According to the Australian Financial Review, the Australian Competition and Consumer Commission has some hard questions to ponder as the sale of biscuit market leader Arnott's and Campbell Soup Company's other international operations draws to a close. Currently Mondelez International is the strongest contender and if the bid is successful would see the major player become even stronger with a 70 percent share of the biscuit market.

For the sale to go ahead the competition regulator must ask themselves Is a biscuit just a biscuit, or is it also a snack?

It wouldn’t be the first time the Australian Competition and Consumer Commission has had to intervene in the biscuit and snack markets. In 1990, the then-Trade Practices Commission took Arnott's to court to stop it form purchasing Cereal Foods. A sale which would have substantially strengthened its power in the biscuit market.

Arnott's, which held about 65 per cent of the market by volume and about 70 per cent by sales value, tried to argue that “biscuits competed with other non-biscuit products such as salty snacks and chocolate bars, and that the market was wider than biscuits themselves".

The Federal Court disagreed stating that the argument did not establish that the two products were 'substitutable' so as to be within a single market.

Twelve years later, the ACCC approved Arnott's purchase of Snack Foods, which owned CC's corn chips and Cheezels, claiming the acquisition was unlikely to lead to a substantial lessening of competition in the market for salty snacks, biscuits or chocolate confectionery.

Even though consumption habits have changed, consumers are more likely to buy chips or chocolate bars rather than biscuits, competition lawyers still believe that the ACCC will likely take the same approach that it has in the past.

"I don't think the ACCC will look at the wider market," said one competition law expert. "The question is does the seller [Campbell Soup] want to take the risk of selling to Mondelez if the transaction might get blocked.

"Or do they go to with KKR [whose $US25 billion leveraged buyout of RJR Nabisco in 1988 triggered the book Barbarians at the Gate] or Ferrero?"

It is understood the ACCC has not yet started making market inquiries and is awaiting details of the preferred bidder. "We are aware of the sale process and are monitoring the situation. If a player with existing assets in the industry is proposed as the buyer, we will review the proposed transaction to assess if there are any competition issues,” said an ACCC spokeswoman.

Market Share Issues

Arnott's has about 61 percent of the biscuit market, with brands such as Tim Tams, Shapes, Iced Vovo's and Tiny Teddy. Mondelez has about 8 percent, mainly through the Oreo, Ritz and Captains Table brands, many of which are former Nabisco brands.

If Mondelez buys Arnott's it may have to sell enough assets to reduce its market share to about 50 percent and create a strong No.2 player with about 20 percent share, to appease ACCC concerns.

However, asset sales would erode the value of synergy benefits between Mondelez and Arnott's and arguably erode the value of sub-brands to be sold.

Global snacks giant Frito-Lay was forced to sell about one-third of its portfolio in 1998 and create a strong competitor to gain clearance for its acquisition of The Smiths Snackfood Company.

KKR and Ferrero have no biscuit businesses in Australia, however, for that reason, they may be unable to offer as high a price as Mondelez, which is expected to offer between 13- and 14-times earnings.

If the ACCC believes there is an overlap between chocolate biscuits and chocolate, Mondelez will also run into problems, as it currently dominates the chocolate market, holding a 50 percent share through the Cadbury brand.

Campbell International, which makes snacks, soup, stock and juices in Australia, New Zealand, Asia-Pacific and the Middle East, earned $US202 million on sales of $US1.05 billion in 2018.

Arnott's is by far the biggest brand in the portfolio, accounting for $US737 million in annual revenues, according to information sent to potential buyers.