On May 10, 2011, the Department of Justice (“DOJ”) filed a civil antitrust lawsuit challenging George's Inc.'s (“George's”) acquisition of Tyson Foods' (“Tyson”) chicken processing complex in Harrisonburg, VA. This is a challenge to a consummated $3 million acquisition in a very limited geographic market in Virginia.
The DOJ alleges that the consummated acquisition eliminates substantial competition between the two companies for the procurement of services of chicken growers in the Shenandoah Valley area. The DOJ's lawsuit, filed in U.S. District Court in Harrisonburg requests that the court declare the acquisition to be unlawful under the antitrust laws and order appropriate equitable relief, such as divestiture of the Harrisonburg complex.
Tyson and George's publicly announced the acquisition on March 18, 2011. Upon learning of the proposed acquisition, the Antitrust Division opened an investigation into the proposed deal and issued civil investigative demands to the parties in early April. The DOJ staff engaged in numerous discussions with the parties. On May 7, despite the parties' awareness of the Antitrust Division's serious antitrust concerns about the transaction and without providing a response to the information requested by the Antitrust Division, George's and Tyson entered into an asset purchase agreement and simultaneously closed the transaction. The companies were not required to get federal antitrust clearance for the transaction beforehand because it did not meet the reporting threshold as it was only a $3 million deal.
Prior to the acquisition, three chicken processors – Tyson, George's and JBS/Pilgrim's Pride – competed in Virginia's Shenandoah Valley region for the services of local chicken growers. According to the DOJ, by combining the Tyson plant with George's Edinburg, Va., operations, the sale decreased the number of processors in the area to two, reducing competition for grower services. The DOJ's lawsuit alleges that George's acquisition of Tyson's Harrisonburg chicken processing facility would reduce growers' ability to receive competitive prices for their services.
The DOJ's complaint alleges that George's and Tyson fought for the services of farmers in the Shenandoah Valley region. Because of their close proximity, the area from which Tyson and George's recruit growers overlaps substantially. Growers in that region have only three processors to whom they can sell their services. The acquisition gives George's control over 43 percent of the region's chicken processing capacity with only Pilgrim's Pride Corp. competing in the area. The DOJ maintains that Pilgrim's Pride does not have the capacity to compete in the region if George's decides to lower the prices it is willing to pay. Therefore, George's will have the unilateral power to suppress the prices paid to growers.
This challenge is noteworthy for several reasons. First, the DOJ is challenging a deal valued at $3 million. This means that the DOJ will challenge any transaction that raises anticompetitive effects regardless of the size of the transaction. Second, the DOJ is challenging the transaction under a monopsony theory. While it does not happen often, here is a situation where the DOJ is concerned about the merging parties' ability to lower prices. Third, while the transaction was not HSR reportable, the DOJ expressed interest in investigating the transaction. The DOJ if it finds about a non reportable transaction that raises competitive issues, is willing to investigate. Fourth, the parties refused to cooperate with the DOJ's inquiry and proceeded to close its acquisition. This decision obviously is one made with a lot of thought by the parties, but one thing is for sure, if parties take this route, the DOJ will certainly file a lawsuit to block the consummated transaction. Merging parties should be aware of the risks of not cooperating with an inquiry. The stance is confrontation and invites the DOJ to litigate rather than to investigate. Now, there may be reasons why merging parties would rather litigate than participate in a government investigation, but the merging parties must recognize the risks and costs of making that decision.