Canadians are good at many things. We make planes, trains, automobiles and all kinds of high tech devices, and we are leading suppliers of various professional and business services. However, we can also hew wood, draw water and dig rocks with the best of them.
A review of Canadian transactions over the last few years reveals a significant volume of resource mergers: Glamis Gold Ltd./Goldcorp Inc.; Inco Limited/Teck Cominco Limited; Placer Dome Inc./Barrick Gold Corporation; Inco Limited/Companhia Vale do Rio Doce (CVRD); Terasen Inc./Kinder Morgan; Xstrata/Falconbridge Ltd.; Petro Kazakhstan Inc./China National Petroleum Corporation; PrimeWest EnergyTrust/Calpine Natural Gas Trust; TransCanada Corp/Gas Transmission Northwest Corp.; and West Fraser Timber Co. Ltd./Weldwood of Canada. Now, Alcan is in play.
As legal counsel, our firm has been privileged to have participated in a number of those mergers and been involved in a variety of interesting legal aspects, including competition and antitrust issues, which are reviewed in this abridged article as they pertain to resource transactions.
Global or Regional Markets
One antitrust advantage that most resource mergers enjoy is that the products of the merging companies are very often sold in broad geographic markets – often global or continental markets. This means that, typically, there will be a relatively large number of competitors. Of course, that is not always the case, but a broad geographic market is usually helpful to avoid antitrust difficulties.
In some cases, however, resources such as aggregates, for example, have a very high cost of transportation and are, therefore, sold in relatively small geographic markets. Mergers including these products may cause difficulties, although in such cases, the difficulties may tend to be localized to one or two sites which can be divested by the merging parties.
In any case, an accurate assessment of the geographic markets involved in the sale of the relevant product or products, noting that resource companies may sell a variety of products – some of which are sold globally and others of which may be sold in more local markets – is essential to assessing potential antitrust issues in the transaction.
Concentration in Specialized Product Areas
One of the things about natural resources transactions is that the products – for example, coal, lumber, gold, nickel and such – are usually easy to understand. That simplicity, however, may sometimes be misleading. For instance, coal is not just coal. Coal may be subdivided into thermal coal (typically used for power plants) and coking coal (typically used for steel making). There are also intermediate products which can be economically efficient if used either way, in combination with true thermal coal or coking coal. Defining the correct antitrust product market, and therefore determining the antitrust concerns, may not be as simple as it seems.
This issue arose in a very practical sense in the proposed merger of Inco and Falconbridge. Their combined share of the worldwide nickel market, while considerable at roughly 25%, was not problematic. However, their combined share of a narrow market of high purity nickel used in making alloys for jet engines was found to be some 80%. As a result, the proposed transaction was held up by both the European Union and United States Department of Justice for many months. That delay prevented the parties from consummating their merger in a timely fashion, and each of Inco and Falconbridge were ultimately purchased by other firms. So, while at first blush the product market might seem straightforward, there may be subtleties in the product definition which could undermine the ability to undertake the transaction, or at least to undertake it expeditiously.
Monopsony and Monopoly Power
Most antitrust or competition law concerns which arise when firms propose to merge are related to whether the merged firm will gain market power so that it can raise prices in downstream (i.e., output) markets. This is known as monopoly power – although of course a firm can acquire this kind of power without being any sort of technical monopoly. Much more rarely, concerns arise when the firm will gain power not over its ability to raise prices in downstream markets, but its ability to lower the price of input (i.e., upstream) products – so called monopsony or buying power.
While this is a relatively rare concern in mergers, it has arisen in a number of Canadian cases, including: UGG; Chapters/Indigo; Maple Leaf/Schneider; Canfor/Slocan; West Fraser/Weldwood; and Riverside/Tolko.
Accordingly, although the question of monopsony power created by mergers is relatively uncommon and somewhat controversial, it has arisen in a number of Canadian transactions, particularly in the resource sector, and it is an important consideration to bear in mind when planning a merger which may have implications for buying power in a local area.
International Coordination and Hostile Takeovers
One of the practical issues in natural resource mergers, among others, is the need to consider and comply with merger laws of various jurisdictions around the world. This issue applies to mergers in any industry, but is particularly relevant for Canadian natural resource firms, for various reasons.
The primary reason is that the nature of the products tends to mean that they are sold on a continental or even worldwide basis. Many jurisdictions have different tests governing whether approval for a proposed transaction is required; some major jurisdictions require approvals when there are certain levels of sales of the product in that jurisdiction, whether or not there is any office or business on the ground in those countries. The lack of an “on the ground” office often characterizes natural resources businesses that simply sell product rather than those that have exploration assets in those jurisdictions.
Investment Canada Issues
Acquisitions of firms over certain size thresholds, $281 million as of January 1, 2007, require approval from the Minister of Industry under the Investment Canada Act. Outside of the field of cultural industries, this approval has always been forthcoming, although often at the price of giving undertakings to the Minister with respect to such things as investment, employment, Canadian purchasing, Canadians in management and the like.
In the concluded purchase of Falconbridge by Xstrata, the Minister of Industry was quoted, early on in the process, as expressing the view that there might be issues with respect to that purchaser – presumably because of the possible involvement of Mark Rich in its establishment. Ultimately, however, approval was given.
In the natural resource area, however, there has been some expression of concern that some types of buyers may not be approved to purchase significant Canadian natural resource companies.
Not long ago, in Advantage Canada: Building a Strong Economy for Canadians, the Government of Canada indicated that the Investment Canada Act may be amended to include specific provisions restricting the ability of large state-owned enterprises with non-commercial objectives and unclear corporate governance to purchase Canadian firms.
It is not yet clear how these matters will ultimately resolve. In the interim, however, the Investment Canada process is important, in that it may affect the timing within which foreign-owned purchasers can close transactions. The Investment Canada Act permits the Minister to take up to 75 days to issue his or her approval, and also provides that, with the consent of the parties, that period may be extended. The need to await Investment Canada approval may have implications for transactions where competing buyers are either further ahead in their Investment Canada process or are Canadian-based and do not require approval.
Some Final Remarks
While resource mergers tend to give rise to a relatively small number of antitrust concerns, because the markets are often global in scope, even global markets can become concentrated at some point and give rise to antitrust concerns, or particular jurisdictions may be disproportionately affected and hold up a transaction. As well, while at first blush the product market definition may appear to be relatively simple, on delving into the facts, sometimes there are niche markets which give rise to substantive concerns. In addition, even where the output is sold globally, inputs are often purchased locally, and that may give rise to concerns about market power exercised by the merged party in squeezing suppliers.
Finally, even without a serious substantive issue, there is the task of coordinating a merger with antitrust authorities in, in some cases, a score or more of countries. Determining where to file, the timelines, the necessary filing materials and all of the complexity that goes with managing these filings in many places is far from a simple prospect. To build and maintain world-scale players in these important Canadian industries, however, is not necessarily supposed to be easy. It is the price of playing in the big leagues, where Canadian resource companies operate.