Before You Close...

Large deals typically involve international operations, which are where a deal can stumble if the M&A team is not mindful of local jurisdictions.

With the recent acquisition of the Skippy® peanut butter line by Hormel Foods Corp. and the announcement that Berkshire Hathaway Inc. and 3G Capital Inc. will acquire H.J. Heinz Co., analysts are predicting the beginning of a wave of mergers for the food and drink industry, particularly staple food companies. Almost all of the mega-deals being announced in the food and drink industry have some international operations, and buyers and sellers should analyze applicable merger control rules and develop a plan for addressing any such issues early in the transaction. Merger control rules, which regulate transactions based on their effect on business competition, vary by jurisdiction and can delay a transaction unless the parties follow all necessary steps to gain regulatory approval in each applicable jurisdiction.

Recruit a Central Team

To begin, the buyer and seller in a food and drink M&A transaction with international aspects will want to select a law firm that has significant experience in cross-border transactions and which can effectively assemble and manage a highly capable and responsive team of local counsel outside the United States. The buyer and seller also should collaborate to recruit a central team of internal personnel to gather information, respond to questions necessary to the analysis and eventually assist with any notifications.

Start Analysis Early

At the beginning of the due diligence process, the central team and outside counsel should make it a priority to gather the necessary business information from both the buyer and seller, which may not be readily available, to identify the jurisdictions where regulatory filings might be required. The analysis can be time-consuming because it involves review of applicable laws, coordination with local counsel and gathering information that in many cases varies by jurisdiction. In some circumstances, the parties may want to seek a formal waiver or ruling from the relevant regulators to confirm that a filing is not necessary, and it might only be possible to do this in a timely manner if the parties start the analysis early in the process.

In some rare circumstances, the parties might ultimately choose to close the transaction despite the merger control rules in a jurisdiction. However, the parties will still need time to carefully assess the penalties or consequences for failing to comply with such merger control rules. This is because the financial penalties can be significant and in some jurisdictions the authorities may even seek to unwind the transaction altogether. Also, the parties should anticipate that the clearance process may take longer in some jurisdictions than others and can be delayed due to holidays, such as August in Europe and the Chinese New Year in China.

The buyer in a food and drink M&A transaction will also want to know early in the process whether it will need to divest any aspect of the new or existing business and to analyze whether this would erode the overall business case for the transaction.

Unanticipated Results

Another reason to start the regulatory analysis early is that merger control rules in many jurisdictions will apply even if there are no substantive antitrust concerns, and in certain jurisdictions can be triggered where it might not be expected. For example, although merger control rules are often based on turnover thresholds or combined assets, in some jurisdictions the overall sales of the selling or buying group are looked at, and not just sales relating to the acquired business.

Other jurisdictions have a marketshare test, which is subjective in nature and can be difficult to define. For instance, a party with just 25 percent of the marketshare in Taiwan – which, depending on the product and market definition, might be triggered by surprisingly small sales – may cause the transaction to require a filing or such party to seek a waiver, even if the other party only has minimal sales in Taiwan and is not directly selling competing products. Also, often there is limited precedent, and how the regulators will implement the merger control rules in a jurisdiction can be unpredictable.

In some cases, the deal structure as reflected in the main purchase agreement can impact the merger control analysis. So, the parties will need to update and adjust their merger control analysis as the deal structure and main purchase agreement are finalized.

The bottom line: By analyzing merger control rules early, preparing for unanticipated application of merger control rules and aligning analysis with deal structure, a food or beverage company can close an international transaction without unexpected delay.

George Martin  ([email protected]) and Ryan Miske ([email protected]) served as lead counsel to Hormel Foods Corp. in its acquisition of the Skippy peanut butter line from Unilever United States Inc. for approximately $700 million. David Vander Haar ([email protected]) and Matthew Levy ([email protected]) handled the merger control filings. Martin, Miske and Vander Haar are partners and Levy is an associate at the international law firm of Faegre Baker Daniels LLP.

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