FTC Challenges Deal Based on Future Competition Concerns

On May 29, 2015, the Federal Trade Commission (“FTC”) issued an administrative complaint alleging that Steris Corporation’s (“Steris”) proposed $1.9 billion acquisition of Synergy Health plc (“Synergy”) would violate the antitrust laws by significantly reducing future competition in regional markets for sterilization of products using radiation, particularly gamma or x-ray radiation.

Background

On October 13, 2014, Steris, headquartered in Mentor, Ohio, announced its intention to acquire Synergy, headquartered in the United Kingdom.  On January 9, 2015, the parties received request for additional information and documentary material (“second requests”).  On April 30, 2015, the parties announced that they certified compliance and entered into a timing agreement where they agreed to close the combination before June 2, 2015, unless the FTC closes the investigation before June 2nd.

On May 29, 2015, the companies issued a press release stating that they had been informed about the FTC’s intention to file a lawsuit to block the deal and they “welcome a full judicial review of the competitive effects of the combination”.   The parties “continue to believe that the combination is precompetitive”.  Walt Rosebrough, President and CEO of Steris further stated that “we have worked diligently to address the FTC’s concerns and to avoid litigation, but we will now focus our efforts on prevailing in court.”  The statement further indicates that the parties intend to extend the long-stop date for completion of the combination to December 31, 2015 so that they can defend against the FTC’s action.

All five commissioners voted in favor of issuing an administrative complaint and to authorize the staff to seek a temporary restraining order and preliminary injunction in federal district court.  While the administrative trial is scheduled to begin on October 28, 2015, the parties and the FTC will meet each other in federal court very shortly.  The FTC will have to convince a federal judge that a temporary restraining order and preliminary injunction is warranted under these set of facts and anticompetitive theory of the case.

FTC’s Case 

According to the FTC’s press release, Steris and Synergy both provide contract sterilization services for companies that need to ensure their products are free of unwanted microorganisms before they reach customers. Implanted medical devices and human tissue products, for example, must meet stringent requirements for sterilization.  For most companies, in-house sterilization is not a viable alternative.  Instead, these customers bring their products to sterilization service facilities on a contract basis, typically within 500 miles of the companies’ manufacturing or distribution facilities to minimize shipping costs.  Therefore, the geographic markets are local not national.

The FTC further stated that “today, gamma radiation, generated by the radioactive isotope Cobalt 60, is considered the only feasible method of sterilizing large volumes of dense and heterogeneously packaged products.”  The FTC openly acknowledges that Steris and one other company, Sterigenics, are the only two companies that provide contract gamma sterilization services in the United States.  Publicly available information suggests that Steris and Synergenics are the two largest players in the United States.

Steris and Synergy maintain that the combination is procompetitive as it merges complementary assets and geographic locations.  Indeed, Synergy does not provide contract gamma sterilization services in the United States so there is no actual overlap between the two firms.

The FTC’s concern, however, is not about any actual overlap in the United States.  Rather, the FTC’s concern relates to Synergy’s entry and expansion plans.  Synergy is a global company with plans to expand in the United States.  According to the FTC, at the time the proposed merger was announced, Synergy was implementing a strategy to open new plants that would provide contract x-ray sterilization services.  The FTC alleges that contract x-ray sterilization services, which currently are not available in the United States, would provide a competitive alternative to gamma radiation.

The FTC’s allegation is that the Steris/Synergy combination would eliminate likely future competition between Steris’s gamma sterilization facilities and Synergy’s planned x-ray sterilization facilities in the United States.

Lessons Learned

While this matter is far from over given that Steris and Synergy will fight the FTC’s challenge in federal court, there are a number of lessons learned from the FTC’s challenge of Steris’ acquisition of Synergy.  First, corporate and antitrust counsel of companies contemplating a merger must be aware that the FTC not only evaluates actual product and service overlaps when conducting a competition analysis, but the FTC will also examine the companies’ future plans.  Second, antitrust counsel must consider and assess as part of its competition analysis, potential anticompetitive effects related to the loss of future competition.  Third, the FTC will examine industry structure and internal strategic company documents that discuss current and future entry and expansion plans to determine anticompetitive effects.  Fourth, it may be difficult to craft a remedy to resolve future competition concerns.  Indeed, future competition concerns present unique challenges that are more complex than simply divesting existing business and product lines or facilities to a buyer because the FTC needs assurances that the buyer has the same wherewithal and incentive to succeed.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com