The last ditch? – Failing firm and efficiency defences in
EU/UK merger control
Mat Hughes – 26 February 2014
© AlixPartners UK LLP 2013
www.alixpartners.com
Contents
 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
www.alixpartners.com
2
Failing firm defence (I)
 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
www.alixpartners.com
3
Failing firm defence (II)
 Criteria
EU
UK
Exit – financial difficulties (application to
banks/state hospitals)
No less anti-competitive purchaser
Assets inevitably exit market
Exit – through failure, but also strategy
change
Ditto (Eurotunnel/Sea France (2013))
Even if exit, look at distribution of sales
(could small players grow?)
 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?
www.alixpartners.com
4
Efficiency defence
 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
www.alixpartners.com
5
NHS Hospital mergers
 Royal Bournemouth and Christchurch/ Poole (2013) merger prohibited. SLC 2131% 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
www.alixpartners.com
6
CC Imerys/Goonvean
 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)
www.alixpartners.com
7
Conclusions
 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
www.alixpartners.com
8
Global Locations
Thank you!
Boston
Chicago
Dallas
Detroit
Dubai
Düsseldorf
Hong Kong
London
One Boston Place
Suite 4040
Boston, MA 02108
617.742.4400
300 N. LaSalle Street
Suite 1900
Chicago, IL 60654
312.346.2500
2101 Cedar Springs Road
Suite 1100
Dallas, TX 75201
214.647.7500
2000 Town Center
Suite 2400
Southfield, MI 48075
248. 358.4420
Office 101, Tower 2
Al Fattan Currency House
P.O. Box 482093
Dubai Intl Financial Centre
Dubai, United Arab Emirates
+971.4.704.6000
Hofgarten Palais
Bleichstraße 8 – 10
40211 Düsseldorf
Germany
+49.211.97.55.10.00
Suite 1802
LHT Tower
31 Queen’s Road Central
Hong Kong
+852.2236.3500
20 North Audley Street
London W1K 6WE
United Kingdom
+44.20.7098.7400
Los Angeles
Milan
Corso Matteotti 9
515 S. Flower Street
20121 Milan
Suite 3050
Italy
Los Angeles, CA 90071
+39.02.360.12000
213.437.7100
© AlixPartners, LLP, 2012
Munich
Mauerkircherstr. 1 a
81679 München
Germany
+49.89.20.30.40.00
New York
Paris
San Francisco
Shanghai
Tokyo
Washington, DC
Marunouchi Building 33F
40 West 57th Street 49/51 Avenue George V
580 California Street
Suite 6111
1999 K Street NW
75008 Paris
2-4-1 Marunouchi
Suite 2050
Plaza 66 Building I
New York, NY 10019
Suite 750
France
Chiyoda-ku
San Francisco, CA 94104 1266 Nan Jing West Road
212.490.2500
Washington, DC 20006
+33.1.76.74.72.00
415.848.0283
Shanghai, 200040 China Tokyo 100-6333 Japan
202.756.9000
+81.3.5533.4800
+8621.6171.7555