Granting of permission to concentrate to A/S Dobeles Dzirnavnieks and AB Baltic Mill with obligations

At the end of 2021, Latvian undertaking A/S Dobeles Dzirnavnieks submitted a notice of concentration to acquire control over AB Baltic Mill. On 16 May 2022, the Competition Authority granted the permission to concentrate, subject to the parties fulfilling their obligations.

Tartu Mill AS, which is engaged in the production and wholesale of wheat and rye flour, wholesale of cereals, warehousing and transport services in Estonia, is the parent undertaking of A/S Dobeles Dzirnavnieks. The undertaking is also active in the sale of dry mixes (cake mixes, pizza mixes, semolina mousse mixes, etc), starches (rice, buckwheat, pearl barley, semolina, etc), flakes, kama, breadcrumbs, pasta products, pasta sauces, oil and sugar to both retail and wholesale customers. AB Baltic Mill is a Lithuanian undertaking with subsidiaries AS Rīgas Dzirnavnieks (Latvia) and Balti Veski AS, among others. Rīgas Dzirnavnieks is engaged in the production and sale of cereals, milling products and other dry goods, the drying and cleaning of cereals, the repackaging of cereal products and the provision of transport services. Balti Veski AS is active in the processing of cereal products, packaging and wholesale of dry goods.

The concentration mainly involves the production and wholesale level, where both parties to the concentration, including the companies belonging to the same group, produce several types of flour (eg wheat flour, rye flour, oat flour), which they sell to bakeries and confectioners, wholesale traders, and retailers. During the proceedings, the Competition Authority assessed the competitive situation on goods markets in which both parties to the concentration and the undertakings which are connected to each other through control are active. The Authority found that competition would be the most distorted on the goods market for the production and wholesale distribution of flour (flour products) in Estonia, as the combined market share of the parties to the concentration would be more than 90% of the flour sold (regardless of the type of flour). In particular, after the concentration, the combined market share of the parties would be highest for wheat flour and rye flour.

Pursuant to subsection 3 of § 22 of the Competition Act, the Competition Authority prohibits a concentration if it is likely to significantly restrict competition in the goods market above all, by creating or strengthening a dominant position. However, according to the guidelines of the European Commission, an otherwise problematic concentration may nevertheless be permissible if one of the parties is a failing firm and the competitive structure would be restricted to at least the same extent, regardless of whether the concentration is accomplished or not. During the proceedings, as a subsidiary argument for concentration, the parties to the concentration highlighted the need to apply the failing firm defence, insofar as the production of AS Rīgas Dzirnavnieks, an undertaking belonging to the AB Baltic Mill Group, had been inefficient for a long time and its financial condition had deteriorated year by year.

According to the guidelines of the European Commission, the failing firm defence can only be applied if: (i) the allegedly failing firm would be forced to exit the market in the near future due to financial difficulties; (ii) there are no other purchasing options that would restrict competition less than the notified concentration; and (iii) without concentration, the assets of the failing firm would exit the market. The Competition Authority found that all three criteria for the failing firm defence  were met and that, without the concentration, AB Baltic Mill’s subsidiary AS Rīgas Dzirnavnieks would likely have to cease business and its assets would exit the market. In the application of the failing firm defence, it is essential that the productive assets that would otherwise exit the market without the concentration continue to operate through the concentration.

In addition, A/S Dobeles Dzirnavnieks proposed the assumption of obligations to prevent competitive distortion resulting from the concentration and to support the defence of an undertaking in difficulty. The content of the obligations is to ensure the continued operation of the production unit of AS Rīgas Dzirnavnieks and to limit price increases.

The Competition Authority found that, since AS Rīgas Dzirnavnieks can be considered a failing firm and the proposed assumption of obligations by A/S Dobeles Dzirnavnieks supports the remaining on the market of the production assets of AS Rīgas Dzirnavnieks which would otherwise leave the market without concentration, the concentration will not result in a competitive situation in the affected goods markets that would be worse than if AS Rīgas Dzirnavnieks were to exit the market. The validity period of obligations also provides all undertakings on the market the opportunity to adapt to market changes. Therefore, the Authority granted A/S Dobeles Dzirnavnieks and AB Baltic Mill the permission to concentrate, subject to the parties fulfilling their obligations.