Up-front Buyer and Fix It First Remedies Part A

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Up-front Buyer and Fix It First RemediesPart A
European CommissionPart B UK Competition
Commission

• Chris Bright
• BIICL Merger Control Conference
• 13 November 2008

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Part A European Commission
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EU framework

• New Remedies Notice
• Commission Notice on remedies acceptable under
  Council Regulation (EC) No 139/2004 and under
  Commission Regulation (EC) No 802/2004, 22
  October 2008, OJ 2008 C 267/01
• Specific provisions dealing with up-front buyer /
  fix it first / crown jewels
• paras 50-57 and 44-46
• Up-front buyer concerns cases involving
  considerable obstacles for divestiture, e.g.
  third party rights or uncertainties as to finding
  suitable purchaser, or cases causing considerable
  risks of preserving competitiveness and
  saleability of divestiture business in interim
  period
• Fix it first concerns, in particular, cases where
  identity of purchaser crucial for effectiveness
  of proposed remedy
• Crown jewel alternative where implementation of
  preferred divestiture option uncertain in view
  of, e.g. third parties pre-emption rights or
  uncertainty as to transferability of key
  contracts, IP rights, or uncertainty of finding
  suitable purchaser
• Model Text for Divestiture Commitments
• The proposed concentration shall not be
  implemented unless and until X or the
  Divestiture Trustee has entered into a final
  binding sales and purchase agreement and the
  Commission has approved the purchaser and the
  terms of sale (Section B.1)
• Form RM
• Acquisition by a suitable purchaser Explain the
  reasons why, in your view, the business will be
  acquired by a suitable purchaser in the
  time-frame proposed in the commitments offered.
  (para 5.13)

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EU history of up-front buyer

• Commission has always had this power
• First used in Case No COMP/M.2060 Bosch / Rexroth
  (3 May 2000)
• Used relatively infrequently
• 6 times out of 87 published Phase II conditional
  clearance decisions (75 of which involving
  divestitures)

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EU history of up-front buyer (cont.)
Name Date Decision Type Issue Crown Jewel Alternative? (Y/N)
M.3796 Omya / Huber 19/07/06 Art 8(2) Identity of purchaser (industrial not financial). Needed speedy divestiture. N
M.3431 Sonoco / Ahlstom / JV 06/10/04 Art 8(2) Financial viability of divested business (plant in isolated geographic position). N
M.2972 DSM / Roche / Vitamins 23/07/03 Art 8(2) Viability and independence of divested business. Needed immediate restoration of effective competition. N
M.2947 Verbund / Energie Allianz 11/06/03 Art 8(2) Purchaser needed to provide an important counterweight to the parties' market power. N
M.2544 Masterfoods / Royal Canin 15/02/02 Art 6(2) Viability of divested business (being composed of assets from both parties which were located in several Member States). Needed purchaser with proven expertise in relevant market. N
M.2337 Nestlé / Ralston Purina 27/07/01 Art 6(2) Viability of divested business. The purchaser needed the necessary financial resources to maintain the business as an effective competitor. Y First time up-front buyer solution coupled with crown jewels remedy.
M.1915 The Post Office / TPG / SPPL 13/03/01 Art 8(2) Viability and competitiveness of divested business (which would quickly have lost its customer base). N
M.2060 Bosch / Rexroth 14/12/00 Art 8(2) Viability and instant competitiveness of divested business (to prevent Bosch regaining market share lost by sale by selling to weak business). N
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EU history of fix it first

• Used even less frequently than up-front buyer
• 4 times out of total 87 published Phase II
  conditional clearance decisions (75 of which
  involving divestitures)

Name Date Decision Type Issue Crown Jewel alternative? (Y/N)
M.4187 Metso / Aker Kvaerner 12/12/06 Art 8(2) Only one purchaser suitable for acquiring divestiture business (only one with necessary know-how and presence in neighbouring markets). N
M.4000 Inco / Falconbridge 04/07/06 Art 8(2) Divestiture of a nickel processing business could only take place to a competitor vertically integrated into the supply of nickel. N
M.3916 T-Mobile Austria / tele.ring 26/04/06 Art 8(2) Divestiture of certain mobile telephony sites and frequencies, not constituting viable business, could only take place to similar competitor. N
M.3436 Continental / Phoenix 26/10/04 Art 8(2) Only the partner in the distribution joint venture was able to render the divested business viable. N
M.3136 GE / AGFA NDT 05/12/03 Art 6(1)(b) Identified purchaser was independent, already active in market and had necessary expertise to operate the divested business. N
M.1878 Pfizer / Warner Lambert 22/05/00 Art 6(1)(b) Identified purchaser of divested Cognex assets was a viable and independent competitor in the relevant market. N
M.1137 Exxon / Shell 08/07/98 Art 6(1)(b) Purchaser was an independent and viable competitor with the financial resources and expertise to act as a competitive force in competition with the JV and other competitors. N
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Areas for use

• Where
• asset package only viable in particular
  circumstances
• few acceptable purchasers
• third party consents required
• difficulties in financing purchase

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Practical issues

• For notifying party
• Little time to run competitive process (although
  potential for parallel negotiations)
• Any crown jewel must be held separate in addition
  to preferred package - cant implement any
  synergies in respect of either package
• Both crown jewel and preferred package have to be
  maintained as competitive businesses
• Neither up-front nor fix it first remedies are
  much use when there may not be any suitable
  purchasers at all
• For potential purchaser
• Potential deal now - reduced risk of resurgent
  competitors during a later auction process
• Greater negotiating strength for purchaser, as
  against time constrained notifying party
• Increased time pressure to conduct due diligence
  and deal negotiation
• Risk of being frozen out in favour of another
  competitor
• Risk of notifying party running parallel
  processes
• Potentially less generous package if notifying
  party points to purchasers ability to fill in
  the gaps
• Risk of spin-off / de-merger

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Part B UK Competition Commission
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Competition Commission Guidelines

• Merger Remedies Competition Commission
  Guidelines Consultation Draft - May 2008
• Where CC is in doubt as to viability or
  attractiveness to purchasers of proposed
  divestiture package (i.e. composition risk) or
  believes there may be only limited pool of
  suitable purchasers (i.e. purchaser risk), it may
  require parties to obtain suitable purchaser that
  is contractually committed to transaction before
  permitting proposed merger to proceed or
  completed merger to progress with integration
• Where CC considers that competitive capability of
  divestiture package may deteriorate pending the
  divestiture (i.e. asset risk) or completion of
  divestiture may be prolonged, it may also require
  that up-front buyer completes acquisition before
  merger may proceed or, in case of completed
  merger, before merger parties may progress with
  integration (para 3.19)

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CC history of up-front buyer

• Few cases
• Note number of completed mergers referred which
  limits scope
• Kemira GrowHow/Terra Industries merger inquiry
  (2007)
• CC insisted on up-front buyer where divestiture
  business was carved out of existing business
  as, given structure of deal, there were doubts
  that suitable purchaser would be found
• CC noted that pool of suitable purchasers would
  probably be restricted to established companies
  in the UK chemical distribution industry
• Somerfield v Competition Commission (Competition
  Appeals Tribunal, 2006)
• CC ordered Somerfield to divest certain acquired
  Morrisons supermarkets
• CC excluded Limited Assortment Discounters from
  competitor set of permitted divestees, on basis
  that they were insufficiently close competitors
  to conventional supermarkets and thus would not
  be sufficiently committed to relevant market
• Somerfield appealed unsuccessfully to CAT
• Hamsard 2786/Academy Music Holdings (2007)
• CC ordered parties to divest specific indoor live
  music venues in London
• CC insisted on up-front buyer due to concerns
  about attractiveness of divestiture package to
  purchasers and doubts about whether there were
  suitable purchasers
• Remedy provided incentive to quickly reach
  agreement with suitable purchaser and so reduced
  the risk of possible degradation of assets