Greencore and Bakkavor confident merger will proceed despite CMA warning

Greencore Group PLC and Bakkavor Group PLC remain confident in their planned £1.2 billion merger, despite the UK's Competition and Markets Authority (CMA) warning that the deal could significantly reduce competition in the chilled sauces market. The CMA's initial phase one review identified a "substantial lessening of competition" for supermarket own-label sauces, potentially triggering a phase two investigation unless remedies are proposed, though other product segments were cleared. Both companies' CEOs expressed optimism, viewing the CMA's findings as constructive and committing to collaborate with the regulator to finalize the transaction.

Analysis

Greencore Group PLC and Bakkavor Group PLC's proposed £1.2 billion merger faces a significant regulatory hurdle from the UK's Competition and Markets Authority (CMA). The CMA's initial phase one review identified a "substantial lessening of competition" in the supermarket own-label chilled sauces market, potentially leading to a more detailed phase two investigation. This concern arises as only Two Sisters Food Group and Billington Foods are seen as remaining, weaker competitors in this segment.

While the CMA cleared the transaction for chilled ready meals and own-label salads, the specific issue in chilled sauces is critical for the deal's completion. Both Greencore and Bakkavor chief executives, Dalton Philips and Mike Edwards respectively, expressed confidence, describing the CMA's findings as "constructive" and affirming their commitment to finalize the merger. This suggests an expectation of finding remedies to address the competition concerns.

The companies' continued confidence, despite the explicit warning, implies they are prepared to propose remedies to the CMA to avoid a phase two referral. Such remedies could involve divestitures or structural changes within the chilled sauces segment. Investors should closely monitor the nature of any proposed remedies, as these will directly impact the final scope and value of the combined entity.

Key Decisions for Investors

• Monitor the specifics of any proposed remedies to the CMA, as these will directly impact the merger's financial synergies and asset composition.
• Evaluate the potential for divestitures within the chilled sauces segment and their implications for the combined entity's market share and profitability.
• Factor in the elevated regulatory risk premium for Greencore (LSE:GNC) and Bakkavor (LSE:BAKK) shares until the CMA's final decision or accepted remedies provide clarity.