Sobeys Inc. Acquisition of Certain Assets of The Oshawa Group Limited

Backgrounder

December 22, 1999

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Introduction

On November 2, 1998, Empire Company Limited ("Empire") and The Oshawa Group Limited ("Oshawa") announced that Empire, through Sobeys Inc. ("Sobeys") would acquire all of the voting common shares and Class "A" non-voting shares of The Oshawa Group Limited. The transaction included Oshawa's retail and wholesale operations across Canada, with the exception of the Maritimes. Sobeys also acquired Oshawa's food service business, SERCA Foodservice Inc. which operates coast-to-coast.

Prior to the acquisition, Sobeys was the largest food retailer and wholesaler in Atlantic Canada, but outside these provinces had only limited operations in Ontario and Quebec.

Sobeys' wholesale group operates under the name T.R.A. Maritimes and T.R.A. Newfoundland in Atlantic Canada, and Lumsden Brothers Limited in Ontario. The wholesale group supplies independent stores in Ontario and Quebec; associated and franchise stores in Atlantic Canada under the Foodland, Needs, Green Gables, Kwikway, Riteway and Clover Farms banners; and the Sobeys, Foodland and Price Check banners in Ontario. Sobeys' Food Service Group operates 11 distribution centers that supply the hotel, restaurant and institutional trade, and operates under Burgess Wholesale in Ontario and through Clover and Judson Foods in Atlantic Canada.

The Oshawa Group Limited and its affiliates were engaged in the retail supermarket and grocery wholesale business in all provinces except British Columbia, as well as food service distribution in all provinces. The major banners of the corporate stores and franchised stores were IGA, Tradition Market Fresh Food, Knechtel, Price Chopper and Food Town. Oshawa's retail and wholesale businesses were carried on through its Agora Food Merchants unit, while its food services business was carried on through its subsidiary, SERCA Foodservice Inc.

With regard to food retailing and wholesaling, the Bureau analysed the impact of this transaction on a regional basis as well as for each market where Sobeys will be supplying retail stores. The assessment of each market focussed on the level of, and any increase in, concentration and market share; the nature and extent of barriers to entry; and the effectiveness of remaining competition. In relation to food service distribution, the Bureau analysed the impact of the transaction on a regional basis, focussing on Ontario and the Atlantic provinces.

Following are details of the Bureau's review process for grocery wholesale and retail, as well as the food service industry in each of the markets affected by this transaction.

Grocery Wholesale And Retail

In Ontario, Sobeys acquired the right to supply 72 corporately owned stores, 133 IGA franchisees and approximately 87 other franchisees (mostly under the Knechtel banner). In Quebec, Sobeys acquired the right to supply 237 IGA franchisees, eight Tradition outlets and seven corporate stores. In Alberta, Manitoba and Saskatchewan, Sobeys acquired the right to supply 27 corporate stores and 131 franchised stores under the IGA and Garden Market IGA banners.

The Bureau's Review

Sobeys' grocery retailing and wholesaling operations were confined to Ontario, Quebec and the Atlantic provinces. The acquisition of Oshawa represents a major expansion for Sobeys. As a result it becomes a national wholesaler and retailer, except in British Columbia. The analysis of the competitive impact for retail markets was confined to the markets where Sobeys and Oshawa overlapped in Ontario and Quebec. The Bureau's analysis concluded that Oshawa's wholesale operations had not been, in recent years, a vigorous and effective a competitor as previously.

Quebec markets

In Quebec, the Bureau conducted a detailed analysis in 13 local markets. It concluded that there were competition concerns in four markets, namely: Grande-Rivière, Rimouski, Rivière-du-Loup, and Paspébiac. In response to the Bureau's concerns, Sobeys has terminated its supply arrangement with a store in Grande-Rivière and another in Paspébiac. In Rivière-du-Loup, Sobeys has also provided a written undertaking to divest its interest in a store. In Rimouski, the Bureau has provided the opportunity for the operator to change suppliers on short notice. The Bureau will continue to monitor the impact of the merger in this market.

The merger represents a major expansion for Sobeys in Quebec, increasing its share of grocery sales to about 17% (based on A.C. Nielsen data). As a result, it becomes a significant competitor, ranking third behind Loblaw and Métro-Richelieu. The following charts provide details of pre- and post-merger market share estimates.

Pre-Merger Market Shares in Quebec

Post-Merger Market Shares in Quebec

Ontario markets

In Ontario, the Bureau carefully examined 22 overlapping markets where Sobeys and Oshawa operated or supplied stores prior to the merger. The Bureau had outstanding concerns in two markets, namely Forest and Peterborough. To address these competition concerns, Sobeys has agreed to divest its interests in one store in each market.

Should Sobeys fail to divest by December 31, 2000, the company has agreed that, at the option of the Bureau, these stores may be placed with a trustee for disposal. Sobeys has also undertaken to provide the Bureau with progress reports and an opportunity to audit the disposition of the remaining stores to be divested.

Prior to the proposed transaction, Oshawa was the third largest retailer with almost 10 percent of grocery sales according to independent third party data. The following tables show the estimated pre- and post-merger market shares of grocery sales in Ontario.

Pre-Merger Market Shares in Ontario

Post-Merger Market Shares in Ontario

It is also important to note that prior to the transaction both Sobeys and Oshawa also supplied independent grocery retailers which were not under a franchise banner with either operation. While Sobeys was a significant player in this sector of the market however, Oshawa was not since the vast majority of its wholesale customers were supplied under a franchise agreement.

Annex A provides a detailed list, by province, of each market where new entry occurred for Sobeys as a result of this transaction. Annex B provides estimated market share ranges for the geographic retail markets where both Sobeys and Oshawa operated prior to the merger.

Food Service Distribution

Food service distribution is the provision of products and related supplies to the food service industry. The types of products distributed to the food service sector include: frozen goods and dry groceries, paper and non-food items, fresh and frozen meats, poultry, fish and seafood products, dairy products and cheeses, produce, chemical products, paper products and cold and hot beverage products and systems. Many of these products are supplied in institutional packaged formats (bulk size). The food service industry comprises all operations that prepare food for consumption away from home. It is made up of independent and chain affiliated businesses operating in defined market niches (fine dining, informal family, quick-counter service, workplace meal services, health care, etc.).

There are two major categories in the food service industry - the commercial sector and the institutional sector. The commercial sector consists of establishments open to the public, that may operate facilities and/or supply meal service on a regular basis to the public at large. The institutional sector operates in a non-commercial, supportive function within a larger organization (such as a heath care facility), and its services are not normally available to the public-at-large.

The Bureau's Review

The Bureau conducted an extensive examination of the impacts of the merger of Sobeys and Oshawa on competition for food service distribution in Atlantic Canada and Ontario. Sobeys is a major food service distributor in Ontario through Burgess Wholesale, and in Atlantic Canada through its Clover Group and Judson Foods Division. Oshawa was a national food service distributor through SERCA Foodservice Inc. with operations in all provinces in Canada.

The Bureau's examination concluded that there are two kinds of food service distributors: full-line and narrow/speciality line.

A full-line distributor carries virtually all of the frozen, chilled and dry products including paper supplies and cleaning materials which make up nearly all the requirements of a food service operator. Narrow-line distributors carry a limited line of food service food products and supplies. Specialty-line distributors concentrate on one line of products such as bakery supplies, special ethnic items, fresh meats, fresh fish and fresh produce. In addition, there are a number of food and non-food products which are distributed directly by the manufacturer. Dairy, bread and soft drinks are specific examples. However, there is also a trend developing in the industry to have these products included in the inventory of full-line distributors.

The Bureau's examination concluded that SERCA, Clover and Judson Foods are full-line distributors.

Over the past decade, the Canadian food service distribution sector has undergone a significant degree of consolidation. It has also been marked by the entry of several large US-based food service distributors into the Ontario market, with some penetration in the West. These include the entry of the Houston-based Sysco Corporation, with operations in Port Coquitlam, British Columbia and Peterborough, Ontario, and Gordon Food Service (GFS) with operations in Ontario and Quebec.

In its assessment the Bureau noted that there are two distinct categories of food service clients, namely systems accounts and street accounts. Systems accounts primarily include national accounts such as fast-food restaurants and local or regional chains which typically rely almost exclusively on full-line food service distribution and are characterized by a limited menu selection and quick service. Street accounts are typically independent restaurants or small local chains that operate in various formats such as limited menu, fine dining, and family dining but also include both institutional and catering operations requiring a broader range of products and supply.

The Bureau concluded that the relevant geographic market for the purposes of its examination was regional in nature. The focus of the Bureau's examination consisted of Ontario and Atlantic Canada. In the Atlantic region, the Bureau concluded that, given its geographic separation from the rest of the Maritime Provinces, Newfoundland is a separate market.

Ontario

In Ontario, the Bureau's examination concluded that the proposed merger between SERCA and Burgess Wholesale in Ontario would not likely result in a substantial lessening or prevention of competition. There is significant and effective competition in the supply of full-line food service in Ontario from a number of full-line food service distributors remaining in the market. Of particular significance is the entry of several major US-based food service distributors which have established, through acquisition, a viable base of operations in Ontario.

Newfoundland

In Newfoundland, Clover has been the dominant food service distributor. SERCA has had limited presence and was not active in attempting to acquire business in the province. SERCA's only business in Newfoundland was to service national accounts as an extension of existing accounts in the Maritime Provinces. Accordingly, the examination concluded that the merger would not result in the removal of a vigorous and effective competitor from this market and found several narrow-line distributors offering limited competition to Clover.

Maritime Provinces

The Bureau's review of the impact of the transaction in the three Maritime Provinces of New Brunswick, Nova Scotia, and Prince Edward Island concluded that, post-merger, there will be only one full-line food service distributor with the capability to supply all three provinces. It was estimated that the combined entity would account for approximately 80 percent of all full-line food service distribution in the Maritime Provinces and about 50 percent of all full- and narrow-line distribution. As well, the merger of SERCA and Clover/Judson will eliminate a vigorous and effective competitor. Moreover, the review concluded that the merged entity will gain market power. This market power could be exercised to increase profit margins by increasing contract prices and raising manufacturer rebates, dictating delivery schedules and level of service, and reducing product line choice.

In addition, the Bureau concluded that it is unlikely that new entry will occur within the next two years which would mitigate the anti-competitive impact of the proposed merger. Viable entry would require an established customer base. Outside of Clover, Judson Foods and SERCA there is no entity that would appear suitable.

As a result of concerns raised by the Bureau, Sobeys proposed to divest part of the assets it acquired in the Maritime Provinces. More specifically, Sobeys proposed to divest its interests in the SERCA facility and distribution operations in Moncton, New Brunswick as well as other assets and resources necessary to service all of the Maritime Provinces to a company to be incorporated as MFS Foodservice Inc. (MFS).

The Bureau conducted a thorough examination of this proposal to ensure that the new entity would be financially and operationally able to provide effective competition in the three Maritime Provinces.In assessing the business plan of MFS, the Bureau conducted further interviews with key stakeholders and concluded that from the facility in Moncton, MFS would have the assets, as well as the financial and human resources, to effectively compete with the merged entity anddistribute a full-line of food service products from this facility to both street and systems accounts in New Brunswick, Nova Scotia and Prince Edward Island. In addition, MFS's alliance with Gordon Food Service provides MFS with access to a broad range of product offerings, including private-label products and the expertise of an established North American foodservice operation.

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Annex A

Sobeys New Entry Markets in Ontario

Acton Ajax Alcona Beach Alisa Craig Alliston Amherstburg Amherstview Angus Aplsley Arkona Ayr Bancroft Barrhaven Barry's Bay Beaverton Beeton Belle River Belmont Blenheim Blyth Bobcaygeon Bolton Bothwell Bow manville Brampton Brighton Brights Grove Brussels Burford Caledon east Caledonia Campbellford Carleton Place Cayuga Chesley Chippawa Clinton Coboconk Cobourg Colb orne Coldwater Collingwood Cookstown Corunna

Courtice Creemore Dorchester Drayton Dresden Dundalk Durham Dutton East York Eganville Elmira Elmvale Elora Ennismore Erin Essex Fenelon Falls Fergus Fonthill Fort Erie Foxboro Frankford Glencoe Grand Bend Grand Valley Guelph Havelock Hagersville Haliburton Hamilton Hanover Harriston Hensall Hillsburgh Huntsville Ignace Janetville Keswick Kincardine Kingston Kingsville Kitchener Lakefield Lion's Head

Little Britain Lucknow MacTier Madoc Malton Maple Markham Marmora Meaford Midland Millbrook Minden Mount Albert New Hamburg Newcastle Nobleton North Bay North York Nothbrook Norwich Oakville Omemee Orangeville Orono Oshawa Paisley Palmerston Parry Sound Penetanguishene Pickering Picton Port Carling Port Lambton Port McNicoll Port Perry Port Rowan Port Stanley Red Lake Renfrew Richmond Hill Ridgetown Rockwood Rodney Scarborough

Schomberg Seaforth Shelburne Smithville Southampton St.Catherines St.Clemens St.George St.Marys Stayner Stirling Stouffville Straffor dville Stroud Sundridge Sutton Sydenham Tavistock Teeswater Thamesford Thornbury Thornhill Thorold Tillbury Toronto Tottenham Trenton Tweed Verona Victoria Harbour Vineland Walkerton Wallaceburg Wasaga Beach Waterdown Wellington West Lorne Westport Whitby Wiarton Wilberforce Wingham Woodville York

Sobeys New Entry Markets in Quebec

Alma Auteuil Baie Saint-Paul Beauceville Beauharnois Bellefeuille Beloeil Bernières Berthierville Blainville Bois-des-Fillions Bromptonville Brossard Candiac Chambly Chelsea Chicoutimi Chicoutimi Nord Chomedey Clermont Coaticook Contrecoeur Cookshire Côte Saint-Luc Cowansville Deux-Montagnes Disraeli Dollar-des-Ormeaux Donnacona Dorion East Angus East Broughton Fabreville Farnham Ferme-Neuve Granby Grand-Mère Hudson Huntington Iberville Île-aux-Noix Île-Bizard Île-des-Soeurs Île-Perrot-Sud Joliette

Jonquière Kirkland Knowlton L'Assomption La Pocatière La Prairie La Tuque Lac-aux-Sables Lac Etchemin Lac Saint-Charles Lachenaie Lachine Lacolle Lafontaine Lasalle Laval-des-Rapides Laval-Ouest Le Gardeur Longueuil Loretteville Louiseville Magog Maria Mercier Métabetchouan Mistassini Mont-Joli Mont-Laurier Mont Saint-Hilaire Montmagny Montréal Montréal-Nord Nicolet Normandin Notre-Dame-des-Praires Ormstown Pierrefonds Plessisville Pointe-aux-Trembles-Nord Pointe-Claire Pont-Rouge Rawdon

Repentigny Richelieu Rigaud Rivière-des-Prairies Roberval Saint-Élie-d'Orford Saint-Éphrem-de-Beauce Saint-Agapit Saint-Amable Saint-Ambroise Saint-Anselme Saint-Apollinaire Saint-Barthélémy Saint-Basile-le-Grand Saint-Bruno-de-Montarville Saint-Césaire Saint-Constant Saint-Damien-de-Buckland Saint-Eustache Saint-Félicien Saint-Félix-de-Valois Saint-François-du-Lac Saint-Gédéon Saint-Henri Saint-Hippolyte Saint-Hubert Saint-Hyacinthe Saint-Jean-Chrysostome Saint-Jean-Port-Joli Saint-Jean-sur-Richelieu Saint-Jérôme Saint-Joseph-de-Beauce Saint-Lambert Saint-Lambert-de-Lauzon Saint-Laurent Saint-Lazare

Saint-Luc Saint-Nicéphore Saint-Pamphile Saint-Pascal Saint-Paulin Saint-Pierre-les-Becquets Saint-Rémi Saint-Tite Saint-Vincent-de-Paul Sainte-Adèle-en-Bas Sainte-Anne-de- Beaupré-Ouest Sainte-Catherine-de-la-Jacques-Cartier Sainte-Dorothée Sainte-Julie Sainte-Justine Sainte-Martine Sainte-Perpétue Sainte-Rose Sainte-Thérèse Sayabec Shawinigan Shawinigan-Sud Sorel Stoneham-et-Tewkesbury Sutton Terrebonne Tracy Trois-Rivières Trois-Rivières-Ouest Valcourt Valleyfield Varennes Vaudreuil Verdun Victoriaville Ville Émard Ville Saint-François Vimont Westmount

Annex B

Where the combined post-merger market share of Sobeys and Oshawa was less than 35 percent in any relevant market, the Bureau ordinarily concluded that the merger would not lessen competition substantially and that further analysis would not be necessary.

When the combined market shares exceeded 35 percent, the Bureau has conducted a detailed analysis of the post-merger market environment. This examination included such factors as barriers to entry, removal of a vigourous and effective competitor and effective remaining competition.

The following table provides estimated market share ranges for geographic retail markets where both Sobeys and Oshawa operated prior to the merger. The pre-merger and post-merger market shares were calculated and categorized into the following bands:

Green- less than 35% market share
Orange- between 35% and 45% market share
Red- greater than 45% market share

Sobeys-Oshawa Overlap Markets

Ontario

Geographic Markets	Pre-merger	Post-merger	Post-Divestiture
Arthur
Aurora
Barrie
Burlington
Bradford
Campbellville
Cannington
Chatham
Exeter
Forest			1 store1
Gravenhurst
Grimsby
Lambeth/London
Markdale			independent2
Mount Forest			independent2
Newmarket
Paris
Peterborough			1 store1
Stratford
Sutton/Keswick
Watford			independent2
Woodstock

Quebec

Geographic Markets	Pre-merger	Post-merger	Post-Divestiture
Beauport
Cap de la Madeleine
Charlesbourg
Châteauguay
Fleurimont
Grande-Rivière			1 store1
Les Saules
Lévis
Paspébiac			1 store1
Rimouski			independent2
Rivière-du-Loup			1 store1
St-Georges-de-Beauce
St-Nicolas-Charny

¹The number of stores in the market for which Sobeys has undertaken to divest its interests is indicated in the post-divestiture column.

² This indicates that after the Bureau's examination it concluded that the operator in this market is an independent businessperson and free to change suppliers, and no divestiture would be necessary.