Proposed acquisition by BASF AG of certain assets of Takeda Chemical Industries Ltd

No. 00243/N

Report under section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 14 November 2000, to the Secretary of State for Trade and Industry under section 76 of the Act

The parties

BASF AG is a German-based multi-national company active in the production, distribution and sale of chemicals, health and nutrition products (including vitamins), oil and gas. Takeda Chemical Industries Ltd is Japan-based, and is predominantly a pharmaceuticals company, active in the supply of vitamins.

Jurisdiction

This transaction satisfies the assets test of the FTA. It also satisfies the share of supply test in respect of the supply of vitamins B2 and C. The ECMR does not apply.

Assessment

Relevant markets

The parties overlap in the supply of vitamin B2 and vitamin C.

The relevant product markets are no wider than the production and supply of vitamins B2 and C. By virtue of their biochemical functions, vitamins are not substitutable on the demand side. On the supply side it would appear that there is no realistic prospect of rapidly switching between the manufacture of different vitamins. Production plants are dedicated to one type of vitamin.

There may, however, be a further subdivision of the market for vitamin B2 between that destined for feed (i.e. agricultural) use and the higher-purity vitamin B2 used for food/pharmaceutical applications. On the demand side, these feed and food products cannot be substituted. Production can be either via a chemical or fermentation process. The chemical technology is older, and produces a lower quality product (which does not flow as well, and creates excessive dust). Vitamin B2 produced for animal feed requires 80% purity. B2 must be further processed, entailing significant additional costs, to achieve 98% purity for the food and pharmaceutical industries. Supply-side substitution is not an economic option with the older chemical technology, which produces a 96% purity. It does appear, however, to be easier to switch between the production of B2 for feed and B2 for food and pharmaceuticals with modern fermentation plant, albeit with some sunk costs.

The geographic market is at least as wide as Europe and may be world-wide. Vitamins B2 and C are produced in only a relatively small number of plants throughout the world, and consequently are exported widely. Market shares are broadly similar on either a European or a world-wide basis.

Horizontal issues

In 1999, the US Department of Justice imposed record fines on the vitamin industry for the operation of a worldwide cartel. Both BASF and Takeda, along with Hoffmann-La Roche, Rhône Poulenc and others, pleaded guilty to violating Section 1 of the Sherman Act for entering into a conspiracy to fix the price and allocate the volume of various vitamins, including vitamins B2 and C. Takeda pleaded guilty to taking part in a conspiracy from at least early in 1991 to at least autumn 1995, whilst BASF admitted to taking part in a more wide ranging conspiracy (including fixing the prices of contracts for vitamin pre-mixes) from January 1990 until February 1999. Criminal fines were imposed on BASF and Takeda of $225 million and $72 million respectively.

On the evidence available (provided by the parties), the merger will produce two-firm concentration ratios in vitamins C, B2 feed and B2 food/pharmaceuticals of 60-80% (See note 1).

Another way of calibrating the degree of concentration in a market is to calculate the Herfindahl-Hirschman Index (HHI). The HHI is used, for example, in the US Merger Guidelines. The level of the HHI ranges from zero (ultra-fragmented) to 10,000 (pure monopoly). The US Merger Guidelines categorise as "highly concentrated" a market in which the HHI exceeds 1800. The Guidelines say that mergers which increase the HHI by more than 100 in such a market "are likely to create or enhance market power or facilitate its exercise".

Post merger, if the Chinese suppliers are treated as a single entity, the HHI in vitamin C will be approximately 2700 (See note 2), for vitamin B2 feed it will be around 2800 (See note 2), and for B2 food it will be around 3000 (See note 2). The only other significant players in the vitamin C and vitamin B2 food markets are Hoffmann-La Roche and the Chinese (we are told that Merck is likely to exit the vitamin C market). In B2 feed the other significant players are Hoffmann-La Roche and ADM/Aventis (which is related to Rhône Poulenc). While we cannot be certain that the Chinese suppliers should be considered as a single entity for the purposes of calculating the HHI, third party comments have suggested that it is correct to do so. Should the HHI be calculated without a single Chinese supplier, the HHI figures would clearly be lower. It would however, still be in excess of 1800 for both B2 feed and B2 food.

Each vitamin type is a relatively homogeneous product with fairly transparent prices in markets with few players, large economies of scale and high barriers to entry. These are circumstances that may be conducive to tacit or explicit co-ordination of behaviour, as was illustrated by the long-standing cartels. This merger, by removing one of the players, reinforces the concentrated oligopolistic features of the market.

Prices have fallen continuously since the mid-1990s in all vitamins. The parties estimate that the price of vitamin C has halved in the last five years, as has the price of B2 feed. The price of B2 food has dropped by more than a third. But these falls must be seen in the context of the break up of the cartels (which for these vitamins ended in 1995) and are not necessarily permanent.

The parties have pointed out that the merger produces synergistic benefits – although they overlap in the production of vitamins B2 and C, their vitamin production is otherwise complementary. Furthermore, BASF is weak in the production of vitamin C, having only [between 0-10%] (See note 3) of the market, while Takeda's production of vitamin B2 is weakening, since it does not possess the more advanced fermentation plant. They also point to the vigorous entry of the Chinese – who now have around on third of the markets for vitamin C and vitamin B2 for food, and whose share of the market for vitamin B2 for feed is growing, although still only [between 0-10%] (See note 3) of that market. They attribute the sharp drop in prices of all three products to Chinese entry. While the Chinese entry may have had an impact on prices, it is unclear to what extent the falling prices are due to Chinese entry or to the break-up of the cartel.

In fact a large part of the drop is prices since 1995 is likely to be attributable to the ending of the cartel – the Chinese had a sizeable share for the vitamins C and B2 food markets at that time.

The parties also suggest that detriment from this merger would be countered, to some extent, by the deterrent effect of the punishment meted out to the cartel members by the Department of Justice in 1999. Of course there will be some deterrent effect to explicit collusion between the parties and other competitors. There would, however, remain the risk of tacit co-ordination, or at least weakened competition, from increased concentration in an already highly concentrated market.

Vertical issues

No significant vertical issues appear to arise from the merger.

Other issues

I have already referred to the Department of Justice action against the vitamin cartel. The European Commission has also issued a Statement of Objections against various manufacturers of vitamins, including BASF and Takeda, relating to a possible infringement of Article 81 of the Treaty and Article 53 of the EEA agreement.

Third party views

I have received representations from a number of third party customers and competitors. Opinions on the acquisition appear to be mixed.

Conclusion

In light of the above assessment, I conclude that there are substantial grounds for concern that the merger may be detrimental to competition in the supply of vitamin C and vitamin B2. Following the merger, market concentrations in the supply of vitamins C and B2 would be very high. There appears to be a serious risk, which requires further investigation, that the change in market structure would be conducive to a substantial lessening of competition, and perhaps to tacitly co-ordinated behaviour.

I therefore recommend that you refer the transaction to the Competition Commission.

Notes

1. This is a range within which the parties market shares in each vitamin falls
2. The increment has been excised at the request of the parties.
3. The precise figure has been excised at the request of the parties

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