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July 31, 1986


Gerhard A. Gesell, Judge.

The opinion of the court was delivered by: GESELL




 By its complaint filed June 24, 1986, the Federal Trade Commission ("FTC") seeks a preliminary injunction pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), to enjoin The Coca-Cola Company from consummating its proposed acquisition of Dr. Pepper Company, which sponsors a carbonated soft drink called Dr. Pepper, pending FTC administrative hearings *fn1" to determine whether the acquisition violates Section 7 of the Clayton Act, 15 U.S.C. § 18. *fn2" Dr. Pepper Company is being offered for sale by DP Holdings, Inc., which owns and controls all its outstanding shares.

  The FTC conducted an extensive investigation over several months before bringing this action. An elaborate record has been amassed consisting of numerous affidavits and documents, *fn3" and the Court has heard testimony of economists and businessmen in a three-day hearing. The issues have been fully briefed and argued. The Court has determined in its discretion that a preliminary injunction in the form attached should be granted based on the following findings of fact and conclusions of law.


 The Applicable Standard for Review

 Section 7 of the Clayton Act prohibits any acquisition of the stock or assets of a company that may substantially lessen competition or tend to create a monopoly in any line of commerce in any section of the country. The FTC has statutory authority to investigate probable violations of that Section and to seek a preliminary injunction to hold a proposed acquisition in abeyance pending administrative enforcement proceedings.

 Such a statutory preliminary injunction, when sought by the FTC, may only be granted if as a factual matter the Court is satisfied that the acquisition is likely to have a substantial anticompetitive effect and the Court concludes, in the exercise of its discretion, that a proposed acquisition presents "'questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance . . . .'" FTC v. Beatrice Foods Co., 190 U.S. App. D.C. 328, 587 F.2d 1225, 1229 (D.C. Cir. 1978) (quoting FTC Brief, at 18-19). Conversely, it is important to emphasize that the Court is not asked to resolve the ultimate issues on the merits. While the Court must indicate in broad factual terms why there is ground to believe that a full hearing is appropriate to safeguard the status quo in the public interest, the Court need not resolve all disputes presented to it during the hearing nor make detailed evidentiary findings on all aspects. *fn4"

 It is, however, clear that the proof before the Court must be sufficient to support a finding that a challenged acquisition is reasonably likely to lessen competition substantially. This assessment is a matter of probability, not speculation, and the inquiry is necessarily factual. The FTC has the burden of proof.

 The Proposed Acquisition

 The Coca-Cola Company is primarily a carbonated soft drink company. It is also a major producer and distributor of motion pictures and television programs and one of the world's largest citrus marketers. Founded a century ago, it operates throughout the United States and internationally. It reported in its most recent Letter to Shareholders that "one of every two colas and one of every three soft drinks consumed by the American public is a Coca-Cola branded product." *fn5" It is forming by acquisition and otherwise the world's largest bottling system in aid of its marketing strategies, thus increasing its power over the principal channel of distribution. It is an aggressive, flexible, creative marketer. It has been and is a highly successful, well-managed, profitable enterprise, with 1985 revenues of approximately $ 7.9 billion.

 Dr Pepper Company is also an old, well-established carbonated soft drink company that is principally involved in marketing its Dr Pepper brand, a soft drink which is sold nationally in direct competition with Coca-Cola Company brands. The Dr Pepper brand has a distinctive "spicy-cherry" or "pepper" taste and the company has developed significant sales, particularly in the South and Southwest United States. Dr Pepper Company was offered for sale through Goldman Sachs & Co., an investment banking firm, which caused Coca-Cola Company to initiate discussions leading to an agreement to buy the entire stock for $ 470,000,000.

 Coca-Cola Company was motivated by a variety of somewhat divergent considerations in agreeing to acquire Dr Pepper Company. As a strictly business matter, the acquisition would be profitable for Coca-Cola Company's shareholders. Essentially, Coca-Cola Company is buying the company for its trademark and existing market. It would give the Dr Pepper brand new life by absorbing it into its multiproduct line of carbonated soft drinks. Dr Pepper's debts would be paid off, expenses would be greatly reduced, and Coca-Cola Company's marketing skills, research ability, resources and position in the overall market would assure greater sales of the Dr Pepper brand at wider per-unit profit margins.

 Another special factor played a role in the bid for Dr Pepper Company. Coca-Cola Company had been expanding without acquisition, but when PepsiCo, Inc., its principal competitor, sought to make a major acquisition of Seven-Up Company, Coca-Cola Company apparently felt it should have the same privilege, if the rules permitted. The Seven-Up acquisition was abandoned domestically under threat of FTC suit but Coca-Cola Company decided to press on. *fn6"

 The acquisition will for all practical purposes eliminate Dr Pepper as an independent company. Many of its employees will be terminated as their functions are merged into Coca-Cola Company. Concentrate manufacturing will be transferred to Puerto Rico. No independent corporate structures of any consequence will remain. Dr Pepper Company, if it retains a separate identity, will become essentially a shell -- its principal product merely another flavor in Coca-Cola Company's expanding product line. Indeed, these economies are essential to the profitability of the acquisition for Coca-Cola Company. Thus the possibility that Dr Pepper Company could be held separate pending FTC review, to allow for effective divestiture in the event of a decision against the acquisition, is not a practical consideration. There has been no suggestion that the company would remain a viable competitor at the conclusion of FTC's long, drawn-out process.

 The Position of the Parties

 FTC challenges Coca-Cola Company's acquisition of Dr Pepper Company on two major grounds. It claims that Dr Pepper is a carbonated soft drink concern competing both nationally and regionally directly with Coca-Cola Company's products, particularly its cherry Coke and Mr. PiBB brands, and that such competition will be eliminated. It further contends that the acquisition will increase concentration in the market and encourage tacit price collusion and other parallel policies of mutual advantage between Coca-Cola Company and PepsiCo, the other major seller in the carbonated soft drink business, thus encouraging if not resulting in a lessening of competition.

 Coca-Cola Company, while admitting that the carbonated soft drink market is concentrated, *fn7" contends that any threat to competition posed by concentration will not significantly change if Dr Pepper is acquired. It says it is locked in an all-out competitive rivalry with PepsiCo which has been and will remain so intense that the possibility of collusion simply does not exist. Any relaxation of the existing competition, it suggests, would, moreover, simply fortify the existing smaller competitors and encourage entry by larger concerns now exploring entry on a full scale. Since it believes entry is otherwise relatively easy, Coca-Cola Company argues that competition will continue should the vigor of the struggle between the two principal companies diminish. Thus it suggests the acquisition of Dr Pepper is basically irrelevant in considering the objectives of Section 7. Moreover, Coca-Cola Company contends that, if anything, the acquisition will actually promote competition by making the Dr Pepper brand a more effective competitor in the market nationwide.


 The Market is Carbonated Soft Drinks

 Both Coca-Cola Company and Dr Pepper Company manufacture and sell soft drink concentrate and syrup as their primary business. In order to appraise the probable effects of the proposed acquisition, it is necessary at the outset to understand the forces at work in the market where the buyers and sellers of concentrate and syrup principally compete.

 Proper market analysis directs attention to the nature of the products that the acquirer and the acquired company principally sell, the channels of distribution they primarily use, the outlets they employ to distribute their products to the ultimate consumer, and the geographic areas they mutually serve. Factors affecting price and interchangeability of products must be considered. Analysis of the market is a matter of business reality -- a matter of how the market is perceived by those who strive for profit in it. *fn8" Moreover, under Section 7 market forces must be analyzed as they operate in "any section of the country" -- any geographic submarket possessing its own economically significant attributes. *fn9"

 The Court is persuaded that the appropriate "line of commerce" for measuring the probable effects of this acquisition is the carbonated soft drink market and that such effects must be appraised both nationally and, as will be noted, in a seven-state area in the South and Southwest United States.

 Carbonated soft drinks are produced by adding carbonated water to a syrup consisting of a "concentrate" flavoring and a sweetener. The carbonated soft drink market is guided primarily by "concentrate companies" like Coca-Cola Company and Dr Pepper Company that develop, test, market and promote a variety of concentrate flavorings to appeal to the consumer. Concentrate is normally purchased by "bottlers" alone or in syrup form; the bottlers then mix the flavoring with carbonated water and package the mixture in bottles and cans. Bottlers normally are also largely responsible for distributing the final product directly to retailers through a variety of channels to consumers. Food stores and similar retail outlets are the primary channel, accounting for approximately 63 percent of carbonated soft drink retail sales. "Fountain" distribution of carbonated soft drinks in restaurants and other outlets for immediate consumption is responsible for about 25 percent of sales, while sales through vending machines account for about 12 percent.

 Concentrate companies are faced with keen competition for the limited shelf space in stores and for placement among the few products featured in the typical fountain or vending machine. Bottlers are key participants in this competition. Concentrate companies normally grant bottlers exclusive franchises to produce and distribute the company's products, to stores and vending accounts, within a defined territory. In return for these perpetual franchises, bottlers are obliged to use their best efforts to promote the company's product line, and are typically barred from dealing in same-flavored products of other concentrate companies. Although most bottlers are not owned by the concentrate companies, the companies provide substantial marketing assistance, research data and a variety of short- and long-term promotional benefits.

 In view of the structure and operation of this industry, the relevant line of commerce in evaluating the acquisition is assuredly not what Coca-Cola Company suggests -- "all . . . beverages including tap water" -- even though it is true that other beverages quench thirst and that "the human stomach can consume only a finite amount of liquid in any given period of time." *fn10" The market or submarkets delineated need not be this broad (anything potable) nor as unduly narrow (concentrate flavoring) as lawyers or economists may choose to suggest.

 Although other beverages could be viewed as within the "outer boundaries of a product market . . . determined by the reasonable interchangeability of use or the cross-elasticity of demand between [carbonated soft drinks] and substitutes" for them, carbonated soft drinks represent at minimum a well-defined and the major beverage submarket sufficient to "constitute [a] product market[] for antitrust purposes." *fn11" The Court is guided here by Brown Shoe Co. v. United States, from which this quotation is adopted, where the Supreme Court counsels reliance on "such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct consumers, distinct prices, sensitivity to price changes, and specialized vendors" as guides for defining the appropriate market. *fn12"

 Such indicia are present here. Carbonated soft drinks are the leading beverage in the United States, accounting for approximately 22.3 percent of per capita beverage consumption. They are among the most heavily promoted and widely distributed consumer products in existence, and generate significant revenues; wholesale carbonated soft drink sales totaled $ 23.5 billion in 1984. Moreover, the major participants in the market do a nationwide business and specialize mainly in carbonated soft drinks. They make pricing and marketing decisions based primarily on comparisons with rival carbonated soft drink products, with little if any concern about possible competition from other beverages such as milk, coffee, beer or fruit juice. *fn13"

 The national carbonated soft drink market, and segments of it, are thus the proper market within which to measure the probable effects of the acquisition at issue.

 The Market Is Highly Concentrated There is general agreement that the market for carbonated soft drinks is already highly concentrated. It consists of a few major concentrate companies and a number of minor concerns, not all of which do business nationally. The major concerns, their 1985 national market shares and their principal soft drink products are approximately as follows: n14 Company Co. / Cumulative Principal Products 1. Coca-Cola 37.4 / 37.4 Coca-Cola Classic, Coke, Company diet Coke, cherry Coke, Tab, Sprite, Minute Maid orange and lemon-lime flavors, Fanta flavors, Mellow Yellow, Fresca and Mr. PiBB 2. PepsiCo, Inc. 28.9 / 66.3 Pepsi-Cola, Diet Pepsi, Mountain Dew and Slice lemon-lime, apple and cherry flavors 3. Philip Morris 5.7 / 72.0 7-Up, Diet 7-Up, Like Cola 4. Dr Pepper 4.6 / 76.6 Dr. Pepper, Company Diet Dr Pepper 5. R.J. Reynolds 3.0 / 79.6 Sunkist Orange Soda, Canada Dry flavor line 6. Royal Crown 2.9 / 82.5 RC Cola, Diet RC, Diet Rite, assorted other flavors 7. Proctor & 1.3 / 83.8 Orange and other Crush Gamble flavors, Hires Root Beer


© 1992-2004 VersusLaw Inc.

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