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Merger review

2018 was another active year for the DOJ and FTC in merger review and enforcement. Both agencies investigated numerous proposed acquisitions and required divestitures or sued to enjoin several transactions. Perhaps most notably, the DOJ lost its bid to block AT&T's acquisition of Time Warner. The FTC prevailed in securing injunctions against mergers in the paint pigment industry and the marine water treatment products industry. In addition, both the DOJ and FTC settled several challenges with consent decrees.

i Significant casesLitigated merger challengesAT&T and Time Warner

On 20 November 2017, the DOJ filed suit to block AT&T's acquisition of Time Warner. The DOJ alleged that AT&T, a video programming distributor, 'would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner's networks, and it would use its increased power to slow the industry's transition to new and exciting video distribution models that provide greater choice for consumers'. AT&T and Time Warner argued that the proposed merger 'is a procompetitive, pro-consumer response to an intensely competitive and rapidly changing video marketplace'; that 'no competitor will be eliminated by this merger'; and that the 'transaction is . . . a classical vertical deal, combining ... content with . . . distribution platforms so that the merged company can compete more effectively against market-leading cable incumbents and insurgent tech giants'. On 12 June 2018, the judge hearing the case denied the DOJ's request for an injunction. In his opinion, the district judge wrote that the government did not meet its burden of showing, among other things, that Time Warner would be able to increase its bargaining leverage in negotiations for the carriage of its networks on rival video distribution systems. On 26 February, the United States Court of Appeals for the District of Columbia Circuit held that the DOJ failed to show that the district court clearly erred in denying the government's request for a permanent injunction to block the AT&T/Time Warner merger.

Tronox Limited and Cristal USA Inc

In December 2017, the FTC filed an administrative complaint seeking to block Tronox's acquisition of Cristal USA Inc. According to the complaint, the merger 'would combine two of the three largest producers of titanium dioxide . . . manufactured through the chloride process . . . in the United States and Canada'. Titanium dioxide 'is an essential pigment used to add whiteness, brightness, and opacity to paints, industrial and automotive coatings, plastics, and other specialty products'. The FTC's complaint alleges that the merger, if it were allowed to proceed, would both increase the likelihood for coordination and may lead to a reduction in output – two possible anticompetitive effects.

In a break from typical practice, the FTC did not seek relief in federal court in the Tronox case simultaneous with commencing an administrative proceeding, citing an ongoing investigation at the European Commission (EC) pending which the parties could not close the transaction. Instead, the FTC held an administrative trial in the spring of 2018. However, once the EC conditionally cleared the transaction, the FTC filed suit for an injunction in federal district court, as the administrative action was still pending.

In September 2018, the federal district judge hearing the suit issued an injunction, holding that 'chloride-process TiO2 sold in North America' is the proper relevant market. The judge excluded 'sulfate-process TiO2' – which defendants argued should be included – citing 'the economic realities of the industry, as described by TiO2 producers and consumers, and the evidence presented by the expert economists,' including 'a lack of significant interchangeability between chloride and sulfate TiO2.' The judge was not convinced by defendants' argument that both types of TiO2 were in the same market because their prices tended to move together, holding that 'the mere fact that the prices of two goods move upward or downward together need not mean that they are substitutes.' However, in finding the geographic market to be limited to North America, the court noted, among other things, the divergence between prices in North America and Europe. After defining the relevant market, the court held that the FTC met its burden in demonstrating that the proposed transaction would increase market concentration and likely lead to a reduction in output; and that the defendants' arguments concerning future market entry and transaction-related efficiencies did not overcome the FTC's prima facie case.

In December 2018, the FTC's in-house administrative law judge also sided with the FTC and found that the proposed acquisition 'may substantially lessen competition in the relevant market for the sale of chloride TiO2 in North America, by creating a highly concentrated market and increasing the likelihood of coordinated effects.' Similar to the district judge, Judge D Michael Chappell found that chloride TiO2 is the relevant product market and North America is the relevant geographic market. The administrative law judge cited a litany of evidence which he found established the 'distinct characteristics' of chloride TiO2 as compared to sulphate TiO2, including its relative brightness, usage by manufacturers, the form in which it is sold and price differential. The judge also cited regional pricing differences, among other things, in holding that North America was the relevant geographic market; this is also in line with the district judge's earlier ruling. The judge went on to find that the proposed acquisition would raise concentration in the relevant market to a level such that the transaction is 'presumptively anticompetitive' and that 'anticompetitive coordinated effects are in fact likely.' Finally, the judge found that, contrary to the respondents' arguments, entry by alternate producers was not likely, nor were 'claimed cost savings [resulting from the acquisition] cognizable.'

Abandoned transactionsWilh. Wilhelmsen and Drew Marine

In July 2018 a federal court granted the FTC's motion for preliminary injunction which blocked the Wilhelmsen/Drew Marine merger and which led the parties to abandon the transaction. The court found that the FTC had met its burden in demonstrating that it would be likely to succeed in proving that the proposed transaction may substantially reduce competition in the market for 'the supply of marine water treatment products and services to Global Fleet Customers'. In so holding, the court approved of the FTC's use of 'cluster markets', which group similar products and services together 'for analytical convenience'. The court also accepted the FTC's definition of the market with reference to customers with particular characteristics.

J.M. Smucker Co and Conagra Brands, Inc

In March 2018, the FTC announced that it had initiated administrative proceedings to halt J.M. Smucker Co's proposed acquisition of Conagra Brands, Inc, citing the likelihood of a substantial lessening of competition in the market for canola oil and vegetable oils. A day after the announcement of the initiation of these proceedings, the parties to the deal announced that they would abandon the transaction.

Divestiture and conduct remedies

The DOJ required divestitures in several proposed mergers, including:

  1. United Technologies Corporation and Rockwell Collins (divestiture of certain aerospace businesses);
  2. CVS Health Corporation and Aetna Inc (divestiture of a certain prescription health insurance plan business);
  3. Gray Television Inc and Raycom Media Inc (divestiture of certain television stations);
  4. The Walt Disney Company and Twenty-First Century Fox, Inc (divestiture of regional sports television networks); and
  5. Bayer AG and Monsanto Company (divestiture of various seed businesses and an herbicide business).

The FTC similarly required divestitures in a number of deals, including:

  1. Penn National Gaming and Pinnacle Entertainment (divestiture of certain casinos);
  2. Linde AG and Praxair Inc (divestiture of various businesses or plants related to 'nine industrial gases product markets in numerous geographic markets in the United States');
  3. Amneal Pharmaceuticals LLC and Impax Laboratories Inc (divestiture of certain generic pharmaceutical products); and
  4. Grifols SA and Biotest US Corporation (divestiture of certain blood plasma collection centres).

In addition, the FTC required the restructuring of a joint venture in a transaction involving the acquisition of a polyethylene terephthalate (PET) resin production facility. Here, three entities that formed a joint venture to acquire an under-construction facility to produce PET resin used in the manufacture of bottles and food packaging 'agreed to restructure their transaction and to accept certain other conditions'. According to the FTC, the parties agreed to a consent order the provisions of which will 'prevent [them] . . . from using their joint ownership of the assets to act alone or in concert to exercise market power, or to transmit competitively sensitive information beyond what is necessary to accomplish the legitimate purposes of the joint venture'. The FTC's decision and order will require, among other things, that the co-venturers do not acquire more than one-third of the joint venture, and that the plant operate as a 'tolling' facility whereby the venturers will supply their own inputs to the manufacturing process run by the plant. The under-construction plant was purchased out of bankruptcy, and the FTC noted that '[c]ompletion of this more efficient facility will significantly expand PET and PTA [a related product] capacity and output in North America, benefiting consumers.'

The FTC also required that Northrop Grumman agree 'to supply solid rocket motors, or SRMs, to competitors on a non-discriminatory basis' and to erect a firewall around its SRM business in order for it to proceed with its acquisition of Orbital ATK, Inc. According to the FTC, SRMs 'propel missiles to their intended targets and are an essential input for missile systems'.

ii Trends, developments and strategies

Merger enforcement remains robust and the agencies continue to focus on thorough investigation of the matters before them. The agencies say they will seek to tailor divestitures to address their competitive concerns, and will not shy from challenging transactions that are unable to be remedied by divestitures.

Notably, in 2018, the DOJ announced reforms to its merger review process designed to decrease the time it takes the DOJ to investigate transactions. Pursuant to these reforms, the DOJ will generally aim to complete investigations within six months of filing. Consistent with its view that divestiture remedies are highly preferred and conduct (or 'behavioural') remedies are disfavoured, the DOJ also withdrew its 2011 Policy Guide to Merger Remedies and will release an updated policy. In the meantime, the 2004 Policy Guide has been reinstated. The now-withdrawn Policy Guide contained a significant discussion of conduct remedies, whereas the currently-effective guide notes that 'structural merger remedies are strongly preferred to conduct remedies'.

iii Outlook

We expect the agencies to continue to devote substantial resources to merger investigations. We will watch with interest to see whether the DOJ's recent process reforms will lead to a noticeable reduction in the time it takes for it to complete these investigations. Moreover, we note that issues surrounding the potential competitive effects of vertical mergers have been gaining increased attention, particularly among certain FTC commissioners. We will therefore be quite interested to see how the agencies address these types of mergers in the coming years.