Fantasy Fantasy Just Energy Inc.Just Energy Inc.

MergerMerger

An Economic AnalysisPresented to the Competition Authority

11 March 2009

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The TransactionThe Transaction

Fantasy is to purchase Just Energy Inc. for 500 Million

The PartiesFantasy : 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.

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Executive SummaryExecutive Summary

The proposed merger is pro-competitive: - Product market is functional beveragesMarket shares are sufficiently small to annul any competitive concerns

- Even with narrower market definition:Expansion and Entry are inexpensive and timelyStrong countervailing buyer powerSignificant efficiencies will be realized, leading to lower prices

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Product MarketProduct MarketCorrect definition – Functional beverages

Indications for market definition:Serve same functionEffect of sales of energy drinks on sales and prices of other alternatives

Price correlations between goods

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Product MarketProduct MarketFunctionality 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

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Product MarketProduct Market

Functional Beverages

0

10

20

30

40

50

60

70

80

90

100

Market share

Sports Drinks

Energy Drinks

EnhancedWater

Energy drink success came at expense of sports drinks!

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Market SharesMarket SharesIn functional beverage market

Market ShareMarket Share

SportAdeSportAde 32%32%

ThriveThrive 21%21%

CraveAdeCraveAde 9%9%

EmergeEmerge 5%5%E-Water Co.E-Water Co. 7%7%

Bom DiaBom Dia 2%2%

OthersOthers 25%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.

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Overly narrow market definition Overly narrow market definition assumedassumed

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The competition authority’s view:Market is defined nation-wideMarket 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

Merger is not anti-competitiveMerger is not anti-competitiveeven in an energy drink ‘market’even in an energy drink ‘market’

Competitors can easily expand productionMost current competitors produce well below capacity

Ease of entry: Firms poised to enter marketLow cost of entry, consumers willing to switch

Strong countervailing buyer powerConvenience stores & supermarkets do not accept price increases

Significant efficiencies Cost savings will be passed on to consumers

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Most competitors are producing well below capacity

Bom Dia sales rapidly increasingIn addition, cost of expansion minimal – 5MM

Competitors would supply any decrease in output by merging parties

Ease of ExpansionEase of Expansion

Capacity UtilizationCapacity Utilization

Bom DiaBom Dia 35%35%

Meta/S-ZingMeta/S-Zing 33%33%

Star/AstroStar/Astro 92%92%

Ever/TiltEver/Tilt 53%53%

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Ease of EntryEase of Entry

Cost of Entry

Processing Plant 15-25MMProduction Line 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!

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Ease of EntryEase of Entry

Market PenetrationConsumers have demonstrated willingness to switch

between productsSports drink share of functional bev sales has decreased w/ rise of energy drinks

Switch from sodas and sports drinks to energySpeedy 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!

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Strong Buyer PowerStrong 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

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Significant EfficienciesSignificant Efficiencies

Savings estimated at over 60MM per annum!Savings from:

Increased production utilizationReduced purchasing costsElimination of overheadReduced payments for promotionsMore efficient utilization of branchesReduced shipping costs due to more optimal route structure

Cost Savings will undoubtedly be passed on to consumers leading to lower prices

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