This supermarket giant’s proposed acquisition has hit a stumbling block.

The Coles Group Ltd (ASX: COL) share price is underperforming today after being hit with some bad news.

In morning trade, the supermarket giant’s shares are down slightly to $18.08.

This compares to a 0.3% gain by ASX 200 index.

What’s happening?

This morning, the Australian Competition and Consumer Commission (ACCC) revealed that it has identified preliminary competition concerns about the company’s proposed $105 million acquisition of two Saputo milk processing plants located in New South Wales (NSW) and Victoria.

The competition watchdog highlights that Coles currently acquires raw milk from farmers in both states and then processes it at these plants under an arrangement with Saputo.

However, a significant number of industry participants have raised strong concerns about the proposed acquisition, particularly given it will result in a major structural change as the first time a supermarket owns and operates its own milk processing facilities.

ACCC Deputy Chair Mick Keogh said:

For NSW dairy farmers, concerns have been raised that this acquisition may change Saputo’s incentives to continue acquiring raw milk in NSW. If Saputo does exit NSW as a result of the acquisition, this would leave limited competition in regions of NSW, which could result in farmers receiving lower prices for their raw milk.

In addition, there are concerns that Coles could have far stronger bargaining power if the acquisition goes ahead. Keogh adds:

Many industry participants have expressed concerns that the acquisition will result in Coles consolidating its private label milk production, which would increase its bargaining power in negotiations with dairy processors and dairy wholesalers.

Coles responds

Coles has acknowledged the announcement by the ACCC but has dismissed concerns that it could lessen competition.

Coles CEO, Leah Weckert, appears hopeful that the deal will still proceed. Weckert said:

We will continue to work constructively with the ACCC on these issues. From Coles’ perspective, we see no lessening of competition in any relevant market, noting that Coles already acquires approximately 80% of the volumes at the facilities and will provide milk processing services to Saputo Dairy Australia under a tolling arrangement. We remain confident that any outstanding concerns can be addressed so that the proposed transaction can proceed to completion.