On 31 October 2011, the Ministry of Commerce (MOFCOM) publicly announced the eighth conditional merger clearance since the enactment of the Anti-monopoly Law (AML) in 2008. According to its announcement1 , MOFCOM cleared the proposed acquisition by Alpha Private Equity Fund V (Alpha V) of Savio group (an Italia based textile machinery producer, Savio) with four conditions. This is also the second conditional merger clearance this year2.
Set out below are the salient issues in relation to this conditional clearance decision.
Parties. The acquirer, Alpha V is a private equity fund, whose investments mainly relate to non-ferrous metal recycling, supply of household textile, and production and supply of textile machinery. Specifically, Alpha V holds 27.9% shares of Uster Technologies Ltd (Uster),the global leader in textile testing and quality control machines.
The target, Savio, is a manufacturer of textile machinery, and its main products include automatic cone winders, yarn clearers, rotor spinning machines, and double twisters.
Relevant market. MOFCOM found that Uster and Leopfe (a wholly-owned subsidiary of Savio) are the only two suppliers of yarn clearers in the world. Since there are no other machines that are substitutable, MOFCOM considers that yarn clearer is the relevant product market here. In the yarn clearer market, Uster has 52.3% market share of the global market while Leopfe has the remaining market share. Their performance in China largely resembles their performance in the global market.
MOFCOM did not specify the relevant geographic market but indeed looked into both the global market and the China market.
Competition concerns. MOFCOM paid a lot of attention on whether Alpha V may influence Uster's operations and management. For this purpose, MOFCOM reviewed, among other things, Uster's shareholding structure, voting mechanism of the shareholders' meetings, meeting minutes of the shareholders meetings, composition and the voting mechanism of the board of directors. After the review, MOFCOM decides that it can not rule out the possibility that Alpha V may influence Uster's operations.
In light of the above, MOFCOM considers that after the transaction, it is likely that Uster and Leopfe can coordinate with each other through Alpha V to restrict and/or eliminate the competition in yarn clearer market; on the other hand, it is also likely that Alpha V can restrict and/or eliminate competition through its control and/or influence over Uster and Leopfe.
Barriers to entry. In order to fully assess the potential anti-competitive effects of the transaction, MOFCOM also carried out a detailed study of the barriers to entry in the yarn clearer market. The result shows that there are significant entry barriers to new entrants due to the existing IP rights, importance of the economies of scale, and customer recognition. MOFCOM specifically notes that there has been no successful new entrant for the past three years.
Remedies. In light of the above, MOFCOM was of the view that the transaction is likely to restrict or exclude competition in the yarn clearer market. In order to counter these anticipated anti-competitive effects, MOFCOM imposed the following four conditions on Alpha V:
- Alpha V shall divest its shares in Uster to an independent party within 6 months upon MOFCOM's approval of the transaction;
- Alpha V shall notify MOFCOM of the transferee of the shares of Uster, the transaction amount, and the estimated closing date of the transaction, to make sure such transfer would not raise any new competition concerns;
- Alpha V shall not participate in or influence Uster's operations and management before completion of the divesture process; and
- Alpha V shall entrust a monitoring trustee to supervise the divestiture.
This is the first conditional clearance decision MOFCOM issued after the promulgation of the Interim Rules on the Assessment of the Impact of Concentrations on Competition (see our article entitled MOFCOM's New Antitrust Rules Shed Light on Its Competitive Assessment Process). In line with the Interim Rules, in its competitive assessment process, MOFCOM considered, in particular, market shares, market structure, market entry, and examined both the unilateral effects and coordinated effects that may arise from the transaction.
The most notable issue in this case is MOFCOM's reading of Alpha V's potential influence in Uster's operations through its minority interest. It appears to be the major reason underlying MOFCOM's concern over this Transaction and MOFCOM appears to consider that this concern can only be properly addressed by divestiture of Alpha V's entire interest in Uster. The fact that the relevant market is a highly concentrated oligopoly market may partly explain MOFCOM's approach. The takeaway for funds with portfolio companies is that even if they believe they do not have control over portfolio companies in which they only hold a minority interest, MOFCOM may think otherwise.
It is also interesting to note that MOFCOM did not specify whether the geographic market in this case is worldwide or China-wide. In practice, MOFCOM would look into both the global market and China market, and would require the parties to provide the market data of both.
1.A copy of MOFCOM's Announcement  No. 73 could be found here (in Chinese): http://fldj.mofcom.gov.cn/aarticle/zcfb/201111/20111107809156.html.
2.The first conditional merger clearance in 2011 is the Russian Potash Deal, see our article entitled The Russian Potash Deal - first conditional clearance of 2011
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