The world’s largest food company, Nestlé SA, and its subsidiaries—Nestlé PR and Nestlé Holdings Inc—were sued by Puerto Rico-based ice cream distributor Payco Foods Corp on charges of violating a stock purchase agreement signed as part of a merger acquisition.
The lawsuit, filed in United States District Court for Puerto Rico, contends that Nestlé acted deceitfully and fraudulently as part of a scheme to lower the value of Payco's shares and monopolize the island's ice cream market. Payco is seeking between $50 and $150 million in compensatory damages.
Nestlé acquired 50% of Payco’s shares in June 2003 for an initial purchase price of $20 million. The acquisition of the remaining 50% would take place after a two-year transition period. The price would be based on a combined value of the Payco/Nestlé operations as determined by the firm's EBITDA (earnings before interest, taxes, depreciation, and amortization). Payco says that based on representations made and the agreement undertaken by Nestlé, its total compensation should have exceeded $50 million.
The stock purchase agreement obtained the approval of the Puerto Rico Justice Department’s Antitrust Office (PRDJ) under certain conditions. These included that Payco divest its distribution rights of its most profitable product line in Puerto Rico (Blue Bunny) and that Nestlé SA agree that if it purchased the distribution rights of Dreyer's Grand Ice Cream in the United States, it would not take away the distribution rights of Dreyers’ products from Sterling Merchandising Inc, the third-largest distributor on the island.
According to the lawsuit, Nestlé broke that last condition when it initiated conversations to purchase Sterling’s distribution of the Edy’s ice cream brand without prior consent of the PRDJ. Had the agreement been consummated, Nestlé would have owned around 90% of the ice cream market in Puerto Rico and could have acquired practically 100% of the market in violation of the Puerto Rico Monopoly Act.