Executive Summary:
On 11 June 2019 and in application of the EU Merger Regulation, the European Commission prohibited the creation of a joint venture between Tata Steel and ThyseenKrupp, the second and the third largest producers of steel European industry.
This is the third EU merger control prohibition in a year. In February, the Commission had blocked the proposed merger between Siemens and Alstom and Wieland’s acquisition of Aurubis’s flat-rolled copper manufacturing business on the same day. Overall intervention levels remain relatively high in the EU.
I. Background
On 11 June 2019, the European Commission prohibited the creation of a joint venture between Tata Steel and ThyseenKrupp, respectively the second and the third largest producers of steel in Europe.
The transaction, notified by the firms to the EU Commission on the 25th of September, was promptly followed by the initiation of an in-depth (“Phase II”) investigation on 30 October that same year.
According to the Commission, the combination of the two firms would have resulted in a higher price for the costumers, in particular as regards: (i) metallic coated and laminated steel for packing applications; and of (ii) galvanised flat carbon steel for the automotive industry. The divestitures offered by the parties were insufficient to address the Commission’s concerns.
This is the third merger control prohibition the Commission decides in a year. In February, the Commission had blocked the proposed merger between Siemens and Alstom and Wieland’s acquisition of Aurubis’s flat-rolled copper manufacturing business on the same day.
II. The Commission´s Concerns
The European Commission, raised a series of concerns in relation to the transaction.
The first concern related to the metallic coated and laminated steel products for packaging. According to the Commission, the merger would have created a market leader in a highly concentrated industry. The text of the prohibition decision is not yet public. However, it seems the Commission has in mind dominance related concerns.
A second concern was found to arise within the automotive hot dip galvanised steel products. Again, according to the Commission, the proposed merger “would have eliminated an important competitor in a market where only a few suppliers can offer significant volumes of this steel”. Though not entirely clear from the press release, the Commission appears to be objecting to the decrease in competitive pressures as such, and not to the potential coordination between the post-transaction players in the market. This theory of harm would be consistent with the Merger Regulation’s substantive test, which allows the Commission to object to transactions where they significantly impede the effective competition between the merging parties.
Imports from third countries as a countervailing factor, capable of offsetting potential price increases deriving from the transaction, were also subjected to the EU Commission’s investigation. However, the Commission’s market test apparently evidenced that imports could not offset the rapid increase of prices the merger could have caused. This was due to due to several reasons including the fact that the qualitative requirements for these special types of steel were apparently higher to those for the community steels. As a result, the Commission concluded that competitive pressure from remaining players and from imports from third countries would not have been sufficient to ensure effective competition.
The Commission’s concerns were compounded by complaints of costumers within the packaging and automotive industries. These companies apparently depend on competitive steel prices to offer their products at competitive prices. Many expressed to the Commission their worry that the transaction might result in higher prices.
III. The Companies’ Proposed Remedies
In order to address the Commission’s concerns, the two merging entities offered remedies consisting in divestitures. Nevertheless, these remedies were found to be insufficient by the Commission. More precisely, the Commission noted the following:
As regards metallic coated and laminated products for packaging, the proposed divestment would only have covered a small part of the overlap between the merging companies.
In relation to automotive hot dip galvanised steel products, the propose of divestment did not include adequate finishing assets capable of serving customers in the geographic areas the merging companies mostly compete in.
For both concerns, it was highly criticized how the proposals didn’t mention assets which could produce the necessary steel input to manufacture the mentioned products. In addition to which, the feedback from market participants was negative in relation to both. As a result, the EU Commission concluded the remedies would not effectively address the competition concerns raised by the transaction, and as a result, prohibited the proposed transaction between the two firms.
V. Comments
Our readers familiar with EU merger control will not be surprised by the fact that certain joint ventures can trigger an EU filing. Since the Merger Regulation of 2004, that is the case of the creation of a joint ventures performing on a lasting basis all the functions of an autonomous economic entity (i.e., the so called “full-function” joint ventures).
The prohibition itself is arguably more interesting.
On the one hand, the debate on Competition and industrial policy post Siemens-Alstom continues. Those who favour EU merger control taking into account industrial policy considerations might find (admittedly weak) relief in the bizarre inclusion, in the Commission’s press release, on the prohibition of an entire section on how EU trade measures “ensure a level playing field”.
In any event, in the said press release, the Commission (correctly) stressed that the vast majority of the notified mergers do not pose competition problems. In fact, in the past ten years, the Commission has approved over 3,000 mergers; the present being only the tenth blocked transaction by the EU Commission in that same period of time.
In the EU, we saw a significant increase in the number of Phase II cases decided, already in 2018: ten compared to four in 2017. Of these, 40% (four cases) resulted in an unconditional clearance – a much higher proportion than 2016 (13%) and 2017 (0%). Together with the lack of prohibitions in 2018, this could suggest that the Commission is taking a less interventionist approach. But in our view this is not necessarily the case. Last year the Commission required remedies in six phase 2 deals (three times the 2017 tally), and three cases were abandoned by the parties as a result of the Commission’s antitrust concerns. Moreover, two deals have already been blocked in 2019.
Put differently, overall intervention levels remain relatively high in the EU. Detractors of Commissioner Margrethe Vestager (including certain US corporations which have arguably suffered due to the Commission’s zeal, such as Google or Starbucks) will not fail to point that this is a collateral by product of the Commissioner’s self-promotion efforts to become the next President of the European Commission, a role for which she has been put forward by the European Liberal Party. Others will, on the contrary point out that it is Commissioner Vestager’s “toughness” that qualifies her for that position.
Whichever the cause, and the finale of Ms Vestager’s saga, it is likely that such interventionism will continue as a by-product of a broader phenomenon: economic populism.
Read the original document at: https://garrido.es/es/publicacion/la-comision-europea-prohibe-una-fusion-en-la-industria-siderúrgica/
Garrido Abogados’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Garrido Abogados lawyer with whom you usually work, any member of the firm’s EU and Competition practice group, or the following lawyers in Madrid:
Pablo Figueroa (+34 91 210 67 86, Pablo.Figueroa@Garrido.es)
Julia González Fernández (+34 91 319 60 62, Julia.Gonzalez@Garrido.es)