In the weeks around Christmas, the U.S. antitrust enforcement agencies — the Federal Trade Commission (FTC) and the Department of Justice — filed a number of challenges to pending transactions. Most, but not all, of those challenged were simultaneously resolved with settlements requiring divestiture of overlapping assets. In addition, the agencies resolved some pending merger litigations and obtained judicial relief in one pending case. The burst of cases makes clear that the U.S. merger enforcement regime remains robust and that parties to strategic mergers should continue to carefully consider the U.S. antitrust risks their transactions pose. These cases also reinforce that merger reviews resulting in settlements are never short and can be very lengthy. Finally, the agencies once again have used an enforcement action to remind us that even though a transaction is not subject to the filing requirements of the Hart-Scott-Rodino Act,1 it can still be subject to U.S. merger review and challenge.
Suits to Block or Unwind
The agencies brought suit a number of times in 2017 in matters where they did not seek or could not obtain a settlement. Two of those were filed last month, and one previously filed matter received a favorable court judgment.
- Titanium Dioxide: In early December the FTC filed an administrative complaint challenging Tronox Limited’s acquisition of its competitor Cristal. According to the complaint,2 Tronox and Cristal are two of the top three producers of “chloride process titanium dioxide,” a white pigment used in paints, coatings, plastics, paper and other products. The FTC expressly noted that in a recent decision involving allegations of price fixing among titanium dioxide producers, the Third Circuit Court of Appeals had described the titanium dioxide industry as an oligopoly with significant entry barriers that operated with “anticompetitive interdependence,”3 echoing the admonition in the Merger Guidelines4 that evidence of past anticompetitive conduct can be a material factor in the agencies’ analysis of a transaction.5
- Prosthetic Knees: Less than a week later, the commission challenged Otto Bock Healthcare North America’s acquisition of FIH Group Holdings, LLC. Unlike the Tronox matter, in this case the transaction had been consummated in September, three months prior to the filing of the complaint. The administrative complaint alleges that the transaction substantially reduced competition in the market for prosthetic knees equipped with microprocessors by strengthening Otto Bock’s already dominant share of the market.6 The FTC says that Otto Bock has agreed to hold the acquired business separate and maintain the relevant assets during the course of the litigation, which will likely occur later this year if no settlement is reached.
- Healthcare Services: The FTC also won a significant court victory in a merger challenge. In June, the FTC and the State of North Dakota sued to block the merger of two healthcare service providers in the Bismarck, North Dakota, region.7 On Dec. 13, the district court issued a preliminary injunction barring the consummation of the transaction pending an administrative trial at the FTC.8 This continues a line of victories the FTC has won in challenges to mergers of healthcare facilities and physician groups.
The agencies entered into a large number of settlements as the year ended, allowing transactions to close.
- Retail Fuel Stations: The FTC challenged the acquisition of Holiday Companies by Alimentation Couche-Tard, Inc. (ACT) and simultaneously announced a settlement allowing the transaction to proceed.9 ACT owns the Circle K brand and has over 7,200 convenience stores across the United States, many of which have associated gasoline stations. ACT also owns a large wholesale operation that provides fuel to over 1,200 locations. As a result of the transaction, ACT would obtain an additional 380 retail fuel outlets with attached convenience stores across 10 states. The FTC asserted that the transaction would substantially reduce competition in 10 local markets and so, to settle its challenge, required ACT to divest retail fuel stations in 10 local markets in Wisconsin and Minnesota.10
- Medical Devices: Right before Christmas weekend, the FTC challenged Becton, Dickinson’s acquisition of C.R. Bard for substantially reducing competition in the markets for two medical device products. To settle the commission’s allegations, the parties agreed to divest Becton, Dickinson’s soft tissue core needle biopsy device business and Bard’s tunneled home drainage catheter system business.11
- Fertilizer Inputs: The FTC also challenged the proposed merger of Potash Corporation of Saskatchewan Inc. and Agrium Inc., alleging that the proposed transaction would reduce competition in the sale of superphosphoric acid and 65 to 67 percent concentration nitric acid. To settle the FTC’s allegations, the parties agreed to divest two U.S. manufacturing facilities.12 Notably, this matter was settled more than 16 months after the parties entered into their merger agreement.
- Aircraft Restraint Systems: In mid-December the Department of Justice challenged TransDigm Group’s February 2017 acquisition of Schroth Safety Products. The department alleged that prior to the acquisition, the parties were two of a very limited number of producers of restraint systems used on commercial aircraft and that the consummated transaction would substantially reduce competition in the sale of these systems. Simultaneously, the department agreed to settlement that required TransDigm to divest all of Schroth.13
- Coarse Aggregate: A day later, the department challenged Vulcan Materials’ acquisition of Aggregates USA, alleging that the transaction would substantially reduce competition in the sale of coarse aggregate, a type of crushed stone used in road construction and other applications, in two areas in Tennessee and one area in Virginia. At the same time the parties agreed to a settlement that required Vulcan to divest 17 facilities in those regions.14
- Aviation Fuel Filters: Finally, the department settled its earlier challenge to Parker-Hannifin’s consummated acquisition of Clarcor, which we wrote about this past fall.15The department had alleged that the acquisition had eliminated competition in the sale of aviation fuel filters. The department’s suit received attention because the transaction had passed through the Hart-Scott-Rodino Act review process without any action but was challenged after it closed due, in part, to complaints from customers. The settlement requires Parker-Hannifin to divest Clarcor’s aviation fuel filtration business.16
Items of Note
Merger Enforcement Is Alive and Well: While there is often a rush of merger settlements toward the end of the year, the seven challenges discussed above are a significant number and show that the two U.S. antitrust agencies remain active and willing to bring cases when they believe the facts support a challenge. Parties to strategic transactions should not assume that the change in administration last year has resulted in materially reduced merger enforcement.
Consummated Merger Challenges: Three of the nine matters described above involve challenges to consummated transactions. Just because a transaction falls below the merger filing thresholds or receives Hart-Scott-Rodino clearance does not mean the government cannot bring suit later to unwind the transaction in part or in whole. The federal antitrust agencies regularly bring cases to unwind closed transactions, and even if the federal government does not challenge a particular transaction, a state may do so under either federal or state law.17 For example, last year the State of California sued to block the acquisition of two petroleum terminals in the San Francisco Bay area by Valero Energy even though the FTC had investigated the transaction and decided not to challenge it. The suit ultimately resulted in Valero’s deciding not to pursue the transaction.
Upfront Buyers: In four of the settlements discussed above, the government required that the parties identify the buyers of the divested businesses or assets prior to settlement. In recent years the agencies have increasingly required that the parties identify divestiture buyers prior to finalizing a settlement to allow the agency to investigate and confirm the viability of the buyer. There have a few high-profile matters in recent years where the divestiture buyer has failed not long after the settlement, and that has only increased the agencies’ interest in thoroughly vetting any divestiture buyer. Not surprisingly, requiring a buyer upfront adds time to the review process, and parties to a transaction that may require divestitures as a condition of obtaining Hart-Scott-Rodino clearance should consider identifying potential purchasers early in the process.
Lengthy Reviews: Complex merger investigations continue to be long, resource-intensive and expensive. In one of the matters above — Potash Corporation — the time from the signing of the merger agreement to settlement was more than 15 months. More commonly, parties can expect such investigations to last seven to nine months and should plan accordingly.