In its latest move in the closely-monitored retail gasoline sector, the Competition Bureau (Bureau) has entered into a pair of consent agreements with Alimentation Couche-Tard (Couche-Tard) and Parkland Fuel Corporation (Parkland) to resolve its concerns flowing from convenience store operator Couche-Tard’s proposed acquisition of CST Brands, Inc. (CST)—the operator of the “Ultramar” brand in Eastern Canada.
In a Position Statement dated July 6, 2017, the Bureau described the detailed, multi-month review leading to the clearances announced on June 27, underscoring the high priority the sector’s developments continue to have for the Bureau. The Bureau affirmed the market definition framework adopted in recent retail gas cases. It also set out its approach to the linked, sequential structure of the relevant transactions set up by the parties, in part, to account for the outcome of the Bureau’s review.
The parties and transactions
The Couche-Tard and Parkland consent agreements involve a pair of linked transactions unveiled in August 2016: the proposed sale of Texas-based CST’s North America–wide assets to Couche-Tard, followed by a proposed acquisition by Parkland of the majority of CST’s Canadian business and assets. Both transactions closed on June 28, 2017, following approval by the Bureau and the US Federal Trade Commission (FTC).
Notably, the transactions involved two of the sector’s fastest-growing companies, both of which had signed recent consent agreements (noted below). In March 2016, Couche-Tard, owner of the “Mac’s” and “Couche-Tard” convenience store brands, had purchased 278 Esso–branded stations in Ontario and Québec from Imperial Oil, building on a retail gas partnership with Irving Oil dating to 2001. For its part, Parkland, Canada’s largest independent fuel marketer, had acquired Eastern Canada’s “Pioneer” brand in 2016, adding to its Western retail base and its position as the country’s largest Esso distributor.
In the first transaction, Couche-Tard proposed a US$4.4 billion purchase of CST’s business, consisting of heating oil, cardlock and retail gas operations in both the US and Canada. The former two businesses raised no competitive concerns with the Bureau, while Couche-Tard agreed with the FTC to divest 70 out of 1,248 US retail sites on June 26, 2017.
In a second transaction, Couche-Tard proposed to sell the majority of CST’s Canadian business and assets for CA$965 million to Parkland. In structuring this second transaction, Couche-Tard and Parkland made the retail sites acquisition contingent, in part, on the outcome of the Bureau’s review of the first transaction.
The Bureau’s analysis and the Consent Agreements
As described in the Bureau’s Position Statement, the Bureau assessed the two transactions on a sequential, stand-alone basis over several months.
Under this approach, the Bureau first analyzed the competitive impact of CST’s transfer of more than 800 stations to Couche-Tard.
Consistent with recent merger reviews in the sector, the Bureau defined the “relevant market” as the local gasoline market, given the limited ability of drivers to switch fuels or drive to more remote stations. In analyzing market power, the Bureau considered, for each market:
- Potential impacts from “horizontal” ownership of overlapping stations;
- Potential “vertical” influence over a dealer’s price by way of wholesale price changes under the terms of acquired distribution contracts; as well as
- Any increased likelihood of tacit coordination between remaining competitors (“coordinated effects”).
For the sites in which the Bureau concluded a substantial lessening of competition would likely result from Couche-Tard’s acquisition, the Bureau then considered whether Parkland—as effectively proposed in the second transaction—would be a “suitable purchaser” of the assets under its merger review framework.
Pursuant to one consent agreement, the Bureau and Couche-Tard agreed to Parkland acquiring 366 stations and dealer contracts in each of Ontario, Québec, Nova Scotia, New Brunswick, PEI and Newfoundland, with one further site being transferred to Philippe Gosselin & Associés Limitée in Québec.
In addition to the above, the Bureau also considered whether certain CST assets would raise competitive issues following the second (Couche-Tard/Parkland) transaction that did not result from CST’s initial sale to Couche-Tard, studying some 220 sites. The Bureau concluded that Couche-Tard’s transfer of a small number of sites to Parkland would raise competitive issues. In a separate consent agreement, Parkland addressed these concerns by agreeing to divest dealer contracts to either MacEwen Petroleum Inc. or McDougall Energy Inc. in nine rural Ontario markets.
The Bureau’s focus on the retail gas sector
The Couche-Tard and Parkland consent agreements form the latest chapter of an ongoing Bureau saga in the retail gasoline sector, one that encompasses studies, merger reviews and criminal investigations dating as far back as the 1980s. The Bureau currently devotes a full section of its website to its activities in the sector, noting that “[m]any Canadians who contact the Competition Bureau have questions regarding gasoline pricing.”
The Bureau’s most recent work relates to merger activity, notably by Couche-Tard and Parkland themselves. As noted above, the Bureau cleared Parkland’s acquisition of Pioneer Energy LP in April 2016, also by way of consent agreement. This followed a Competition Tribunal (Tribunal) hearing at which Parkland challenged the Bureau’s proposed interim order to prevent the transaction’s implementation in 14 markets (with the Tribunal narrowing the order’s scope to six markets). Likewise, in March 2016, Couche-Tard had joined four other fuel distributors in purchasing a total of 497 Esso stations from Imperial Oil. In September, the Bureau announced a consent agreement with Couche-Tard requiring it to divest one Ontario and one Québec station in this transaction.
Also in 2016, the Bureau entered into a consent agreement with Québec-based Esso distributor Le Groupe Harnois Inc., requiring the company to divest one station or dealer agreement in one rural Québec market, and restricting margin increases in another, with respect to its acquisition of 50 distribution contracts from other Québec dealers. A significant consent agreement was also reached in 2009 following the Suncor/Petro-Canada merger, which resulted in Husky Energy Inc. acquiring 98 divested stations in Ontario.
Outside of merger review, the Bureau has made cartel prosecution in the sector a priority, following a number of unsuccessful price maintenance prosecutions from the 1980s through to the early 2000s. From 2008 to the present, the Bureau’s retail gas cartel investigation in Québec and Eastern Ontario has resulted in fines totalling CA$4 million, and sentences totalling 54 months, on 33 individuals and seven companies. Most recently, Les Pétroles Global Inc. was fined CA$1 million in 2015, following a trial at the Québec Superior Court.
With its recent pair of consent agreements in the CST/Couche-Tard and Couche-Tard/Parkland transactions, the Bureau continues to signal the importance of the retail gasoline sector in its enforcement work, particularly in rural, Eastern Canadian markets. Parties acquiring assets in the sector should prepare for considerable engagement by the Bureau in these transactions, including the prospect of an extended review, as well as remedies, in complex cases.