Tissue firms merger to clear last obstacle

Date: 11/01/1996

By Tim Jones

KIMBERLY-CLARK is offering to sell one paper mill and licence the sale of four top tissue brands in return for the European Commission's blessing for its 7-billion-ecu take-over of Scott Paper.

Clearance of the merger by the 22 January deadline, first announced last summer, would remove the last hurdle to the creation of the world's largest manufacturer of tissue.

To address Commission concerns about its dominance in the UK branded tissue market, the company has offered to sell one of its two paper mills at Prudhoe in Northumberland or Larkfield in Kent.

At the same time, the Kleenex 'double velvet' toilet tissue, Kleenex kitchen towels and Scottex and Andrex facial tissues could be sold under licence for a period of years, while Kimberly-Clark would continue to own the trademark.

This is the second round of divestments required by regulators in return for allowing the merger.

In order to win approval in the US, the company had to sell its Scotties facial-tissue and baby-wipe businesses - including the brands Baby Fresh, Wash-a-bye Baby and Kid Fresh - along with a factory in Delaware and two of Scott's four US tissue mills.

This allowed the shareholders to give the green light to the merger.

But the Commission, still unhappy with the combined company's dominance in branded tissues in the UK, simply allowed the merger of the non-European operations to go ahead.

On 12 September, it began a full investigation of the merger because its preliminary enquiry had revealed markets where the combined shares enjoyed by the companies - especially in branded tissue products - suggested a dominant position that could impede competition.

In particular, they had an extremely high combined share in the UK and Irish consumer markets for toilet tissue, kitchen towels and facials, as well as the overall UK tissues markets.

This included 'away-from-home' products used in factories, hospitals and catering such as industrial wipes, hand-towels and disposable overalls.

According to the Commission's analysis, the combined market share for the two companies was 75&percent; for branded toilet tissue and branded facial tissues, and 50&percent; for branded kitchen towels.

In October, the companies hit back with a detailed document explaining where they believed the Commission was mistaken, pointing out their combined capacity would be only 18&percent; of western European capacity and their market share 30&percent; in the EEA.

They also said that simply looking at the market for branded products did not tell the whole story, since the market was really dominated by large-volume store brands, small manufacturers and converters of tissue.

The UK market, the Commission's biggest worry, is the best example of this.

Store brands hold a 53&percent; market share by volume on the domestic tissue market (toilet paper, facial tissues and kitchen towels), and have increased their share over the past five years by 12&percent;.

Since the top six retailers control nearly 80&percent; of UK grocery sales, they could give priority to their own brands and source competitively from a wide range of low-cost suppliers, the companies said.

They argued that for these everyday items, cost was the key issue and brand loyalty played only a minor role since the biggest selling brand in the UK's three leading retailers was their own.

As a result, branded products are a minority in the market.

On the basis of market figures for 1994, the combined shares of the two companies branded products will represent 35&percent; of toilet paper by volume (43&percent; by value), 23&percent; of facial tissues by volume (34&percent; by value) and 12&percent; of kitchen towels by volume (20&percent; by value).

The companies resisted the pressure from the Commission for months, but finally gave way in November and agreed to sell some of the UK operations. But until now, they have kept quiet about what would be sold.

The merger will create the second largest consumer products business in the US, behind Proctor & Gamble, with sales of 9 billion ecu.