FTC Examines Grocery Merger Environment

May 25, 2007 Supermarket News

By STEPHEN BARLAS

WASHINGTON -- The Federal Trade Commission is trying to determine whether the yardsticks they have used in the past to measure the legality of proposed supermarket mergers are still accurate enough to use today with regard to the Whole Foods/Wild Oats and A&P/Pathmark acquisitions. That casting about for current "intelligence" was reflected in the FTC's conference on grocery store antitrust issues held here yesterday at an FTC satellite location in the shadow of the historic Union Station near Capitol Hill. About 100 listeners heard day-long presentations, none of which addressed the Whole Foods and A&P mergers directly. But they clearly cast a long shadow. One attorney for one of the four companies involved in the two mergers said, "Anytime you get economists involved in something like this it leads to a more sophisticated understanding of the current environment. Michael Salinger, director of the FTC's Bureau of Economics, which sponsored the conference, told SN that the conference had been planned well in advance of the announcement of the proposed A&P and Whole Foods acquisitions.

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Legislators Push Digitized Health Records

May 25, 2007 Digital HealthCare & Productivity.com

by Stephen Barlas

One Congressman noted the blustery conditions on the outdoor terrace attached to the House Cannon Office Building and hoped it was a sign of the “winds of change” blowing through Capitol Hill on the issue of health information technology. But it was apparent from the remarks of Rep. Charles Gonzalez (D-TX), chairman of the House Small Business regulations, healthcare and trade subcommittee, and his House and Senate colleagues gathered for the outdoor press conference on May 16, that there are also still substantial head winds impeding the forward movement of health IT bills.

The press conference was held in conjunction with National Health IT Week 2007, and was organized by the Healthcare Information and Management Systems Society (HIMSS). Gonzalez, Reps. Patrick Kennedy (D-RI), Phil Gingrey (R-GA), Dennis Moore (D-KS) and Sens. Debbie Stabenow (D-MI) and Sheldon Whitehouse (D-R.I.) all discussed bills they had recently introduced or would soon be introducing. Many of the proposals were introduced in past Congresses, where they stalled. All of the bills in one form or another seek to spike adoption of health IT by health care providers.

The political roadblocks which impeded legislative progress in the past still remain. The two most imposing are what the bills would cost the federal treasury in lost revenue—adding to the budget deficit—and concerns from consumer groups that electronic health records equal loss of personal privacy.

“A lot has been made about the cost of this,” Kennedy admitted. His Personalized Health Information Act of 2007 would allow the secretary of HHS to provide financial incentives to health care providers for the use of interactive qualifying personal health records. Gonzalez’s bill, the National Health Information Incentive Act of 2007, authorizes the secretary of HHS to make grants to small medical care providers.

Kennedy complained about estimates of the costs of the various bills done by the Congressional Budget Office (CBO) saying those estimates do not take into account the ultimate savings to the federal government from implementation of electronic health records. Gingrey referred to the CBO’s methodology as “the idiocy of static budget scoring.”

Sen. Whitehouse pointed out that the Rand Corporation has estimated that health care spending could be cut by as much as $346 billion if health IT is adopted at a maximum level. “With savings like that, why is it not happening,” he asked?

He answered his own question by alluding to Medicare’s failure to reimburse providers for investments in health care IT and a “deficit” of government leadership. “But if we don’t do our duty now, in five, eight or ten years we are going to have to tell a little old lady in Woonsocket, Rhode Island that she doesn’t have Medicare any longer.”

A Farm Bill That Milks Dairy

March 2007 Dairy Field

by Stephen Barlas

The first thing to note about the Bush administration’s farm bill proposal is that Agriculture Secretary Mike Johanns spent one short paragraph explaining a very limited dairy-reform proposal when he appeared before the Senate Agriculture Committee on February 7.

So the dairy price support, Milk Income Loss Contract (MILC) and milk marketing order programs are very low down on the USDA’s reform agenda.

“The Bush administration punted on dairy,” says Chip Kunde, senior vice president of Washington, D.C.-based International Dairy Foods Association (IDFA). “They moved every other commodity program to a revenue-based, counter-cyclical basis, and made them more compliant with World Trade Organization rules.”

Kunde agrees that the White House has proposed some good changes in the MILC program. “But those do not go far enough,” he argues. The milk price support and milk marketing orders would not change at all.

The milk price support program is kind of silly when you think about it. The USDA buys mostly nonfat dry milk when milk’s price dips below $9.90 per hundredweight for milk testing 3.67 percent butterfat. But right now, milk prices are high, so not much milk is being purchased.

However, just keeping the program in place hurts dairy product manufacturers, and in two ways. First, few suppliers of such things as high-grade milk protein concentrate are available locally because they are worried the federal government could jump into the market as a competitor at any time. So makers of ice cream and cheese have to go overseas to find some of those types of ingredients.

Second, the World Trade Organization considers milk price supports an unfair federal subsidy, and that makes it harder for the United States to argue for more access to foreign markets for dairy products.

While it is refusing to budge on price supports, the Bush administration would make changes to the MILC program by limiting payments to farmers earning less than $200,000 in adjusted gross income. The current limit is $2.5 million a year. And the size of those payments would decline from 34 percent of the difference between $16.94 per hundredweight and the Class I price in Boston in fiscal 2008 to 20 percent in FY 2013-17.

However, just maintaining the MILC program, even at a reduced level, maintains the crazy relationship between it and the price support program, where the USDA buys heavy quantities of nonfat dry milk, butter and cheese (mostly NFDM) when the price of milk is low at the same time it is making direct payments to those same milk producers via the MILC program. That spells milk price volatility, which is doubly dangerous to proprietary dairy processors because they are not allowed to forward contract with milk suppliers.

Kunde thinks a better safety net for milk producers would be one where the price support program was eliminated entirely, and the MILC program replaced with a different direct payment program based on two components: a milk producer’s revenue, as the administration has proposed to do with other commodity programs, perhaps tied to the number of cows on a farm; and a milk producer’s nutrient management plan.

Another idea is for the USDA to underwrite a milk producer’s income insurance program, as it does for other commodities. Lastly, the USDA could formalize on a national level the pilot program it ran in 2000-04 that allowed cheese and ice cream makers to forward contract for milk.

Instead of endorsing these kinds of farsighted reforms, the Bush administration has proposed a farm bill that will continue to milk dairy processors.

Merger mania linked to lame-duck Bush regulators

June 4, 2007 Financial Week,

By Stephen Barlas

Corporate mergers have exploded over the past few years as George W. Bush’s popularity has imploded, and the Republicans’ chances of retaining the White House have diminished. That may be why so many companies are rushing to complete acquisitions while a compliant, Republican-run Federal Trade Commission and Justice Department are still in the reviewer’s seat.

David Scheffman, director of consultancy LECG and a former director of the FTC bureau of enforcement, said there is a perception that a Democratic administration would not look as kindly on some of the recent mergers as a Republican administration has.

The FTC, for example, received 1,768 pre-merger filings in fiscal 2006, a 28% increase over fiscal 2004. In fiscal 2007 so far, filings are up 17% from a year ago. Under the Hart-Scott-Rodino Act, either the FTC or the Justice Department’s antitrust division reviews a merger to ensure it is not anti-competitive, meaning it does not hurt consumers. The FTC and Justice have an informal agreement, worked out over time, on which industry sectors each one reviews.

Three months ago, Herbert Kohl (D-Wis.) didn’t mince words when he voiced Democrats’ views of antitrust policy under the Bush administration.

“We are very concerned with the direction that the antitrust division has taken under this administration,” he said at a hearing in March on competition policy and consumer rights. “With the exception of criminal enforcement, there is an alarming decline in the division’s antitrust enforcement efforts across the board, particularly with respect to mergers.”

But Thomas Barnett, assistant attorney general for the Justice Department’s antitrust division, told Mr. Kohl that merger enforcement continues to be one of his top priorities. “The division filed 10 merger enforcement actions in fiscal year 2006, and an additional six transactions were restructured by the parties in response to a division investigation,” he explained at the hearing. “This marks the highest level of merger enforcement activity since the end of 2001—a time when the department was reviewing twice as many mergers during the merger wave of that era.”

Mr. Barnett’s numbers aside, Steven Bernard, director of M&A market analysis at Robert W. Baird & Co., said he agrees that some of the current crop of mergers are being pushed now out of a concern that Democrats might control both Congress and the White House in 2008 and make deal-making harder. Still, he said the majority of the mergers are progressing mostly because conditions are right: Record private equity capital is available, corporate earnings are climbing, stock prices are strong and interest rates remain low.

Moreover, he contrasts the mergers taking place today with those during the last period of merger mania, from 1999 to 2000. The earlier deals, such as AOL-Time-Warner, were done for the sake of empire building. This new generation of mergers is based on sound strategy, for example to create efficiencies.

One such deal is AirTran’s attempt to acquire Milwaukee-based Midwest Air.

Perhaps not surprisingly, Wisconsin’s Mr. Kohl was apoplectic that the Justice Department gave quick approval to that deal. “Should AirTran acquire Midwest Airlines and decide in the future to reduce service from Milwaukee, the negative consequences for the Wisconsin economy would be enormous,” he stated.

Supermarket mergers, arguably, are more politically sensitive than AirTran’s hostile bid for Midwest Air, Google’s acquisition of DoubleClick or Sirius Satellite Radio’s bid for XM Satellite Radio, just to name a few of the recently proposed deals. That’s because someone from every family in every congressional district visits a grocery store, so changes in prices, offerings and service can cause an uproar considerably more explosive—and potentially politically damaging—than any adverse change in Internet advertising rates or satellite radio service.

The FTC, which reviews supermarket mergers, seemed to be signaling their political ramifications when it held a supermarket industry merger workshop in late May. The FTC has sought more information in both A& P’s proposed acquisition of Pathmark and Whole Foods Market’s tender offer for Wild Oats Markets.

The last and only enforcement action filed in conjunction with a supermarket merger by the Bush administration was when the commission challenged Wal-Mart’s acquisition of the largest supermarket chain in Puerto Rico, Supermercados Amigo. In a consent agreement in November 2002, Wal-Mart agreed to divest four stores. However, Puerto Rico went to court to force additional divestitures, and Wal-Mart agreed.

The FTC forced no concessions from Supervalu when it bought 1,100 Albertson’s stores in June 2006.

At the supermarket industry workshop on May 24, Debbie Feinstein, a partner at the law firm of Arnold & Porter, who spoke on behalf of Kroger Co., urged officials at the FTC’s bureau of economics, which also plays a role in antitrust investigations, to be even more lenient toward mergers and give greater weight to their potential “efficiencies” and to the competition posed by Wal-Mart Super Centers and traditional mass merchandisers such as Target, both of which have been expanding into the grocery market.

Over its two terms, the Bush FTC has become increasingly open to arguments that mergers, even when they result in the disappearance of a neighborhood supermarket, can be pro-competitive through their efficiencies, where the remaining supermarket benefits from corporate savings on administration, advertising, warehousing and other services. Those savings theoretically translate into benefits for consumers, such as lower prices, better service and more offerings.

Referring to FTC chairwoman Debra Platt Majoras, LECG’s Mr. Scheffman explained: “This chairman has spoken about taking efficiencies more seriously.”

He added that his firm had been involved on behalf of Rite Aid in its acquisition of both Brooks and Eckerd drugstores, a deal that the FTC is still looking at. Going into that merger, Mr. Scheffman had thought Rite Aid would have to divest 125 Brooks stores for the deal to win FTC approval. But by underlining the efficiencies that would be gained in the merger, Rite Aid may only have to divest 25 stores. FW