Fantasy
Just Energy Inc.
Merger
An Economic Analysis
Presented to the Competition Authority
11 March 2009
1
The Transaction
Fantasy is to purchase Just Energy Inc. for 500 Million
The Parties
Fantasy : Nation’s leading processor and distributor of
bottled water. Also active in functional beverages.
Entered energy drink production 2 years ago (Emerge).
Just Energy: #1 energy company.
2
Executive Summary
The proposed merger is pro-competitive:
- Product market is functional beverages
Market shares are sufficiently small to annul any
competitive concerns
- Even with narrower market definition:
Expansion and Entry are inexpensive and timely
Strong countervailing buyer power
Significant efficiencies will be realized, leading to
lower prices
3
Product Market
Correct definition – Functional beverages
Indications for market definition:
Serve same function
Effect of sales of energy drinks on sales and prices of
other alternatives
Price correlations between goods
4
Product Market
Functionality and Substitutability
Energy Drinks and other functional beverages all serve
the same function (energy burst), and are used for
identical purposes. They also compete for shelf space.
HENCE:
Proper Market Definition: Functional Beverages =
energy drinks + sports drinks + enhanced water
5
Product Market
Functional Beverages
100
90
80
Sports Drinks
Market share
70
60
50
Energy Drinks
40
30
Enhanced
20
Water
10
0
Energy drink success came at expense
of sports drinks!
6
Market Shares
In functional beverage market
Market Share
SportAde
Thrive
CraveAde
Emerge
E-Water Co.
Bom Dia
Others
32%
21%
9%
5%
7%
2%
25%
Pre-merger HHI = 1624
Change in HHI =
210
Post-Merger HHI = 1834
With wider market definition
(including soda) post-merger
HHI less than 500 and change
less than 100.
7
Overly narrow market definition
assumed
The competition authority’s view:
Market is defined nation-wide
Market includes energy drinks only,
but excludes soda and even functional beverage alternatives
Structure of national energy drink “market”:
66% Thrive
15% Fantasy’s Emerge
7% Bom Dia
4% Star/Astro
2% Meta/Shaolin-Zing
1-2% Ever/Tilt
4-5% Others
8
Merger is not anti-competitive
even in an energy drink ‘market’
Competitors can easily expand production
Most current competitors produce well below capacity
Ease of entry: Firms poised to enter market
Low cost of entry, consumers willing to switch
Strong countervailing buyer power
Convenience stores & supermarkets do not accept price
increases
Significant efficiencies
Cost savings will be passed on to consumers
9
Ease of Expansion
 Most competitors are producing well below capacity
Capacity Utilization
Bom Dia
35%
Meta/S-Zing
33%
Star/Astro
92%
Ever/Tilt
53%
 Bom Dia sales rapidly increasing
 In addition, cost of expansion minimal – 5MM
Competitors would supply any decrease in output by merging parties
10
Ease of Entry
Cost of Entry
Processing Plant
Production Line
15-25MM
5-10MM
Timely entry – about 6-9 months from inception to
production
Numerous companies that can enter quickly (e.g.,
Pangea Beverages)
Fantasy entered in 8 months, at a total cost of 25MM!
11
Ease of Entry
Market Penetration
Consumers have demonstrated willingness to switch
between products
Sports drink share of functional bev sales has
decreased w/ rise of energy drinks
Switch from sodas and sports drinks to energy
Speedy penetration of emerge and Bom Dia:
Emerge – captured 15% of energy sales in first
year!
Bom Dia – captured 7% of energy sales in first nine
months!
12
Strong Buyer Power
Retail stores do not accept price increases
Highly concentrated: Top 4 convenience chains have more
than 70% market share
Battle for shelf space: Suppliers even have to pay fees for
shelf space
Stores would de-list supplier when attempting to raise
prices
Trend towards private labels: threaten to replace external
supplier by own private label when not supplying at low
prices
13
Significant Efficiencies
Savings estimated at over 60MM per annum!
Savings from:
Increased production utilization
Reduced purchasing costs
Elimination of overhead
Reduced payments for promotions
More efficient utilization of branches
Reduced shipping costs due to more optimal route structure
Cost Savings will undoubtedly be passed on to
consumers leading to lower prices
14