distorting competition within the State. This is because some level of export sales is essential to the long-term viability of Cooley. By preventing it from exporting its products, this restriction hampers the development of Cooley, thereby limiting its ability to compete in the domestic market.

103. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement which offends against Section 4(1) but which, ´having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

104. It may be argued that a licence is not very satisfactory for a merger as it can only apply for a limited period of time. Admittedly a licence may be extended but this nevertheless means that the merger is always subject to some degree of uncertainty. The Authority is aware of such viewpoints but points out that a decision on whether or not to grant a licence must be based on an assessment of whether or not the criteria set out in section 4(2) of the Act are satisfied.

105. In the Authority's view the present arrangements will not contribute to improving the production of goods or provision of services or to promoting technical or economic progress. In fact the arrangements will result in a reduction in the production of Irish whiskey. Cooley uses a different process to produce its whiskey compared to IDG, double rather than triple distilling. Without adjudicating on the relative merits of the different processes, the Authority concludes that the introduction of new or alternative methods of production would constitute a form of technical progress which would be prevented by the arrangements. The arrangements will produce no benefits which can be shared with consumers. In fact the arrangements will deny consumers the benefit which they might obtain from the availability of a new source of Irish whiskey. In addition as IDG accounts for almost 100% of Irish whiskey sales and over 76% of all whisk(e)y, the arrangements, in the Authority's view, afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. As all four of the licence criteria must be satisfied before a licence may be granted, a licence cannot be granted in respect of the notified arrangements.

106. IDG and Cooley are undertakings within the meaning of the Competition Act. The letter of agreement dated 5 October 1993, between Irish Distillers Group plc (IDG) and Cooley Distillery plc (Cooley) whereby IDG agreed to make an offer for the whole of the existing share capital of Cooley subject to certain conditions, which would have had the ultimate effect of IDG acquiring the assets and property, including the goodwill of Cooley, is an agreement between undertakings. In the Authority's opinion the notified agreement has both the object and the effect of preventing, restricting or distorting competition in the markets for Irish whiskey, for whisk(e)y generally, and for certain other spirits, within the State and offends against section 4(1) of the Competition Act. It does not meet the requirements for a licence specified in section 4(2). The Authority therefore refuses to issue a certificate or grant a licence in respect of the notified arrangements.

For the Competition Authority

Patrick Massey

Authority Member

25 February 1994.