Wal-Mart’s Purchase of Puerto Rico Chain Challenged

Date: 1 Feb 2003 | posted in: Retail | 0 Facebooktwitterredditmail

Puerto Rico’s Department of Justice has asked the U.S. Court of Appeals for the First Circuit to block Wal-Mart’s acquisition of the island’s largest grocery store chain, Supermercados Amigo Inc. The outcome of the case could affect the ability of states to review and challenge mergers.

Wal-Mart already operates 19 outlets in Puerto Rico, including eight Sam’s Club stores and one supercenter. Last February the company announced its intention to purchase the 36-store Amigo chain, which employs 4,800 people and takes in about $500 million annually. The Federal Trade Commission (FTC) approved the merger in November, provided that Wal-Mart divest four of the Amigo units in areas where the agency believed the deal would restrict competition.

Puerto Rican antitrust officials, however, did not bless the merger, contending that it could severely curtail competition and harm the island’s farmers and distributors. Nevertheless, Wal-Mart closed the deal in early December. Local officials immediately sought an injunction from a Puerto Rico court. Wal-Mart appealed to a federal court, which ruled that the Puerto Rico Department of Justice had illegally sought to protect local suppliers and interfere with interstate commerce. The judge also found that Justice Secretary Anabelle Rodriquez had abused her authority—a decision that, if upheld, could result in jail time.

The case could affect how much authority states have to review and block federally approved mergers. The district court’s decision concludes that state power is very limited.

“This is a serious issue if a company can get a federal injunction barring a state from pursuing a claim,” said Albert Foer of the American Antitrust Institute (AAI).

Meanwhile, several agriculture, retail, and legal groups have filed letters with the FTC arguing that the consent decree is insufficient and violates agency policy. The FTC will review these letters and possibly revise the terms of its approval over the next few months.

The Organization for Competitive Markets (OCM) raised concerns about Wal-Mart’s power as a buyer and the impact on Puerto Rican farmers. “Local farmers. . . already faced limited channels of distribution and potential purchasers of their products due to. . . geography. [This merger will] further concentrate the buying power of Wal-Mart to the detriment of local farmers.”

The deal could “destroy or at least strongly disadvantage the distribution system that supplies the remaining competitors, thereby raising the costs of Wal-Mart’s rivals,” noted Albert Foer of the AAI. “But, without explanation, the Commission ignores Wal-Mart’s buying power.”

The National Grocers Association points out that the FTC did not explain its criteria for requiring the sale of only four Amigo stores. The NGA’s own market share calculations suggest problems in at least five other local markets.

Concerns have also been raised about the divestiture’s ability to alleviate anticompetitive harm in the four local markets. The FTC insisted that a buyer for the stores be identified before the acquisition. But the company slated to buy the stores is owned by a principal shareholder of Amigo. “His motives for purchasing the stores are not to maintain the levels of competition existing before he sold his business to Wal-Mart,” a group of Puerto Rican grocers argues. “They are clearly to induce the FTC to approve the acquisition without further delay or investigation.”

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance, and directs its Independent Business Initiative, which partners with a wide range of allies to implement policies that counter concentrated power and strengthen local economies.