Analysis: Inflation fears, Biden antitrust efforts could doom Sanderson, Wayne chicken deal

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WASHINGTON, Jan 31 (Reuters) - A plan hatched by Cargill Inc and Continental Grain Co to combine two big chicken processors - Sanderson Farms and Wayne Farms - flies in the face of the Biden administration's efforts to fight not just consolidation in the sector, but inflation.

The deal is being considered even as the U.S. Labor Department said in early January that inflation was at a nearly 40-year high. read more Chicken prices rose 10.4% in the previous year.

President Joe Biden's administration, concerned about price hikes in general and especially in the meat sector, announced earlier this month that it would spend $1 billion and issue new rules as a way to address a lack of "meaningful competition" in meat processing. read more

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The Justice Department, if it decides to fight the deal in court, will be able to argue that there has already been price-fixing in the sector.

Still, the market shares of the two companies are not as big as is often seen in merger challenges, experts said. Wayne and Sanderson combined would have a market share of 13.5%, according to two people familiar with the matter.

Commodities trader Cargill and agricultural investor Continental Grain said in August they planned to buy Sanderson Farms Inc (SAFM.O) - the third largest U.S. chicken producer - for $4.53 billion. read more In a sign regulators are taking a serious look at the deal, the companies got a second request for more information in December.

Meanwhile there has been concern about the deal from both sides of the political aisle. Senators Chuck Grassley, a Republican, and Elizabeth Warren, a Democrat, both urged the Justice Department to take a hard look at the proposed transaction because it might raise prices. read more

The Minnesota attorney general's office also has reached out to other states to aid in the federal investigation, according to a source familiar with the matter. The Minnesota state attorney general's office did not respond to a request for comment.

The plan is to merge Sanderson Farms with smaller rival Wayne Farms, owned by Continental Grain.

Tyson Foods Inc (TSN.N) leads the U.S. chicken market at 21%, Pilgrim's Pride Corp (PPC.O) is second at 17% and Sanderson third at 10%. Perdue and Koch Foods are fourth and fifth at 7% and 6%, respectively, according to a Tyson investor fact book from the 2019 fiscal year published in 2020.

Another argument against trying to scuttle the deal is that the two companies serve different sectors of the chicken market with Sanderson focused on retail and Wayne on supplying restaurants.

But Pilgrim's Pride pleaded guilty in February 2021 to conspiring to fix chicken prices and pass on the costs to consumers and other purchasers. read more Tyson said in June 2020 that it had self-reported price-fixing to the Justice Department.

Antitrust experts agreed the price-fixing - even if Sanderson and Wayne were not involved - would be cited as evidence of a concentrated market.

"That's a factor that weighs against the merger even if you don't have high market shares, said William Kovacic, a former chair of the Federal Trade Commission.

Scott Gant, a partner with the law firm Boies Schiller Flexner who represents food distributors U.S. Foods and Sysco (SYY.N), in a 2018 lawsuit alleging chicken price fixing against Sanderson and others, said tough talk from the White House along with rising prices and price fixing allegations does not bode well for approval of the proposed transaction.

"It has an uphill battle," he said.

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Reporting by Diane Bartz; Additional reporting by Tom Polansek; Editing by Chris Sanders and Bill Berkrot

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