Originally published June 8, 2011
Keywords: China, Uralkali, Silvinit, merger, anti-monopoly review, Mofcom
On 2 June 2011, the Anti-Monopoly Bureau of China's Ministry of Commerce (Mofcom) announced its seventh conditional approval decision, clearing the proposed US$7.8 billion merger of Russian potash producers Uralkali and Silvinit subject to requirements relating to the merged entity's future levels of supply and pricing for Chinese customers. This marks the first published merger review decision in China in approximately 10 months (since the Novartis/Alcon conditional clearance decision in August 2010).
The positive news for the business sector is that China's rate of unconditional clearance decisions for notified transactions remains well above 95%. Additionally, this latest decision appears to be further evidence of Mofcom's willingness to negotiate behavioural remedies with parties to a deal in relation to which it identifies competition concerns, rather than insist on structural remedies such as divestment of relevant business operations.
In this case, however, the true scope of the behavioural remedies remains to be seen, as they are broadly worded and could allow Mofcom to take a very interventionist approach in the merged businesses' dealings in respect of China customers going forward. Some observers may also be unsettled by the fact that Mofcom continues to focus on deals between foreign multinationals, with the Ministry yet to intervene in relation to a purely domestic deal in the (almost) three year period that the Anti- Monopoly Law (AML) has been in effect.
In this legal update, we examine the decision more closely and highlight the key take-outs for the business sector.
About the companies and proposed deal
Both Silvinit and Uralkali are Russian companies with leading positions in the global fertiliser industry. Silvinit's main outputs include mineral fertilisers, while Uralkali is a major producer of potash fertiliser.
The proposed merger of the two companies was announced in December 2010, and prior to Mofcom's conditional approval decision the transaction had received approvals from competition authorities in Russia, Brazil, Poland and Ukraine.
Under the AML, any merger must be reported to and pre-approved by Mofcom if certain global and/or China turnover thresholds are met. Unsurprisingly given that China is one of the largest consumers of the two companies' products (along with Brazil, India and Malaysia), the thresholds were met by the parties to this merger.
According to Mofcom's decision statement, notification of the merger was accepted by Mofcom on 14 March 2011. The formal review period lasted 81 days.
In conducting its review, Mofcom obtained views on the relevant market and the potential impact of the deal from a wide range of entities, including government departments, trade associations, industry experts, and industry participants. This type of broad consultation is now a common feature of Mofcom reviews, and is one of the main reasons that review periods can be lengthy.
Identified competition concerns
Mofcom determined that the relevant product market in the context of the proposed merger was the market for potassium chloride. This was based on the fact that potassium chloride was the main product in relation to which China-related competition concerns might be seen to arise from the deal, and Mofcom's view that the product was not sufficiently substitutable with other products.
In relation to this product market, Mofcom made the following key findings:
- Potassium chloride is a resource that is naturally found in just a few locations, and global production and sales of potassium chloride are concentrated in the hands of a small number of companies.
- There are high barriers to market entry (and thus no lessening of concentration in the market is likely in the short to medium term).
- The merged entity would become the world's second largest producer and exporter of potassium chloride, with a market share exceeding one-third. Together with the world's largest supplier of this product, the two companies would control approximately 70% of trade.
- China is one of the largest importers of potassium chloride, relying on imports for almost 50% of its domestic consumption.
- More than 50% of China's imports were from the transaction participants (or associated parties).
- The merger would create a monopoly in the supply of potash imports that enter China over land (one of the most significant import sources, along with sea trade).
Based on these findings, Mofcom determined that the proposed transaction would increase the level of concentration in the relevant market, would provide the merged entity with significant market power, and would potentially increase the risk of co-ordination between major global suppliers of potassium chloride.
Under the terms of Mofcom's approval decision (which are understood to have been negotiated with the transaction participants):
- The merged entity is required to maintain its established sales process and procedures when supplying potassium chloride to customers in China, including by maintaining direct trade and supply via rail or sea in a reliable and diligent manner.
- The merged entity must continue to meet the demands of China's customers (including those in agricultural, general and 'special' industries) for potassium chloride - both in terms of product volume and product range.
- In relation to price negotiations with customers in China, the merged entity must continue to utilise traditional negotiation procedures with such customers and take account of the historical and current trading situation as well as the unique features of the Chinese market.
The merged company is also required to appoint a monitoring trustee to report to Mofcom every six months (or upon being requested to do so by Mofcom) on fulfilment of these conditions, and
Mofcom retains the right to impose sanctions for any failure to comply.
This is the seventh time Mofcom has issued a conditional approval decision, but it is the first time the conditions it has imposed on a deal may be seen as constraining a party's ability to independently determine future pricing and supply levels.
By requiring the merged entity to maintain current levels of sales and supplies to customers in China, and to continue utilising existing price negotiation procedures, Mofcom will have eased any concerns these customers may have had about the potential for price rises and increased disparity in their bargaining power with suppliers of potassium chloride. This issue is likely to have been a significant one in the eyes of Mofcom officials, given the importance of agricultural fertiliser to China's economy and food production stability.
However, the conditions are worded in a very general manner, and leave room for interpretation. The merged entity may therefore face some risk of having its customers in China complain to Mofcom about any changes to pricing and supply terms that occurs in the coming years, a threat that could be a source of continuing anxiety and pressure in negotiations with customers. The onus will be on the merged entity to keep Mofcom informed of sound reasons for any changes to its trading terms in respect of the China market.
Many international businesses who supply key raw materials and other inputs to China will watch closely to see how aggressive Mofcom is in monitoring and enforcing compliance with these conditions. Any indications that Mofcom is taking a particularly interventionist approach on this issue may lead those businesses to steer clear of proposing or willingly accepting these types of conditions as a means to get their future deals cleared in China.
More generally, however, there are some promising take-outs from the decision. These include:
- The fact that the formal review period was approximately 12 weeks, which is at least four weeks less than the previous average review period for deals in relation to which Mofcom had made conditional approval or prohibition decisions.
- Inclusion in the decision statement of a number of key facts or findings that were central to Mofcom's decision, which although presented without supporting data in some cases at least provides sufficient context in which to understand Mofcom's concerns (and certainly more explanation than some of the regulator's previous conditional approval decisions).
- The fact that the decision may be seen as further evidence of Mofcom's willingness to negotiate behavioural remedies with parties to a deal in relation to which it identifies competition concerns, rather than insist on structural remedies such as divestment of relevant business operations.
- Mofcom's focus on addressing competition concerns in China only, which may be seen as in contrast to previous decisions such as in relation to the Panasonic/Sanyo merger in 2009, where it required divestitures intended to safeguard competition in the global market, rather than just in China.
Notwithstanding the above points, the business sector may have ongoing concerns about the fact that Mofcom's decision statements continue to evidence a tendency to rely on high existing market shares as a basis upon which to assume that the merged business operator will not be adequately constrained from unilaterally raising prices or otherwise imposing more onerous terms on customers. Additionally, it must be noted that Mofcom is still, almost three years since the AML commenced, to hand down any adverse merger review decision in relation to a merger of Chinese enterprises or an acquisition by a Chinese enterprise.
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