Friday, 12 October 2012

Remedies in merger cases

The Competition Commission have published a very helpful and clear analysis of how the remedies in three merger cases have worked out. The analysis can be found, rather obscurely, on this page: by clicking on "Understanding past Merger Remedies" and going to page 82! Three inquiries are discussed: Clifford Kent/Deans, Macquarie UK Broadcast/National Grid Wireless and Nufarm/A H Marks, all of which were completed mergers from around 2007-08.

Clifford Kent/Deans was a merger between the two largest suppliers of eggs in the UK and the CC decided that this would result in an SLC in the supply of fresh eggs. The CC's preferred remedy was the divestiture of Stonegate, the subsidiary of Clifford Kent, from the merged entity, now called Noble. The process was, to put it mildly, not straightforward. The initial divestiture period was three months, from the acceptance of the final undertakings, with the possibility of a three months extension. In the event, the entire process took nine and half months from the acceptance of the undertakings and the appointment of a divestiture trustee. The delay was caused partly by the unexpected fact that one of the bidders was the hold separate manager, who became the preferred bidder, which led to a substantial revision of their offer, and more discussion of their suitability. Just when everything appeared to be set, the bidder's lender withdrew financing, apparently because of the credit crunch, and it took another couple of months before a new offer of finance was in place and Stonegate was eventually sold. Perhaps more importantly, the CC's evaluation suggests that Stonegate has operated as an effective competitor, albeit in a context where Noble has a very strong market position.

The other two cases are particularly interesting because they involve the successful use of complicated behavioural remedies, as opposed to the difficult implementation of a standard divestment remedy. The Macquarie case involved the acquisition by Macquarie's subsidiary, Arquiva, of National Grid Wireless Group's operations in relation to managed transmission services (MTS) and network access (NA) to sites and associated facilities to terrestrial television and radio broadcasters. In essence, this is doing the work of making sure that television and radio broadcasts are transmitted properly from the various sites across the country, around 1,000. The CC found that there would be an SLC because the merger combined the only active providers of MTS/NA to UK television broadcasters and that the two entities were the most significant providers of these services to radio broadcasters, with a market share over eighty-five per cent, that they exercised a competitive constraint on each other and that there was insufficient threat of entry. Although intuitively, these circumstances might be thought to lead to a full divestiture, the CC also identified that the merger could give rise to significant relevant customer benefits (RCBs) which would be lost if the merger was not allowed to go ahead. The other background issue was that the merger was taking place during the switchover to digital television and there was a strong concern that this should not be disrupted.

The CC therefore came up with a set of complicated behavioural remedies. The main points were that customers would get a variety of significant price reductions, contract renewals or new contracts would be based either on existing contracts or cost-oriented and FRAND terms, protection for quality of services, the creation of an independent adjudicator ( to deal with disputes, the preparation and audit of regulatory accounts for Arqiva and protection for confidential information, among other rules. The analysis suggests that the remedies have worked well, although the CC cautions that there has not yet been any stress test of the provisions, for example, through a contract renewal. In particular, there has been better information provision and the adjudicator has been seen as a clear success, even though there have been no formal disputes! As the CC points out, a lack of disputes can be seen as a sign of success.

The final case is Nufarm which involved the acquisition of a company producing herbicides, plus related products, as part of a complicated supply chain. The CC found that there was likely to be an SLC in relation to two herbicides, MCPA and MCPP-p, at various levels in the supply chain. This merger was also investigated in a number of other countries, notably the US and Canada. The final remedies agreed upon were a complex mixture of structural and behavioural ones, which also required careful attention to the regulatory context. To be more precise, in relation to MCPA to remedies were: the extension and improvement of a supply agreement to a potential competitor (Dow), the transfer to this potential competitor of a formulated product registration, and the creation of a new formulated product and the transfer of it to another potential competitor (Sarzyna, a Polish company). For MCPP-p the remedies required: entry into two toll manufacturing agreements, the transfer of the registration of a formulated product to a customer, access to a particular technology and a commitment to allow two customers to continue to rely on certain product registrations, so long as the merged entity maintained those registrations for its own use. There was a fallback divestiture remedy which the CC noted helped to provide a strong incentive on the parties to agree undertakings and implement the preferred remedies. Almost all of the agreements were reached within the timetable set down by the CC, with one minor exception, and some were reached earlier. The MCPA remedy appeared to be effective, even though Dow had not entered the market, because Sarzyna had entered – although Sarzyna had not given any information directly to the CC about its activities. The customers for MCPP-p said that the remedies had been effective because the agreements and the transfer of registration had worked well.

This analysis of how remedies have worked in relation to particular inquiries is very valuable but it does make one wonder why the European Commission cannot do something similar. The use of behavioural remedies is particularly interesting, as they often are seen as the poor relations of the remedies universe. The CC cautions, however, that behavioural remedies are more likely to be effective if the pace of change in the industry concerned is both relatively slow and predictable.