Anticipated acquisition by FMC corporation of the alginates business of ISP Holdings (U.K.) Limited

Affected market: Alginates

No. ME/3688/08

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, exceptions to the duty to refer and decision.

The OFT's decision on reference under section 33(2)(a) given on 30 July 2008. Full text of decision published on 7 August 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.

PARTIES

FMC Corporation (FMC) is a US-based global diversified chemicals company, with interests in agricultural, industrial and consumer markets. Its business is divided into Agricultural Products, Industrial Chemicals and Speciality Chemicals. FMC's alginates business, which was acquired in 2000 and operates from two sites in Norway, falls within the Speciality Chemicals division's Biopolymer business.

International Specialty Products Inc. (ISP) is a supplier of specialty chemicals and performance-enhancing products for a wide variety of personal care, pharmaceutical, food, beverage, and industrial applications, which it markets and sells worldwide. ISP is selling its alginates business (the Target Business, as defined below). The Target Business has global revenues of approximately £[ ] million of which approximately £[ ] million are generated in the UK. Of this £[ ] million sold in the UK, approximately £[ ] million relate to alginates and the remainder relates to sales of other hydrocolloids including Xantham gum and Carragean.

TRANSACTION

The Target Business which FMC intends to acquire consists of those assets of ISP and certain of its subsidiaries related to the manufacture, marketing and sale of alginates and algin derivatives, as well as the distribution of propylene glycol alginate (PGA) and certain other hyrdrocolloids. The acquisition includes: (1) existing inventory, (2) ISP's joint venture interests in seaweed harvesting operations in both Iceland and Tasmania, and (3) ISP's production facility located at Girvan, including the associated blending, product development and business operations used in the Target Business. The transaction does not include any part of ISP's business related to the personal care or cosmetic markets.

An informal submission was received from the parties on 30 May 2008. The 40 day administrative timetable as extended expires on 30 July 2008.

JURISDICTION

As a result of this transaction FMC and the Target Business will cease to be distinct.

The parties overlap in the supply of alginates in the UK. The parties' share of supply of alginates in the UK for all pharmaceutical applications 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 arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

Many customers were either neutral about the effect of the transaction or did not see that it would have any effect on them. There were, however, a small number of customers of alginates for wound care, controlled release and anti-reflux products which raised concerns about their supply of these products post-merger. These concerns have been dealt with in the OFT's analysis discussed above.

Competitors considered that the transaction represented the merger of the two leading global suppliers of alginates for pharmaceutical applications (that were particularly strong historically in the UK) and that this would create a significant competitor for these products.

ASSESSMENT

The parties overlap in the supply of alginates. Alginates are used in industrial, speciality, food and pharmaceutical products. The OFT did not receive any substantiated concerns in relation to the supply of alginates for industrial, speciality and food applications. The OFT received evidence that the parties face sufficient competition from existing alternative suppliers in relation to the supply of alginates for these purposes. Therefore, the OFT has concluded that the transaction does not create a realistic prospect of a substantial lessening of competition in relation to the supply of alginates used for industrial, speciality and food applications.

The parties account for a high proportion of alginates supplied for pharmaceutical applications. Alginates supplied for pharmaceutical applications are used in wound care, controlled release and anti-reflux products. The OFT received a number of customer concerns in relation to the supply of alginate for each of these products. These concerns related to the availability to customers of alternative suppliers to the merging parties.

Therefore, the OFT focused its investigation on the supply of alginates for pharmaceutical applications, namely for wound care, controlled release and anti-reflux products. Although the OFT does not consider that alginates for wound care and controlled release are immediately substitutable, the issues which arise in relation to each are similar and, as such, the OFT has considered them together. A particular concern arises where customers of alginates for wound care or controlled release products source from both of the parties (and see them as competing on pricing) or see them as their only alternative suppliers. However, the OFT considers that there are sufficient alternative suppliers of alginates for wound care and controlled release and as such concluded that the transaction does not create a realistic prospect of a substantial lessening of competition in this area.

The know-how, regulatory conditions and time required to develop alginate for use in an anti-reflux product means that a supplier not currently producing such a product could not easily and quickly start supplying it. Therefore, the OFT is not convinced that customers of the merging parties for alginates for anti-reflux products could reasonably and quickly source alginates from an alternative supplier if the parties increased prices post-merger. There are competitors which currently sell a small amount of alginates for use in anti-reflux products although not currently to UK customers. However, the majority of third parties contacted by the OFT considered that the merging parties were the two most important suppliers of alginates for anti-reflux products and some customers had concerns that other suppliers would not be able to match the product they currently receive from the merging parties.

The OFT also believes that there are barriers to switching to one of the existing alternative suppliers of alginates for anti-reflux applications. These barriers consist of costs incurred by the customer on the one hand and the regulatory requirements with which an alternative supplier must comply on the other hand. The switching cost concern applies particularly for customers that are familiar with and/or have already tested both party's alginate products for this purpose and so consider that their switching costs would be much lower between the parties than between one of the parties and an alternative (untested or unfamiliar) supplier. A number of customers also felt that the merging parties were the two suppliers of alginates for anti-reflux products which already complied with or were closest to complying with the relevant regulatory requirements.

While the OFT considered that FMC's main customer, Reckitt Benckiser, has sufficient countervailing buyer power to offset any potential adverse effects from the merger, this would not protect smaller customers for whom switching costs away from the merging parties to an alternative (and non-qualified) supplier may be very significant, or even prohibitive, when judged against the value of the alginate purchases being made.

Therefore, the OFT believes that it is or may be the case that the transaction may be expected to result in a substantial lessening of competition in relation to the supply of alginates for anti-reflux products.

The parties also overlap in the distribution of PGA. While the parties would be the only current distributors in the UK post-merger, customers would still be able to obtain PGA from other suppliers operating elsewhere in Europe and also directly from the manufacturers themselves. As such, the OFT does not believe that the transaction will result in a realistic prospect of a substantial lessening of competition in relation to the distribution of PGA.

EXCEPTIONS TO THE DUTY TO REFER

The OFT's duty to refer under section 33(1) is subject to the application of certain discretionary exceptions, including the markets of insufficient importance or de minimis exception under section 33(2)(a) and the undertakings in lieu exception under section 73(2).

As stated in the Dunfermline/BRN case,  and as explained further in the BOC/Ineos case,  the OFT believes that it would be proportionate to refer a problematic merger (that is, not to apply the de minimis exception) where it is clearly open to the party or parties to offer a clear-cut undertaking in lieu of reference, because the recurring benefits of avoiding consumer harm by means of undertakings in lieu in a given, and all future like cases, outweighs the one-off costs of a reference.

As set out in more detail in the Dunfermline/BRN case, the OFT makes this judgment on an objective or 'in principle' basis at the stage of considering whether to invoke the de minimis exception, without regard to whether parties have actually made any such offer, or the content of any such offer, neither of which will in any event be known to the decision maker at the time that application of the de minimis exception is considered.

In this case, it was not clear to the OFT, based on its objective evaluation of the transaction, that this case was a clear candidate for undertakings in lieu. This case does not fit the classical profile of the OFT's undertakings in lieu cases: in other words, a small proportion of a larger benign or even beneficial transaction raises concerns, and those concerns can be addressed structurally by means of a divestiture package. In this case, the most obviously available structural remedy (divestment of ISP's production facility in Girvan) would constitute divestment of the major part of the overall transaction and without which the acquisition would not have proceeded. The OFT does not include what would amount to prohibition when considering whether clear-cut undertakings in lieu are available. Therefore, it would be wholly inappropriate for the OFT, at this stage of the analysis, to rule out an evaluation of the de minimis exception in this case on the grounds that it would be clearly open to the parties to offer a clear-cut - that is, effective and proportionate - undertaking in lieu.

The OFT has recently considered the de minimis exception to the duty to refer in some detail in its decision to refer the anticipated acquisition by BOC Limited of the packaged chlorine business and assets carried on by Ineos Chlor Limited  (the BOC/Ineos case). In that case, the OFT set out in further detail the considerations it takes into account when considering whether to apply the de minimis exception following the OFT's revised guidance  on this.

The BOC/Ineos case restated the OFT's position that 'the pivotal issue is whether the impact of the merger is likely to be particularly significant'. In BOC/Ineos, the OFT made it clear that, in placing the predicted impact of a merger on the scale between limited (when the OFT is likely to apply the de minimis exception) and particularly significant (when the OFT will not use the exception), it takes the following factors into account:

• Market size
• strength of the OFT's concern
• magnitude of competition lost by the merger
• durability of the merger's impact, and
• transaction rationale and the value of deterrence.

Overall, the combination of these various factors suggest that the impact of this merger is best characterised as being very limited, rather than particularly significant. Accordingly, the OFT has decided to exercise its discretion not to refer this transaction to the Competition Commission because the market concerned is of insufficient importance to justify the making of a reference.

DECISION

This merger will therefore not be referred to the Competition Commission pursuant to section 33(2)(a) of the Act.

Back to top