The completion of Cargill and Continental Grain’s $4.53 billion acquisition of the world’s largest poultry producer Sanderson Farms seemed promising when the deal was announced in the summer of last year. After Sanderson was merged with Continental Grain subsidiary Wayne Farms to form a privately controlled company, it will be the third largest U.S. processing company for poultry and employ over 25,000 workers, Wayne Farms CEO Clint Rivers said to Food Dive this past November.
“This is an opportunity that doesn’t come along very often,” he told reporters when he was in that moment.
However, while the two companies originally anticipated the deal to conclude in the month of December 2021 or in early 2022, the date is uncertain now, since they are still waiting for confirmation from regulators at the Federal Trade Commission. On December 1, Sanderson Farms revealed in a Securities and Exchange filing that the Department of Justice, which is the federal authority for antitrust enforcement, was making an additional request for information as part of its investigation of the transaction.
In February, there was an assembly of lawmakers, including Sens. Elizabeth Warren (D-Mass.) along with Bernie Sanders (I-Vt.) wrote to the Department of Justice warning of “significant antitrust concerns” about the merger plan and its potential to boost the poultry industry’s power of monopoly and ultimately the price for chicken. They asked the DOJ to conduct an extensive examination of the proposed merger.
The spotlight is on the president as Biden has criticized the concentration of market share among all large meat producers, which includes that of the “Big Four” poultry processors which include Tyson, JBS, Perdue, and Sanderson Farms — which collectively control 54 percent of the poultry market.
In early March the deal was believed to be unlikely to go through without a change to the specifics of the purchase contract, in a study published by CNBC.
In response in a response to Food Dive, Cargill and Continental Grain said they are continuing to cooperate with the DOJ on its review and believe that the approval of the deal “will ensure there is a strong and competitive American food supply.” Sanderson Farms did not respond to requests for information.
However, as the approval of the merger is delayed experts highlight the aspects of the merger that may impede its approval, as well as the possibility of continued oversight by regulators on any future M&A deals within the meat industry.
Legal setbacks
The inability thus far to reach a deal indicates that there are substantial legal hurdles to overcome for companies that specialize in poultry and meat to join in the future, due to the Biden administration’s stoic position on market consolidation within the industry. However, the record profits businesses are making amid the dramatic price rise for food can increase the opposition to any further consolidation.
The merger will increase the four top chicken companies between 54% and 60% in the event of its closure, “That seems like a consolidated industry,” according to Michael Carrier, a professor of antitrust law at Rutgers Law School.
John Lopatka, professor of antitrust law at Penn State Law, said that the DOJ is able to judge mergers of this magnitude according to their nature. “A “horizontal merger” involves one company purchasing a competitor, while”vertical mergers” are those that involve “vertical merger” means the merger of two companies that aren’t directly competing, but both are part of an identical supply chain.
According to Lopatka In merger and acquisition cases, such as Sanderson and Wayne regulators will attempt to identify which markets they are serving and if there is an overlap in the roles of the businesses.
In this instance, the deal is a vertical merger since Cargill makes chicken feed, as Sanderson and Wayne produce poultry for human consumption. This could hinder the merger’s approval process, Lopatka explained, if regulators think it is an issue for a chicken feed supplier to gain an advantage over its rivals in the poultry market.
“Most of those arguments center on the idea that in a case like this, the supplier will disadvantage downstream rivals,” Lopatka explained by referring to competitors of the new business.
The regulators at the DOJ may be concerned because Cargill is the sole owner of the market for chicken feed and could be able to charge competitors higher prices for these ingredients, according to Carrier. He added that Jonathan Kanter, the assistant attorney general of the Department of Justice’s Antitrust Division, has the incentive to pursue this kind of investigation into suppliers.
“Historically, the agencies have not focused on this, but in the last couple of years, there has been a greater focus,” Carrier stated. “Kanter has said that vertical mergers should be on the table.”
If regulators conclude it is not competitive and the DOJ filed a lawsuit against the companies in order to block the merger, it will be the responsibility of Cargill, Continental Grain, and Sanderson Farms to prove that even with the apparent loss of competition, there are efficiency gains, such as cost savings for consumers, Lopatka said.
In discussions about the merger in autumn, executives emphasized the potential synergies that could be created between both businesses, which includes the sharing of the most efficient practices to cut costs and improve production. This could ultimately benefit the farmers who are family-owned and provide Sanderson and Wayne as they claimed.
However, the Broiler Chicken industry’s past of anti-competitive behavior makes it difficult to see the benefits of the agreement, says Carrier. Price fixing allegations among the largest producers have plagued the industry for years, resulting in significant settlements and even criminal charges. The DOJ is proceeding in its pursuit against”the “Big Four” producers in the price-fixing case for the third time, an unprecedented move.
Congress is also worried about the impression of the absence of competition, particularly in the meat industry. In the Congressional hearing this week, lawmakers quizzed the chief executives from four of the biggest meatpackers on the reasons they are earning record profits in the midst of record costs for food.
It is unclear what the outcome of the transaction will be ratified by regulators even if the conditions of the agreement are changed considering the Biden administration’s anti-consolidation policy regarding the meat industry According to Lopatka. A traditional merger analysis during either the Obama or Trump administrations would be more likely to go ahead, he added however, this has altered during this Biden administration.
“I believe that both federal agencies are now driven by ideology. When there’s a change in administration, there may be an emphasis shift,” Lopatka said. “The antitrust enforcers that have been appointed are unabashedly driven by political ideology.”
Many are in favor of Biden’s antitrust policies that are more strict. Biden’s aggressive strategy to combat the concentration of corporations by a small number of firms can lead to an innovative, cost-effective as well as more democratic marketplace, as per Niko Lusiani head of power for corporations at the Roosevelt Institute, a progressive think organization.
“This is the role the Federal government should be playing: not cow-towing to the corporate powers-that-be, but standing up on behalf of the public as a counterweight to concentrated private power,” Lusiani stated.
The attention that this Sanderson as well as the Wayne merger is facing can cast a larger shadow over other deals in the industry experts believe. The antitrust enforcement process has gotten more intense and the Biden DOJ has been acting from a desire to expand enforcement into other industries, including food.
“In the past, there’s been a focus on just a few areas, for example, the pharmaceutical industry, and in the last five years Big Tech,” Carrier declared. “I think that the Biden administration will look to make a statement in other areas.”
