May 24, 2016
Since our last update in March 2015, we have witnessed increasing volumes of M&A activity and a corresponding level of global competition law enforcement. Antitrust and competition enforcers around the world continued to devote substantial resources to policing mergers at a time when transactional activity is accelerating across a wide range of industries.
Nowhere is this trend more pronounced than in the United States. In April of last year, the Antitrust Division of the U.S. Department of Justice, supported by the Federal Communications Commission, successfully opposed Comcast’s $45 billion acquisition of Time Warner Cable. Two months later, the Federal Trade Commission persuaded a court to enjoin Sysco’s $8.2 billion takeover of rival distributor US Foods, despite the parties’ substantial remedy offer. And in recent weeks, Halliburton abandoned its $35 billion bid to buy Baker Hughes and the Federal Trade Commission won its high-profile court challenge to Staples’ attempted acquisition of Office Depot. Both agencies are also expected to make decisions in the coming months involving a series of healthcare-sector mergers. The FTC is investigating (and in some cases challenging) a number of significant transactions involving hospitals, pharmaceuticals, and retail pharmacies, while the DOJ is tasked with reviewing several large health insurer transactions.
A number of factors are driving the high level of antitrust enforcement in the United States:
As the Obama Administration reaches its final months, it is clear that the President’s 2008 campaign promise to increase merger enforcement has become a reality. As we reported in 2010, the agencies issued the first revision of the U.S. Horizontal Merger Guidelines in nearly two decades, which was aimed at strengthening the government’s hand in challenging mergers, particularly in high-technology sectors. Over the past five years, the agencies have successfully pursued challenges of high-profile deals based on many of the principles articulated in the 2010 Guidelines, most notably its reduced emphasis on market definition and greater focus on proving “direct effects.” Time will tell how far-reaching and lasting the agencies’ efforts will be.
Merger enforcement is also on the rise outside the U.S. The European Commission initiated 11 in-depth (Phase II) investigations of mergers in 2015, the highest annual total since 2007. The percentage of all EC merger filings that triggered a Phase II has more than doubled over the past five years. In addition to blocking large mergers such as the $15 billion takeover of mobile phone operator O2 by CK Hutchison, the EC has demonstrated its willingness to demand and impose substantial remedies.
Gibson Dunn’s Antitrust and Competition Law Practice Group has extensive experience successfully representing clients in a broad range of industries in antitrust investigations conducted by enforcement agencies in the U.S., Europe, and other jurisdictions worldwide. In 2015 and 2016 alone, Gibson Dunn’s antitrust and competition lawyers represented AT&T in its $48 billion acquisition of DirecTV, Williams in its $33 billion proposed merger with Energy Transfer, Intel in its $16.7 billion acquisition of Altera, Schlumberger in its $14.8 billion acquisition of Cameron, Southern Power in its $8 billion acquisition of AGL Resources, Marriott in its $13.6 billion proposed acquisition of Starwood, St. Jude in its $25 billion sale to Abbott, Tenet Healthcare in its $2 billion acquisition of United Surgical Partners International, and Hewlett-Packard it its $3 billion acquisition of Aruba Networks.
Our worldwide Antitrust Practice Group numbers over 100 lawyers located throughout the United States and Europe. In addition, the Antitrust Group works closely with attorneys in Gibson Dunn’s other practice groups to provide efficient service for our clients.
Stability in DOJ’s Leadership
DOJ Lawsuits and Threats to Litigate Caused Parties to Abandon Mergers
DOJ Finds No Competitive Issues in Expedia/Orbitz and AT&T/DirecTV Transactions
United’s Lease of Slots from Delta at Newark Airport Abandoned Following DOJ Challenge and FAA Ruling
And Then There Were Three
Déjà Vu – FTC Blocks Staples’s Proposed Acquisition of Office Depot (Again)
FTC Obtains Injunction Blocking Sysco’s Proposed Acquisition of US Foods
FTC Loses Preliminary Injunction Case Premised on a Potential Competition Theory
FTC Enforcement in the Healthcare Provider Sector Reaches Unprecedented Levels
The FTC Continues to Resolve Competitive Issues Raised by Pharmaceutical and Medical Device Transactions Through Negotiated Remedies
The FTC Continues Vigorous Enforcement in Energy, Infrastructure, and Other Industries
Both the DOJ and the FTC Require Increasingly Demanding Remedies
The DOJ and the FTC Hold the Line on Merger Reporting Requirements
Other High-Profile EU Investigations in 2015
European Commission Policy and Procedural Reforms
Merger Activity in the Telecommunications Sector
Appeals to the Courts of the European Union
Merger Control in EU Member States
CADE Issues Eight Prohibitions Since the Entry into Force of the Brazilian Competition Act
Other Noteworthy Transactions
Other Noteworthy Transactions Subject to Remedies
Ongoing High-Profile Transactions
The well-publicized uptick in global M&A activity in 2014 was borne out in a 25% increase in the number of transactions reported under the Hart-Scott-Rodino (“HSR”) Act in FY 2014 over FY 2013 and another 8% increase in FY 2015 over FY 2014. Based on activity in the first half of FY 2016, it appears that total FY 2016 HSR transaction volume will be even higher than in FY 2015, perhaps approaching the extraordinary level of HSR activity in FY 2007.
HSR Act-Reportable Transactions
Of course, the number of HSR filings is a useful measure of overall US M&A activity, but because a small percentage of these filings trigger formal second request investigations (less than 5% historically), such figures provide little insight into the agencies’ enforcement workload. The rate at which the agencies investigate transactions and seek enforcement shows merger enforcement continues to be a priority. The percentage of HSR Act-reportable transactions subject to a second request was slightly lower (3.2% in FY 2014) than in previous years; however, because of the higher number of transactions reported, the actual number of second requests issued was higher in FY 2014 (51) than in FY 2013 (47).
Percentage of HSR Act
Transactions Resulting in a Second Request
Enforcement rates (reflecting transactions that are either challenged in court, abandoned due to antitrust concerns, or subject to remedies) under the Obama Administration continue to be on the higher end of the historic range. Between FY 2006 and FY 2008, the agencies brought an average of 34 merger enforcement actions per year. By contrast, between FY 2010 and FY 2012, the agencies averaged 41 challenges annually, even though M&A volume was considerably lower than it is today. However, despite a number of high-profile challenges and increased overall M&A activity, the FTC and DOJ actually broughtfewer merger enforcement cases in each of the most recent three years where data is publicly available: The agencies challenged 44, 38, and 33 mergers in FY 2012, FY 2013, and FY 2014, respectively.
In 2015, the Antitrust Division of the Department of Justice (“DOJ”) continued to aggressively investigate and challenge mergers in many sectors of the economy. The DOJ caused three deals—Halliburton/Baker Hughes, GE/Electrolux and National CineMedia/Screenvision—to collapse after filing court challenges, and caused the parties to five other transactions to abandon or modify their deals, including Applied Materials/Tokyo Electron and Comcast/Time Warner Cable. The DOJ’s decisions to oppose the Applied Materials and Comcast transactions were particularly notable because the parties to both deals arguably had relatively few directly competing lines of business. In its review of these two transactions, the DOJ focused on “conglomerate” market power and “innovation” issues, respectively, both of which are more commonly associated with reviews by the European Commission. These enforcement actions signal that DOJ may closely investigate any transaction that produces a large firm in a high-profile industry, even if there is not a clear cut traditional basis to conclude that it is likely to reduce competition.
The DOJ has also devoted substantial resources to investigating and challenging non-merger transactions. In November, the DOJ filed a lawsuit to stop United’s lease of slots from Delta at Newark Airport, alleging that United’s planned acquisition of 24 slots at Newark would increase United’s already dominant position at the airport, and would strengthen a barrier that diminishes the ability of other airlines to challenge United at the location. United announced that it would abandon the acquisition in April, citing the FAA’s decision to eliminate slot controls at Newark. ‘
Heading into the final year of the Obama Administration, DOJ’s Front Office will continue to have a very experienced team. Assistant Attorney General Bill Baer will become the Department’s Associate Attorney General, which supervises the Antitrust Division. Renata Hesse is now serving as the Division’s Acting AAG, with David Gelfand and Sonia Pfaffenroth as the two Civil DAAGs. Underscoring that litigation readiness remains a key objective of the DOJ, Baer quickly replaced the Director of Litigation, Mark Ryan, with Eric Mahr when Ryan returned to private practice in May 2015.
Throughout the year, the DOJ proactively used its ability to litigate to force parties into abandoning deals. This track record reflects that the DOJ is highly confident that it has the litigation team in place to win in court. Parties involved in transactions that raise material antitrust issues cannot count on any hesitancy by DOJ’s leadership to file a lawsuit.
Halliburton-Baker Hughes: On April 6, 2016, the DOJ filed a complaint against Halliburton and Baker Hughes alleging that their proposed merger would violate Section 7 of the Clayton Act by combining two of the three largest oilfield services providers in the world. In announcing the complaint, AAG Baer remarked that the “transaction is unprecedented in the breadth and scope of competitive overlaps and antitrust issues it presents.” DOJ alleged that the transaction would harm competition in at least 23 separate relevant markets involving a wide range of products and services used to drill and prepare oil and gas wells for production. In addition, the DOJ’s complaint highlighted the inadequacies of the parties’ divestiture packages, further underscoring the agencies’ tougher stance on remedies. Three weeks after the complaint was filed, the parties abandoned the transaction, ending the litigation and triggering a $3.5 Billion reverse-break-fee payment from Halliburton to Baker Hughes.
GE/Electrolux: In July 2015, the DOJ challenged Electrolux’s proposed $33 billion acquisition of GE’s appliance business in federal court, alleging that the transaction would reduce the number of providers of value-segment, major home appliances to homebuilders from three to two. Competitors such as Samsung and LG sold higher-end appliances but the DOJ alleged the parties were the primary suppliers of mid-range appliances. GE abandoned the transaction once it was contractually allowed to do so at the end of trial, before the court ruled on the injunction.
National CineMedia’s/Screenvision: In March 2015, National CineMedia walked away from its efforts to acquire Screenvision shortly before the scheduled trial. The DOJ had filed a lawsuit alleging that a merger between the only two significant cinema advertising networks in the United States would deprive movie theatres of options and risk raising ticket prices to consumers. According to the complaint, the companies had a combined 88% share of all movie theatre screens in the United States through long-term, exclusive contracts.
In the face of a DOJ that continues to succeed through litigation, 2015 saw the parties to five other mergers abandon or modify their transactions when confronted with concerns by the DOJ. Of particular significance are several transactions in which the DOJ was prepared to rely on “innovation” and “conglomerate” theories of anticompetitive effects in the Applied Materials and Comcast matters, respectively.
Applied Materials/Tokyo Electron: In April, eighteen months after proposing a merger, the two semiconductor manufacturers abandoned the transaction after the DOJ raised concerns about a loss of innovation for “next-generation semiconductors.” Significantly, in its press release after the parties abandoned the deal, the DOJ did not focus on a reduction in head-to-head competition between the parties, but on the development of new types of semiconductor manufacturing equipment. The CFO of Applied Materials in statements following the collapse of the deal underscored that the transaction ran into obstacles when the DOJ began looking at the products in development and general technology innovation.
Comcast/Time Warner Cable: In April, after 14 months of review, Comcast and Time Warner Cable abandoned their merger plans when faced with opposition from the DOJ and the Federal Communications Commission (“FCC”). Both reviewing agencies opposed the transaction notwithstanding that there appeared to be little local head-to-head competition between the parties. Instead, both the DOJ and FCC noted concerns that the transaction would “make Comcast an unavoidable gatekeeper for Internet-based services that rely on a broadband connection to reach consumers.” The DOJ’s approach shows that it may not be constrained by conventional merger theories when investigating transactions that will produce a company with a large footprint in a particular sector.
Chicken of the Sea/Bumble Bee: In the Chicken of the Sea/Bumble Bee merger, the DOJ alleged that the companies were the second- and third-largest sellers of shelf-stable seafood products. The DOJ also raised concerns that the market was “not functioning competitively today and further consolidation would only make things worse.” Faced with opposition based on traditional structural concerns, the parties abandoned the merger in December.
Entercom Communications Corp./Lincoln Financial Media Company: The DOJ also kept up its enforcement efforts in older industries. In July 2015, the DOJ challenged a transaction between Entercom Communications Corp. and Lincoln Financial Media Company. The parties entered into a consent decree which required them to divest three radio stations in Denver. Despite the substantial changes that have occurred in the media and advertising sectors, the DOJ continued to define the product market as “English-language broadcast radio stations.” As the media landscape continues to evolve, with Internet and social media outlets commanding an increasing share of advertising dollars, the DOJ may ultimately need to reevaluate this approach but for now, the DOJ’s policy is to take an aggressive stance of defining media markets by format type.
Tribune Publishing Co./Freedom Communications, Inc.: The newspaper industry also received close DOJ scrutiny. In March 2016, the DOJ challenged Tribune Publishing Co.’s (“Tribune”) purchase of Freedom Communications, Inc. (“Freedom”). Tribune owns the Los Angeles Times, while Freedom owned the Orange County Register and the Riverside County Press-Enterprise, the two other newspapers with significant circulation in Orange and Riverside counties that sell alongside Tribune’s Los Angeles Times. Freedom was in bankruptcy and its auction on March 16, 2016 resulted in Tribune winning. The DOJ alleged that the acquisition would create a monopoly by combining the two largest English-language local daily newspapers in the market, thereby increasing subscription prices, raising advertising rates and reducing the incentive to invest in the newspapers. Following the DOJ’s lawsuit, a California bankruptcy judge approved the sale of Freedom to another buyer. The lawsuit reflects that the DOJ continues to review transactions that are too small to trigger an HSR filing or occur through bankruptcy.
Notwithstanding its aggressive enforcement posture, the DOJ’s leadership demonstrated that they will decisively close investigations, without asking for remedies, when the parties persuasively demonstrate that the transaction is not anticompetitive. Most notable, following a six-month investigation, the DOJ decided to close its investigation into the Expedia/Orbitz transaction. The DOJ based its decision in part on its conclusion that “the online travel business is rapidly evolving” with new entry such as TripAdvisor’s Instant Booking service and Google’s Hotel and Flight Finder, both of which had booking functionality.
The DOJ also declined to challenge AT&T’s acquisition of DirecTV, concluding that the transaction did not pose a risk to competition. The FCC did require that AT&T commit to continue to build out broadband assets and not discriminate against content providers.
In addition to the expected continuation of an aggressive review of mergers, the DOJ in 2016 will continue to challenge asset acquisitions as well as mergers. In November 2015, the DOJ filed a civil antitrust lawsuit seeking to block United Continental Holdings Inc.’s $14 million lease of slots from Delta Air Lines. Both United and Delta operate out of Newark Liberty International Airport with United already controlling 73 percent of the slots. United sought to lease an additional 24 takeoff and landing slots from Delta. The DOJ alleged that the lease was an acquisition and would strengthen United’s “monopoly position” and result in higher fares to the 35 million annual passengers traveling through Newark. The airlines abandoned their transaction before the court ruled on their motion to dismiss the DOJ’s complaint, citing an FAA ruling lifting takeoff restrictions at Newark.
The last twelve months have been a veritable high water mark for FTC merger enforcement activity. The agency scored two high-profile litigation wins by securing injunctions blocking Staples’ $6.8 billion bid for Office Depot and Sysco’s $8.2 billion proposed acquisition of rival US Foods. In addition to requiring remedies in over 15 matters during the last year, the FTC initiated litigation to block five transactions, roughly doubling the agency’s recent historical average of approximately two-to-three merger litigations per year.
Not all of the FTC’s merger litigation efforts have succeeded. In particular, as discussed below, the FTC lost a significant preliminary injunction proceeding in federal court involving a merger between alleged potential competitors, and another federal court denied the FTC’s efforts to enjoin a hospital merger in central Pennsylvania. Time will tell how this might influence the FTC’s willingness to challenge potential competition and hospital cases going forward, but statements from the FTC officials suggest that the agency will continue to bring lawsuits where it concludes that enforcement is warranted.
Notably, several large transactions that raise interesting antitrust issues are currently pending before the agency, including Walgreens’ proposed $17 billion purchase of Rite Aid, ‘Teva Pharmaceuticals’ $40.5 billion acquisition of Allergan’s generic drugs portfolio, and Sherwin-Williams $8.9 billion proposed acquisition of Valspar. The agency’s actions–or inactions–in these matters will provide further insights into the agency’s future direction.
Although the Commission’s Democratic majority will very likely persist through the election cycle, Commissioner Wright resigned on August 17, 2015, to return to the faculty of the George Mason law school and Commissioner Brill announced her resignation on March 22, 2016, to enter private practice. The President has not nominated a candidate for either position and, given the current acrimony between the President and Congress regarding appointments, both seats may remain empty for some time.
Other staffing changes at the Commission include the departure of the Commission’s General Counsel, Jonathan Nuechterlein, to private practice; the addition of Professor Ginger Zhe of the University of Maryland to the Bureau of Economics as the Bureau’s Director; and the addition of Lorrie Faith Cranor, a Professor of Computer Science and Engineering and Public Policy at Carnegie Mellon University, to replace Ashkan Soltani as Chief Technologist. While notable, these staffing changes are unlikely to materially alter the agency’s enforcement decisions.
On May 10, 2016, following a year-long investigation and two weeks of trial, the FTC secured an injunction in federal court blocking Staples’s proposed acquisition of rival Office Depot. This is the third time the FTC has weighed in on a major office supply superstore transaction, and marks the second time it has prevented Staples from acquiring Office Depot. Nearly two decades ago, in 1997, the Commission obtained an injunction from the same court blocking this very same deal. In the 1997 case, the Commission’s focus was on sales of disposable office supplies (e.g., Post-it notes, paper, and pens) to retail store consumers. Sixteen years later, in November 2013, the FTC cleared a merger of Office Depot and OfficeMax, which was then the third-largest operator of retail office supply stores in the United States. In clearing that transaction, the FTC issued a closing statement noting that the “current competitive dynamics are very different” than they were in 1997. In addition to concluding that office supply chains face “significant competition” for retail customers, the Commission explained that “[a] substantial body of evidence indicates that the merger is unlikely to substantially lessen competition or harm large [business] contract customers.”
Notwithstanding its 2013 closing statement, the Commission elected to challenge the Staples/Office Depot transaction after rejecting the parties’ offers to divest assets and customer contracts to a third party. Unlike its 1997 challenge, the agency’s case focused not on retail sales of office supplies to individual consumers, but rather on sales to large corporations. Specifically, the agency alleged that the relevant market “is the sale and distribution of consumable office supplies to large business-to-business [“B-to-B”] customers in the United States.” The agency’s economist, Dr. Carl Shapiro, estimated that Staples and Office Depot combined accounted for nearly 80% of consumable office supply sales to Fortune 100 companies.
In a 75-page opinion, Judge Sullivan explained that the FTC had met its burden of “showing that the merger would result in ‘undue concentration’ in the relevant market of the sale and distribution of consumable office supplies to large B-to-B customers in the United States.” In addition to accepting the FTC’s relevant market definition, Judge Sullivan noted that “Amazon Business’ lack of demonstrated ability to compete for [B-to-B contracts] and the structural and institutional challenges of its marketplace model” mean that it “will not be in a position to compete . . . on par with the proposed merged entity within three years,” and “it would be sheer speculation . . . for the Court to conclude otherwise.”
The outcome of this case was far from preordained, given the FTC’s 2013 Office Depot/OfficeMax closing statement, but reflects several emerging trends in U.S. merger enforcement. First, as discussed above, the agencies are increasingly skeptical of remedy proposals, particularly in large transactions where there is extensive pre-merger competition and overlap between the parties. Staples is yet another high-profile instance where the agency chose to litigate rather than agree to a substantial divestiture package. Second, the agencies are gaining confidence in defining national markets in which large players vie for business from customers that require services across multiple distribution facilities throughout the country. The DOJ relied on a similar market definition theory in its 2010 challenge of AT&T’s proposed acquisition of T-Mobile, and the FTC used it in its litigation against Sysco/US Foods (discussed below). Finally, the agencies are increasingly relying on evidence of head-to-head competition to support not only competitive effects, but also their proposed market definition. The Commission’s expert argued that evidence of competitive rivalry between Staples and Office Depot for large corporate customers supported the contention that these customers formed a distinct relevant market.
In June 2015, Sysco and US Foods abandoned their proposed merger after the FTC won a preliminary injunction enjoining the transaction in federal district court. The case was the FTC’s signature victory of 2015, and is noteworthy because it came outside of the healthcare sector, the focus of virtually all recent FTC competition-law litigation successes, merger or otherwise. Another impressive aspect of this win was that the FTC prevailed by alleging the merger would lessen competition in a market where the merging parties faced many (albeit differentiated) competitors.
In the litigation, the FTC contended–and the court agreed–that the relevant product market was broadline food product distribution, a market that excluded distributors who focused only on certain categories of food (or food-related products) or served only narrow geographic areas. The court found that the product market must be defined in a way that grasps the reality that large government agencies, healthcare systems, industrial catering companies, and restaurant chains conduct a very substantial portion of their business with the broadliners, who offer special services unavailable from others. The court also concluded that the sheer scale of certain national customers means they are categorically different from regional customers who only receive goods from a small set of distribution centers.
But the FTC’s fortunes changed several months later in September 2015, when the Northern District of Ohio denied the FTC’s motion for a preliminary injunction to block Steris Corporation’s (“Steris”) proposed acquisition of Synergy Health plc (“Synergy”). The $1.9 billion merger combined the second- and third-largest medical product sterilization companies in the world.
The FTC’s Complaint asserted an actual potential competition theory, under which the agency claimed that the merger would eliminate future rivalry between the two companies. Both Steris and Synergy provide contract sterilization services for companies that need to ensure their products (e.g., medical devices) are free of unwanted microorganisms before they reach customers. According to the FTC, gamma radiation is currently considered the only feasible method of sterilizing large volumes of dense and heterogeneously packaged products, and Steris is one of only two companies providing such services in the United States. The FTC further alleged that, prior to the proposed merger, Synergy was implementing a strategy to open new plants in the United States that would offer X-ray sterilization services, which would provide a competitive alternative to Steris’s dominant gamma radiation offering.
In evaluating its actual potential competition claim, the court accepted the FTC’s underlying legal theory – i.e., that a merger could be blocked on the ground that one party would enter and compete against the other absent the transaction. But at the preliminary injunction hearing the court focused on the evidence the FTC proffered in support of its claim that Synergy was likely to enter the US market by building one or more X-ray facilities within a reasonable period of time. The court concluded that the FTC failed to meet its evidentiary burden on this point. It concluded that, absent the deal, Synergy was unlikely to enter the market in any reasonable timeframe because the evidence demonstrated that it had failed to obtain customer commitments for its X-ray sterilization services, and that Synergy had failed to lower its capital costs to levels that would enable it to compete effectively. Following the court’s decision to deny the injunction, the Commission announced that it did not intend to appeal and was dropping the suit.
We do not expect the loss to portend the end of the Commission’s interest in pursuing cases premised on “potential competition” theories. Bureau of Competition Director Feinstein delivered a major policy speech outlining the FTC’s commitment to potential competition cases in September 2014 and the agency has an established history of pursuing remedies premised on competition that will occur only in the future, some of which were successful (e.g., the Commission’s successful defense of its Polypore decision in the Eleventh Circuit). However, Steris reflects the reality that potential competition cases inherently place a high evidentiary burden on the agency because it must prove future, rather than current, rivalry. Commissioner Ohlhausen recently commented that the Steris decision may reflect that the courts have a “different appetite than does the Commission” when it comes to forecasting future competitive dynamics.
After pressing “pause” on merger enforcement in the healthcare provider sector after suffering a string of eight FTC and DOJ losses in hospital merger cases in the late 1990s, the FTC has now fully rebooted its efforts in this large and important sector. After successfully challenging the consummated acquisition of Highland Park Hospital by Evanston Northwestern Hospital in 2008, an action that resulted in relatively limited behavioral remedies, the FTC has aggressively policed hospital mergers on a prospective basis.
Indeed, since the FTC issued its decision in Evanston eight years ago, the agency is five-for-six, posting an impressive .833 batting average, in litigating hospital merger challenges. During the final two months of 2015, the FTC initiated three additional hospital merger challenges, two of which are currently pending in the courts. On May 10, 2016, the court in the third case involving two hospitals in Pennsylvania, denied the FTC’s motion for an injunction—the agency’s lone hospital-matter loss since the agency issued its decision in the Evanston case. This unprecedented level of enforcement reflects the agency’s commitment to policing combinations among healthcare providers.
In both Hershey and Cabell Huntington, the merging hospitals contracted with their largest payors to freeze rates at pre-merger levels for five and ten years, respectively. The court in Hershey concluded that the hospitals’ long-term agreements foreclosed the possibility of anticompetitive post-merger price increases. The FTC, according to the court, was “essentially asking the Court [to] prevent this merger based on a prediction of what might happen to . . . rates in 5 years.” In response, Chairwoman Ramirez voiced her “very serious” concerns with using such agreements as a means of deflecting antitrust attack. She described such strategies as “akin to conduct remedies” that fail to address the longer-term anticompetitive effects of horizontal mergers, including future reductions in innovation and quality. It remains to be seen whether long term price contracts will be more broadly accepted as a safeguard against the anticompetitive effects of mergers as the FTC pursues its appeal of the Hershey decision and awaits the outcome of Cabell Huntington. If this practice gains favor in the courts, it will have significant implications for merger remedies both in and outside the health care context.
Of these three challenges, the Advocate/NorthShore matter may turn out to be the most significant precedent. Unlike the FTC’s other recent hospital merger challenges, the area served by Advocate and NorthShore is not an isolated city (or town) surrounded by a rural area. Rather, the hospitals serve the suburbs north of downtown Chicago. The FTC alleged that the relevant market excluded hospitals located in downtown Chicago and to the west of the city. The court’s reaction to the FTC’s alleged geographic market may create an important benchmark for geographic market definition in healthcare provider markets in large metropolitan areas. In addition, unlike other recent FTC hospital challenges, the combined shares of Advocate and NorthShore (and market concentration) are relatively close to the thresholds specified in the Horizontal Merger Guidelines needed to establish a presumption of anticompetitive harm (i.e., a post-merger HHI greater than 2,500 and an increase in HHI of 200 or more). Thus, even if the court accepts the FTC’s geographic market, the court may give less weight to the presumption of harm associated with concentration thresholds, and correspondingly more weight to other evidence, including the parties’ efficiency justifications.
A notable trend in the FTC’s enforcement program in the healthcare provider sector is the extension of its enforcement beyond hospitals to include ambulatory surgery centers (ASCs), physician groups, and other low-acuity healthcare providers. Although the FTC had previously pursued merger enforcement cases involving dialysis clinics and laboratory services (and continues to do so, as evidenced by the remedy it required in approving U.S. Renal Care, Inc.’s acquisition of DSI Renal), the agency had not previously targeted low-acuity medical services offered by local providers. The FTC’s current position, however, appears to be that any transaction involving healthcare providers–no matter how small or “local”–that results in concentration levels in excess of the thresholds specified in the Horizontal Merger Guidelines merits scrutiny.
During the last year, which witnessed a number of very large pharmaceutical transactions, the FTC has stayed the course in the pharmaceutical and medical device sector. In particular, the FTC maintained its approach to analyzing deals involving drugs and medical devices based on whether the transactions involve therapies that are substitute treatments for patient conditions.
Most notably, the FTC’s investigations of several blockbuster pharma deals–including Shire PLC’s $32 billion proposed merger with Baxalta’ and Teva Pharmaceuticals’ $40.5 billion acquisition of Allergan’s generic drugs portfolio–remain ongoing. Commentators anticipate the FTC requiring as much as $600 million in divestitures to clear the Teva/Allergan deal.
In November 2015, the FTC cleared Pfizer’s $16 billion acquisition of Hospira, Inc. after the parties agreed to divest assets related to four generic drugs. The FTC’s required divestitures related to two alleged product markets where the parties were two of three (acetylcysteine inhalation solution) or two of four (clindamycin phosphate injection) current sellers. The FTC also required divestitures of two products based on concerns that future (i.e., potential) competition would be harmed. Specifically, with regard to injectable voriconazole, Pfizer currently marketed a branded version and was expected to obtain and launch FDA approval for a generic version in May 2016. With regard to injectable melphalan hydrochloride, a drug used in conjunction with various chemotherapy treatments, the parties were the only companies with generic versions in late-stage development.
The FTC also required Endo International and Par Pharmaceuticals to divest generic drugs for treating ulcers and thyroid ailments as part of their $8 billion merger. Endo and Par were the two foremost producers of the generic ulcer medication; and the merger would have reduced the number of competitors from four to three for the thyroid medication in question.
The FTC cleared Mylan N.V.’s acquisition of Perrigo Company plc in November 2015 after the parties agreed to divest four generic pharmaceuticals in which they already competed, as well as three other generic medications for which the Commission deemed the parties future competitors.
In keeping with the potential-competition theme in this space, the Commission required a remedy in Impax Laboratories Inc.’s $700 million deal for CorePharma, LLC: the parties agreed to divest assets related to two different generic pharmaceuticals. In one, pilocarpine, the Commission alleged that the parties were the only two likely new entrants absent the proposed merger. Impax currently produces the other generic medication in question, ursodiol, and CorePharma is one of relatively few likely future entrants in a market that has suffered from supply shortages recently.
In June 2015, the FTC required Zimmer Holdings to divest overlapping products as a condition of clearing its $13 billion acquisition of Biomet Inc. First, the parties divested knee implant and elbow implant products. In these markets, the FTC alleged that the transaction would have reduced the number of current competitors from three to two. Second, the Commission required divestiture of bone cement assets, after finding that the deal would have reduced the number of competitors in the relevant market from four to three.
Most recently, in February of this year the Commission required divestitures in two other mergers of marketers of generic drugs. Lupin Ltd. will be allowed to close its $850 million acquisition of Gavis Pharmaceuticals LLC after agreeing to divest a pair of generic pharmaceuticals. The FTC alleged that the deal would have reduced the number of generic options from four to three for antibacterial drug doxycycline monohydrate, and that the parties were likely future competitors in the market for a generic ulcerative colitis medication called mesalamine. The Commission showed that no merger is too small to attract antitrust scrutiny when it mandated that Hikma Pharmaceuticals PLC divest five generic drugs to remedy allegations its $5 million acquisition of Ben Venue Laboratories would be anticompetitive. The five drugs in question treat a range of maladies, such as infections, hypertension, ulcers, and psychiatric and neurological disorders.
Notably, the Commission voted unanimously in each of these cases, reflecting the consensus within the agency regarding market definition and competition effects analysis in the pharmaceutical and medical device sectors.
Oil & Gas – In March 2015, the FTC announced that it had obtained a settlement in its challenge to the proposed $107 million acquisition of Mid Pac Petroleum, LLC by Texas-based energy company Par Petroleum Corporation. In its Administrative Complaint, the FTC alleged that the proposed merger would reduce competition and lead to higher prices for bulk supply of Hawaii-grade gasoline blendstock. Under the final consent order, Par Petroleum was required to terminate its storage and throughput rights at a key gasoline terminal in Hawaii.
Just before the New Year, the FTC announced that ArcLight Energy agreed to divest its stake in four petroleum product terminals in Pennsylvania. ArcLight had purchased the Gulf Oil Limited Partnership from Cumberland Farms, which the FTC deemed anticompetitive.
In addition, the FTC’s investigation of the proposed acquisition of Williams Companies, Inc. by Energy Transfer Equity, L.P. (“ETE”) remains ongoing. According to ETE, the combined company will be one of the five largest global energy companies. The FTC issued a Second Request in December 2015.
Infrastructure: In May 2015, the FTC announced that cement manufacturers Holcim Ltd. and Lafarge S.A. agreed to divest plants, terminals, and a quarry to settle FTC charges that their proposed $25 billion merger creating the world’s largest cement manufacturer would likely harm competition in the United States. According to the FTC’s Complaint, the merger would have harmed competition in 12 markets where the two companies either were the only significant suppliers of cement or were two of, at most, four significant suppliers in the market.
Automotive: Also in May 2015, the FTC reached a settlement requiring two of the world’s largest auto parts suppliers, ZF Friedrichshafen AG and TRW Automotive Holdings Corp., to divest TRW’s linkage and suspension business in North America and Europe as part of their proposed $12.4 billion merger. The merging companies were two of only three North American suppliers of heavy vehicle tie rods.
Tobacco: To resolve a closely watched transaction, tobacco companies Reynolds American Inc. and Lorillard Inc., the second- and third-largest US cigarette makers, agreed to divest four brands of cigarettes as part of their $27.4 billion merger. The May 2015 order required Reynolds to divest the four brands to Imperial Tobacco Group, a tobacco manufacturer with a significant international presence but a comparatively smaller presence in the United States. Significantly, the parties had proposed the divestiture to the FTC very early in its investigation, and negotiated with Imperial prior to announcing their deal. This strategy proved to be effective, although the FTC’s prolonged investigation underscores the reality that early remedy proposals do not necessarily result in expedited clearance.
Retail: Following up on what we reported on the dollar store industry last year, in January 2015, Family Dollar shareholders approved Dollar Tree’s $8.5 billion takeover bid and rejected a $9.1 billion bid from Dollar General, reasoning that the FTC would require divestiture of thousands of stores in a merger with Dollar General but only around 300 stores in a merger with Dollar Tree. Following shareholder approval, the FTC identified 330 stores in local markets across 35 states where competition would be lost if the acquisition went forward as proposed. On July 2, 2015, Dollar Tree agreed to sell the 330 Family Dollar stores to a private equity firm.
The Commission is also currently reviewing Walgreens’ proposed $17 billion purchase of Rite Aid. Walgreens and Rite Aid are the largest and third-largest retail pharmacy operators, respectively, in the United States. There are a variety of product markets the Commission will examine during its review, including local retail pharmacy markets, the market for the distribution of drugs billed by insurance companies, and other markets that may exist on a regional or national scale.
Electronics: In November, NXP Semiconductors N.V. agreed to sell its RF power amplifier assets to settle FTC charges that its proposed $11.8 billion acquisition of Freescale Semiconductor Ltd. is anticompetitive. The companies were two of only three major worldwide suppliers of RF power amplifiers–semiconductors that amplify radio signals used to transmit information between electronic devices such as cellular base stations and mobile phones.
Packaging: The FTC issued Second Requests to fully evaluate Ball Corporation’s proposed $7.8 billion acquisition of Rexam PLC in April 2015. Rexam and Ball Corp. are two of only three major aluminum can manufacturers in the US market. The merger was recently approved by the Administrative Council for Economic Defense, Brazil’s competition authority, with limited conditions and divestitures. Recent reports indicate that the EU is also likely to approve the deal following some additional recent concessions from Ball Corp. Neither Ball nor the FTC has issued a public statement regarding resolution of the FTC’s investigation.
Industrial Gases: In the FTC’s most recent merger remedy in May 2016, Air Liquide and Airgas obtained clearance for their $13.4 billion merger after agreeing to divest commercial gas production and distribution facilities that pertain to seven different commodities in numerous geographic markets. The FTC emphasized that the markets for these particular products – such as oxygen gas and dry ice – are already concentrated and that the barriers to new entry are high. In sum, the parties agreed to divest 18 Air Liquide facilities and seven Airgas facilities across the country.
The leadership at both the DOJ and FTC have made it clear that they will require robust remedies to resolve any competitive concerns from mergers and acquisitions. In a speech in February 2015, Assistant Attorney General Bill Baer explained that the Division had filed complaints against the AB InBev/Grupo Model and the USAir/American Airlines mergers because the parties had failed to put forward remedies that the DOJ believed would preserve competition in the industries at issue. Baer explained that in both cases, the DOJ was only willing to settle the cases after the parties had offered substantially greater remedies than they had prior to DOJ’s initiating the lawsuits.
Both agencies have continued to reject remedy packages that they view as inadequate, even when it means litigation. In each of the major litigations discussed above – Sysco, Staples, and Halliburton – the merging parties offered to divest substantial portions of their businesses before the agency filed its complaint. The agencies rejected these packages as insufficient to ensure that the level of post-merger competition (including innovation competition) would remain robust. As AAG Baer remarked at a press conference announcing the Halliburton complaint:
Halliburton wants the United States to agree to the most complicated array of piecemeal divestitures and entanglements that I have ever seen. Halliburton’s various proposals – and those have been a moving target – involve selling a grab bag of assets in certain product lines. . . . At the end of the day, Halliburton’s purported settlement would eliminate a formidable rival – Baker Hughes – and replace it with a smaller, weaker rival that is not the equivalent of Baker Hughes today.
These and other comments by agency leaders underscore the stricter scrutiny remedy proposals have received in recent years, particularly where the divestiture package (i) spans multiple business lines, (ii) is national or global in scope, (iii) requires that the merged firm provide extensive long-term support services, (iv) does not identify a buyer or includes a buyer with inadequate scale and resources, and (v) requires the agency to devote substantial resources over many years to supervise.
The DOJ also demonstrated that in certain cases it would require the parties to consummated mergers to disgorge what DOJ views as unlawful profits from an anticompetitive transaction. In March 2015, the DOJ and the New York State Attorney General settled the long-running investigation into Twin America, the joint venture between Coach USA Inc. and City Sights LLC, created in 2009. The lawsuit, which was filed in 2012, centered on hop-on, hop-off bus tours in New York City. The DOJ and NY AG alleged that Twin America had a monopoly over the hop-on, hop-off bus tour market in New York City and that the transaction had enabled Twin America to raise ticket prices by 10%. The settlement required the parties to divest all of City Sight’s Manhattan bus stop authorizations and disgorge $7.5 million in profits from the joint venture.
We noted in last year’s Update that the FTC had announced a second merger remedy retrospective, following on the heels of the Commission’s similar 1999 study. That effort has undergone the notice and comment process and is now underway. The Commission is gathering data from various parties–both voluntarily and by the use of compulsory process–and we expect the study to be released in late 2016 or 2017. We believe that the study is an integral component of a broader FTC effort to obtain more robust (and correspondingly onerous) merger remedies, including by requiring parties to divest more assets, provide more substantial transition services, and take various other steps to ensure that buyers are positioned to succeed in selling (or developing) the divestiture product(s).
The agencies have continued to prosecute parties who failed to file the proper HSR notifications, regardless of whether the underlying transaction raised substantive antitrust issues. In April, DOJ filed a lawsuit against ValueAct seeking fines of at least $19 million – a record for an HSR Act violation – for failing to file before acquiring shares of Halliburton and Baker Hughes. As detailed above, Halliburton and Baker Hughes abandoned their proposed merger following a separate antitrust lawsuit from the DOJ. ValueAct allegedly purchased shares in both companies “with the intent to influence the companies’ business decisions as the merger unfolded,” and as a consequence its purchases did not qualify for the “investment-only” exemption to HSR’s notification requirements. This lawsuit follows a string of cases brought by the DOJ and FTC in recent years against activist investors that are alleged to have improperly claimed the investment-only exemption.
In September 2015, the DOJ fined Leucadia National Corp. $240,000 for violating the premerger notification rules by improperly relying on the institutional investor exemption when it acquired shares in KCG Holdings, Inc. in July 2013. Similarly, in October 2015, the DOJ fined Len Blavatnik $656,000 for violating the premerger notification rules when he acquired shares in TangoMe, Inc. in August 2014. Mr. Blavatnik purchased shares that brought his stake above the reporting threshold and failed to report the transaction. The multi-year gaps between the violation and DOJ prosecution underscores that the DOJ will seek penalties for failures to comply with the HSR Act whenever it learns about the violation.
The Commission made a point of enforcing the reporting requirements of the Hart-Scott-Rodino Act, securing nearly $900,000 in fines for two separate alleged violations. A year after fining Berkshire Hathaway nearly $900,000, the Commission fined a holding company $240,000 for failing to report a new investment–its second HSR violation since 2007. In October 2015, famed investor Len Blavatnik and his company paid a $656,000 fine for a similar violation, which came on the heels of a prior violation in 2010. These actions, which both involved unintentional violations of the HSR Act’s reporting requirements, reflect the seriousness with which the FTC polices its review process even where the transaction at issue does not pose antitrust concerns.
Shortly after the financial crisis brought an end to the last merger wave, there was an apparent decline in the number of mergers notified to the European Commission (with the number of notified transactions falling from 402 in 2007 to 259 in 2009). However, as of Q3 and Q4 of 2014, M&A activity in the EU has reached very high levels again, with the number of notified transactions growing from 277 in 2013 to 303 in 2014 and up to 337 in 2015. Consistent with this trend, 62 notifications had already been filed in 2016 by the end of the month of February.
Mergers Notified at EU Level 2001-2015
The trend towards greater scrutiny of notified transactions, which arguably commenced in 2011, has continued apace throughout the year in 2015. Over the course of 2015, the Commission has initiated 11 in-depth (Phase II) investigations, which reflects a record high since the year 2007. Over the past five years, the rate at which M&A transactions have triggered an in-depth investigation has more than doubled, from 1.46% in 2010 to 3.26% in 2015. Despite this increasing level of scrutiny, Competition Commissioner Vestager has yet to block her first merger, although notifying parties have decided to terminate their proposed mergers in at least two high-profile situations.
Percentage of Reported Transactions Resulting in Phase II Investigation
The appetite for mergers in the telecommunications industry in the EU remained undiminished over the course of 2015, even in the face of what appears to be a hardening of approach by the Commission to the review of mergers in the sector. There has also been an increasing amount of activity in the oil exploration industry recently, largely in response to the dramatically changed economic circumstances in which the sector finds itself. Finally, there is a continued interest in consolidation in the pharmaceutical sector, with the Zimmer/Biomed and GlaxoSmithKline/Novartis transactions being the main examples in 2015.
The Commission has continued its established preference for the use of structural remedies and the identification of up-front buyers as the basis for addressing identified theories of harm flowing from notified mergers (as reported in our 2015 Antitrust Merger Enforcement Update and Outlook), with the divesture of viable businesses to a suitable purchaser remaining the preferred remedy.
The Commission’s desire to review high profile mergers was given even greater impetus when, on 10 March 2016, Commissioner Vestager signaled her Directorate’s intention to consider the review of mergers by reference to the value of the deal, rather than simply on the basis of its traditional annual revenue thresholds test.
The Commission cleared eight proposed transactions in 2015 after in-depth (Phase II) investigations, only one of which was cleared without any conditions attached. In the first two months of 2016, the Commission has cleared another four notified concentrations that were subject to Phase II investigations, with one being cleared unconditionally. Merger activity in the electronic communications sector escalated even further in 2015, and is subject to a separate discussion below.
After an in-depth investigation, the Commission cleared unconditionally the proposed acquisition of US corporation Dresser-Rand by Germany’s Siemens. Both companies supply a range of turbo compressors as well as their “drivers”, which take different forms, such as aero-derivative gas turbines (“ADGT”), industrial gas turbines (“IGT”), steam turbines and electric motors. The combination of a compressor with a driver (which creates a “turbo compressor train”) is widely used for various applications in the oil and gas industry. The Commission initially had concerns that the transaction would lead to less product variety and to higher prices by reducing the number of significant suppliers of ADGT-driven turbo compressor trains from three to two. In addition, the parties’ competitors for the supply of small steam turbines had a limited presence and might not pose a significant competitive constraint on the merged entity.
The Commission’s investigation revealed that, as regards ADGT-driven compressor trains, the activities of Dresser-Rand and Siemens were largely complementary, as they focused on different oil and gas applications. This was demonstrated by the fact that they were found to have bid rarely against each other in tender bids. In addition, the ADGT-driven compressor trains were found to be largely substitutable with light IGT-driven compressor trains, where the parties faced strong competition from entities such as Solar and GE. With regard to small steam turbines, the investigation again demonstrated that the two companies were not close competitors, given that their activities were largely complementary and they faced strong competition from other major suppliers. Moreover, not only were a number of smaller competitors already active in the small steam turbine market which were capable of expanding their production, but additional producers could also enter the market.
The acquisition of Biomet by Zimmer Holdings (both orthopedic implant producers for knees and elbows from the United States) was cleared subject to commitments. The Commission was concerned that the merger would lead to less innovation and choice (in what was in effect a 5-to-4 merger), as well as to price increases, since the transaction would combine two leading orthopedic implants manufacturers which collectively had significant market power in a large number of EEA countries. By contrast, the size of other competitors on the relevant affected markets was small and there were relatively high entry barriers.
To address these concerns, Zimmer offered an extensive remedy package, whereby it would divest: (i) its knee and elbow businesses across the EEA; and (ii) Biomet’s knee business in Denmark and Sweden. These divestures were to be accompanied by corresponding instrumentation, improvements and pipeline projects. The parties would also divest IP rights, know-how and customer contracts, as well as committing to supply the businesses’ product lines on reasonable conditions for a transitional period. Moreover, the purchaser of the Biomet knee business was to be granted an EEA-wide licence to the rights and know-how used to manufacture and sell exact copies of the knee implant. The companies also committed not to implement the transaction before one or more suitable purchasers were found.
The Commission approved the joint venture between two of the world’s leading coffee manufacturers – DEMB of The Netherlands and Mondelēz of the US – subject to commitments. Concerns were expressed that the transaction, as initially notified, would have led to price increases in roast and ground coffee products, as well as in filter pads. The transaction would combine all material assets of DEMB and the coffee business of Mondelēz. The joint venture would therefore be active across all coffee formats, including filter pads, discs and capsules for different single-serve coffee machines. Concerns were raised in relation to markets where the transaction would bring together consumer brands which competed closely against each another, as the remaining companies on the market would not be able to exert sufficient competitive pressure on the joint venture to avoid price increases.
To address these concerns, the parties offered to divest the Carte Noire business, together with manufacturing plants in France, and the Merrild business in Denmark and Latvia, as well as to license for the purpose of re-branding the Senseo brand so as to remove concerns in Austria. The Commission was also initially concerned that the joint venture could lead to higher prices and less innovation by bringing together the parties’ single-serve system of capsules and pods, as they could influence the price paid for single-serve coffee machines. However the in-depth investigation revealed these concerns were unfounded once the divestures were implemented.
The Commission approved a joint venture for online music licensing between three collective rights management organisations (“CMOs”): Britain’s PRSfM, Sweden’s STIM, and Germany’s GEMA, subject to commitments. CMOs manage the copyright of authors, performers and writers of musical works and grant licences on their behalf. There were concerns that the creation of the joint venture would render more difficult the task of other collecting societies to offer copyright administration services, by raising barriers to entry and expansion in the market. This was because the joint venture could bundle different types of copyright administration services and make it difficult for customers of its database to port their data to a competitor. Moreover, it might require its customers not to source their copyright administration services from any other third party. This would result in higher prices and worse commercial conditions for digital service providers (“DSPs”), resulting ultimately in less choice and higher prices for European consumers of digital music.
To address the Commission’s concerns, the parties committed not to use the joint venture’s control over performing rights to force their customers to purchase copyright administration services from it. In addition, the joint venture would offer key copyright administration services to other collecting societies on terms that are fair, reasonable and non-discriminatory when compared to the terms offered to the parent companies, as well as allowing collecting societies to terminate their contracts at any time (thereby allowing them to switch to other database providers). Finally, the joint venture committed not to enter into exclusive contracts with its customers for copyright administration services other than in relation to database services. The Commission considers that these commitments will ensure that the market for copyright administration services provided to CMOs and “option 3” publishers remains contestable, as they will remove PRSfM’s ability to use its performing rights to force CMOs or option 3 publishers to use the services of the joint venture and they will also enable CMOs to switch from the joint venture to another CMO that offers copyright administration services.
In July 2015, the Commission approved the acquisition of Archer Daniels Midland (“ADM”) Chocolate by Cargill, subject to conditions. The Commission opened a Phase II investigation in February 2015, focusing on competition in industrial chocolate markets. Both companies supply industrial chocolate, as well as fat-based coatings and fillings and are important suppliers of industrial chocolate to customers based around their plants in Germany. The Commission considered that the transaction would reduce competition, as the number of main competitors would be reduced from three to two, with smaller competitors not being able to exert a sufficient competitive constraint on the parties. The Commission also stated that the market structure is different in the areas around the parties’ plants in Belgium, France and the United Kingdom (the parties’ combined market share in these countries is smaller and Barry Callebaut is a much more important competitor). With regard to the cocoa market, which the Commission considered to be a related market as cocoa is used as a raw material for industrial chocolate, the Commission concluded that Cargill’s position in cocoa markets was not significant and there were sufficient alternative suppliers. Cargill offered commitments according to which it would divest ADM’s industrial chocolate plant in Mannheim to a suitable purchaser, as this plant is one of the largest ADM plants in Europe and its only industrial chocolate plant in Germany. The commitment thus ensures that an important alternative supplier will remain available.
In September 2015, following an in-depth review by the Commission, approval was granted for GE‘s acquisition of Alstom, subject to the divestiture of key elements of Alstom’s heavy-duty gas turbines business. Both companies are active in the market for heavy-duty gas turbines, which are mainly used in gas-fired power plants. The Commission expressed concern that the transaction would eliminate competition between GE and Alstom in that market, and identified the parties as two of four competitors (i.e., GE, Mitsubishi Hitachi Power Systems (MHPS), Siemens, and Alstom). The parties offered commitments in order to address the EC’s concerns, focusing mainly on the divestiture of: (i) Alstom’s heavy-duty gas turbine technology for the GT 26 and GT 36 turbines, existing upgrades and pipeline technology for future upgrades, excluding essentially only the technology for Alstom’s older GT 13 model in relation to which the Commission had no competition concerns; (ii) Alstom’s key personnel (R&D engineers); (iii) two test facilities for the GT 26 and GT 36 turbine models in Switzerland; and (iv) Alstom’s PSM servicing business based in Florida. GE proposed that Ansaldo, an Italian competitor in the heavy gas turbine market, be the purchaser for the assets. According to GE, Ansaldo already had the know-how and a factory for gas turbines and other power plants components (as steam turbines and generators) that are often sold together with heavy-duty gas turbines. The Commission concluded that the commitment would allow the purchaser to replicate Alstom’s previous role in the market, thus maintaining effective competition. Given the global reach of the parties’ activities, the Commission cooperated with the competition authorities of a number of countries, such as the DOJ in the US, along with the respective competition agencies of Canada, China, Brazil, South Africa and Israel.
In July 2015, the Commission opened an in-depth investigation into the proposed acquisition of TNT Express by FedEx. The companies are two of the four global “integrators” said to be active in the European small package delivery sector. Integrators are companies that control a comprehensive air and road delivery network in many parts of the world (including the EEA) capable of offering a broad portfolio of small package delivery services. The Commission was concerned that, on a number of European markets for international express and regular small package deliveries (for destinations within and outside the EEA), the merged entity would face insufficient competitive constraints from the remaining integrators (namely, UPS and DHL), which might eventually result in higher prices.
After an in-depth investigation, the transaction was authorised unconditionally, because FedEx and TNT were deemed to be not particularly close competitors and because the merged entity would continue to face sufficient competition from its rivals in all the relevant markets concerned. The investigation concluded that, within the EEA, FedEx still exerts a weaker competitive constraint on other integrators due to the lack of density and scale of its European network and that, outside the EEA, TNT is not a strong competitor to the other integrators. These conclusions were said to be supported by a Price Concentration Analysis, which was supposedly conducted in terms consistent with the Commission’s approach in the UPS/TNT case that was discussed in our 2014 Antitrust Merger Enforcement Update and Outlook. In addition, the Commission took into account merger-specific efficiencies put forth by the parties. The transaction was thus authorised unconditionally on 8 January, 2016.
In January 2016, the Commission cleared the acquisition of the UK-based beverage can manufacturer Rexam by the US-based Ball. Rexam is a UK-based company that is also active worldwide in beverage can manufacture. Ball is a US-based company active worldwide in the production and supply of metal packaging for beverages, food and household products and in the design, development and manufacture of aerospace systems. Rexam and Ball are, respectively, the largest and second-largest beverage can manufacturers, with both entities owning the most extensive network of plants across the EEA. The Commission opened an in-depth investigation in July 2015, due to its initial concerns that the proposed transaction might reduce competition in the beverage can and aluminum bottle manufacturing industry in the EEA. The Commission considered that the remaining two suppliers (Can-Pack and Crown) would not pose a sufficient competitive constraint on the merged entity. In addition, the Commission has found that the industry is characterised by high barriers to entry, primarily because of economies of scale. In order to address the Commission’s concerns, Ball committed to the divesture of ten plants manufacturing can bodies and two plants making can ends to a suitable purchaser, thereby ensuring that an important alternative supplier would constrain the merged entity. The divestiture consists of most of Ball’s Metal Beverage Packaging activities in Europe and two of Rexam’s can-body plants. The business to be divested will have a total manufacturing capacity in the EEA of over 18 billion cans.
In September 2015, the Commission opened an in-depth investigation into the acquisition of office supplies distributor Office Depot by its competitor Staples, both from the US. Both parties are active in the distribution of office products via a number of sales channels and are two of the three largest suppliers of office products for business customers in Europe. The Commission’s preliminary investigation indicated potential competition concerns that could lead to price increases and less choice in the market for the supply of office products to business customers through international contracts in the EEA, as well as in the market for the supply of office products to business customers through national contracts in the Netherlands and Sweden. According to the Commission, its Phase II investigation confirmed that the proposed transaction would have critically reduced competition in an already highly concentrated market. The Commission also found that barriers to enter the office supplies contract market were high. In February 2016, the Commission authorised the transaction conditional upon: (i) the divesture of the whole of Office Depot’s contract distribution business in the EEA and Switzerland; and (ii) the divesture of Office Depot’s entire business operations in Sweden. These commitments were deemed sufficient to remove in their entirety the problematic overlaps between the merging companies, with the clearance being made conditional upon the Commission approving the divestitures to a suitable purchaser.
In September 2015, the Commission opened an in-depth investigation to assess whether the proposed acquisition by Mondi of two industrial packaging plants owned by Walki raised competition concerns. Mondi and Walki are two leading suppliers of wrapping materials in the EEA. According to the Commission, the proposed acquisition could result in less choice and higher prices for consumers of wrapping materials, as it entailed the removal of a key competitor, with the remaining competitors being arguably unable to exert a sufficient competitive constraint. For this reason, Mondi and Walki started discussions with the European Commission in order to craft remedies that would eliminate competition concerns. However, as by December 2015, no workable solution had been found by the parties, with Mondi deciding to withdraw its notification and to terminate the acquisition agreement.
In January 2016, a Phase II investigation was opened in the proposed acquisition of oilfield service supplier Baker Hughes by rival Halliburton. The merging parties supply a broad range of services for the drilling and production of oil and gas wells. ‘Three months later, as discussed above, the parties abandoned the transaction in the wake of a lawsuit filed by the U.S. DOJ. The Commission’s statement following the termination of the merger noted that the merger “raised competition concerns on a very large number of markets relating to oilfield services . . . in the EEA.” At the time it was abandoned, the merger also faced opposition from the authorities in Brazil and Australia.
Refer also to the TeliaSonera/Telenor case below.
As reported in our 2015 Antitrust Merger Enforcement Update and Outlook, the Commission opened an in-depth investigation into the proposed acquisition of a majority stake (66%) in the Greek gas transmission system, DESFA, by the State Oil Company of Azerbaijan Republic (“SOCAR”) in November 2014. SOCAR operates and performs activities which include the production of natural gas and the upstream wholesale sale of gas in Greece. The entity being acquired, DESFA, owns and directs the only high-pressure gas transmission pipeline in Greece, including its only existing Liquefied natural gas (“LNG”) terminal, while mainly transporting gas through its network and not over the network facilities of competitors. As a result of SOCAR’s minority shareholdings in various gas pipelines, concerns have arisen as to whether the transaction might allow the merged entity to hinder the access of SOCAR’s competitors to the Greek gas transmission network (i.e., seeking to reduce competition on the upstream wholesale gas market) by strategically limiting investments in future expansions of import capacity, including an expansion of the LNG Terminal and the interconnection of the TAP pipeline (which has recently received EU State aid approval) with DESFA’s network. In addition, the merged entity could restrict inflows of gas into Greece by managing the gas transmission network in a discriminatory manner which favours SOCAR’s supplies over those of its competitors.
The Commission has concluded that the transposed Greek national regulatory framework would be unlikely under the circumstances to prevent the identified potential harm from occurring, thereby eliminating the ability of actual or potential competitors from competing effectively. The procedural clock for review was stopped in January 2015 and has not been resumed since that time. It is speculated that SOCAR will have to propose remedies to allow the proposed takeover to be approved by the Commission, although additional complications will have inevitably arisen in relation to SOCAR’s potential controlling interest in an EU energy operator, given its non-EU origins.
In February 2016, the Commission opened an in-depth Phase II investigation into the proposed acquisition of Arianespace by Airbus Safran Launchers (“ASL”). Arianespace is the global leader for launches of commercial satellites to geostationary transfer orbits. It has a de facto monopoly in the European markets for institutional launches and is entrusted by the European Space Agency (“ESA”) with the commercial exploitation of the two ESA-funded launchers, Ariane and Vega. ASL is a 50/50 joint venture between Airbus and Safran. Airbus is one of the leading global manufacturers of satellites, sub-systems for launchers and satellite operations for telecommunications and Earth observation satellites, while Safran is active in the provision of aerospace propulsion, aircraft equipment and defence and security.
According to the Commission, the transaction might lead the merged entity to discriminate on price against satellite manufacturers competing with Airbus, thereby reducing the incentives of Airbus’ rivals to innovate and invest in satellite manufacturing. As regards the launch services market, post-merger ASL might give priority to launch services connected to Ariane launchers, since ASL produces this launcher. The Commission is also concerned by the fact that the merged entity might procure payload adapters and dispensers exclusively from Airbus and ASL, irrespective of the price and quantity offered by competitors leading to potentially higher prices and less research and development in these services markets. The Commission has decision deadline of 10 August 2016.
The Commission has approved, unconditionally or subject to commitments, several high-profile transactions notified in 2015, without opening an in-depth Phase II investigation.
The Commission granted conditional clearance to two acquisitions made by GlaxoSmithKline plc (“GSK”) over the course of a three-part inter-related deal between GSK and Novartis AG (“Novartis”). GSK and Novartis are active worldwide in the research, manufacturing and supply of pharmaceuticals, vaccines and consumer health products. First, the Commission cleared the acquisition of sole control by GSK of Novartis’ global human vaccines business (excluding influenza vaccines), as well as creation of a new entity combining the consumer health activities of GSK and Novartis under the sole control of GSK. In a separate Decision, the Commission approved the acquisition of GSK’s oncology business by Novartis.
The market investigation showed that the first transaction would have eliminated an important competitor to GSK for the supply of several vaccines and consumer health products, which might have led to price increases for European consumers, given that GSK and Novartis were the only suppliers of vaccines for bacterial meningitis in the EEA (i.e., the creation of a monopoly). In addition, GSK and Novartis were competing suppliers of bivalent vaccines for diphtheria and tetanus in Germany and Italy, where the remaining players would be unable to sufficiently constrain the merged entity. As regards consumer health activities, the Commission concluded that the proposed transaction would have combined key branded products, such as those relating to smoking cessation aids, cold sore management products, cold and flu products, as well as pain management products, which might have led to price increases for consumers. In addition, the second transaction would have reduced competition and innovation for certain cancer treatment products after eliminating GSK as a competitor. In order to address the Commission’s concerns in the latter case, the parties committed to divesting assets in their vaccines and consumer health businesses, as well as to grant licences and enter into distribution agreements. As regards cancer treatment products, clearance was made conditional upon certain divestiture commitments being made, along with the relinquishment of licences for certain cancer treatments.
In May 2015, the Commission approved the acquisition of sole control of Eurostar International Limited (“Eurostar”) by SNCF MOBILITES (“SNCF”), the French rail operator. Since 2010, Eurostar has operated as a full-function joint venture controlled jointly by SNCF and the UK Government. Clearance was made conditional upon compliance with commitments providing for fair access of new entrants to: (i) standard and cross-Channel areas and services, such as ticket offices; (ii) maintenance centers in France, the UK and Belgium currently managed by SNCF, Eurostar and SNCB (the Belgian national railway) for services such as overnight storage, servicing and cleaning of trains; and (iii) access to train paths that are currently being used by Eurostar at peak times. These commitments would supposedly reduce barriers to entry for new operators offering international rail passenger transport services on the London-Paris and London-Brussels routes.
The Commission cleared the transaction between Royal Dutch Shell (“Shell”) and BG Group (“BG”) despite initial competitive concerns that, post-merger, Shell would benefit from market power in: (i) oil and gas exploration; (ii) the liquefaction of gas; and (iii) the wholesale supply of liquefied natural gas (“LNG”). The Commission’s investigation showed that Shell would be faced with a number of strong competitors that would remain active in the identified markets after the merger. It was therefore concluded that the takeover would not allow Shell to influence prices and that these markets would remain competitive post-merger. Moreover, the merged entity would be unlikely to prevent competitors from accessing some of Shell’s LNG liquefaction facilities used to supply LNG into the EEA or from its natural gas transportation and processing infrastructure in the North Sea. This was mainly due to significant additional liquefaction capacity being built and coming on-stream post-merger with significant spare oil and gas transport and processing capacity already existing in the North Sea region.
Further to close cooperation with the US Federal Trade Commission, the European Commission approved the proposed acquisition of data storage manufacturer SanDisk by rival Western Digital after concluding that the takeover would not adversely affect competition in Europe. The investigation showed that, despite the merged entity’s relatively high combined share in the market for enterprise space for flash memory storage solutions, strong established players such as Intel, Toshiba, Micron and Samsung would continue to exert competitive pressure on the merged entity. The Commission also investigated the vertical link between SanDisk’s activities in the production of flash memory and the downstream markets for which flash memory was an essential input, concluding that the merged entity would be unable to foreclose competitors from access to flash memory and that competing producers of flash memory would still have a sufficient customer base to address, given SanDisk’s limited market share and the presence of several established competitors upstream.
In January 2016, the Commission approved the acquisition of Cameron by Schlumberger. Schlumberger provides services supplying technology, information solutions and integrated project management for oil and gas customers, as well as oilfield products, while Cameron provides drilling systems and topside process systems used on oil, gas and process platforms above sea level. According to the Commission, the proposed acquisition would not raise competition concerns, as there were limited overlaps between the companies’ activities. Moreover, even where horizontal overlaps were identified, the incremental changes in market shares brought about by the transaction were negligible. OneSubsea, a JV formed in 2013 between Cameron and Schlumberger and granted clearance in its own right by the Commission, was active in the supply of products and services for subsea oil and sea production. Cameron’s stake in the OneSubsea JV was also part of the transaction, but raised no additional vertical issues beyond those already addressed by the Commission in its initial review of the JV in 2015.
With the aim of intervening to the least extent possible while efficiently maintaining the competitive structure of markets, the Commission adopted a White Paper towards the achievement of more effective merger control in July 2014. The White Paper contains proposals that would allow the Commission to better deal with non-controlling minority shareholdings which may affect competition, as well as making referral procedures simpler and faster. On the basis of comments received during the public consultation for the White Paper, Commission policy along a range of policy fronts is emerging.
In March 2016, the EU Commissioner for Competition Margrethe Vestager remarked that changes might take place with regard to the “simplified procedure” for deals that are unlikely to raise competition concerns. The Commissioner considers that because a successful merger control has to be very selective, mergers that are “very unlikely” to restrain competition should face less burdensome reviews before the European Commission.
The Commissioner however stated that, after extensive consideration, DG Competition has decided to carry out further studies with respect to extension of the existing merger control regime to acquisitions of minority shareholdings. This implies that for the moment, no such procedural changes are to be proposed; however, upon collection of compelling evidence that such system could run smoothly at the European level (and not only at a national level), steps in that direction might be taken in the future.
With respect to potential changes of the notification thresholds, Vestager clarified that it may be necessary to take into account criteria other than turnover in order to judge the size and impact of a deal. For instance, Facebook’s $19 billion acquisition of WhatsApp was outside the scope of EU Merger Regulation on the grounds of WhatsApp’s revenues at the time being under the notification threshold. This example illustrates that what incentivises companies to merge might also be assets, a customer base or even a set of data. In the pharmaceutical sector, it might be a new drug that’s been developed but not yet approved for sale, or simply the ability to innovate. A merger involving this sort of company could clearly affect competition, even though its turnover might not be high enough to meet the notification thresholds.
A recent study conducted for the Commission has sought to address some of the criticism that has arisen that the Commission’s approach towards the adoption of geographic market definitions may be too narrow. Since a transaction is less likely to give rise to concerns in a wider geographic market, given that the merging parties’ shares are likely to be lower, the adoption of such narrow geographic market definitions tends to have the effect of amplifying competition concerns beyond what may be strictly necessary. Given that many companies today operate on a global scale and compete with a variety of suppliers in different parts of the world, it is felt that a more expansive approach to geographic market definition should be taken.
In 2015, only 30% of all geographic markets were defined by the Commission as national in scope. In the retail telecommunications sector, however, the Commission has always defined the market as national, despite the mobile network operators operating on a pan-European or even on a global level. The Commission has consistently held that this is due not only to regulatory requirements and spectrum allocations at a national level, but also due to consumer preferences which affect the way mobile operators compete on the market. In Orange/Jazztel, for instance, the Commission concluded that the relevant geographic market was national, whereas it left the precise delineation of the relevant product market open as it considered the proposed commitments addressed its concerns adequately, regardless of the product market definition.
Moreover, in Zimmer/Biomet, the Commission also concluded that the geographic markets for orthopaedic medical devices were national in scope, notably due to the fact that market structures differed from country to country (in light, for example, of different public reimbursement systems and hospital purchasing behaviour), but also due to the importance of local/national sales forces.
The Commission has, inter alia, repeatedly held that regulation plays a significant role in market definitions, especially in liberalised sectors. The creation of a digital single market, for example, which is one of the priorities of the Juncker Commission and which intends to break down national barriers through telecommunications regulation, copyright and data protection and in the management of radio spectrum, could therefore have significant impact on how market definitions are approached in the future.
In Cargill/ADM, the Commission carried out a market reconstruction in addition to the performance of its classic market definition exercise, as regards the question of the extent to which competition was national, regional or EEA-wide, depending largely on the characteristics of the product. By obtaining transaction-level data, the Commission reconstructed the market and rejected the notifying party’s argument that the relevant geographic market was EEA-wide. Interestingly, the Commission did not reach a final conclusion in that regard, but merely stated that the transaction resulted in a significant impediment to effective competition both on national markets, as well as geographic markets delineated based on identified catchment areas, while ultimately leaving open the relevant geographic market definition.
By contrast, where the products or services are purchased by customers on a global scale, such as information technology products, natural resources and mining or avionics, the Commission has identified global markets. Indeed, the number of Decisions which defined EEA or even wider geographic markets shifted from 48% in 2004 to 61% by 2013. For instance, when Western Digital, a manufacturer of hard disk drivers for use in computers, acquired the competing business Hitachi back in 2011, the Commission identified a global market. Given that customers, in particular computer manufacturers, source hard disk drivers on a global basis, the prices for hard disk drivers are broadly similar on the different continents, and customer needs do not vary significantly between regions.
The Commission’s approach towards telecommunications sector mergers has reached a critical stage, reflecting increasing concerns with mergers that result in less than four network-based players in the mobile sector, and possibly even in the fixed sector. These concerns have been expressed in the application of the “Substantial Lessening of Effective Competition” test for so-called “gap” cases, as opposed to its legal predecessor (the creation or strengthening of a ‘Dominant Position’ test), which seeks to address the range of competition concerns that might arise from the loss of competition between parties identified as “close” competitors.
In December 2014, a Phase II investigation was opened into the proposed acquisition of Jazztel plc by Orange, S.A. The Commission believed that the proposed transaction would reduce the number of nationwide providers of fixed telecommunications services in Spain from four to three. While the merged entity would not hold a dominant position, there were concerns that the proposed transaction could lead to a significant loss of competitive pressure for fixed Internet access services and fixed-mobile multi-play or converged offers. The Commission’s Statement of Objections concluded that: (i) the merged entity would have had fewer incentives to compete aggressively against the remaining operators; (ii) the major competitors (Telefónica and Vodafone) would have been unlikely to replace the competitive pressure formerly exercised by Orange and Jazztel because they would also have benefited from the reduced pricing pressure; (iii) new entrants would be faced with significant difficulties due to the high investments required to enter the retail markets involving fixed Internet access services; and (iv) end consumers would have no countervailing buyer power.
Following the in-depth investigation and commitments submitted by the parties designed to remove the Commission’s perceived need to promote viable network-based entry, the Commission approved the transaction in May 2015. In doing so, it took into account the fact that Orange and Jazztel’s offers for the provision of mobile telecommunication services were complementary in nature and could lead to efficiencies which would benefit consumers. Although these efficiencies reduced the anticompetitive effects of the transaction, the Commission concluded that the loss of competition caused by the merger would still remain significant. The commitments submitted by Orange were based on two different technologies: (i) an optical fibre network, according to which Orange committed to divest an independent high speed Fibre-To-The-Home (“FTTH”) network (including wholesale access to its mobile network, including 4G services covering 13 urban districts located in five of the largest Spanish cities); and (ii) a copper network. The new player would be able to compete aggressively against Orange and Jazztel; Orange was committed to granting the purchaser of the FTTH network wholesale access to Jazztel’s national ADSL network for up to eight years, for an unlimited number of subscribers, while allowing the purchaser of the assets to compete immediately over 78% of Spanish territory.
On 24 February 2015, after the opening of a Phase II investigation on 22 September 2014, the Commission authorised Liberty Global‘s acquisition of the Belgian media company De Vijver Media NV (“De Vijver”), subject to commitments. The Commission’s initial concerns were that, post-transaction, De Vijver would refuse to license its channels (Vier and Vijf) to TV distributors competing with Telenet (a cable company controlled by Liberty Global). It was concluded that TV distributors in Belgium (both in Flanders and Brussels) must have Vier and Vijf in their offer in order to compete with Telenet. It would be profitable for Telenet and De Vijver to withhold popular channels from competitors such as Belgacom and TV Vlaanderen. As a result of not having access to these popular regional channels, the latter and the former would find it harder to attract and retain customers without those channels, while new entrants such as Mobistar would not be able to enter the market at all (i.e., resulting in less competition in the TV distribution market that could possibly lead to higher prices and less innovation for consumers).
In addition, the Commission’s investigation revealed that Telenet could disadvantage the channels and programmes of Medialaan and VRT discreetly (e.g., by displaying their video-on-demand content less prominently than that of De Vijver). The commitments offered by the parties to remove these concerns included: (i) access to Vier and Vijf; (ii) licensing to new basic pay TV channels launched in the future; and (iii) licensing to distributors with linked services such as “catch-up TV” and “PVR” (Personal Video Recorder). The commitments had to be provided under fair, reasonable and non-discriminatory terms (FRAND) to any interested TV distributor in Belgium, as well as being in place for seven years. In the eyes of the Commission, these commitments ensured that Telenet’s competitors are able to offer Vier and Vijf to their subscribers at no competitive disadvantage vis-à-vis Telenet.
On 5 October 2015, the Commission opened an in-depth investigation into the proposed acquisition of BASE by Liberty Global in Belgium. This transaction had two features: (1) it would combine one of the largest mobile network operators in Belgium (BASE) with the largest Mobile Virtual Network Operator (“MVNO”) (Telenet, a subsidiary of Liberty Global); and (2) it would also combine a strong player in fixed-line telecommunications with a strong mobile network operator. The Commission was concerned that the merger would thereby: (i) reduce competition in the retail mobile telephony market in Belgium by removing an important independent competitive force; (ii) would likely reduce the incentives for BASE to offer access to its network to other MVNOs; and (iii) the post-merged entity would have the ability to foreclose competitors through the bundling of both its fixed and mobile services. After the Commission’s in-depth investigation, it found that BASE competed “aggressively” on the Belgian retail mobile market and had challenged other price-competitive operators. Telenet was recognised to be an effective MVNO competitor, as it had contributed towards major price reductions in Belgium.
In the mobile market, the Commission concluded that the post-merger entity would be able to significantly reduce competition, with a risk of higher prices and less choice and innovation for Belgian mobile consumers. By contrast, with regard to the bundling of fixed and mobile services, Liberty Global’s ability to exclude competitors from the market was limited, as Telenet already offered both fixed and mobile offerings (i.e., the merger produced no change to the market structure). There were also no incentives to limit MVNO wholesale access on the network of both BASE and Liberty Global. To resolve the Commission’s competition concerns, Liberty Global submitted commitments: (i) to Sell BASE’s share in Mobile Vikings (MVNO using BASE’s network) to Belgian broadcaster Medialaan; and (ii) to transfer part of BASE’s customer base to Medialaan. Liberty Global also concluded an agreement with Medialaan, giving it access to BASE’s mobile network on the condition that it would allow Medialaan to compete effectively. As a result of the commitments, the Commission conditionally approved the transaction on 4 February 2016.
Danish operators TeliaSonera and Telenor announced on 8 April 2015, a proposed joint venture which sought to combine the parties’ respective telecommunications activities in Denmark, leading to the largest market player/network operator, and thereby reducing the total number of Mobile Network Operators (“MNOs”) from four to three. The joint venture would result in the post-merged entity having a 40% market share, reflected in 3.5 million mobile subscribers. The Commission was initially concerned that the merger would: (i) reduce the merged entity’s and its competitors’ incentives to compete, leading to higher prices, a loss of innovative offers and lower quality on the Danish retail mobile telecommunications market; (ii) reduce the number of MNOs able to offer wholesale services (thus reducing the choice of alternative host networks, and weakening the negotiating position of wholesale customers); and (iii) result in a highly concentrated market structure with two of the largest and symmetric operators active at both retail and wholesale levels (i.e., leading to possible co-ordination).
In August 2015, both parties offered concessions and there was a general belief that the proposed commitments would resolve the Commission’s competition concerns. The first proposal provided that the parties would make available a limited amount of spectrum for the roll-out of a self-standing mobile network, and provide wholesale access to their own joint network. The second set of proposed commitments would have enabled a new (fourth) market entrant to accumulate as much as 40% of TeliaSonera/Telenor’s joint mobile infrastructure unit (to divest an ownership stake in their shared mobile network to a new entrant with a right to use a corresponding share of the network capacity). Such a 40% ownership solution would have been “groundbreaking” and a significant hardening of the approach adopted by the Commission in relation to earlier mergers in the mobile sector. However, the Commission was not satisfied as the commitment did not guarantee the entry of a fourth MNO in Denmark. Competition Commissioner Margrethe Vestager stated that “… [b]ased on the commission’s in-depth analysis and evidence gathered, we are convinced that the significant competition concerns required an equally significant remedy. This means the creation of a fourth mobile network operator. What the parties offered was not sufficient to avoid harm to competition in Danish mobile markets“. As a result, on 11 September 2015, TeliaSonera and Telenor informed the Commission that they had withdrawn their notification. It is a sign of a more circumspect stance on consolidation in the mobile sector by the Commission.
On 25 February 2015, the Commission received a notification for the proposed acquisition of PT Portugal by Altice. Altice operates via two subsidiaries in Portugal, namely, Cabovisão and ONI: (i) Cabovisão provides pay TV, fixed Internet access and fixed telephony services essentially to residential customers; and (ii) ONI provides services to business customers, including fixed telecommunication services, particularly voice, data and Internet access services, as well as IT services. PT Portugal was the former Portuguese telecommunications/multimedia incumbent, offering fixed, mobile voice and data services (to both residential and business customers); broadband Internet access services; and pay TV services to residential customers.
The Commission had initial concerns that the post-merger entity would have faced insufficient competitive constraints for the provision of fixed telecommunications, thereby leading to higher prices. There were significant horizontal overlaps with regard to PT Portugal’s activities in the residential and business sectors, arguably dampening competition in the provision of retail communications services (both stand-alone retail offers and multiple-play bundles). Post-merger, PT Portugal’s dominance would arguably extend from 50% to 100% in at least 18 districts in Portugal through the offering of double- and triple-play service bundles. Moreover, it was considered likely that the merged entity would focus its commercial efforts on the accelerated upselling of triple-play customers to higher-value quadruple-play service offers. The retail pay TV market, fixed Internet services market, and various relevant wholesale markets, were also considered to be national in scope, with the possibility being left open by the Commission that certain markets might be sub-regional in their geographic scope. On 20 April 2015, the Commission approved the proposed transaction on the condition that Altice divest its current Portuguese businesses ONI and Cabovisão. The structural commitments completely remove the overlap between the activities of Altice and PT Portugal within Portugal, thereby satisfying the initial competition concerns identified by the Commission.
On 11 September 2015, Hutchison notified the Commission of its acquisition of Telefónica UK. The combination of Telefónica UK and Hutchison would create the largest MNO in the UK with more than 31 million subscribers (or about 41% of the market), followed by EE with 32% and Vodafone with 24%. Thus, the number of major UK mobile operators would be lowered from five to three in a short period of time (following the BT/EE approval by the CMA in the UK in 2015). The Competition and Markets Authority (“CMA”) made a referral request to review the proposed transaction, however, the Commission rejected its application and highlighted that it was best placed to review the proposed transaction. On 30 October 2015, the Commission announced that it would be carrying out an in-depth investigation into the proposed acquisition, as it had underlying concerns that the transaction could lead to higher prices, less choice and reduced innovation for customers of mobile telecommunications services in the UK. A combined Telefónica UK and Hutchison would have a concentrated amount of lower-frequency spectrum, but would have none of the higher frequency spectrum that is needed to satisfy consumers’ increasing demands for data-rich applications.
The Commission expressed the following three concerns arising from the merger: (i) given the fact that Telefónica UK and Hutchinson’s “Three UK” currently compete against each other in the retail mobile telecommunications market in the UK, the merger could remove or limit incentives on them to exercise significant competitive pressure on the remaining market competitors (leading to higher prices, lower investment, etc.); (ii) there would be a reduction in the number of MNOs that are effectively willing to host MVNOs, with prospective/current MVNOs having less choice between host networks and weaker negotiating power to obtain favourable wholesale access terms; and (iii) a reduction in the number of MNOs could lead to coordinated behaviour, thereby leading to price increases on both the retail and wholesale markets. On 11 May 2016, the Commission blocked the proposed acquisition the parties had failed to propose sufficient remedies to deal with Commission’s competition concerns. The remedies proposed by Hutchison failed to address adequately the serious concerns raised by the takeover, insofar as they would not have been able to prevent the likely negative impact on prices, quality of service and network innovation in the UK mobile sector as a result of the takeover. Commissioner Margrethe Vestager, in charge of EU competition policy, expressed that: “We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality. The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses. Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal. It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this“.
Appeals before the European Courts in merger cases have a mixed history of success. In 2015, the protracted litigation derived from a merger Decision of 2004 came to an end as regards the selection of an appropriate purchaser of divested assets, while a number of other cases have raised interesting challenges to the Commission’s fundamental methodology in arriving at robust conclusions on the substance of merger reviews.
On 28 January 2016, the European Court of Justice upheld the General Court’s Judgment confirming the Commission Decision to approve the purchaser for the Vivendi assets sold off as one of the elements of a remedy package relating to the acquisition by Lagardère of Vivendi Universal Publishing (“VUP”). As discussed in our 2015 Antitrust Merger Enforcement Update and Outlook, the Commission authorised the concentration in 2004, on the condition that a suitable buyer would be found for VUP’s assets. Among several interested undertakings, including Éditions Odile Jacob, Lagardère accepted the offer of Wendel Investments, which was in turn approved by the Commission. Odile Jacob appealed the Decision of the Commission to award the divested assets to Wendel. The General Court, while confirming that the Commission was entitled to authorise the acquisition by Lagardère, annulled the Decision approving the purchaser, on grounds that the Decision was based on a Report of a Trustee who did not satisfy the required condition of independence. This finding was upheld on appeal by the Court of Justice in 2012. Following the General Court Judgment, the Commission again consented to Lagardère’s request to approve Wendel as a purchaser of the assets, with retroactive effect as from 30 July 2004. Odile Jacob then brought another action for the annulment of that Decision before the General Court, which was rejected in September 2014, after which it has brought yet another new action before the Court of Justice.
In March 2015, the General Court confirmed the Commission’s Decision by which it had prohibited the proposed merger between Deutsche Börse and NYSE Euronext. Through this merger, the parties aimed to create a new company (HoldCo) under Dutch law that was to acquire, by way of public tender offer, all of the outstanding shares issued by Deutsche Börse, in exchange for its own shares. Following the offer being acted upon, a newly formed company, incorporated under US law, and wholly owned by HoldCo, was to merge with NYSE to become a wholly owned subsidiary of HoldCo. In February 2012, the Commission considered that the merger was incompatible with the internal market as it would have led to a single vertical structure, conducting the trading and clearing of more than 90% of the global transactions of European exchange-traded derivatives. The General Court rejected each of the arguments put forward by Deutsche Börse, concluding that the Commission had not made errors of assessment when considering that exchange-traded derivatives (“ETDs”) and over-the-counter derivatives (“OTC derivatives”) constituted two separate product markets. Second, the General Court concluded that no efficiencies would be generated by the merger that were capable of overriding the restrictions of competition generated by it.
As mentioned in the 2014 Merger Review, in January 2013, the Commission issued a Press Release announcing the prohibition of the merger of UPS and TNT Express, based on the level of concentration in the markets for small parcel delivery services and for international express services. The Commission explained that the remedies UPS had offered, including divestitures and the granting of access to a new competitor to UPS’s air network for a period of five years, were insufficient to address the Commission’s concerns. In the Commission’s view, UPS was not able to secure the signing of a binding agreement before the end of Phase II and the Commission expressed concerns regarding the candidates’ ability to stimulate competition post-transaction. On 5 April 2013, UPS appealed the Commission’s Decision on a range of grounds, including: (i) UPS’s right of defence was infringed, as the Commission had modified the econometric model submitted by UPS without explaining the modifications made or without hearing UPS on those modifications; (ii) the Commission had assigned zero weight to efficiencies, which it had accepted in principle; (iii) the “price-concentration analysis” made by the Commission, which explored the relationship between prices and the number of players on the markets at issue, was wrong; and (iv) the Commission had erred in assessing whether buyer power existed.
In January 2015, the Court of Justice published its preliminary ruling regarding the request in the proceeding between T-Mobile Austria (“T-Mobile”) and the Telekom-Control-Kommission (“TCK”) concerning the latter’s refusal to grant T-Mobile “interested party” status in the procedure authorising the modification of the ownership structure resulting from the acquisition of Orange Austria Telecommunication GmbH (“Orange”) by Hutchison 3G Austria GmbH (now Hutchison Drei Austria GmbH (“Hutchison”)), and the possibility of bringing an appeal against the Decision adopted by the TCK at the end of that procedure. The proceedings arose out of the Commission’s 2012 merger authorisation, subject to the parties’ commitment to divest radio spectrum in the Austrian mobile telephony market through an auction held by the Austrian Regulatory Authority that granted the right to use the divested radio spectrum to Al Telekom Austria. In this context, T-Mobile challenged the Regulator’s Decision before the Administrative Court, which referred the matter to the Court of Justice in order to clarify whether Directive 2002/20EC (regarding the rights of use for radio frequencies and numbers) and Directive 2002/21/EC (regarding the right of appeal against a decision of a National Regulatory Authority) conferred upon a competitor legal standing to challenge the outcome of spectrum transfer authorisation procedures. The Court of Justice concluded that T-Mobile, as a direct competitor on the electronic communications services market with the parties to the transaction for the transfer of frequencies, must, by definition, be regarded as being a party “affected” by the Decision, since the transfer modifies the respective shares of radio frequencies granted to those undertakings and therefore must have an impact on T-Mobile’s position on the market.
In September 2015, KPN N.V. (“KPN”), a Dutch fixed and mobile telecommunications company, brought an action before the General Court seeking to annul the Commission’s Decision in which it approved the acquisition by Liberty Global plc (“Liberty Global”) of Ziggo NV (“Ziggo”), subject to conditions. (See discussion in Section V above). According to KPN, the Commission had committed a manifest error in the assessment of the vertical effects on the market for Premium Pay TV sports channels, especially given the role played by the largest individual shareholder in Liberty Global in other media companies.
In June 2015, 1&1 Telecom and Airdata, third party German Internet providers, appealed the Commission’s Decision by which it had authorised the acquisition of Dutch telecommunications operator KPN’s German mobile telecommunications business, “E-Plus” by Telefónica Deutschland, subject to conditions. Telefónica and E-Plus were both MNOs which provided mobile telecommunications services to end consumers, in Germany and in related markets (such as the wholesale of network access and call origination). The Commission originally had concerns that the transaction would weaken the position of MVNOs and Service Providers to the detriment of consumers, as it would bring together the third and fourth largest MNOs in Germany. Telefónica submitted commitments based on three components, namely, MVNO entry using 30% of the merged entity’s network capacity, radio spectrum divestiture and the extension of existing wholesale access arrangements. 1&1 Telecom and Airdata claim that the Commission has committed errors of law and assessment when it analysed the vertical effects of the transaction, as the commitments offered by Telefónica were unlikely to be sufficient to allow the acquirer of the divested assets to compete effectively with the merged entity in a manner which addressed the theory of harm expressed by the Commission. 1&1 Telecom has also brought a separate action in relation to the Self-Commitment Letter.
It is the first full year since the Competition and Markets Authority (“CMA”) became fully operational. As of 1 April 2015, there has been a change made to the maximum penalty amounts for the failure to comply with merger control rules. While these penalties are capped at 5% of the worldwide turnover of the entity concerned, the CMA can also impose fines on parties that do not, intentionally or without reasonable excuse, comply with investigatory requirements.
Over the course of 2015, a major Phase II case was decided in the telecommunications sector, involving BT Group plc and EE Limited, which are respectively the largest suppliers in the UK of fixed telecommunications services and broadband services, on the one hand, and mobile telecommunications services, on the other. BT provides many fixed services to other communications providers, including the provision of network (backhaul) services (to connect their radio masts to their core network) to mobile communications providers such as EE, O2, Three and Vodafone, while also providing Global Telecommunications Services on a worldwide basis. By contrast, EE is the leading mobile network operator in the UK, with 31 million customers overall (24.5 million of which are direct mobile customers), while also providing wholesale mobile access services to other MNOs and providing fixed voice, broadband and pay TV services to retail customers in the UK (where it has 834,000 fixed broadband customers). EE also has the largest national 4G customer base of any operator in Europe. As a result, the post-merger entity would be able to offer “quad-play” services, whereby fixed-line phones, broadband, mobile and TV would be sold in one package. Rivals warned that the EE deal would give BT an estimated 40% of the UK retail telecommunications market and could result in the wholesale foreclosure of smaller competitors.
As a result of the CMA’s initial findings as regards the provision of fibre mobile broadband services to MNOs and the provision of wholesale access and call organisation services, the CMA referred BT’s proposed acquisition of EE for an in-depth Phase II investigation in June 2015. The merger was ultimately cleared unconditionally by the CMA on 15 January 2016. Rivals of BT criticised the unconditional approval and expressed the view that the CMA had failed to analyse concerns that the merged entity would be able to abuse its dominance in supplying backhaul services and in providing wholesale lines and capacity to place them at a disadvantage. The issue was heavily debated after a report published on 23 January 2016 entitled “Broadband”, which raised concerns as to whether Openreach should have been divested for the merger to be accepted. Currently, the UK’s National Regulatory Authority Ofcom, is investigating whether or not to compel BT to divest Openreach, i.e., thereby rendering it structurally separate to BT, because of its alleged lack of investment in Internet infrastructure.
A notable UK Supreme Court case in the UK concerns jurisdictional issues that arose in the Eurotunnel/SeaFrance/SCOP merger. In 2012, Groupe Eurotunnel SA (“Eurotunnel”) and Société Coopérative De Production SeaFrance SA sought to acquire SeaFrance SA (“SeaFrance”), which went into liquidation in 2011. The CMA’s predecessor, the Competition Commission (“CC”), prohibited the acquisition on the ground that, post-merger, there would be likely price rises for both passengers and freight customers. The dispute concerned whether the acquisition actually gave rise to a merger situation. The issue arose as to whether the CC had jurisdiction to review the merger, given that assets per se were not being transferred as part of a business concern.
After a series of appeals, the Supreme Court ultimately upheld the CAT’s finding that the CMA had exercised jurisdiction correctly over the transaction. The Supreme Court stated that the identification of “economic continuity” is necessary when identifying whether the transaction involves a collection of assets or an “enterprise” under the Enterprise Act of 2002: “it depends on whether at the time of the acquisition one can still say that economically the whole is greater than the sum of its parts“. The Supreme Court also expressed that it is necessary to identify whether: (i) the acquirer of the assets is gaining “more than he might have acquired by going into the market and buying factors of production“; and (ii) this advantage is owed “to the fact that the assets were previously employed in the ‘activities’ of the target enterprise“.
Key developments in Spain in 2015 included important precedents for “gun-jumping” by notifying parties in two cases and the crafting of remedies to remove vertical foreclosure concerns in a key merger involving the provision of pay TV services.
In October 2015, the CNMC imposed a fine of 106,500 euros on Grifols S.A. (“Grifols”) for its failure to comply with the obligation to notify its acquisition of certain assets of Novartis International AG (“Novartis”), resulting in a serious infringement of Article 9.1 of the Spanish Competition Law 15/2007, which establishes an obligation to notify any transaction where market shares exceed 50%. Grifols had closed the transaction by which it had acquired Novartis’s transfusion diagnostics business in January 2014 and then notified the deal on 10 March 2015. In April 2015, the CNMC initiated proceedings against Grifols for “gun-jumping”. When calculating the fine, the CNMC took into account that: (i) the market share of Grifols after the acquisition was in the range of 52.2%; (ii) its failure to notify was not due to an error, as it had previously notified acquisitions of other companies, thus being aware of the obligation to notify; (iii) Grifols maintained this irregular situation for one year and three months; and (iv) this transaction did not represent a threat to competition. Grifols can now appeal before the Spanish High Court.
In May 2015, the CNMC also initiated proceedings against Masmovil Ibercom – a telecommunications operator – for its failure to notify its acquisition of Xtra Telecom, Tecnologías Integrales and The Phone House Movil. Despite having decided to authorise the acquisition in Phase I in February 2015, the CNMC reminded the parties that the authorisation had been granted without prejudice to the possible responsibilities derived from the infringement of Article 9.1 of the Spanish Competition Law 15/2007. The CNMC has six months to notify its Decision in this regard.
In April 2015, the CNMC authorised the acquisition of sole control of DTS – active in the pay television market – by Telefónica, through its acquisition of 56% of the share capital of Prisa, which was added to the 44% of the share capital already held by Telefónica. The CNMC initiated Phase II proceedings in November 2014 and, in February 2015, after having submitted five different versions of its proposal of commitments, Telefónica submitted a final version, which was accepted by the CNMC and classified in three different groups: (i) commitments relating to the pay television market in Spain; (ii) commitments relating to the wholesale commercialisation of individual audiovisual content and television channels markets in Spain; and (iii) wholesale commitments relating to Telefónica’s Internet access network in Spain. As regards access to its Internet network, this commitment was made by reference to the necessary capacity and quality conditions required to sustain the provision of OTT pay television services to fixed and mobile broadband clients, lasting for a period of five years.
On 15 March 2016, Belgium’s Competition Authority granted a conditional clearance to the merger of the Netherlands-based supermarket operator Royal Ahold and Belgium-based Delhaize Group. The deal stands out as one of a few transactions that have been cleared by the Belgian Competition Authority subject to remedies. The European Commission handed the review of the deal over to the National Authority in October 2015, stating that the transaction might significantly affect competition in regions of Belgium. Delhaize and Royal Ahold operate 800 and 40 supermarkets respectively in Belgium, whereas their activities do not overlap in any other European jurisdiction. In its referral Decision, the European Commission noted that the merging parties would control more than 60% of supermarket food sales in a number of local areas in Belgium, while adding that both supermarkets would still face strong competition from France’s Carrefour and from discount retailers Colruyt, Aldi and Lidl. In addition to retail food distribution, the Commission has expressed concerns as regards the national wholesale level, where the merging parties would achieve a combined market share of 20-30%. In order to address competition concerns, the merging parties offered to divest eight Royal Ahold shops, five Delhaize shops and several other shops that had not yet opened.
Having secured competition clearances in Belgium, Serbia and Montenegro, the deal is still under review in the US, where the merging parties make approximately 60% of their worldwide sales. The FTC opened an in-depth investigation in November 2015, given the strong presence of both parties on the East Coast.
In the course of 2015, the Dutch Competition Authority (Autoriteit Consument en Markt, “ACM”) conducted two in-depth (Phase II) merger investigations.
On 11 February 2015, the ACM conditionally approved the acquisition of Mecom Group plc (“Mecom”) by De Persgroep Publishing NV (“De Persgroep”) following an in-depth investigation. The acquisition created a nationwide publisher, which publishes national and regional daily newspapers and distributes papers and magazines. De Persgroep already owned several national and regional publications, a radio station, and a diverse range of online media. Mecom’s subsidiary Wegener mainly publishes regional daily newspapers. The ACM investigated the impact of the transaction on advertisers, on printers, and on distributors, and concluded that commitments were required to ensure sufficient competition in the distribution of newspapers and magazines. The ACM observed that the media landscape is changing rapidly, and faces a declining number of newspaper readers, an increasing shift towards the provision of services over the Internet, as well as changing advertising options. The ACM concluded that consumers would not be harmed, and would have sufficient choices post-transaction. With regard to advertisers, the ACM concluded that the two parties largely attract different kinds of advertisers in light of their different geographic coverage (nationwide for De Persgroep and regional for Mecom). As such, the parties were not considered to be “close competitors”, and the transaction would not raise any concerns for advertisers, who in any event would have sufficient choice among various providers of advertising space post-transaction.
On the other hand, the ACM found that the transaction did raise some concerns regarding distribution. In particular, following the transaction, De Persgroep would cover distribution of daily newspapers in almost 66% of the Netherlands (given that the publisher with the most subscribers typically takes on the distribution of all daily newspapers in the entire area in order to keep distribution costs low for all). In light of the concerns raised by the ACM, De Persgroep offered commitments to ensure that other publishers would not become too dependent on the distribution network of the combined entity. De Persgroep committed itself to maintaining current agreements with the distribution arm of Telegraaf Media Group for the next 10 years, and to the guarantee of the distribution of all daily newspapers at reasonable conditions.
On 7 December 2015, the ACM approved the merger between Stichting Exploitatie Nederlandse Staatslotery (“State Lottery”) and Stichting de Nationale Sporttotalisator (“Lotto”), after an in-depth investigation. Chris Fonteijn, President of the ACM, stated that: “[i]t appears that the State Lottery and Lotto in practice barely compete with each other, amongst others because of the strong regulation of games of chance. Our investigation shows that this merger only has a limited effect on the market for games of chance“. The two largest gaming organisations would remain in the market for lotteries post-transaction: the new combination State Lottery – Lotto (which markets the state lottery, Miljoenenspel, Loot, Eurojackpot, Lucky Day, Toto and scratch tickets), and Goede Doelenloterij (with among others Postcode lottery and Vriendenloterij). Both organisations would hold approximately half of the current market for games of chance. All these lottery games have their own target group of players, and the ACM’s investigation demonstrated that few consumers switch between different types of lottery game.
The ACM also noted that online games of chance were likely to be legalised in 2017, and investigated what the competitive position would be on this market. The ACM concluded that there are powerful competing foreign players in this market, and that it did not see a risk of the creation of a dominant position by State Lottery – Lotto on the (online) games of chance market. Finally, the ACM took into account that the Netherlands has strict regulatory rules for games of chance. The government will, for example, grant one single licence for each kind of lottery, which prevents too many lotteries from fighting over the favour of the same players.
Over the course of 2015, the French Competition Authority, “Autorité de la concurrence” (the “Autorité“), was notified of numerous mergers in a variety of sectors.
As regards the food distribution sector, on 24 February 2015, the Autorité cleared the acquisition of poultry slaughterer and seller Glon Sanders by LDC. Both companies are active across the whole value chain for the sale of poultry, ranging from its collection for slaughter to the marketing of fresh meat and poultry processed products. Further to an assessment of the transaction, the Autorité was satisfied that it would not lead to competition concerns. As regards the market for the collection of live poultry intended for slaughter, the Autorité found that the transaction only led to overlaps in the region of Brittany, where the combined market shares remained nevertheless moderate. In the market for the sale of fresh meat and poultry-processed products, the Autorité noted that, despite its high market share, the merged entity would face countervailing buying power from the distribution chains where poultry products are sold (i.e., mass retail distribution chains, as well as Terrena Gastronome, Maïsadour/FSO/Delpeyrat and Ronsard). The Autorité also took into account the growing importance of imports in the French poultry sector.
More recently, Groupe Auchan and Groupement Systeme U notified their proposed alliance to the Autorité on December 30, 2015. Groupe Auchan and Groupement Systeme U are important players in the retail sector, being primarily involved in food distribution. In terms of size, they are supposedly the fifth and sixth operators in food distribution and have an overlapping presence in approximately 400 areas. Although the transaction does not amount to a concentration in the strict sense of EU merger control rules, the European Commission agreed to refer the case to the Autorité, which will assess the operation under French merger control rules. In addition to analysing the effects of the alliance in the retail markets and areas where the parties have overlapping presence, the Autorité will also assess the impact of the operation on competition in the upstream markets for the supply and sourcing of food and other products for mass distribution.
In the energy sector, on May 18, 2015 the Autorité authorised, subject to commitments, the purchase of Totalgaz, a subsidiary of the Total Group, by UGI Bordeaux Holding France (“UGI”), which is owned by competitor Antargaz. The Autorité‘s Decision brings to an end the procedure under French merger control rules, which was initiated further to a referral conceded by the European Commission. Antargaz and Totalgaz are both present in the French markets for the sale of bottled liquefied petroleum gas (“LPG”), fuel LPG and LPG sold in mini-bulk (for filling private tanks), as well as in intermediate and large-bulk (for filling professional tanks) forms. The Autorité found that the merger would strengthen significantly Antargaz’s national presence in the intermediate and large-bulk LPG markets, since the merged entity would own the main supply infrastructures such as sea import depots and the refineries. As far as the mini-bulk LPG markets were concerned, the post-merger entity would hold particularly high market shares in 11 local areas. Clearance by the Autorité was made conditional upon UGI’s commitment to divest part of its shareholding in a number of depots. Furthermore, UGI also committed to reducing its supply contracts with the Total Group refineries to one year, thereby freeing up the amounts of LPG produced by the Total Group for other operators.
Finally, in the medical devices sector, on 18 September 2015 the Autorité authorised, subject to commitments, the acquisition of Audika by William Demant. William Demant is one of the main manufacturers of hearing aid products in Europe, and is also involved in distribution activities through its minority stake in the networks of the Audilab and Auditis companies (which have respectively 108 and 11 hearing centers in France). The target, Audika, is a major player in the retail sale of hearing aid products, with 476 hearing centers in France. After the market investigation, the Autorité considered that the transaction was likely to harm competition in 12 local markets for the retail distribution of hearing aid products. To address these concerns, William Demant committed to divesting 11 hearing centres (one of these divestments addressing overlaps in two different local markets). The Autorité did not consider that the transaction would harm competition through vertical effects, since there was no risk of foreclosure of competitors in the hearing aids product market.
Due to the relatively low turnover thresholds and the wide definition of a “concentration” under German merger control rules, which includes minority shareholdings, the Bundeskartellamt (“BKartA”) usually receives at least around 1,000 merger filings per year. Only a small number of these are usually subject to an in-depth investigation in Phase II and an even smaller number of mergers are prohibited. In 2014, for example, the BKartA received 1,188 merger control notifications, only 22 of which were closely examined in Phase II proceedings, with only one merger being prohibited and another being cleared subject to conditions.
BKartA has not yet published statistics for 2015 but, according to its website, seven Phase II decisions were adopted in 2015. In five of those cases the BKartA cleared unconditionally the concentration, whereas in one case (a merger between wholesalers of auto spare parts; B9 – 48/15 – Wessels & Müller SE / Trost Auto Service Technik SE) it granted clearance subject to conditions, while another merger (the €1.8 billion Edeka/Kaiser´sTengelmann deal; Case B 2 – 96/14) was prohibited.
The Edeka/Kaiser´s Tengelmann merger concerned the acquisition of 451 Kaiser´s Tengelmann food retail outlets by rival Edeka. The BKartA held that the elimination of Kaiser’s Tengelmann as an independent retail company and the acquisition of its outlet network by Edeka would have considerably worsened competition conditions on a large number of already highly concentrated regional markets and municipal districts in greater Berlin, Munich, Upper Bavaria and North Rhine-Westphalia. The BKartA furthermore concluded that the leading group of retailers, consisting of Edeka, Rewe and the Schwarz group (with Kaufland and Lidl), would have further increased their market lead over their competitors in the procurement of branded products in particular, because the manufacturers would have lost one of the remaining alternative sales outlets outside this group.
Edeka and Kaiser’s Tengelmann offered to give up a total of approximately 100 outlets in Berlin and Bavaria in two separate steps. However, the BKartA held that, in their choice of outlets, the parties did not satisfy the criteria and conditions established by the BKartA for offering sustainable commitments. The BKartA held that the parties offered to sell those outlets to third parties which would not have had the effect of reducing Edeka’s critical market share or which Edeka could have easily acquired in any event without the need for the merger. The BKartA found that some outlets which were closed, or on the verge of closure, were offered for sale to third parties as part of the commitments. Ultimately, the BKartA held that the commitments did not address how the prohibition criterion of a “significant impediment to effective competition (SIEC)” could be overcome and hence decided to prohibit the merger.
The parties have applied to the Federal Minister for Economic Affairs and Energy for a Ministerial authorisation. They have also filed an appeal against parts of the prohibition decision with the Düsseldorf Higher Regional Court.
Under German law, the Economics Minister can allow a merger to proceed if the restraint of competition found by the BKartA is outweighed by advantages to the economy as a whole resulting from the concentration, or if the concentration is justified by an overriding public interest. Since 1974, there have been only 21 applications for a Ministerial authorisation, resulting in three unconditional authorisations and five conditional authorisations.
On 17 March 2016, Economics Minister Sigmar Gabriel granted the Ministerial authorisation subject to conditions, e.g., that Edeka will have to maintain at least 95% of the 16,000 employees in the acquired outlets and that it will not divest any Kaiser’s Tengelmann outlets for a period of five years. Rivals and other participants to the proceedings can appeal the authorisation within one month. As a result of the ministerial authorization, the chairman of Germany’s Monopolies Commission (“Monopolkommission“), Professor Daniel Zimmer (director of the Centre for Advanced Studies in Law and Economics at the University of Bonn), resigned from his post. The Monopolies Commission is an independent expert committee, which advises the German government and legislature in the areas of competition policy-making, competition law, and regulation. The Monopolies Commission in its non-binding assessment unanimously recommended to not grant the ministerial authorization because the alleged public interest concerns would not outweigh the deal’s anticompetitive effects. In addition, Rewe, a rival of the merging parties, announced that it will appeal the ministerial authorization before court.
During the course of the past year, the Italian Competition Authority (L’Autorità Garante Della Concorrenza e Del Mercato (the “AGCM”)) has approved several Phase II merger investigations pursuant to Article 16(4) of Law 287/90, often imposing structural remedies. These include:
The AGCM is also currently reviewing a high profile merger between two close competitors, Mondadori and RCS Libri, and has concerns that the concentration might create or strengthen a dominant position in the publishing sector, in particular, in ebooks and fiction and non-fiction publications. According to the AGCM, the five key players represent around 60% of the publishing sector in Italy. The AGCM considers that the sector is already concentrated and that the businesses of bigger players (including the merging parties) are characterised by varying degrees of vertical integration (whereas SMEs tend not to be integrated at all).
In 2016, the AGCM raised the turnover thresholds for the notification of concentrations, effective as from 14 March 2016. The thresholds are adjusted annually to take into account increases in the GDP deflator index. Section 16(1) of Law No. 287/90 now requires the prior notification of all mergers and acquisitions where both of the following conditions have been fulfilled, namely: (1) aggregate turnover in Italy of all undertakings involved in the concentration exceeds €495 million (previously €492 million); and (2) aggregate turnover in Italy of the target company involved in the concentration exceeds €50 million (previously €49 million).
In May 2015, the Brazilian Administrative Council of Economic Defense (“Conselho Administrativo de Defesa Econômica,” or “CADE“) celebrated the third anniversary of the entry into force of the Brazilian Competition Act (Law 12,529 of November 30, 2011). As reported in our 2015 Antitrust Merger Enforcement Update and Outlook, the new Law introduced the following changes to Brazilian merger control:
1. Consolidating powers for merger review under a single authority (CADE).
2. Establishing a pre-merger review system with suspensory effect (i.e., a mandatory waiting period).
3. Implementing other changes with the objective of streamlining the review of “simple” cases.
Under the prior regime, three separate agencies were responsible for the application of the Brazilian merger control rules. Now, a single institution, CADE, consisting of the Administrative Tribunal (the “Tribunal Administrativo,” or “Tribunal”) and the Superintendence (“Superintendência-Geral“), is in charge of merger analysis. The Superintendence investigates cases before referring them to the Tribunal for decision. The Secretariat, previously assigned to the Ministry of Justice and scrutinizing only antitrust behavioral cases, is now a part of CADE’s Superintendence and also deals with merger control.
In 2015, 404 transactions were reported to CADE, just 19 fewer than in 2014 but significantly less than the 626 transactions notified in 2012. This decrease is likely the result of the slowdown in the Brazilian economy. According to statistics from the World Bank, Brazil’s GDP grew by 3% in 2013 and by 0.1% in 2014. According to the IMF’s World Economic Outlook Report from October 2015, Brazil’s GDP is projected to decrease by 3% in 2015 and 1 % in 2016. According to the report, business and consumer confidence in Brazil continues to retreat in large part because of deteriorating political conditions; overall investment is declining rapidly.
Mergers Reported to CADE
As in other jurisdictions, only a small fraction of transactions reported to CADE are subject to an in-depth investigation. In 2015, the Superintendence referred eight transactions to CADE’s Tribunal for an in-depth assessment, i.e., 1.98% of all the transactions. This reflected a slightly lower rate than in 2014 and 2013 (approx. 2.60 % and 2.39 %, of all the transactions, respectively), but is significantly lower than the proportion of transactions reported under HSR subject to a Second Request.
Percentage of Reported Transactions Resulting
in an In-depth Assessment 2012-2015
On June 2, 2015, a plenary session of Brazil’s Federal Senate confirmed the appointment of four new Commissioners and a new General Superintendent at CADE. The new appointees were designated for these positions by the President of the Republic, Ms. Dilma Rousseff, at the end of April. The Federal Senate referred the names to the Presidency of the Republic to proceed with their formal designation. The Brazilian competition bar has been widely reported to welcome the new appointments.
The Senate approved the appointment of João Paulo de Resende, Paulo Burnier da Silveira, Alexandre Cordeiro de Macedo and Cristiane Alkmin Junqueira Schmidt as Commissioners of CADE’s decision-making body, the Tribunal. The Tribunal is composed of seven Commissioners, including its President, each appointed for a term of four years. Its decisions are taken by majority vote.
Prior to his appointment, Mr. Burnier da Silveira led CADE’s international unit since 2011. Mr. Paulo de Resende headed a unit in charge of public-private partnerships at the Brazilian Ministry for Planning since 2012. Mr. Cordeiro de Macedo served as executive secretary of the Ministry of Cities and as an auditor at the Office of the Comptroller General. Ms. Alkim Junqueira Schmidt was an economist for Itaú, an asset management company. She holds a Ph.D. in Economics from the Postgraduate School of Economics of the Fundação Getúlio Vargas and worked in different positions at the Secretariat of Economic Affairs of the Ministry of Finance from 2000 to 2003, including the position of Deputy Secretary.
Eduardo Frade Rodrigues was confirmed by the Senate as CADE’s General Superintendent for a term of two years. The General Superintendence, which is CADE’s investigative arm, is led by a General Superintendent and two Deputy Superintendents. Since June 2014, Mr. Frade Rodrigues has been the Acting General Superintendent of CADE, where he had previously worked as Deputy Superintendent (2012-2014) and as an advisor to CADE’s Commissioners (2007-2011).
In a joint interview of Mr. Frade Rodrigues and Mr. Vinicius Marques de Carvalho, the President of CADE, Brazil’s top two antitrust enforcers hinted that the new appointments were unlikely to dramatically change Brazil’s enforcement.
On September 3, 2015, CADE blocked the acquisition of Condor Pincéis Ltda. by Tigre S/A – Tubos e Conexões. The reporting Commissioner Márcio de Carvalho Oliveria Júnior, followed CADE’s General Superintendence opinion that, according to the evidence in the file, the merger would lead to significant competition concerns in certain markets for paint brushes, brushes, paint rollers and other painting accessories, including high concentration, enhanced barriers to entry and low rivalry in some markets. More specifically, according to CADE, as a result of the proposed transaction, Tigre would control more than 70% of the paint brush market. In order to remedy these competition concerns, the companies had suggested the signature of a Merger Control Agreement (in Portuguese, “ACC”), which was negotiated by the Reporting Commissioner’s Office, but they could not reach an agreement with CADE’s Tribunal.
This is the eighth transaction blocked by CADE since the new Brazilian Competition Act came into force in late 2011. As reported in our 2015 Antitrust Merger Enforcement Update and Outlook, in 2014, CADE blocked one transaction, the acquisition of Solvay Indupa by Braskem S/A. As reported in our 2014 Antitrust Merger Enforcement Update and Outlook, in 2013 CADE blocked three proposed acquisitions: first, the acquisition by the steel manufacturer Armco Staco S.A. of Mangels Industrial, S/A.’s guard rails and galvanized steel divisions. Guard rails are a type of barrier used on streets, avenues, and highways to protect vehicles. Galvanization is the fire treatment given to steel structures used to manufacture guard rails. Second, CADE blocked the proposed acquisition by Brasil Foods S/A, the second largest food company in Brazil, of the pork production and slaughter assets of Doux Frangosul S/A, a poultry and pork producer. And, third, the proposed acquisition, by Unimed Franca, a health services cooperative, of the control over Hospital Regional de Franca, in São Paulo, and its healthcare plan “Regional Saúde.”
According to CADE’s own statistics, CADE was very active in 2015, imposing a variety of structural and behavioral remedies in seven transactions decided in 2015. These include the imposition of remedies on global transactions involving non-Brazilian companies, such as GlaxoSmithKline PLC, Novartis AG and Rexam PLC.
Gun-Jumping Enforcement. On January 20, 2015, CADE imposed a fine amounting to BRL 30 million (USD 8 million) on Cisco Systems Inc. and Technicolor S/A for gun-jumping. According to CADE, the parties had closed a global transaction for the takeover of a wholly owned subsidiary of Cisco Systems Inc., based in the USA, by Technicolor S/A, based in France, before the conclusion of CADE’s final analysis was released.
As reported in our 2015 Antitrust Merger Enforcement Update and Outlook, in November 2014, CADE had decided that the acquisition of Brasfrigo Alimentos Ltda (a company which operated in the market for canned vegetables) by Goiás Verde Alimentos Ltda had been closed before receiving the mandatory authorization from CADE. On April 22, 2015, CADE imposed a fine on both parties of BRL 3 million (USD 0.8 million) for gun-jumping. The fine was the result of an agreement between CADE and the parties. The agreement also provides that Goiás Verde must refrain from using the Jurema brand within the Brazilian territory for two years.
On June 24, 2015, the companies GNL Gemini Comercialização e Logística de Gás Ltda. – GásLocal and Companhia de Gás de Minas Gerais – Gasmig agreed, before the Tribunal, to pay BRL 90,000 (USD 24,500) for engaging in gun-jumping. CADE was of the view that the agreement signed between the companies in order to regulate the general conditions for LNG supply to Gasmig by GásLocal amounted to gun-jumping. The quantity of the pecuniary contribution to be paid by GásLocal and Gasmig was agreed between CADE and the Parties.
On September 21, 2015, CADE ordered the notification of two transactions, namely: (i) Banco Carrefour acquiring Itaú Unibanco; and (ii) TAM Linhas Aéreas S/A codeshare contracts with Total Linhas Aéreas S/A and Trip Linhas Aéreas S/A. CADE concluded that the two transactions should have been notified as they met the relevant criteria (incidentally, under the previous Brazilian Competition Act, namely Law 8.884/94, which was in force at the time both the transactions were carried out). No fines appear to have been imposed as a result of these failures to notify.
Together with the fines for gun-jumping imposed by CADE in 2014 and 2013 (and reported in our 2015 Antitrust Merger Enforcement Update and Outlook and 2014 Antitrust Merger Enforcement Update and Outlook, respectively), these decisions stress CADE’s commitment to enforce its merger control regulations.
Remedies in Foreign-to-Foreign Transactions. On February 25, 2015, CADE approved the proposed joint venture between GlaxoSmithKline PLC (“GSK”) and Novartis AG. Post-merger GSK will own 63.5% and Novartis 35.5% of the joint venture’s shares. According to Reporting Commissioner Márcio de Oliveira Júnior, the transaction would give rise to high concentration in relation to smoking-related drugs. To mitigate these competition concerns, the companies and CADE signed a Merger Control Agreement stipulating that GSK commits to divest a package of assets related to its main antismoking product (sold in the form of tablets and patches). The divestitures also include intangible assets, such as intellectual property rights, licenses and contracts. In addition, the parties committed to adopt various measures guaranteeing that unlawful information exchanges between the joint venture and Novartis will not occur during the period of existence of the joint venture.
On December 9, 2015 CADE approved, the acquisition of Rexam PLC by the Ball Corporation. According to reporting Commissioner Gilvandro Araújo, the transaction would create a tie-up of the two biggest producers of metal cans for beverages in Brazil. In the post-merger scenario, the market shares of both companies would be significant across all of the regions in Brazil. In order to address these concerns, the transaction’s approval was conditioned to:
Access Remedies. As reported in our 2015 Antitrust Merger Enforcement Update and Outlook, on February 12, 2015, CADE authorized the acquisition of America Latina Logística – ALL by Rumo Logística a Operadora Multimodal S/A. According to CADE, the transaction would allow one of the country’s largest sugar exporters to take control over a major railroad company. The new company, in addition to being controlled by a major player that uses the railroad for its own transportation of sugar and fuel, will control the entire export supply chain of dry bulk through the Port of Santos. To reduce the possibility of market foreclosure, CADE conditioned its approval, among others, on the new company: (i) guaranteeing access by Rumo’s competitors to its terminals in the Port of Santos; (ii) offering long-term contracts to certain railway users; and (iii) applying objective parameters for pricing the services provided to competitors.
Imposition of Remedies Arguably Unrelated to the Competition Concerns Identified During the Merger Review. On March 25, 2015, CADE approved two mergers involving the Spanish telecommunications group Telefónica S/A. Telefónica controls Vivo do Brasil and operates in the markets for fixed and mobile telephony, broadband internet, and pay TV.
Finally, in the Merger Control Agreement, both Telefónica and Vivendi, also a minority shareholder of Telefônica Brazil, committed to refrain from sharing, directly or indirectly, confidential, strategic and competitively sensitive information between any of the companies or between those responsible for the management and representation of the companies of the Telefónica Group, Vivendi and Telecom Italia.
Extra-territorial application of the remedial powers of CADE. As reported in our 2015 Antitrust Merger Enforcement Update and Outlook, on January 29, 2015, CADE authorized the acquisition of Veyance Technologies Inc. by Continental Aktiengesellschaft subject to divestitures, some of which in Mexico. The companies manufacture auto parts, rubber products, hoses and industrial equipment, among other products. According to CADE, the transaction represents a merger between the market leader and the third player in the markets for heavyweight steel conveyor belts and air springs. To address the competition concerns, the parties committed to divest the following assets of Veyance: (i) a plant located in San Luis Potosi, in Mexico, which produces air springs, and (ii) a factory in São Paulo, which produces heavyweight steel conveyor belts.
On November 25, 2015, CADE approved the proposed merger involving Dabi Atlante S/S Indústrias Médico-Odontológicas and Gnatus Equipamentos Médico-Odontológicas Ltda. According to CADE, both companies are market leaders in the provision of dental products in Brazil. More specifically, CADE identified competition problems in the following product markets: vacuum pumps; clinical or dental sets; intraoral x-ray; manual instruments; and prophylaxis equipment. The transaction was approved subject to a combination of structural and behavioural remedies including:
According to Reporting Commissioner Paulo Burnier, the proposed remedies will be able to restore competition in the sector of dental products in Brazil.
On March 23, 2015, CADE’s Superintendence issued an opinion in which it referred to the Tribunal of the acquisition of the totality of equity shares of Genix Indústria Farmacêutica by Capsugel Brasil. After the analysis of the information provided by the parties, competitors and clients, the Superintendence verified that Capsugel and Genix are the main suppliers of hard capsules to the pharmaceutical industry and to the Brazilian manipulation pharmacies’ market. In addition, the Superintendence is of the view that there is a high concentration in the sector and there is only one competitor in the Brazilian market that produces hard capsules.
On December 7, 2015, the Superintendence referred to CADE’s Tribunal the proposed merger regarding the acquisition of Baker Hughes by Halliburton. The transaction refers to a worldwide operation, notified, according to CADE’s press release, in different jurisdictions, such as the United States, the European Union, China, Russia and Australia.
Also according to the Superintendence, the transaction may result in price increases in several markets related to the companies’ activities, particularly since, according to the Superintendence, the industry features high barriers to entry and there would be a situation of lower competition in the post-merger scenario. The initial deadline for a decision in Brazil is 240 days after notification. However, this can be extended for an additional 90 days.
On January 25, 2016, CADE’s Superintendence published a decision, submitted to The Tribunal concerning the proposed joint venture between Itaú Unibanco S/A and MasterCard Brasil Solucoes de Pagamento Ltda. The proposed joint venture proposed to launch a new credit and debit card brand in Brazil. Itaú Unibanco operates in the market for (i) credit and debit card issuance and (ii) merchant acquirer – through Bede, a certifier controlled by Lau. According to the Superintendence, the proposed transaction would involve the vertical integration between the joint venture and the markets for issuance and merchant acquirer. CADE’s Superintendence found that the proposed joint venture could lead to discriminating strategies against competing merchant acquirers, which could possibly make behavioural and access remedies necessary. After the Superintendence’s analyses, the case will be submitted directly to the Tribunal.
According to publicly available information, on February 19, 2016, the United Parcel Service filed an appeal of a merger between its parcel delivery rivals FedEx and TNT Express, two weeks after CADE cleared the USD 4.8 billion deal. In its appeal to CADE’s tribunal yesterday, UPS apparently claimed that the deal would eliminate competition and give the post-merger company a dominant position in parcel delivery services – especially in the Brazilian market for international express deliveries of small packages. CADE’s superintendent-general had recommended to the Tribunal to unconditionally clear the deal on 2 February, concluding there were no anticompetitive effects in any of the parcel delivery markets.
On May 25, 2015, CADE, adopted a document entitled Guidelines for Analysis of Previous Consummation of Merger Transactions during the Tribunal’s public hearing on 20 May 2015. The document is divided into three sections. The first section provides a definition for gun-jumping and specifies the actions which can lead to it. The second section sets forth specific guidelines for companies as a means of avoiding the risks of this practice, such as clean teams and parlor rooms. The third section concludes with the penalties that can be applied to the parties in case of noncompliance with the established rules.
Among the actions which can lead to gun-jumping, the guidelines include the pre-closing exchange of sensitive information, price fixation between competitors, and interference on the acquired companies’ decisions and other actions that take place before and during the transaction. In regards to the penalties, the practice of gun-jumping entails fines ranging from BRL 60,000 (USD 16,631) to BRL 60 million (USD 1,633,010).
The following Gibson Dunn lawyers assisted in preparing this client update: US Sections – Josh Soven, Adam Di Vincenzo, Rich Cunningham, Andrew Cline, Tim Zimmerman, Joe Vardner, and Justin Epner; EU Sections – Peter Alexiadis, Jens-Olrik Murach, Madeleine Healy, Alejandro Guerrero Perez, Charles Clarke, Yevgen Khodakovskyy, Vesna Tezak, and Susana Santandreu Jimenez; and Brazil Section – Pablo Figueroa.
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