Tennessee-based Louisiana-Pacific Corporation (LP) recently abandoned its proposed acquisition of Canadian competitor Ainsworth Lumber Co. Ltd. (Ainsworth). The decision came several days after an announcement by U.S. Department of Justice (DOJ) and an announcement by the Canadian Competition Bureau (Bureau) that they each considered the transaction would likely substantially lessen competition of the sale of oriented strand board (OSB). The Bureau and DOJ collaborated and shared information during the review of the proposed merger.
The Bureau, DOJ and the Federal Trade Commission have long coordinated reviews of cross-border mergers. This experience is reflected in the recently published Best Practices on Cooperation in Merger Investigations, issued by the agencies in late March. According to the publication, the collaborative effort aims to not only increase the efficiency of the merger review process and reduce the burdens placed on merging parties, but also to encourage the agencies to use consistent analysis and reach similar outcomes. The recent positions the Bureau and the DOJ took in the LP/Ainsworth case support that they have met their objectives.
Transaction Background
On September 4, 2013, LP and Ainsworth entered into an agreement where LP agreed to acquire all the outstanding common shares of Ainsworth. Both parties are large manufacturers of OSB, and according to the agencies the merged entity would have controlled approximately 60% of the OSB market in Western Canada, 63% in the Pacific Northwest region of the U.S. and 55% in the Upper Midwest of the U.S.
The Bureau's analysis
The Bureau analyzed whether the merged entity would gain enough market power to substantially reduce the competitiveness of the OSB industry in British Columbia.
It first considered whether existing competitors in the OSB industry would be able to restrain the merged entity from raising the price of OSB in British Columbia. At the time of the merger review, there were only four OSB producers – including Ainsworth and LP- that also had mills located in British Columbia. The Bureau concluded that the remaining competitors did not have enough market power nor could they expand their operations fast enough to constrain a material price increase on OSB. The Bureau discounted the market power of competitors with mills outside of British Columbia because they faced higher freight costs , putting them at a disadvantage over the parties' mills that are in British Columbia.
The Bureau then examined whether new competitors could enter into the OSB industry in British Columbia to reduce the potential market harm the merger may cause. It concluded that the likelihood of a timely and sufficient entry is low due to high barriers to entry and expansion , such as obtaining environmental approvals to build a new mill and negotiating a long-term supply contract with fibre suppliers.
The Bureau concluded that the proposed acquisition would have likely resulted in a substantial lessening of competition in the OSB industry in British Columbia. Concurrently, the DOJ raised similar concerns, stating that the merged entity would raise the price of OSB in the Pacific Northwest and Upper Midwest of the U.S., and would likely lessen competition in these regions substantially.
The author wishes to thank Lucy Liu, summer student, for her assistance in preparing this legal update.
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