The Competition and Markets Authority has cleared Associated British Foods’ deal to buy Hovis after finding the UK bakery sector is under significant structural pressure.

ABF, which owns Kingsmill through its Allied Bakeries division, agreed to acquire Hovis Group from private equity firm Endless LLP last year.

The watchdog’s independent inquiry group has now published its final report following an in-depth phase two investigation into the merger.

The CMA said Allied Bakeries and Hovis are both major suppliers of branded and own-brand bakery products to supermarkets across the UK.

However, evidence gathered during the investigation found that bread suppliers have been hit by falling demand, rising costs and a shift towards lower-margin private-label products.

Allied Bakeries, which owns Kingsmill, Allinson’s and Sunblest, has recorded significant losses over the past 14 years, despite exploring a range of options to improve its performance.

The CMA said those losses had been driven by the long-term decline in bread demand, higher demand for lower-margin own-label products and rising energy, wheat and distribution costs.

The regulator concluded that, if the merger did not go ahead, Allied Bakeries would most likely exit the market entirely in Great Britain and Northern Ireland.

It said this meant the competitive pressure from Allied Bakeries would be lost with or without the deal, and that the merger did not raise competition concerns.

Cyrus Mehta, chair of the independent inquiry group leading the investigation, said bread remained a basic staple for millions of people, which meant the deal needed careful scrutiny.

“On the basis of the wide range of evidence we received, which showed the difficult position many UK-based bakeries are in, we found Allied Bakeries – owned by ABF – would likely leave the market entirely if the deal did not proceed,” he said.

“Taking that into account, we have concluded the deal does not raise competition concerns.”

The final decision follows the CMA’s earlier provisional findings, which had cleared the deal in Great Britain but initially raised concerns around competition in Northern Ireland.

The regulator later revised that position after reviewing further evidence on Allied Bakeries’ performance in the region and the likelihood of the business remaining in the market without the merger.

The clearance marks a major step for ABF as it looks to create a more sustainable UK bakery operation in a category facing intense cost pressure and changing shopper habits.

ABF has previously said the deal would help create a more efficient long-term bakery business, while Hovis and Allied Bakeries have continued to operate separately during the regulatory process.

Publication of the CMA’s final report marks the end of the watchdog’s investigation.

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