FTC Sues to Block Chemical Merger

On August 2, 2019, the FTC authorized an enforcement action to challenge Evonik Industries AG’s (“Evonik”) proposed $625 million acquisition of PeroxyChem Holding Company (“PeroxyChem”).

Complaint

The FTC is alleging the merger of the chemical companies would substantially reduce competition in the Pacific Northwest and the Southern and Central United States for the production and sale of hydrogen peroxide, a commodity chemical used for oxidation, disinfection, and bleaching.

Most hydrogen peroxide produced in North America is sold to pulp and paper customers for bleaching pulp and de-inking recycled paper, according to the complaint.  Hydrogen peroxide is also used to sterilize food and beverage packaging, and in chemical synthesis, fracking, water treatment, and electronics.  For most end uses, there are no effective substitutes, the complaint alleges.  Because of high transportation costs, customers prefer nearby suppliers.

The complaint alleges that the acquisition would harm competition in at least two ways.  First, it would increase the likelihood of coordination in a market  that already functions as an oligopoly and has a long history of price-fixing including guilty pleas and litigation settlements.   The markets are highly concentrated, with significant transparency among rival firms, and long-term, stable customer-supplier relationships, low elasticity of demand, and a history of strong interdependent behavior, the complaint states.  Evonik has high market shares of approximately 50% in both geographic markets.  Second, the acquisition would eliminate significant head-to-head competition between Evonik and PeroxyChem in the Pacific Northwest, where it would leave only one other hydrogen peroxide producer, and in the Southern and Central United States, where it would leave three other producers.  The complaint alleges that customers have benefitted from competition between Evonik and PeroxyChem in the form of lower prices.

New competitors or expansion by existing firms is unlikely to be timely or sufficient to offset anticompetitive harm, due to the massive investment necessary to build a new hydrogen peroxide plant.

The FTC vote to issue the administrative complaint and file the agreed-upon request for a temporary restraining order in the U.S. District Court for the District of Columbia was 4-0-1.  Chairman Joseph J. Simons was recused.  The administrative trial is scheduled to begin on January 22, 2020.

Lessons Learned

The FTC’s challenge of the merger is demonstrates that the FTC will take action to preserve competition and protect consumers when the facts support a lawsuit.  The FTC action shows that  firms that propose a merger or acquisition in a concentrated industry with a history of past collusion should expect increased scrutiny. As the FTC noted in its Complaint, evidence of past collusion is important to the FTC’s coordinated effects analysis. Merging parties should be prepared to show that market conditions have changed since the past collusion has occurred. Here, the parties were not able to do that and the FTC alleged that the market is vulnerable to coordination.  Besides relying on a coordinated effects theory, the FTC alleges that the merger eliminates head to head competition, which will likely lead to higher prices.

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