Greif, which has its
Four days after the announcement, the UK Office of Fair Trading (OFT) wrote to Greif requesting details of the acquisition. Thus began more than nine months of investigations by the OFT and, subsequently, by the UK Competition Commission (CC) as to whether a merger would result in a substantial lessening of competition in the
The
However, the OFT and the CC can investigate acquisitions once they have been completed and an adverse finding is likely to lead to the acquirer being ordered to divest itself of the new business at whatever cost.
The OFT and CC investigations take place over a number of months. In the meantime, they have the power to order the acquirer not to integrate the business into its own operations but to keep it operating independently. This allows for divestment to be achievable should the CC decide to ‘unscramble the eggs’.
This ‘hold separate’ power was exercised in the Greif case; however, the position was not straightforward. Firstly, although Greif acquired the European and Asian businesses of Blagden, the only competition authority which investigated the transaction was that in the
Secondly, Blagden Packaging had not been a separate entity in the
Throughout its existence, Blagden
As a standalone business, it did not have the resources or the purchasing power to compete with other steel drum manufacturers. Therefore, when it came to negotiating the ‘hold separate’ undertakings with the OFT, these had to be carefully crafted to ensure it had the necessary support from Greif UK but was still as far as possible carrying on its business separately.
It is normal where pre-completion clearance is sought from the competition authorities for both the seller and the buyer to work together to present a single application for clearance. However, this being a completed transaction, as far as the seller was concerned, the deal was done and it had no obligation to buy back the business should clearance be refused.
Therefore, DWF, which was advising Greif, was also effectively acting for Blagden, which in itself led to a number of practical difficulties. The ‘hold separate’ undertakings prevented the disclosure of confidential information between the two companies.
As lawyers, we had to put in place Chinese walls to ensure that such information was not passed on. As separate hearings were held by the CC with Greif and Blagden management, with DWF lawyers attending, we had to ensure that no confidential information disclosed at those hearings was passed from one entity to the other.
Although the companies had a combined share of 85% of the
Greif also argued that the relevant geographic market included Northern Europe, not just the
As is normal in these circumstances, the CC took a two-stage approach in assessing competition. It first defined the relevant product market, and then sought to assess the competitive effects within it. In its provisional findings it defined a product market of steel drums, both new and reconditioned, but since it did not believe that there were sufficient reconditioned drums in the marketplace to constitute a sufficient restraint on the price of new steel drums, it stuck with an 85% market share.
The CC excluded imports since it believed that there was little independent capacity in
We maintained that this was the wrong approach. Even if the definition of steel drums was correct as a product market, there was strong evidence that a significant proportion of customers could switch to other products or to overseas suppliers if a 5% price increase was imposed by Greif — the ‘small but significant and non-transitory increase in price (SSNIP) test’ — effectively making such a price increase uneconomic.
The CC’s own customer survey showed that two-thirds of customers had at least one realistic alternative to new steel drums. We therefore maintained that, regardless of the products included in the product market, it was still necessary to take account of external constraints, in this case plastic drums, IBCs and imports.
Nevertheless, the CC’s provisional findings were adverse and found against the merger. The CC indicated that it was looking for a divestment remedy.
Surprisingly, when the final decision was announced, the merger was cleared. The CC indicated in a press release that the main reason for the change of heart was that a new steel drum plant was to be opened in the Netherlands by a competitor. There were also signs that the Commission in the end took into account the constraints from products outside the relevant market.
The decision stated “this [new steel drum plant] would operate in addition to any constraints imposed by other forms of packaging, other large steel drum suppliers in
It therefore appears that the CC finally did take into consideration the competition from other forms of industrial packaging as we argued, and correctly applied the SSNIP test to conclude that the merger would not lead to a substantial lessening of competition in the
This is only the second time that the CC has approved a merger in its entirety following an adverse provisional findings report. The CC’s inquiry chairman noted: “we did not find this an easy decision”.
In our view, the CC came to the correct conclusion by including in its deliberations all relevant competitive constraints, even where these fell outside the narrowly-defined product market of steel drums.
Laurence Pritchard is a partner and head of the competition law team at DWF.
