Antitrust in focus - May 2020
01 June 2020
This newsletter is our take on the antitrust developments we think are most interesting to your business. Jürgen Schindler, partner based in Brussels and Hamburg, is our editor for this edition. He has selected:
- State aid Temporary Framework extended to recapitalisations and subordinated loans
- CMA continues tough merger control enforcement record
- Aurubis/Metallo: European Commission unusually clears a merger without remedies following a Statement of Objections
As Covid-19-related challenges facing businesses in the EU continue to crystallise, the European Commission has again expanded its Temporary State Aid Framework – to cover recapitalisations of non-financial companies and subordinated debt. Of course, a host of conditions – including among other things eligibility and entry, types and amount of recapitalisation, remuneration and exit, governance and acquisitions, reporting and transparency – are attached to this loosening of the rules. The conditions were contentious and the final text amounts to a softening of the stance taken in the draft amendment. We set out the details in this alert, as an update to our earlier alert on the Temporary Framework and the Commission's first amendment. And you can keep track of all the Commission's coronavirus-related State aid decisions – now racking up to over EUR1.9 trillion of aid – via our overview.
The UK Competition and Markets Authority (CMA) was one of the standout merger control enforcers in 2019 (as set out in more detail in our recent Global trends in merger enforcement report). It frustrated (ie prohibited or caused to be abandoned) significantly more transactions compared to previous years – eight in total. And we are seeing no let-up in enforcement levels in the first half of 2020. Last month we reported that the CMA had blocked Sabre/Farelogix. Only a few weeks later, it has prohibited a second deal: JD Sports' completed acquisition of Footasylum. The CMA concluded that the parties were close competitors, with both parties among only a small number of retailers selling sports-fashion across the UK. It found that removing Footasylum as a rival would result in fewer discounts and/or lower quality customer service for consumers. Interestingly, the CMA considered Covid-19 as part of its assessment. The authority found that while the pandemic is significantly affecting the retail sector, its extent and duration is uncertain, and it is not clear that the parties would be hit harder relative to other retailers. The CMA therefore concluded that the impact of Covid-19 did not remove its antitrust concerns. JD Sports must now unscramble the transaction by selling off Footasylum. Acknowledging the "additional challenges" posed by the current situation, the CMA will give JD Sports additional time to complete the sale. But this show of flexibility does not seem to have appeased JD Sports, which has spoken out strongly against the decision. An appeal may be on the cards.
In addition, CMA (together with U.S. Department of Justice (DOJ)) antitrust concerns have caused another deal abandonment, bringing the tally for the year so far to three. Education publishers McGraw-Hill and Cengage pulled out of their merger shortly after the CMA sent the transaction for an in-depth review. The authority was concerned that the deal would lead to students paying more for textbooks. The DOJ raised similar issues in the U.S. While the parties offered remedies to both authorities, in each case the divestment package fell short. When announcing the abandonment, the CMA highlighted the "benefits of international cooperation in merger control" – as well as the DOJ, the CMA liaised with the Australian Competition & Consumer Commission (which had also raised concerns about the deal) and the New Zealand Commerce Commission (which cleared the transaction despite an initial statement of issues). This fits with a more general trend for antitrust authorities across the globe to coordinate merger reviews, in particular of remedy packages – parties to international transactions should take note.
The dairy industry in many countries has been hugely disrupted by the Covid-19 pandemic. In Europe, significant drops in demand from the hospitality and catering industry, as well as a reduction in third-country exports, has resulted in a supply-demand imbalance and a fall in wholesale prices. Governments and agencies have responded. The European Commission has adopted a six-month exceptional derogation from the antitrust rules for the milk sector (in addition to the flowers and potatoes sectors) – allowing for collective planning of raw milk production. In the UK, the government has temporarily relaxed antitrust law to allow the dairy industry – the UK's largest farming sector – to work together during the coronavirus outbreak. An order has given farmers and producers a green light to collaborate to avoid waste and maintain productive capacity to meet future demand. With the Agriculture and Horticulture Development Board taking the lead, they may share labour and facilities, and/or cooperate to identify where there is hidden capacity in the supply chain for processing milk into other dairy products. Farmers have also been encouraged to access loans available from their banks under the Coronavirus Business Interruption Loan Scheme.
In the U.S., the impact of the crisis – "causing demand for milk by schools and restaurants to collapse" – has fed into a merger control review. The U.S.'s two largest fluid milk processors, Dean Foods Company and Borden Dairy Company, were already in bankruptcy when the crisis hit. Dean Foods was facing imminent liquidation. So the U.S. Department of Justice (DOJ) wrapped up its review of the acquisitions of Dean's fluid milk processing plants by Dairy Farmers of America (DFA) and Prairie Farms Dairy following a "fast but comprehensive" investigation. The DOJ has required DFA to divest plants and associated equipment to address concerns in three regions (northeastern Illinois, Wisconsin and New England), and has persuaded DFA to drop plans to buy plants in the Upper Midwest. However, it closed its investigation into Prairie Farms' acquisitions after concluding that the plants in the South and Midwest would otherwise be shut down given Dean's distressed financial condition and "the lack of alternative operators who could timely buy the plants". The DOJ sought to "preserve necessary outlets for dairy farmers and keep milk on consumers' refrigerator shelves by keeping the plants in operation". The approach in the Prairie Farms acquisitions shows the DOJ's willingness – in appropriate cases – to take into account the impact of the Covid-19 pandemic, which in this deal had worsened the target's already vulnerable financial position.
The European Commission’s 2016 prohibition of the proposed Hutchison/Telefónica tie-up that would have united two of the UK’s four mobile network operators, Three and O2, following hot on the heels of the abandonment of the Danish TeliaSonera/Telenor deal in September 2015 after the parties were unable to agree, after two rounds of remedy offers, on commitments capable of meeting the Commission’s concerns, somewhat put the brake on the European telecoms sector push for consolidation that had begun with the H3G Austria/Orange Austria merger in 2012. A wave of Commission conditional approvals in the wake of that prohibition further curbed industry appetite for consolidation, particularly where ‘four-to-three’ mergers were concerned. Now, in a landmark ruling with likely repercussions not only for mergers in the telecoms sector but for antitrust law more widely, the EU General Court has overturned the Commission’s decision in Hutchison/Telefónica. At the heart of the Court’s judgment is the interpretation of the legal test that the Commission needs to apply in assessing mergers which would significantly impede effective competition but where there is no creation or strengthening of a dominant position – subject to judicial scrutiny for the first time since it became part of the EU merger rules in 2004. Look out for our upcoming alert analysing the court’s ruling in more detail, and in particular why it found that the Commission fell short of meeting the test.
Aurubis/Metallo: European Commission unusually clears a merger without remedies following a Statement of Objections (SO)
An unconditional clearance following a phase 2 merger control review by the European Commission is rare. In the past five years, only 15% of phase 2 cases have been cleared without remedies. It is even more unusual for a deal to receive unconditional approval after the Commission has issued an SO setting out its concerns with the transaction – there has been only one other example since 2015 (T-Mobile NL/Tele2 NL). This month, however, we saw such a case: Aurubis' acquisition of copper scrap refiner Metallo. The Commission's initial concerns centred on the EEA market for copper scrap for smelting and refining (CSSR). It focused on the purchasing of CSSR, where the parties are the two leading players – again, this is unusual: antitrust concerns in merger reviews tend to relate to the supply of goods or services. The Commission considered carefully whether the deal would enable the merged entity to increase its buyer power and impose lower prices for the copper scrap it purchases. The parties even offered commitments to address the concerns. However, the Commission ultimately concluded that: (i) the firms' combined market share would remain moderate after the transaction; (ii) the parties have largely complementary purchasing focuses (and therefore did not compete closely); and (iii) the merged entity would be constrained by a large number of alternative purchasers of copper scrap both inside and outside the EEA. It was therefore satisfied that the deal would not harm CSSR suppliers.
In addition to the points already mentioned, the case is interesting in two other respects. First, during the phase 1 review the parties withdrew and then refiled their notification. We can assume this was an attempt to buy more time in order to secure a phase 1 clearance, and is a tactic we are seeing parties increasingly use in EU reviews. But it clearly did not pay off in this case, showing that it is not a failsafe strategy. Second, this is the second Commission phase 2 investigation into a copper deal in as many years. The first (Wieland/Aurubis) did not fare so well: it was prohibited in February 2019. The concerns in that case were, however, more traditional – the removal of an important rival in the supply of certain copper products.
Where the U.S. Federal Trade Commission (FTC) has antitrust concerns in relation to a pharmaceutical merger, they are often dealt with by divestments of overlapping products to one or more upfront buyers (i.e. a buyer that has been approved in advance by the agency). The FTC's conditional approval of AbbVie's acquisition of Allergan is no exception. After an investigation lasting ten months and involving the review of more than 430,000 documents and over 40 interviews, the FTC focused in on two areas of concern. First, it found the merger would harm competition in the market for the treatment of exocrine pancreatic insufficiency (EPI) – a condition that results in the inability to digest food properly – where the parties are two of only four companies to sell pharmaceutical products to treat EPI and together account for 95% of the market. Second, the FTC was concerned about the elimination of future direct competition between the parties in the development and sales in the U.S. of IL-23 inhibitor drugs for the treatment of Crohn's disease and ulcerative colitis – both inflammatory bowel diseases – where the parties have overlapping pipeline products. Again, the parties are two of only four companies selling or in late-stage development of such drugs. Unsurprisingly, the remedies involve the divestment of two of Allergan's EPI drug assets as well as its IL-23 inhibitor pipeline drug, brazikumab.
For the FTC, the identity of a divestiture buyer, as well as the scope of a divestiture package, is critical. It conducted "a lengthy vetting process to ensure the ability and incentive of the proposed divestiture buyers to preserve competition that would otherwise be lost under the proposed acquisition". In relation to EPI, the FTC is confident that Nestlé and its leadership has the expertise, U.S. sales infrastructure and resources to acquire and maintain the divested drugs. For IL-23 inhibitors, it is assured that the terms of the transfer of Allergan's brazikumab-related rights and assets to Astra Zeneca, the drug's original developer, will incentivise Astra Zeneca to bring the product to market. The FTC did not make its decision in isolation: as well as working with the offices of "several" state Attorneys General, the FTC cooperated with antitrust authorities in Canada, Mexico, South Africa and the European Union. In fact, it liaised closely with the European Commission on the analysis of proposed remedies – in January, after a phase 1 review, the Commission also approved the merger subject to the sale of brazikumab.
Finally, the case is important as being another example of a split decision by the FTC. The two Democratic commissioners dissented, questioning the FTC's approach to assessing pharmaceutical mergers as well as the specific remedy in this case. This continues a trend we observed in 2019 – of FTC commissioners split along party lines, both in enforcement cases and on policy issues (see our Global trends in merger enforcement report for more details).
This month the Full Federal Court of Australia delivered a major blow to the Australian Competition & Consumer Commission (ACCC)'s merger control enforcement efforts and, in the process, confirmed the standard to be applied in relation to the substantial lessening of competition (SLC) test. The case relates to Pacific National's proposed acquisition of the Acacia Ridge Terminal (ART) in Brisbane from Aurizon (a key asset in Australia's inter/intrastate intermodal freight and steel rail linehaul services network). In 2018 the ACCC opposed the deal and commenced proceedings against Pacific National and Aurizon on the basis that Pacific National's ownership of the terminal would allow it to discriminate against and so deter new entrants from providing interstate linehaul services, as well as leading to the exit of Aurizon from the intermodal business by a combination of disposals and closures. This would in turn entrench Pacific National's position as the dominant rail freight carrier on the east coast of Australia. However, the Federal Court reversed the ACCC’s decision in May 2019, concluding that antitrust issues would be resolved by a behavioural access undertaking by Pacific National providing non-discriminatory access to other rail operators at ART. The Federal Court indicated that, but for the undertaking, it would have found the transaction was likely to substantially lessen competition. In June 2019, the ACCC appealed that ruling.
The ACCC's subsequent appeal has handed it a worse outcome. The Full Court of the Federal Court has concluded that the proposed acquisition was not anti-competitive – the counterfactual assessment indicated that if the acquisition were not to proceed, high barriers to entry would make the prospect of new entry in the next five to ten years no more than speculative. On that basis, the competitive constraints facing Pacific National within this timeframe would not differ in any real or substantive way irrespective of whether Pacific National acquired the ART. The transaction may now proceed, without any conditions (including the access undertaking that was previously offered by Pacific National). Interestingly, the Full Court also clarified the word "likely" in the SLC test – a transaction will contravene the Australian merger control rules where there is a "real commercial likelihood" of it substantially lessening competition in a market in Australia. And it confirmed that courts have the power to accept undertakings from merging parties, either as they consider appropriate, or where they are put forward by an acquirer in lieu of an injunction in circumstances where the Australian merger control rules would be infringed.
What does this mean for the ACCC? Chair Rod Sims says that "the outcome demonstrates the real difficulty of applying the substantial lessening of competition provisions in the legislation" and that "the ACCC will continue to consider what changes are needed to make Australia's merger laws work in the way they need to, to safeguard the economy from highly concentrated markets". In the wake of the Federal Court's recent decision to allow the merger of Vodafone and TPG to proceed (despite the ACCC's objections) – see our February edition of Antitrust in focus – the Full Court's decision will add further weight to the ACCC's calls for reform.