Affected market: Agro-chemical products
Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.
The OFT's decision on reference under section 22(1) given on 29 August 2008. Full text of decision published 12 September 2008.
Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.
Nufarm Limited (Nufarm) is an Australian-based manufacturer of crop protection products with operations worldwide. Its wholly-owned UK subsidiary, Nufarm Crop Products UK Limited, manufactures a range of herbicides, and chemical inputs into the manufacture of herbicides, at its factory in Belvedere, Kent. It also supplies the UK market with herbicides using inputs from the 'phenoxy' group of chemicals as their active ingredient. These inputs are manufactured at its factories in The Netherlands and Austria.
AH Marks Holdings Limited (AH Marks) is a manufacturer and supplier of herbicides and other chemicals to the agricultural sector. It manufactures a range of herbicides, and chemical inputs into the manufacture of herbicides, at its plant in Wyke, Yorkshire, which it supplies to the UK and overseas markets. In 2007 AH Marks had revenues of approximately £62 million of which approximately £[10-20] million were generated in the UK. Virtually all of its UK revenues were generated from the sale of herbicides belonging to the phenoxy group of chemicals.
On 5 March 2008 Nufarm announced that it had acquired the entire business of AH Marks. The Office of Fair Trading (OFT) only became aware of, and subsequently initiated a review of the transaction in June when it was drawn to the OFT's attention by an overseas competition authority. The four month statutory timetable, as extended, expires on 1 September 2008.
Nufarm submitted an informal submission to the OFT dated 18 July 2008. While Nufarm was perfectly entitled to take the risk of completing the transaction without notifying it to the OFT, the practical implication of the particular sequence of events in this case - that is, the OFT only becoming aware of the transaction in June after it had completed in March - is that the OFT had a relatively (compared to its 40 working day administrative timetable) short period of time within which to review the transaction.
As a result of the transaction, Nufarm and AH Marks have ceased to be distinct.
The parties overlap in the supply of two phenoxyacetic acids:
2-methyl-4-chlorophenoxyacetic acid (commonly known as MCPA) and 2,4-dichlorophenoxyacetic acid (commonly known as 2,4-D). The parties' share of supply for each of these acids for all applications in the UK exceeds 25 per cent. Consequently, the transaction satisfies the share of supply test in section 23 of the Enterprise Act 2002 (the Act). The OFT, therefore, believes that it is or may be the case that the acquisition has resulted in the creation of a relevant merger situation.
The transaction has also been notified to, and subsequently cleared by, the Bundeskartellamt in Germany and is currently being considered by the United States Federal Trade Commission (FTC) and the Australian Competition and Consumer Commission (ACCC). The OFT liaised closely with the FTC and ACCC during the course of its investigation, receiving information from the ACCC pursuant to a confidentiality waiver provided by Nufarm. However, at the time of the OFT's decision, Nufarm had not provided a similar waiver to allow the OFT to take into account information Nufarm provided to the FTC.
THIRD PARTY VIEWS
Multiple third parties identified issues that were indicative of this transaction raising competition issues. All identified the parties as the only suppliers of MCPA and 2,4-D into the UK and the vast majority considered them to be each others' closest competitor. Despite this, many customers were either neutral about the effect of this transaction or did not think it would have an effect on them. Given none of these customers were at the end-user level, however, the OFT did not consider that the absence of concern was likely to be a conclusive indicator of a lack of competition issues, particularly in light of comments regarding the lack of viable substitutes for the parties' products and barriers to entry.
Competitors of the parties noted that the merger represented the combination of two of the world leaders in the production of phenoxyacetic acids, and placed the merged entity in a very strong position in this segment of the UK market. Nevertheless, competitors noted that phenoxy-based herbicides represented a small part of the total herbicides industry and that, while they still played a role in the industry, newer, more effective chemistries had replaced phenoxy-based products in a number of applications.
The primary overlap between the parties occurs at the level of the upstream supply of MCPA and 2,4-D manufacturing concentrate. In assessing the impact on competition at this level of supply, the OFT first considered the potential direct constraints on MCPA and 2,4-D manufacturing concentrates, and second the strength of indirect downstream constraints on both chemicals through the existence of alternative herbicide formulates.
The OFT considered that there are no direct constraints for 2,4-D and MCPA manufacturing concentrate in the creation of 2,4-D and MCPA formulated product on the basis that no products other than 2,4-D and MCPA manufacturing concentrate are able to be substituted for them as active ingredients to manufacture the same formulated product.
Given that each of MCPA and 2,4-D comprised a high proportion of the total value of the formulated products they were used to make, the OFT considered that competition at the formulated product level could provide some guidance as to the level of competition upstream.
The OFT's market enquiries revealed that MCPA and 2,4-D based products, despite being used in similar applications, were not generally regarded by market participants as being substitutable for each other. Pricing and market share data provided by the parties tended to support this view. While market participants considered phenoxy-based products faced competition from other non-phenoxy herbicides for the treatment of weeds in cereal crops, this was not the case for all applications in grasslands. Specifically, market participants did not consider there to be viable alternatives to phenoxies in low intensity grassland situations, despite the fact that higher priced products on the market were more effective and had longer lasting effects.
Nevertheless, the parties argued that, even if the merger did give Nufarm the incentive to effect a price rise with respect to grassland farmers, it would be unable to do so because it could not price discriminate between customers based on end use, and any across the board price rise to cereals and grasslands farmers, taken as a whole, would not be profitable. On the basis of the data provided by the parties, however, the OFT was unable rule out the possibility that such an across the board price rise would, in fact, be profitable.
The transaction has therefore resulted in the merger of the two leading suppliers of MCPA and 2,4-D manufacturing concentrate in the UK.
Barriers to entry in MCPA were found to be high, with MCPA being data protected in Europe until May 2011. Although the OFT considered that entry into the UK before this time would be theoretically possible, it was unable to identify any companies that it considered would be sufficiently likely to enter in the short to medium term and with sufficient capacity to constrain the merged entity.
With respect to 2,4-D, barriers to entry appeared less onerous, with data protection having expired in October 2007. Nevertheless, despite accepting that entry could occur in the short to medium term, it was also unable to conclude that the likelihood and viability of entry would be adequate to constrain a post-merger exercise of market power by the parties.
Therefore, the OFT believes that it is or may be the case that the transaction has resulted, or may be expected to result, in a substantial lessening of competition in relation to each of the supply of MCPA manufacturing concentrate and 2,4-D manufacturing concentrate in the UK.
This merger will therefore be referred to the Competition Commission under section 22(1) of the Act.