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© AlixPartners UK LLP 2013 www.alixpartners.com
The last ditch? – Failing firm and efficiency defences in EU/UK merger control
Mat Hughes – 26 February 2014
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The failing firm defence - Do you feel lucky?
Efficiencies – Mission impossible?
Case study: Royal Bournemouth and Christchurch/ Poole (2013)
Case study: CC Imerys/Goonvean (2013)
Conclusions
Contents
Failing firm defence (I)
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When is an otherwise anti-competitive merger OK? “Failing firm” defence means no SLC or SIEC (exiting-rationalising business defence):
- firms might also be “flailing”, reducing concerns- merger effects must be judged by reference to competition absent merger (counterfactual)
May also be relevant to: - de minimis exception in UK (e.g. OFT Midland General Omnibus/Felix Bus Services (2012)) - remedies (alternative purchaser?)- merger benefits (absent merger what would happen to supply costs/output?)- barriers to entry (watch consistency - entry likely/profitable?)
Do you feel lucky?
From 2010-13:‒ 23 Phase II EUMR decisions from 2010-13, and only 8 unconditional
clearances (35%) and two on the basis of failing firm (2013: Nynas/ Shell and Olympic/Aegean (II))
‒ 29 CC reports from 2010-13 (plus 1 water), and 18 unconditional clearances (62%!). Of these:
‒ two failing firm (Optimax/Ultralase (2013) and Sector Treasury Services/Butler (2011))
‒ Imerys/Goonvean (2013) failing product plus limited duration of concerns, and no SLC in McGill/Arriva Scotland West (2012) due to expectation of declining competition and threat of entry
Failing firm defence (II)
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Criteria
Surprise! Watch out for failing firm “offence”: - the overlaps with businesses closed by seller, i.e. was closure due to sale of other business thus
leading to anti-competitive effects? - issue in 2011 in Stena/DFDS Irish Ferries and Ratcliffe Palfinger/Ross & Bonnyman, but (on
facts) CC accepted closures not due to merger What evidence do you need?
EU UK
Exit – financial difficulties (application to banks/state hospitals)No less anti-competitive purchaserAssets inevitably exit market
Exit – through failure, but also strategy changeDitto (Eurotunnel/Sea France (2013))Even if exit, look at distribution of sales (could small players grow?)
Efficiency defence
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Really? EU: efficiencies may offset anti-competitive effects UK: three “bites at cherry” (enhance rivalry (PF
Tradebe/Sita (2014)); exception to refer (1 marginal), 2 cases influenced CC remedies)
Closest EU TNT/UPS (2013) - prohibition decision! Annual cost savings €400-550m in three main areas:
- management/administrative overheads- ground transportation costs- air network. EC estimated pass on and compared with
the price increases predicted by its price concentration model (prices higher where fewer rivals…model submitted by parties)
Customer efficiencies outweigh price rises in 15/29 countries (based on market shares, FedEx presence and expansion plans, bidding data)
Nynas/Shell only EU case where efficiencies were a contributory factor in clearance decision, linked to failing firm (closure = higher import costs) plus lower variable costs
NHS Hospital mergers
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Royal Bournemouth and Christchurch/ Poole (2013) merger prohibited. SLC 21-31% of each hospital’s clinical income (much smaller in Akzo Nobel/Metlac (2012))
Proposition: we can’t afford duplication and merger benefits mainly where SLC No RCB found. Why, surely good? No presumptions - law and experience US merger integration/expert witness experience Duty to consult = no detail/plan? CC no need consult/decide but
- preferred proposal/evidence of need; groups to evaluate benefits; model of care; assess clinical benefits/dis-benefits plus financial/economic viability
Likely with merger? Maternity unit start 16/17? Likely without? Cardiology rota? Dis-benefits from rationalisation? A&E/emergency surgery? Cost savings? If CC had found RCB, might still have prohibited
CC Imerys/Goonvean
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Efficiency defence:- detailed efficiency analysis. Large due to proximity of parties’ pits, mixture of fixed/variable savings
but also increasing output (access to lower cost reserves and increasing life of pits)
CC: Efficiencies not rivalry enhancing:- rivalry against whom?
- efficiency plans assume 0% pass on (!) and paid out in purchase price (?), BUT higher output a RCB Variant of failing firm defence? GHL: cash (EBITDA) generative, and
kaolin + aggregates profitable overall bar two years:“the board was unanimous in its view that it would seek to ensure that the
company would survive, although the prospects for the next few years appeared poor.”
K + A cash generative? Look at management accounts
- costs rising faster than prices, and ROCE very low
- limited positive cash flows due to no re-investment (replace when fail) - capex
less than depreciation over last five years
- now heavily loss making (customer loss/high cost), major capex, limited
reserves (abandon less profitable tableware – complex!), pension deficit Rational investor? Exit now or when Greensplat fails? CC: When(?) Greensplat fails Proportionality and RCB:
- Divestment (add assets/keep liabilities!) and 5 year price cap equally effective (not harming rivals/simple). But divestment mean loss of RCB across all markets which would be large relative to divestment benefits (CPM sales low % of total)
Conclusions
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All cases turn on their facts – don’t rule out failing firm or efficiency arguments
Four successful second stage, failing firm cases in 2013 (2 UK, 2 EU)
Royal Bournemouth and Christchurch/ Poole (2013) - CC put out a press release at provisional findings stage: “Hospitals must now prove merger benefits”
EU narrowed concerns in TNT/UPS due to efficiencies
PF Tradebe/SITA rely on merger efficiencies as one factor as why not concerned by 3:2 merger
Rationale should be part of story. E.g. why do you want to buy a failing firm? An obvious efficiency story in both Nynas and Imerys
Key challenges are facts - Expert TRS and EI evidence is needed
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