The Federal Trade Commission (FTC) and US Department of Justice’s (DOJ) Antitrust Division have been actively challenging mergers and acquisitions (M&A) across a variety of industries where there is not a viable or acceptable remedy to mitigate the agencies’ competitive concerns. Parties to M&A transactions that the FTC or the DOJ believe are likely to harm competition may remedy those concerns by divesting certain businesses or assets. The parties may divest the business or assets that raise anticompetitive concerns and proceed with the remainder of the transaction. Divestitures in horizontal mergers (i.e., transactions between competitors) aim to maintain or replace the competition in the relevant market that might otherwise be lost as a result of the transaction.
Proposed divestitures are evaluated on the particular facts of the case and must be robust enough to present a viable competitor. Recent transactions demonstrate that the FTC and DOJ will reject divestiture proposals that the agency finds insufficient, putting the entire deal at risk for merging parties. Before proposing a remedy to the FTC or DOJ, parties should keep the following in mind: (1) in today’s enforcement environment, the agencies are more demanding in seeking effective remedies; (2) the agencies are more likely to require a buyer up front, particularly if the parties seek to divest assets that are less than an entire on-going, stand-alone business, or the to-be-divested assets are at risk of deterioration pending divestiture; and (3) a buyer must be competitively and financially viable.
Proposing an Effective Divestiture Package
The DOJ and FTC are most likely to accept a divestiture package when it includes an autonomous, on-going business unit that comprises at least one party’s entire business in the relevant market. As noted in the FTC’s guide on Negotiating Merger Remedies, “The parties should be prepared to show that the business unit contains all components necessary to operate autonomously, that it has operated autonomously, that it is separable from the parent, and that the unit’s buyer will be able to maintain or restore competition almost immediately.”
If the proposed divestiture package is something less than a complete, autonomous and operable business unit, the parties must show that their proposed package will enable the buyer to maintain or restore competition in the market. Parties have been criticized by the agencies for proposing divestiture packages that would split complementary business lines, facilities, and other dependent assets. For example, in US v. Halliburton / Baker Hughes, the DOJ’s complaint criticized the parties’ proposed divestiture package because it “would separate business lines and divide facilities, intellectual property, research and development, workforces, contracts, software, data, and other assets across the world between the merged company and the buyer of the divested assets.” The DOJ further explained that the proposed divestiture package lacked assets in important segments of the business that each of the major competitors in the industry possessed today and failed to include many of the assets that would be used to perform services. The DOJ rejected the parties’ divestiture offer, concluding that the assets in the proposed remedy would not “replicate the competition provided by Defendants’ businesses from which they would be extracted.” The parties abandoned the transaction after the DOJ sued to block the deal.
Most, but Not All Transactions, Require a Buyer up Front
The agencies typically prefer and require a “buyer up front”; in other words, the parties must find an acceptable buyer for the proposed divestiture package and execute an acceptable agreement (and all necessary ancillary agreements with the buyer and third parties, if required) before the agencies accept the proposed consent order. Buyers up front have been required in many industries, including medical devices, pharmaceutical products, mirror coatings, mining equipment, industrial gases, general aviation fuel, supermarkets and other retail operations. In determining whether to require a buyer up front, the agencies evaluate the following:
- Is there a concern about whether the proposed asset package is adequate to maintain or restore competition;
- Is the asset package sufficient to attract an acceptable buyer or buyers;
- Is the pool of acceptable buyers limited because of specialized needs; and
- Is there a concern about deterioration of the assets (including human capital, good will and other intangible assets) pending divestiture?
In industries where the agencies have significant experience, and where the ownership interest is a high-value, low-risk asset that is likely to generate substantial interest from more than one potentially acceptable buyer, the agencies will not require a buyer up front. In “post-closing divestitures,” the parties may enter into an agreement with the agency regarding the complete set of assets to be divested without agreeing on a particular buyer. The parties will hold separate and maintain the to-be-divested assets, but may close the part of the transaction not subject to the consent order. The order will require the parties to divest certain assets within a period of time and the potential buyer must ultimately be approved by the agencies. Recently, the FTC entered into a consent order with Energy Transfer Equity L.P. (ETE) and The Williams Company. The consent order did not require an upfront buyer and ordered ETE to divest to a Commission-approved buyer Williams’ ownership interest in Gulfstream Natural Gas System, LLC, an interstate natural gas pipeline. The FTC has a variety of experience with natural gas pipeline transactions and determined that the to-be-divested asset was high-value and low-risk and would generate multiple acceptable buyers.
Buyers Must Be Competitively and Financially Viable
The agencies will look closely at any proposed buyer, and will discuss relevant issues with the potential buyer regarding the assets to be divested and the financial viability of the potential buyer. An acceptable buyer will be competitively and financially viable and have the financial capability and incentives to maintain or restore competition in the relevant market after acquiring the divested assets. A potential buyer must also have the industry know-how to operate the divested business or assets. The FTC has seen several divestitures fail when the buyer was unable to operate the business profitably. For example, when a buyer in the rental car market did not have the industry knowledge and financial capability to manage the business in a concentrated market, the divested business went bankrupt less than one year after the divestiture was complete. Additionally, a regional supermarket chain filed for bankruptcy less than one year after acquiring divested grocery stores from a large transaction that raised competitive concerns in certain states. After these divestiture-buyer failures, the agencies even more carefully scrutinize the ability of the potential buyer to successfully and competitively operate the to-be-divested assets.
In today’s enforcement environment, and after recent experiences where buyers of divested assets faced bankruptcy shortly after acquiring the divested assets, the agencies continue to demand robust divestiture proposals. Parties should consider carefully any proposed divestiture they wish to present to the agencies, vetting potential buyers—paying particular attention to the buyer’s competence and financial viability—and to the completeness of the divestiture package and its ability to independently compete in the marketplace. Merging parties should carefully evaluate the potential antitrust risk and likelihood that any competitive issues can be remedied with a divestiture before proceeding with a transaction. This analysis at the outset will inform contract negotiations and may avoid the pain of abandoning an untenable transaction.