The Competition Council has authorized the acquisition of control over Financiére-Franklin Roosevelt SAS (hereinafter Roosevelt) by Raffinerie Tirlemontoise SA (hereinafter Tirlemontoise) with the precondition that the control over Eastern Sugar Cukoripari Rt. (hereinafter Eastern Sugar) will devolve on the Tate & Lyle group. Following the fulfilment of this condition, for a duration of three years the applicant has the obligation to submit to the Competition Council all the decisions and minutes made by the board of Eastern Sugar.

The transaction and the parties

The Belgian Tirlemontoise, a subsidiary of the German Südzucker AG (hereinafter Südzucker), applied for the authorization of the competition authority in July 2001 concerning its acquisition of sole control over Roosevelt. The transaction affects indirectly two of the three interest groups of the sugar market in Hungary.

The German Südzucker, by controlling the Austrian Agrana Beteiligungs AG (hereinafter Agrana), has an indirect influence over Magyar Cukor Rt. (hereinafter Magyar Cukor). On the other hand Südzucker would gain with the transaction joint control over Eastern Sugar BV, the parent company of Eastern Sugar through Tirlemontoise.

Tirlemontoise is the Belgian subsidiary of Südzucker, the greatest sugar producer in the world. It manufactures and distributes sugar, sweeteners, food additives, starch, molasses and several other products. Roosevelt is the parent company of Saint Louis Sucre, the second-biggest sugar manufacturer in France and the seventh-biggest in Europe. Together with the British Tate & Lyle, Saint Louis Sucre set up a joint venture (Eastern Sugar BV) for investments in the former socialist countries. This joint venture controls the biggest sugar factory of Hungary at Kaba (Eastern Sugar).

The Hungarian sugar market

The Hungarian sugar factories belong to three separate interest groups. Magyar Cukor, which owns three factories, is controlled by Agrana, the production site at Kaba as mentioned above belongs to Eastern Europe BV, while another three plants form part of the French Eridania Béghin Say. The total amount of marketed sugar was 340 000 t in 2000, 61 per cent of which was purchased by retailers and 39 by industrial customers.

In 1998-99 the sugar manufacturers and the sugar-beet producers shared the quantities of producible and marketable sugar with the tacit approval of the Ministry of Agriculture, legitimised by the quota system introduced in 2000. Accordingly, Magyar Cukor has a market share of 37.1 per cent, Eastern Sugar 26.2 per cent and Béghin Say 36.7 per cent.

Following the privatisation the new owners, leading multinationals, made significant investments to modernize the obsolete production infrastructure, reaching high efficiency. The number of plants has been reduced from 12 to 7, during the procedure another factory was shut down. Since 1945 only 1 factory has been built and new entries are hardly imaginable given the significant capacity surplus of the industry.

Although the parties regard the import as a permanent threat, in 2000 the import represented only 2 per cent of the total amount sold. The Hungarian sugar market operates in a relatively transparent way, prices are regularly published.

The decision

The undertakings concerned are mainly active in the field of sugar-beet processing and the manufacture of sugar. The sugar market has two segments distinguished according to the customers of the product. The markets for retailers and industrial users have different characteristics in terms of the trading conditions or packaging, however the product is the same. In the case of industrial use isosugar could be regarded as a substitute for beet-sugar, however for the transportation and storage of isosugar special facilities are needed and price differences are not negligible.

Sugar manufacturers distribute their products on national level, given the fact that sugar is not perishable, therefore it could be profitably transported. The Competition Council defined the geographic market as national.

The Competition Council raised the issue of collective dominance, stating that even at present the market structure is characterised by collective dominance. According to the Competition Council, it is for the competition policy to prevent the creation or in this case the strengthening of these detrimental market structures.

The Competition Council examined several factors concerning the possible oligopolistic interdependence, underlining that the most decisive factors are the structure of the supply side, barriers to entry and the transparency of the market.

The sugar market was highly concentrated already before the transaction with a HHI value of 3414. The number of market players would be reduced from three to two. On the sugar market barriers to entry are high for the following reasons. Market demand is reducing, the present manufacturers can satisfy it. All of the sugar producers have capacity surplus, which can be used immediately. The creation of a new sugar factory is extremely capital intensive, while the payback period is relatively long. The fixed production quotas and the need for raw materials close to the production site constitute also high barriers to entry.

Transparency helps to monitor the prices and strategy of the others, which is a precondition for parallel behaviour, while precisely this transparency assists to identify undertakings not pursuing the parallel behaviour, which discourages deviation. All the three interest groups have quite similar capacities, levels of utilisation or cost structures. The low level of capacity utilisation could be an incentive in favour of parallel behaviour, as well as high proportionality of fixed costs.

Sugar could be regarded as a homogenous product, due to the fact that it is in 99.7 per cent chemically pure material. The price elasticity of the demand is relatively low, the Competition Council had statistical evidence on recent price increases where the demand stagnated or even decreased. There is no countervailing buyer power from the supermarkets on the sugar market. Industry players have several other connections to each other, which could strengthen their collective dominant position. They pursue joint promoting activities, they have concerted action against import threats, all the three are members in trade associations and previously they have already participated in a cartel.

As to the state interventions concerning the regulation of the Hungarian sugar market, the Competition Council, though it acknowledges the significant influence of it, states that the remaining competition had to be protected and this could not be an excuse for the parties.

As a result of the transaction the connection between the remaining two competitors would be even tighter, the incentives to compete weaker. Südzucker besides having sole control over Magyar Cukor, would gain joint control over Eastern Sugar, thereby without its consent, it is not possible to act against its interest on the significant part of the market.

Pursuant Article 30(3) of the Competition Act, to reduce the detrimental effects of a concentration pre- or post-conditions and obligations can be attached to the decision. Therefore the Competition Council imposed the condition that the applicant should create a situation concerning the sugar factory of Kaba where Südzucker has neither direct nor indirect, neither legal nor factual control over the plant`s business activity.

March 21, 2002. Budapest