On February 10, 2009, the UK Competition Commission (CC) issued its final report on the acquisition by Nufarm Crop Products UK Limited (Nufarm) of AH Marks Holdings Limited (AH Marks). The CC found that the merger would lead to a substantial lessening of competition in the UK markets for the supply of herbicide products based on two types of phenoxy acid (MCPA and MCPP-p). The CC accepted a package of behavioral remedies aimed at facilitating new entry into the markets for MCPA and MCPP-p. However, if the behavioral remedies are not implemented to the satisfaction of the CC within the required timeframe, the CC reserves the right to require the divestment of the AH Marks business.
On August 29, 2008, the UK Office of Fair Trading (OFT) referred the completed acquisition by Nufarm of AH Marks to the CC for an in-depth investigation. The merging parties are the leading UK suppliers of certain phenoxy acetic acids used to make herbicides. Phenoxy herbicides are used as a low-cost method of ‘broadleaf’ weed control in grasslands and cereals. The leading phenoxy herbicides globally are 2,4-D, MCPA and MCPP/MCPP-p (which is most commonly used in the UK). These herbicides are produced from manufacturing concentrates, derived from technical acids.
The CC’s final report confirms a narrow approach to market definition in the herbicides sector. It concluded that there are:
- Two separate markets for the supply of 2,4-D, and MCPA technical acids to UK customers;
- Three separate markets for the supply of 2,4-D, MCPA and MCPP-p manufacturing concentrates to UK customers;
- Six separate markets for the supply of 2,4-D, MCPA and MCPP-p formulated products to UK customers for use on, respectively, cereal crops and grassland.
The CC concluded that for each of the above markets the ability to sell into the UK, by virtue of possession of relevant UK and EU licenses, was part of the product market.
The CC found that, absent the acquisition by Nufarm, it was likely that AH Marks would have been sold to United Phosphorous Ltd (UPL) which would have supplied UK customers with phenoxy herbicide products at all levels of the supply chain.
The CC concluded that:
- The merger may be expected to result in a substantial lessening of competition for MCPA at the technical acid, manufacturing concentrate and formulated product levels of the supply chain. This would last until at least a year after MCPA lost data protection in May 2011;
- The merger may be expected to result in a substantial lessening of competition for MCPP-p at the manufacturing concentrate and formulated product levels of the supply chain. This would last until at least 18 months after MCPP-p lost data protection in June 2009, and possibly longer.
There was insufficient evidence to conclude that the merger will result in a substantial lessening of competition for 2,4-D at the technical acid, manufacturing concentrate or formulated product levels of the supply chain.
The CC considered the following possible remedies against various options:
- Structural. The CC considered partial or total divestiture of the AH Marks business. The CC concluded that divestiture of the AH Marks business as a whole was feasible and would effectively address the competition concerns identified because it would address the loss of competition which resulted from the merger by restoring the competitive structure of the market.
- Behavioral remedies. The CC considered a package of measures proposed by Nufarm to facilitate entry by providing access for competitors to the necessary licenses and by entering into toll manufacturing agreements and/or supply agreements with competitors to enable them to supply UK customers.
The case is a noteworthy example of the CC’s receptiveness to considering behavioral remedies. The CC concluded that divestiture and the behavioral remedies could be implemented in similar timeframes and involve similar costs. Comparing the structural and the behavioral remedies as a whole, the CC concluded that, in the circumstances of this particular case, the behavioral remedies were more targeted at the substantial lessening of competition identified and thus were preferable.
However, the implementation of the behavioral package still requires agreement with third parties and depends on other parties taking steps relating to product registration and authorizations. If Nufarm cannot reach the necessary agreements or if difficulties arise in relation to the regulatory process, then this would fundamentally compromise the effectiveness of the remedies. Therefore, the CC has concluded that the option of full divestiture for the duration of the implementation period of the remedies package should be retained.
It should be noted that the CC’s in-depth investigation of the relevant markets identified concerns in relation to the concentrated nature of the markets for phenoxy acids, and the extent of co-operation between competitors. In particular, competitor cooperation in the development of each technical acid and toll manufacturing agreements is widespread. It is also common for competitors to buy from and sell product to each other to satisfy particular contracts. Moreover, the CC noted that, unsurprisingly, the regulatory framework creates barriers to entry and has the potential to enhance transparency and facilitate market sharing among competitors. The CC stated that it is drawing these concerns to the attention of the “relevant authorities.” The case highlights the difficulty for merging parties to convince UK authorities to approve their transaction, but also that in appropriate cases solutions other than divestment are possible.