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© AlixPartners UK LLP 2013 www.alixpartners.com The last ditch? – Failing firm and efficiency defences in EU/UK merger control Mat Hughes – 26 February.

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Presentation on theme: "© AlixPartners UK LLP 2013 www.alixpartners.com The last ditch? – Failing firm and efficiency defences in EU/UK merger control Mat Hughes – 26 February."— Presentation transcript:

1 © AlixPartners UK LLP The last ditch? – Failing firm and efficiency defences in EU/UK merger control Mat Hughes – 26 February 2014

2 2  The failing firm defence - Do you feel lucky?  Efficiencies – Mission impossible?  Case study: Royal Bournemouth and Christchurch/ Poole (2013)  Case study: CC Imerys/Goonvean (2013)  Conclusions Contents

3 Failing firm defence (I) 3  When is an otherwise anti-competitive merger OK?  “Failing firm” defence means no SLC or SIEC (exiting-rationalising business defence): -firms might also be “flailing”, reducing concerns -merger effects must be judged by reference to competition absent merger (counterfactual)  May also be relevant to: -de minimis exception in UK (e.g. OFT Midland General Omnibus/Felix Bus Services (2012)) -remedies (alternative purchaser?) -merger benefits (absent merger what would happen to supply costs/output?) -barriers to entry (watch consistency - entry likely/profitable?)  Do you feel lucky?  From : ‒ 23 Phase II EUMR decisions from , and only 8 unconditional clearances (35%) and two on the basis of failing firm (2013: Nynas/ Shell and Olympic/Aegean (II)) ‒ 29 CC reports from (plus 1 water), and 18 unconditional clearances (62%!). Of these: ‒ two failing firm (Optimax/Ultralase (2013) and Sector Treasury Services/Butler (2011)) ‒ Imerys/Goonvean (2013) failing product plus limited duration of concerns, and no SLC in McGill/Arriva Scotland West (2012) due to expectation of declining competition and threat of entry

4 Failing firm defence (II) 4  Criteria  Surprise! Watch out for failing firm “offence”: -the overlaps with businesses closed by seller, i.e. was closure due to sale of other business thus leading to anti-competitive effects? -issue in 2011 in Stena/DFDS Irish Ferries and Ratcliffe Palfinger/Ross & Bonnyman, but (on facts) CC accepted closures not due to merger  What evidence do you need? EUUK Exit – financial difficulties (application to banks/state hospitals) No less anti-competitive purchaser Assets inevitably exit market Exit – through failure, but also strategy change Ditto (Eurotunnel/Sea France (2013)) Even if exit, look at distribution of sales (could small players grow?)

5 Efficiency defence 5  Really?  EU: efficiencies may offset anti-competitive effects  UK: three “bites at cherry” (enhance rivalry (PF Tradebe/Sita (2014)); exception to refer (1 marginal), 2 cases influenced CC remedies)  Closest EU TNT/UPS (2013) - prohibition decision!  Annual cost savings € m in three main areas: -management/administrative overheads -ground transportation costs -air network. EC estimated pass on and compared with the price increases predicted by its price concentration model (prices higher where fewer rivals…model submitted by parties)  Customer efficiencies outweigh price rises in 15/29 countries (based on market shares, FedEx presence and expansion plans, bidding data)  Nynas/Shell only EU case where efficiencies were a contributory factor in clearance decision, linked to failing firm (closure = higher import costs) plus lower variable costs

6 NHS Hospital mergers 6  Royal Bournemouth and Christchurch/ Poole (2013) merger prohibited. SLC % of each hospital’s clinical income (much smaller in Akzo Nobel/Metlac (2012))  Proposition: we can’t afford duplication and merger benefits mainly where SLC  No RCB found. Why, surely good? No presumptions - law and experience  US merger integration/expert witness experience  Duty to consult = no detail/plan? CC no need consult/decide but - preferred proposal/evidence of need; groups to evaluate benefits; model of care; assess clinical benefits/dis-benefits plus financial/economic viability  Likely with merger? Maternity unit start 16/17?  Likely without? Cardiology rota?  Dis-benefits from rationalisation? A&E/emergency surgery?  Cost savings?  If CC had found RCB, might still have prohibited

7 CC Imerys/Goonvean 7  Efficiency defence: -detailed efficiency analysis. Large due to proximity of parties’ pits, mixture of fixed/variable savings but also increasing output (access to lower cost reserves and increasing life of pits)  CC: Efficiencies not rivalry enhancing: -rivalry against whom? -efficiency plans assume 0% pass on (!) and paid out in purchase price (?), BUT higher output a RCB  Variant of failing firm defence? GHL: cash (EBITDA) generative, and kaolin + aggregates profitable overall bar two years: “the board was unanimous in its view that it would seek to ensure that the company would survive, although the prospects for the next few years appeared poor.”  K + A cash generative? Look at management accounts -costs rising faster than prices, and ROCE very low -limited positive cash flows due to no re-investment (replace when fail) - capex less than depreciation over last five years -now heavily loss making (customer loss/high cost), major capex, limited reserves (abandon less profitable tableware – complex!), pension deficit  Rational investor? Exit now or when Greensplat fails? CC: When(?) Greensplat fails  Proportionality and RCB: - Divestment (add assets/keep liabilities!) and 5 year price cap equally effective (not harming rivals/simple). But divestment mean loss of RCB across all markets which would be large relative to divestment benefits (CPM sales low % of total)

8 Conclusions 8  All cases turn on their facts – don’t rule out failing firm or efficiency arguments  Four successful second stage, failing firm cases in 2013 (2 UK, 2 EU)  Royal Bournemouth and Christchurch/ Poole (2013) - CC put out a press release at provisional findings stage: “Hospitals must now prove merger benefits”  EU narrowed concerns in TNT/UPS due to efficiencies  PF Tradebe/SITA rely on merger efficiencies as one factor as why not concerned by 3:2 merger  Rationale should be part of story. E.g. why do you want to buy a failing firm? An obvious efficiency story in both Nynas and Imerys  Key challenges are facts - Expert TRS and EI evidence is needed

9 Dallas 2101 Cedar Springs Road Suite 1100 Dallas, TX Global Locations London 20 North Audley Street London W1K 6WE United Kingdom Chicago 300 N. LaSalle Street Suite 1900 Chicago, IL Detroit 2000 Town Center Suite 2400 Southfield, MI Los Angeles 515 S. Flower Street Suite 3050 Los Angeles, CA New York 40 West 57 th Street New York, NY Milan Corso Matteotti Milan Italy Munich Mauerkircherstr. 1 a München Germany Düsseldorf Hofgarten Palais Bleichstraße 8 – Düsseldorf Germany Tokyo Marunouchi Building 33F Marunouchi Chiyoda-ku Tokyo Japan Shanghai Suite 6111 Plaza 66 Building I 1266 Nan Jing West Road Shanghai, China Paris 49/51 Avenue George V Paris France San Francisco 580 California Street Suite 2050 San Francisco, CA Washington, DC 1999 K Street NW Suite 750 Washington, DC Thank you! © AlixPartners, LLP, 2012 Dubai Office 101, Tower 2 Al Fattan Currency House P.O. Box Dubai Intl Financial Centre Dubai, United Arab Emirates Boston One Boston Place Suite 4040 Boston, MA Hong Kong Suite 1802 LHT Tower 31 Queen’s Road Central Hong Kong


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