DOC - Europa

Brussels, 14 March 2000
Alcan abandons its plans to acquire Pechiney to
avoid the prospect of a decision by the European
Commission to block the merger
Alcan informed the European Commission this morning that it has put an
end to its Combination Agreement with Pechiney to merge their world-wide
activities. Alcan also withdrew the notification of the operation. Before the
abandonment of the original merger plans, the Commission had carried out
an in-depth investigation of the operation and concluded that the merger
would create dominant positions in a certain number of markets (flat-rolled
aluminium products used in the production of beverage and food cans and
packaging products such as aerosols cans, aluminium cartridges and cheese
foil). Moreover, the merger, which would create the largest aluminium
producer in Europe, would cause the merged firm and its immediate
competitor, VAW, to share a major aluminium rolling mill, Alunorf, in
Germany. In the course of the procedure, Alcan proposed undertakings
which the Commission did not consider sufficient to remove the competition
problems. As a result, Commissioner Mario Monti, in charge of competition
policy, proposed to his colleagues to block the merger. As a result of the
abandonment of Alcan’s merger plans, this decision has not been adopted.
The second transaction, however, involving Alcan’s acquisition of Alusuisse
was authorised as the competition problems identified were remedied by
undertakings submitted by Alcan. Alcan’s initial idea was to proceed with a
three-way merger which would give birth to the second largest aluminium
producer in the world, under the provisional company name APA (AlcanPechiney-Alusuisse).
Alcan, a Canadian Corporation, and Pechiney, a French corporation, are each
involved in all aspects of the aluminium industry. Their activities include bauxite
mining, alumina refining, power generation, aluminium smelting, manufacturing and
recycling as well as research and technology. Pechiney is also active in packaging
materials, including the production of aerosols, plastic bottles, plastic cosmetic
containers and flexible packaging.
The Commission received notification of two merger proposals by Alcan. According
to this proposal Alcan would make two separate and independent share exchange
offers, one for the shares of Alusuisse and the other for the shares of Pechiney.
Although the ultimate aim of the companies is a three-way merger, the two offers are
not conditional upon each other and it is possible for one merger to happen without
the other. The Commission examined the two cases on their own merits, and
concluded that although the Alcan/Alusuisse transaction could be declared
compatible with the common market, the Alcan/Pechiney merger was more
Summary of the Commission’s analysis
Today, the Commission was to decide on Commissioner Monti’s proposal to block
the Alcan/Pechiney transaction. The investigation showed that the merged firm
would hold substantial market shares conferring it with a dominant position in the
markets for aluminium beverage can body stock (a raw material used in the
production of beverage cans) and for aluminium food can sheet (a raw material used
in the production of food cans). Moreover, the merged entity would become the
dominant player in a number of packaging markets, in particular aluminium aerosol
cans, aluminium cartridges and aluminium flexible packaging for processed cheese.
In addition, Alcan is a 50:50 joint partner of VAW, in the largest aluminium rolling mill
world-wide, Alunorf, in Germany. As a result of the merger, VAW, Alcan and
Pechiney, that is the three largest aluminium producers in the EU, would produce
their products in the same facility. This situation would have induced parallel
anticompetitive competitive behaviour between the Alunorf partners, which would
ultimately harm competition and consumers.
In order to alleviate the competition concerns identified by the Commission, the
merging firms proposed a series of undertakings. These aimed at reducing the
merged firm’s market shares in the various problematic markets, as well as at
loosening the link between competitors in the Norf joint venture. The Commission did
not consider these undertakings fully satisfactory. This assessment was confirmed
by the negative results of the market test. As a consequence, Commissioner Monti
decided to submit a prohibition decision to the Commission, as the proposed merger
would result in the creation of several dominant positions as a result of which
effective competition would be impeded in the common market.
Details of the Commission’s analysis
Flat-rolled products
The Commission identified concerns which led it to conclude on the creation of a
dominant position in the markets for beverage can body stock and food can sheet.
These concerns were particularly aggravated by the presence of the Norf joint
venture between the merged firm and its immediate competitor in these markets,
Beverage can body stock is the raw material for the manufacture of beverage cans.
The Commission’s detailed investigation led it to conclude that aluminium and
tinplate beverage can body stock are not part of the same product market. The
geographic market for beverage can body stock is the EEA. The merger would result
in a significant combined market share with the remaining competitors (VAW of
Germany and Elval of Greece) lacking well behind. Those could not be regarded as
a competitive threat to the possible exercise of market power by the merged firm.
Elval is, at present, too small to capture market share from the merged firm, unless it
invests heavily in capacity expansions. VAW produces all of its beverage can stock
at Norf and is linked to the merged firm through that joint venture. Its incentives to
compete would diminish significantly after the merger. VAW has capacity constraints,
which is not the case for the merged firm. If VAW wanted to compete head-on, it
would have to expand its capacity at Norf. This could be blocked by the merged firm
under the Norf joint venture agreements. Moreover, the arrangements on the cost
allocation between the two partners at Norf give the possibility to the merged firm to
raise VAW’s costs, by simply re-arranging its product mix at Norf. This represents a
credible threat of retaliation at the disposal of the merged firm. Under these
circumstances, the most rational course of action to be followed by VAW was to align
its behaviour on that of the merged firm and become a price taker. No mitigating
circumstances to the market power of the merged firm were found to exist.
Consequently, the Commission considered that the Alcan/Pechiney transaction
would create a dominant position in the market for beverage can body stock.
The merger would also create a dominant position in the market for food can sheet.
This is the raw material for the manufacture of food cans. Although food cans are
made of either tinplate or aluminium, aluminium and tinplate can sheet were found to
be two separate product markets. From a geographic viewpoint, competition in this
market takes place within the EEA. The combined market share of the merged firm
would be substantial whereas the next competitor, VAW, would have five times
smaller a market share. However, as for beverage can body stock, VAW’s incentives
to compete would be reduced as a result of its participation along with the merged
firm in the Norf joint venture. The remaining competitors are small and capacityconstrained so as not to be able to capture market share from the merged firm. For
these reasons, the Commission considered that the concentration would result in the
creation of a dominant position in the market for food can sheet in the EEA.
The Norf joint venture between Alcan and VAW
One of the crucial features in the Commission’s analysis was the existence of
Aluminium Norf GmbH (“Norf”), a 50:50 joint venture rolling mill between Alcan and
VAW. Alcan had argued that the Norf joint venture is not a classical production joint
venture but a time sharing facility, which would not restrict competition between the
parent companies, as a result of the merger. However, the Commission considered
that the degree of interdependence between Alcan and VAW stemming from the joint
operation of Norf prevented it from qualifying as a simple time sharing facility. The
presence of the two largest EEA producers of aluminium flat-rolled products in a joint
structure that manufactures products in which the merged firm will acquire significant
market positions, raises competition problems. These stem from the legal structure
of Norf and the resulting de facto co-operation between the parents; from the strong
dependence of VAW on Norf, its capacity constraints in other rolling mills and the
right of Alcan to veto investments proposals by VAW aiming at increasing its
capacity; and the ability of the merged firm to raise VAW’s costs by changing
unilaterally its product mix at Norf. Overall, the asymmetrical capacity constraints, in
favour of the merged firm, and the credible threat of retaliation on VAW would create
a situation where collusion among the parents of Norf could be sustainable in the
long run.
Undertakings in relation to flat-rolled products and the Norf joint venture
In order to eliminate the competition problems identified by the Commission, Alcan
proposed a package of undertakings.
Concerning beverage can body stock and food can sheet, the merger would bring
about the combination of Alcan’s Norf and Pechiney’s Neuf-Brisach rolling mills,
where these products are produced. Alcan proposed to make available to a third
party, its rolling capacity at Norf, corresponding to the production of beverage can
body stock and food can stock (corresponding to 20% of Alcan’s rolling activity in
Norf). Moreover, Alcan would cease the production of these products at Norf, for a
long period of time. Overall, the merged entity would remain a partner in Norf,
although on a reduced capacity basis.
This proposal was not acceptable to the Commission. First, it would not severe the
link between the two largest aluminium producers in Europe (APA and VAW).
Secondly, if another aluminium producer were to acquire Alcan’s share of capacity in
Norf, then a joint venture between three, and probably the only, suppliers of
beverage can body stock would occur. This would increase the already extremely
high concentration of the European aluminium industry. Therefore, this solution could
not be accepted. On the other hand, if VAW were to acquire Alcan’s divested
capacity share in Norf, this would remove the competitive overlap between Alcan
and Pechiney, but it would create two players with symmetrical market positions
which, in addition, would share the Norf mill. Given the structure of the market and
the links between APA and VAW, the creation of a duopolistic dominant position held
by the merged firm and VAW in the beverage can body stock market could not be
It is precisely in order to address such duopolistic dominance doubts that Alcan
offered an additional measure: to make available to a third party, for a certain period,
a capacity of several thousands tonnes of beverage can body stock from Pechiney’s
Neuf-Brisach mill. This tonnage corresponds to a small, but not insignificant, share of
the market. In exchange, the third party would make available to APA an equivalent
capacity of foil stock and the price differential between the two products will be
compensated through a conversion formula. Overall, through this additional
measure, the parties considered that a third player with a given market share would
become active in this market, therefore dispelling any doubts as to the creation of a
duopolistic market structure.
However, the Commission considered it doubtful whether such a proposal could
really dispel a possible duopoly. Firstly, the third party would be strongly dependent
on Neuf-Brisach; it would be no more than a wholesaler of the APA’s Neuf-Brisach
mill. Indeed, the third party would not be involved at all in the production process; it
would just be entitled to sell the material to can makers, most probably without even
coming into contact with it. Secondly, it would be constrained to a given amount of
capacity and unlikely to compete against the APA or VAW for market share. It is
unlikely that such a third party would ever become a real and independent
competitor. On the contrary it is rather likely that it would align its behaviour and
prices on those of the merged firm. Thirdly, it is not certain at all whether, after the
expiry of the start-up period, the third party would commit to continue producing and
supplying beverage can body stock on its own or whether it would stop this activity
once the Neuf-Brisach supply agreement had elapsed. Overall, the proposed
undertaking was not considered able to eliminate the creation of a dominant position
in the relevant product markets.
Undertakings in respect of Norf
In order to address the Commission’s concerns as to the cohabitation of APA and
VAW in the Norf joint venture, Alcan proposed to remain a joint partner in Norf, in
exchange of loosening the joint venture link. Alcan proposed undertakings in order to
remove (i) the concerns about the flow of confidential information between the parent
companies, by putting in place confidentiality obligations and firewalls between the
APA and VAW; (ii) the concerns about Alcan’s possibility to raise VAW’s costs by
changing its product mix at Norf, by proposing to amend the current Norf cost
allocation formula so as to ensure that no action of APA would negatively affect the
costs to be borne by VAW at Norf; and (iii) the concerns about Alcan’s right to block
investments aiming at expanding VAW’s capacity at Norf, by proposing to amend the
provisions relating to capacity expansions and allow any party to expand capacity at
Norf unilaterally.
Overall, Alcan offered undertakings which provide for the amendment of its existing
joint venture agreements with VAW. However, these undertakings cannot be
performed by Alcan alone but can only be implemented with the prior agreement of
VAW. Besides the fact that these undertakings were not self-executing, the
Commission did not consider them able to eliminate the risk of collusion at Norf.
First, the undertaking relating to the veto right on investments concerns only
investments related to the installation of new facilities at Norf (i.e., a new rolling mill).
All the remaining investments were not caught by the undertaking (i.e., debottlenecking of current capacities, maintenance work, modernisation of working
methods and other day-to-day improvements).
Moreover, the undertaking was qualified, in that Alcan would not veto any expansion
by VAW provided that such expansion would not “adversely affect the existing
operations of the other party at Alunorf”. This provision would be subject to
interpretation and highly likely to give raise to vivid discussions between APA and
VAW. Secondly, as to the undertaking to put in place “stringent confidentiality
procedures” at Norf, the Commission considered that besides the fact that such
‘firewalls’ could not be effectively monitored, any confidentiality procedures with
respect to production schedules and sales forecasts could adversely affect the
functioning and competitiveness of Norf. Indeed, if the parent companies are
selective as to the information they will pass on to the Norf production staff, then Norf
could not co-ordinate and optimise its production process in advance but would have
to wait for each individual order put by the parents up to the total capacity which they
are entitled to use. Consequently, no standardisation with respect to the alloys,
routing or other production processes would be possible, due to the fact that no
forecast business plan could be established. Ultimately, this would harm only VAW,
as APA’s relative dependence on Norf would be reduced after the merger owing to
the other rolling mills that the merging partner would bring together.
Overall, neither the undertakings concerning the specific product markets nor those
concerning the link of APA and VAW in Norf were able to eliminate the competition
problems identified by the Commission throughout the procedure.
The packaging markets
The merger also raised competition problems in three packaging markets, namely
aluminium cartridges, aerosol cans and cheese foil. Although Alcan does not
produce aerosol cans and cheese foil, the merger would bring together the
respective businesses of Alusuisse (which Alcan was authorised by the Commission
to acquire) and Pechiney in those products.
Aluminium cartridges are used to pack sealants and adhesives used in the car and
construction industry. The Commission found that the merger would create the
dominant producer and supplier of aluminium cartridges in the EEA.
As far as aerosol cans are concerned, the Commission found that tinplate and
aluminium aerosol cans do not belong to the same product market. There is a
specific demand for aluminium aerosol cans, motivated by the superior
characteristics of that metal. Competition takes place at EEA level. The merged firm
would have a considerable share of the aluminium aerosol cans market, six times
higher than its nearest rival. Moreover, it would control by far the largest share of
overcapacity, which exceeds the production capacity of any of the smaller suppliers,
placing thus the merged firm in the best position to win a price war. The Commission
concluded that the proposed concentration would lead to a dominant position in the
EEA market for aluminium aerosol cans.
Finally, in the market for flexible packaging for cheese (cheese foil), the merged firm
would have a large market share, three times higher than that of the nearest rival.
Moreover, the merged firm would be the only supplier with dedicated production line
for cheese foil which would give the new company a considerable cost advantage
over rivals. The Commission concluded that the proposed concentration would lead
to a dominant position in the EEA market for lacquered aluminium foil for the
packaging of cheese.
Undertakings proposed by Alcan in relation to the packaging markets
In order to eliminate the competition problems identified by the Commission, Alcan
proposed a package of undertakings.
As far as aerosol cans are concerned, Alcan offered to sell two plants (Bellegarde in
France and Badalona, in Spain) and half of the Hanko plant in Finland. In addition, a
certain amount of can lines would be transferred to Bellegarde after the closure of
the Nürnberg plant, Germany. The results of the Commission’s analysis of the
undertakings have shown that the proposed undertaking would not remove the
competitive overlap and would leave APA with a substantial part of the market. In
addition, the proposed plants were, reportedly, not viable or are high cost facilities
which were meant to be shut down anyway. Moreover, the Commission strongly
questioned the likelihood that the acquirer of these plants would be able to build up a
competitive business, in particular given that the full transfer of the divested business
and the integration and establishment process would take a number of years to
complete. During that time, transferred customers would not receive a flawless
service and would have a fully operational alternative to go in the event of problems,
that is, APA. Consequently, the proposed undertaking was not considered sufficient
to eliminate the competition problem identified by the Commission.
In relation to cartridges, Alcan produces this material in Göttingen, Germany and
Pechiney in Saumur, France. Alcan offered to sell either its own or Pechiney’s
cartridge plant. The proposed sale seems to eliminate the competitive overlap and
restore the status quo ante prevailing before the merger. However, the Commission
pointed out that the undertaking was not firm, but remained vague and ambiguous as
to the specific plant that will be finally sold.
Finally, in relation to cheese foil, Alcan proposed to grant a licence to a third party in
respect of its technology used in the lacquering of aluminium foil for wrapping
processed cheese or to sell a line that is capable of lacquering aluminium foil for
wrapping processed cheese together with a licence of the technology used in
respect of the relevant line. In addition, Alcan proposed to offer a supply contract for
the lacquered foil to ensure that the licensed competitor will be fully operational
before the supply agreement expires.
The Commission considered that the proposed undertaking were not sufficient to
remove the competition problem identified. The undertaking is vague as to whose
party’s technology or production line will be divested. Furthermore, the transfer of
technology, short of the transfer of a manufacturing site, would not be sufficient to
enable a third party acquirer to generate a production capacity equivalent to the
amount of the overlap. Therefore, the overlap of activities would remain in place.
Moreover, it is doubtful whether such a third party acquirer would be able to swiftly
integrate and assimilate the transferred technology within its business in the short to
medium term. A possible delay would make the third party acquirer non competitive
in this market while the dominant position of the parties would remain. Furthermore,
a third party acquirer might not be able to adapt its research and development efforts
on the transferred technology so as to fully exploit the benefits of such technology in
the future. Overall, a mere transfer of technology would not enable the new acquirer
to establish itself in the market and get the necessary approvals and accreditation
from customers so as to become a viable and independent competitor of APA.
The same considerations apply to the alternative proposal to sell a line capable of
lacquering aluminium foil for wrapping processed cheese together with a licence of
the technology. The proposed solution would not eliminate the overlap. The merged
firm would keep its current business, including customer contracts and
accreditations. The mere sale of a production line also posed the problem of
accreditation with customers. The Commission gathered evidence of cases where
the established suppliers of cheese foils were discredited by customers because of
the simple fact that they moved some of their production from one site to another.
This resulted in poorer quality product and to the removal of the accreditation by
customers. It is, therefore, doubtful whether a third party acquirer would be able to
produce and commercialise a marketable product so as to challenge the dominant
position of the merged firm. Finally, Alcan did not propose the transfer of customer
contracts and accompanying non-competition and non-solicitation clauses.
Therefore, the Commission considered that the proposed undertaking was not
sufficient to prevent the creation of a dominant position.