It is widely recognized and accepted that vertical mergers are generally pro-competitive or benign. For example, the Competition Bureau (the “Bureau”) has stated in its Merger Enforcement Guidelines (the “MEGs”) that vertical mergers “may not entail the loss of competition between the merging firms in a relevant market” and “frequently create significant efficiencies”, such as efficiencies related to quality improvements, increased innovation, the creation of maverick firms and the elimination of double-marginalization (or double markups in price by cutting out the middle-person in a supply chain). That being said, as is evident from the Bureau’s recent review of the proposed joint venture between Federated Co-operatives Limited (“FCL”) and Blair’s Family of Companies (“Blair’s”) (the “Proposed Transaction”), vertical mergers can raise competition concerns in some circumstances, such as where they result in a competing firm being foreclosed from the market.
What Are Vertical Mergers?
A horizontal merger is a merger between firms that supply competing products. By contrast, vertical mergers involve firms that produce products at different levels of a supply chain (e.g., a merger between a supplier and a customer). Vertical mergers do not reduce competition on its face since there is no competition between the goods or services of the merging firms.
The Proposed Transaction
Each of FCL and Blair’s is involved in the agricultural business in Western Canada. In particular, FCL operates a wholesaling, manufacturing, marketing and administrative co-operative owned by more than 160 independent retail co-operatives ( the “Local-Co-ops”), which in turn own and operate ag-retailers in communities throughout Western Canada. Blair’s is a full service ag-retailer that, among other things, operates seven ag-retail locations in Saskatchewan. These retail locations supply growers with various crop inputs, such as fertilizer, crop protection products, seeds, animal nutrition products and related services (e.g., agronomy services).
On February 3, 2021, FCL and Blair’s announced that they had agreed to enter a joint venture. The joint venture would be majority owned by FCL and it would acquire Blair’s seven ag-retail locations.
Review of the Proposed Transaction
Following its review, the Bureau concluded that the Proposed Transaction would likely substantially lessen competition in the retailing of crop inputs in Lipton, Saskatchewan, resulting in higher prices and lower service quality for local growers. In order to address these concerns, FCL and Blair’s entered into a consent agreement with the Commissioner of Competition (the “Commissioner”), pursuant to which they agreed to sell Blair’s retail location in Lipton, along with two nearby anhydrous ammonia facilities.
Significantly, as discussed in more detail in the Position Statement issued by the Bureau, the alleged anti-competitive effects of concern arose from the vertical relationship between the parties: with FCL acting as a wholesale supplier to the Local Co-op ag-retailers which compete with Blair’s ag-retail business. In particular, the Bureau examined whether the Proposed Transaction would create incentives for both FCL’s Local Co-Ops and Blair’s retail locations to raise prices or lower quality in the supply of crop inputs in the any relevant geographic area.
The Bureau considered both qualitative and quantitative evidence as part of its investigation, and notably put a lot of weight on the parties own documents with respect to its analysis of the vertical relationship between the parties and the likely competitive effects of the Proposed Transaction.
Approach to Vertical Mergers
Vertical mergers may harm competition if the merged firm is able to limit or eliminate rival firms’ access to inputs or markets, thereby reducing or eliminating rival firms’ ability or incentive to compete. The ability to affect rivals in this manner is referred to as “foreclosure”. As discussed in more detail in the MEGs, foreclosure may be partial or complete and may involve inputs or customers.
Specifically, in the case of vertical mergers, the Bureau considers four main categories of foreclosure:
- total input foreclosure, which occurs when the merged firm refuses to supply an input to rival manufacturers that compete with it in the downstream market;
- partial input foreclosure, which occurs when the merged firm increases the price it charges to supply an input to rival manufacturers that compete with it in the downstream market;
- total customer foreclosure, which occurs when the merged firm refuses to purchase inputs from an upstream rival; and
- partial customer foreclosure, which occurs when the merged firm is a distributor and can disadvantage upstream rivals in the distribution/resale of their products.
When examining the likely foreclosure effects of a vertical merger, the Bureau considers three inter‑related questions, namely (1) whether the merged firm has the ability to harm rivals; (2) whether the merged firm has the incentive (i.e., whether it is profitable) to do so; and (3) whether the merged firm’s actions would be sufficient to prevent or lessen competition substantially.
The Bureau also considers whether a vertical merger could increase the likelihood of coordinated interaction among firms, either at the upstream or downstream level. Vertical integration can facilitate coordinated behaviour by firms in the upstream market by making it easier to monitor the prices rivals charge upstream and control the competition in the market. On the other hand, vertical mergers can also facilitate coordinated behaviour by firms in a downstream market by increasing transparency (e.g., by enabling firms to observe increased purchases of inputs) or by providing additional ways to discourage or punish deviations (e.g., by limiting the supply of inputs).
While not set out explicitly in the Position Statement, in assessing whether the Proposed Transaction would create incentives for FCL and Blair’s retail locations to raise prices or lower quality in the supply of crop inputs in the Lipton area, both input foreclosure and as well as downstream coordinated effects theories of harm may have been considered by the Bureau.
This recent transaction highlights the Bureau’s continued focus on potentially anti-competitive vertical mergers – a trend that is also apparent in other jurisdictions around the world, including the United States. As such, the nature and extent of any existing or potential vertical relationships between the merging parties continues to be an important consideration in any competition-related risk assessment.
Separately, it is worth noting that the parties were able to reach a settlement prior to full compliance with the Supplementary Information Request that had been issued by the Commissioner. While in our experience this is rare, it provides a helpful precedent that merging parties will be able to point to in the future.