BRITISH AMERICAN TOBACCO/ENTE TABACCHI ITALIANI
PRESS RELEASE
PRESS RELEASE
THE COMPETITION AUTHORITY HAS AUTHORISED BAT'S ACQUISITION OF ETI
At its meeting on 17 December 2003 the Competition Authority resolved to close its investigation of the British American Tobacco (BAT) company and Ente Tabacchi Italiani (ETI), and to authorise the takeover, on condition that BAT does not renew the production contract with Philip Morris when it expires on 31 December 2005.
The operation at issue is the acquisition by BAT of the entire equity of ETI. The origin of the takeover was competition floated by the Ministry of the Economy and Finance in the process of privatising its activities in the tobacco industry.
The relevant markets affected by the takeover are the production and marketing of: i) cigarettes, ii) cigars, iii) pipe tobacco and iv) RYO (roll-your-own) loose tobacco. All the markets have a national dimension.
The cigarette market is highly concentrated, with Philip Morris and ETI accounting for an aggregate 80 percent of the total in value and in volume, while BAT - which in the past few years has proven to be the most dynamic company on the market - only has between a five and 10 percent market share. Furthermore, there is a de facto wholesale cigarette (and other processed tobaccos) distribution monopoly managed by Etinera, a company wholly-owned by ETI, which will be taken over by BAT as a result of the acquisition. The market is also highly transparent, as a result of the publication in the Official Gazette of cigarette prices and their variations. Lastly, ETI has two contractual agreements with Philip Morris. One is for the production of Diana and Marlboro cigarettes for Philip Morris, and the other is for the wholesale distribution of Philip Morris products.
As a consequence of the takeover, BAT will acquire a market share in excess of 30 percent, while the aggregate BAT/ETI and Philip Morris share will be in excess of 85 percent.
The Authority considered that the takeover would give BAT/ETI and Philip Morris a collective dominant position on the market, such that it would eliminate or substantially reduce competition on the cigarette market on a lasting basis. For as a consequence of the takeover, compounded by the features of the market, conditions would be created such that the two main players would have no incentive to adopt competition policies, deeming it more rational to tacitly collude. Among the elements creating the collective dominant position, the two contracts between BAT/ETI and Philip Morris were considered to be particularly relevant, by virtue of the fact that their mutual use to the detriment of the other company would be likely to discourage them from adopting aggressive pricing policies.
In the course of the investigation, BAT submitted its undertakings to the Authority. In particular, it pledged not to renew the production contract with Philip Morris upon its expiry on 31 December 2005, speaking on its own behalf and that of its two subsidiaries. The Authority considered that this was appropriate and sufficient to remove its collective dominant position on the cigarette market by eliminating one essential retaliatory element that could be used to discourage the two leading companies from competing with it. This being so, the Authority noted that the contract would be reaching its natural expiry date at an appropriate time for removing the companies' collective market dominance because the parties would have to take account of their future inability, even over the next two years, to take any retaliatory measures, because of the existence of the definite expiry date for the contract, removing any incentive to comply with the tacitly agreed market balance.
The Authority has therefore authorised the operation, subject to compliance with the condition that BAT/ETI does not renew the production contract with Philip Morris.
Rome, 18 December 2003