On 12 February 2019, the Philippine Competition Commission (PCC) released its first ever decision prohibiting a proposed merger in the Philippines and rejecting the voluntary commitments of the parties to the transaction. The PCC blocked the merger between Universal Robina Corporation (URC), and Central Azucarera Don Pedro Inc. (CADPI) and Roxas Holdings Inc. (RHI) on the basis that it will lead to a monopoly in the sugarcane milling services market in Southern Luzon.
Implications for Business in the Philippines
Mergers, acquisitions, and joint venture transactions (M&A) that meet the thresholds for mandatory notification under the Implementing Rules and Regulations of the Philippine Competition Act (PCA) (IRR) must comply with the mandatory notification procedure, timelines and requirements under the IRR and the new Rules on Merger Procedure (Merger Rules) before consummation of the deal. Please see our previous Client Alert on the Notification Thresholds here.
If the PCC determines that the proposed transaction substantially prevents, restricts, or lessens competition in the relevant market or in the market for goods or services, it may (a) prohibit the implementation of the agreement, (b) prohibit the implementation of the agreement unless and until it is modified by changes specified by the PCC, or (c) prohibit the implementation of the agreement unless and until the pertinent party or parties enter into legally enforceable agreements specified by the PCC.
Prohibited M&A transactions may, nonetheless, be exempt from prohibition when the parties establish that: (a) the concentration has brought about or is likely to bring about gains in efficiencies that are greater than the effects of any limitation on competition that result or likely to result from the merger or acquisition agreement; or (b) a party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the agreement represents the least anti-competitive arrangement among the known alternative uses for the failing entity’s assets.
The PCC’s decision signals that the PCC will not hesitate to exercise its power to prohibit a proposed M&A transaction, if it determines that the same may lead to a monopoly and potential harm for stakeholders in the relevant market.
What the Case Says
URC is engaged in a wide range of food-related businesses including, among others, production of packed foods and beverages, sugar, agro-industrial products, and bioethanol. Its sugar division operates a total of 6 mills located in Balayan, Batangas, Iloilo, Negros Oriental, Negros Occidental, and Cagayan. The mills produce raw sugar, refined sugar and molasses for supply to other URC business segments and third parties.
On the other hand, RHI owns 100% of the shares in CADPI (RHI-CADPI), which also operates an integrated sugar cane milling and refining plant in Nasugbu, Batangas. RHI is also engaged in the trading of raw and refined sugar and molasses.
URC proposed to acquire all buildings, machineries and equipment, land and other assets necessary for the operations of the refinery and milling plant of RHI-CADPI located at Brgy. Lumbanga, Nasugbu, Batangas (the Proposed Transaction). The PCC raised competition concerns on the Proposed Transaction. The parties voluntarily committed to increase sugar recovery rates, perform capital upgrades, maintain trucking allowances, provide planter assistance, share ratios, and obtain feedback from Stakeholders.
In its decision, the PCC stated that although URC's sugar mill is located in Balayan, Batangas while that of CADPI-RHI is in Nasugbu, Batangas, the monopoly that will be created by the merger will substantially lessen competition in the sugar milling services market not only in Batangas, but also in Cavite, Laguna, and Quezon. Based on its earlier investigations, the PCC expressed concerns that the farmers would stand to lose the benefits of competition due to the merger, especially in terms of planters' cut in sharing agreements, sugar recovery rates, and incentives.
In its analysis, the PCC emphasized that while the Proposed Transaction mainly affects sugarcane farmers in Southern Luzon, the sugar processed from these facilities serve nationwide demand, including that of Metro Manila.
In particular, the PCC raised the following competition concerns:
- The transaction is a merger-to-monopoly and will eliminate the only competitor of URC in the relevant market;
- The transaction will create market power for URC and allow it to unilaterally reduce the planters' share in the planter-miller sharing agreement, the theoretical recovery rates quoted to planters, and the incentives provided to planters;
- Other sugar mills outside of Batangas are too far (Pampanga, Tarlac, Camarines Sur), thus not sufficient to constrain URC from exercising market power; and
- Barriers to entry are high and the possibility of a new entrant seems remote and, if at all possible, may not be immediately forthcoming as to constrain URC from exercising market power after the transaction.
The PCC ultimately rejected the proposed commitments of the parties on the basis that these failed to sufficiently address the competition concerns.
In the press release of the PCC on their website, PCC Chairman Arsenio M. Balisacan said that, "A merger-to-monopoly deal is among the most detrimental types of business transactions. The URC takeover removes its only competitor, erodes the benefits of competition for the sugarcane planters, and leaves market power at the hands of a single provider in an area.”
Actions to Consider
Parties to an M&A transaction should carefully assess whether the proposed transaction may substantially prevent, restrict, or lessen competition in the relevant market. In the event that the transaction may be deemed to raise possible competition concerns, the parties should be ready to submit voluntary commitments to address the same or establish that the deal falls under the relevant exemptions under the law. If the potential anticompetitive effects are significant, the parties should consider at the early stages of the transaction, contingency arrangements that may involve alternatives to restructure or include divestment strategies, in the proposed transaction, or to terminate the same, in order to minimize costs and disruption to business.
The Decision is a clear indication that the PCC intends to enforce the full force of the PCA in case it finds M&A agreements to be anti-competitive. It also shows that the PCC will not hesitate to block M&As if voluntary commitments and other measures are not sufficient to address the substantial lessening of competition arising from the proposed transaction.