Peter Glossop, Shuli Rodal, Christopher Naudie, Kaeleigh Kuzma, Peter Franklyn
July 6, 2015
Osler's Competition & Foreign Investment Group
The first half of 2015 has proven to be busy for the Competition Bureau’s newly established Mergers and Monopolistic Practices Branch, with activities including:
the challenge of a merger in the retail gasoline sector and clarification of the threshold that must be met by the Commissioner when seeking a hold separate interim order
entry into three consent agreements
the issuance of five detailed press releases regarding completed merger reviews where the Bureau issued no-action letters
the implementation of a compliance program in response to a company’s failure to file statutory notifications with respect to two separate transactions
publication of merger review statistics for the Bureau’s most recently completed fiscal year
Further details are set out below.
Challenge to the Merger
On April 30, 2015, the Commissioner of Competition filed an application under section 92 of the Competition Act challenging the retail gasoline merger between Parkland and Pioneer pursuant to which Parkland would acquire 181 Pioneer corporate stations and 212 supply agreements in Ontario and Manitoba on the basis that the merger would substantially lessen competition in 14 geographic markets. The Commissioner is seeking an order from the Competition Tribunal prohibiting the transaction in these 14 geographic markets and/or requiring Parkland to dispose of the assets being acquired in these markets, as well as such other assets as are required for an effective remedy.
Based on the Commissioner’s definition of the market, Parkland’s post-merger share in the disputed markets would range from 39% to 100%, with a merger to monopoly occurring in two markets, and in 12 of the 14 markets post-merger concentration levels would increase to 100%. Accordingly, the Commissioner’s theory of harm is based on both a concern that the merger will enable Parkland to unilaterally exercise market power (e.g., profitably sustain higher prices than those that would exist in the absence of the merger, without relying on competitors’ accommodating responses) and, in most of the markets, will also reduce the competitive vigour of the markets by enabling or enhancing the ability of Parkland to coordinate its behaviour with that of its competitors (e.g., profitably sustain higher prices because other competitors in the market have accommodating responses).
Parkland contends that the Commissioner has not properly defined the geographic markets and improperly attributes independent dealer stations to Parkland, resulting in overstated market shares and concentration levels. Parkland also argues that its incentives are to maintain low prices so as to sell higher volumes of gasoline, thereby increasing the availability of volume discounts.
The transaction was initially scheduled to close on January 31, 2015, but the outside date was extended four times in order to provide the Commissioner more time to evaluate the transaction. On April 27, pursuant to their commitment to provide the Commissioner with 15-days’ notice of closing, the parties advised the Commissioner of their intention to close on May 15. Then, on April 29, one day before the Commissioner filed his application challenging the merger, Parkland sought to address his concerns by proposing the divestiture of four corporate stations and six supply agreements in 10 of the 14 markets where the Commissioner is seeking divestitures (Divestiture Proposal).
The transaction closed June 25, 2015, after implementation of the “hold separate order” (discussed below). Parkland is pursuing negotiations with the Commissioner in order to resolve concerns in 11 of the 14 communities (including those subject to the hold separate order), and will simultaneously continue to contest the Commissioner’s application where there is no resolution of the dispute.
“Hold Separate” Order for the Interim Period
Parkland and Pioneer would not agree not to close prior to the determination of the Commissioner’s application challenging the merger. As a result, the Commissioner sought an interim order requiring Parkland to preserve and independently operate the assets in the disputed geographic markets (hold separate order).
Significantly, the Commissioner was not seeking a hold separate order because he was concerned about the inability to effect a remedy post-closing (i.e., the Commissioner was not concerned with an inability to “unscramble the eggs”). Rather, the Commissioner alleged that the order was required to prevent consumers from paying higher prices for retail gasoline during the interim period, particularly given the Tribunal’s lack of authority to remedy any harm that may occur during the interim period.
Parkland argued that a hold separate order was unnecessary given the Divestiture Proposal and further commitments Parkland offered in an attempt to address the Commissioner’s concerns about Parkland exercising pricing power. Parkland further argued that a hold separate order would jeopardize the entire transaction because the stations in question require an underlying infrastructure that Parkland would need to provide.
The Commissioner argued that the Divestiture Proposal was wholly lacking in detail with respect to timelines and manner of implementation, and that the need for Parkland’s infrastructure was overstated.
Tribunal Decision on the Interim Order
The Tribunal issued the interim order in only six of the 14 markets in respect of which the Commissioner sought the order. In doing so, the Tribunal clarified the test for obtaining a hold separate interim order and emphasized the need for “clear and non-speculative” evidence to demonstrate irreparable harm.
The Tribunal confirmed that under section 104 of the Competition Act it has discretion to grant an interim order if it is satisfied that: (i) there is a serious issue to be tried; (ii) the applicant would suffer irreparable harm if the order were refused; and (iii) the “balance of convenience” weighs in favour of granting the order. The Tribunal’s consideration of these factors may be summarized as follows:
- Serious Issue to be Tried – The Tribunal found that there was a serious issue to be tried and agreed with the Commissioner’s contention that the Divestiture Proposal was not sufficiently defined to be effective and enforceable such that the Commissioner could properly conclude that it would remedy all competition concerns. In the Tribunal’s view, the Divestiture Proposal lacked details as to when and how the divestitures would take place, did not specify any potential or suitable purchasers and did not include measures meant to keep the divested assets viable in the interim.
- Irreparable Harm – The Tribunal found that the Commissioner failed to provide “clear and non-speculative” evidence of the likelihood of irreparable harm in eight of the 14 markets in dispute. The Tribunal found that in six of the 14 markets such evidence was presented by the Commissioner (and conceded by Parkland’s expert witness), and that Parkland’s proposed further commitments would not be sufficient to eliminate the risk of such harm in these six markets. The Tribunal emphasized the importance of correctly defining the boundaries of the relevant geographic markets, and the resulting post-merger market share and concentration levels where such factors are critical to the Commissioner’s claim of irreparable harm.
- Balance of Convenience – The Tribunal found that for the six identified markets, the balance of convenience favoured the granting of the order, as any losses foreseen by Parkland were either unsupported or speculative.
The Tribunal’s decision establishes that the Commissioner must present “clear and non-speculative” evidence to demonstrate irreparable harm when seeking an interim order.
Merger Consent Agreements
In July 2014, as part of a global divestiture process associated with the April 2014 announcement of Holcim Ltd.’s global merger with Lafarge S.A., Holcim proposed the sale of its Canadian operations and associated assets, including certain cement terminals in the United States. On May 4, 2015, the Commissioner reached a consent agreement pursuant to which Holcim will sell its Canadian operations and associated assets – either to one purchaser or as two separate packages to two purchasers. Significantly, the divestiture package includes a non-Canadian asset.
The Bureau’s review determined that while Holcim’s proposed divestiture constituted Holcim’s entire stand-alone business in Canada in relation to ready-mix concrete, aggregates and construction services, it did not constitute a stand-alone business for Holcim’s Canadian cement operations. The Bureau noted the regional nature of the Alberta cement supply market and the significant reliance upon supply from Holcim assets in the United States, and found that even if Holcim sold all of its Alberta assets to one party, it would still result in the removal of a vigorous and effective competitor. Accordingly, the Commissioner required that a Holcim cement plant in Montana be added to the divestiture package. On June 3, 2015, the Bureau announced that it had approved building materials maker CRH plc as a purchaser of all of Holcim’s Canadian operations and associated assets in the United States.
BCE and Rogers Acquisition of GLENTEL
On May 5, 2015, the Commissioner reached a consent agreement with BCE and Rogers to address concerns regarding the proposed co-ownership of GLENTEL, a retailer of wireless telecommunications products. In the vast majority of its locations, GLENTEL sells the wireless products and services of only BCE and Rogers. The Bureau was concerned that the transaction may provide BCE and Rogers with access to each other’s competitively sensitive information, as well as the competitively sensitive information of competing carriers whose products and services are also distributed by GLENTEL. The consent agreement establishes a confidentiality protocol which, among other things, requires that firewalls be maintained and prohibits BCE and Rogers from accessing GLENTEL information about any subscribers or relating to forward-looking pricing, promotions or marketing strategies of other carriers.
This remedy is strictly behavioural in nature. Typically the Bureau prefers structural remedies, which tend to be considered more effective in eliminating competition law concerns and are less costly to administer. That said, the Commissioner recently confirmed his comfort in relying on behavioural remedies where structural remedies are unavailable or insufficient. The remedy is similar to that required with respect to Coca-Cola’s 2010 acquisition of a bottling company that would have allowed Coca-Cola to gain access to commercially sensitive information of Dr Pepper. Under the consent agreement, Coca-Cola agreed to a number of restrictions on its access to this information. In addition, in March 2014, the Bureau issued a qualified no-action letter in respect of Garda-World’s acquisition of G4S Cash Solutions. The no-action letter was issued in respect of the transaction given, among other things, a commitment by Garda-World to alter certain contracting practices.
Kingspan Acquisition of Vicwest’s Building Products Division
In November 2014, Irish building materials company Kingspan agreed to acquire the building products division of Vicwest, a Canadian supplier of metal roofing and steel building components, including three insulated metal panel manufacturing plants and a number of profiling facilities in Canada and the United States. The Bureau’s review of the acquisition found that given the unique characteristics of insulated metal panels, customers rarely switch to other building envelope products and are unlikely to do so even if a small but significant price increase occurs. Moreover, the Bureau found that Kingspan and Vicwest are significant direct competitors in Ontario with limited alternatives available to customers, and that barriers to entry are relatively high. The Bureau therefore determined that the transaction would result in a lessening of competition and on May 19, 2015, the Commissioner entered into a consent agreement requiring Kingspan to sell Vicwest’s manufacturing facility in Hamilton, Ontario. The Commissioner retains sole discretion under the consent agreement to approve a buyer that will effectively compete in Ontario.
Public Announcements of Approved Mergers
From January until June, the Bureau issued either advanced ruling certificates or no-action letters in respect of more than 70 transactions. Five of these transactions merited the issuance of press releases to provide insight to the Bureau’s review:
- Pharmaceuticals – On February 23, 2015, the Bureau issued to GlaxcoSmithKline plc and Novartis AG a no-action letter regarding a three-part inter-conditional transaction: the formation of a joint venture for over-the-counter products; the sale of Novartis’ global vaccine business (excluding influenza vaccine) to GSK; and the sale of GSK’s portfolio of oncology products (excluding manufacturing assets) to Novartis. Only the formation of the joint venture was subject to mandatory pre-merger notification. With respect to the oncology products, the Bureau found that both parties were developing a MEK/BRAF combination therapy to treat a particular sub-group of metastatic melanoma patients, and there was only one other competitor developing a comparable combination therapy. The Bureau noted that in applying the framework for “prevention of competition cases” endorsed by the Supreme Court of Canada in Tervita Corp. v. Canada (Commissioner of Competition) (refer to our Osler Update), it concluded that “but for” the transaction, it was likely that Novartis would have continued clinical trials for its MEK/BRAF combination therapy and that the therapy would have been available in Canada in 2017. Accordingly, the Bureau found that the transaction was likely to have a substantial effect on competition through a loss of innovation. The Bureau issued its no-action letter contingent upon the implementation of a consent agreement in the United States which required that Novartis sell its MEK inhibitor and BRAF inhibitor to Array BioPharma.
- Magazines – On March 2, 2015, the Bureau issued a no-action letter in respect of TVA Group’s acquisition of Transcontinental’s magazines business, citing the ongoing presence of competitors in all relevant magazine genres and the general decline in readership of magazines due to the Internet’s prevalence.
- Hotels – On March 16, 2015, the Bureau issued a no-action letter regarding Marriott International’s proposed acquisition of Delta Hotels and Resorts, having determined that a number of effective competitive chain and independent hotels remained present in all relevant geographic markets.
- Newspapers – On March 25, 2015, the Bureau issued a no-action letter following a five-month review of Postmedia’s proposed acquisition of Sun Media’s English-language media assets. The Bureau found that Postmedia and Sun Media were not each other’s closest competitors, determined that significant competition remained in the relevant product markets and cited the increasing competition faced by print media from digital alternatives. The Bureau also noted that Postmedia made persuasive submissions regarding the meaningful gains in efficiency that could be achieved as a result of the transaction.
- Food and Beverage – On June 10, 2015, the Bureau issued a no-action letter regarding the merger between H.J. Heinz Company and Kraft Foods Group after completing its review of the parties’ retail and foodservice sales of condiments, sauces and dressings. The Bureau’s review determined that with respect to most overlapping products, the parties were not each other’s closest competitors, there would be sufficient remaining competition post-merger and that barriers to entry or expansion are low. As there is a higher degree of concentration for barbecue sauce and pourable salad dressing, the Bureau conducted a more detailed econometric analysis but ultimately concluded that given the differentiation between the parties’ brands, effective remaining competition and low barriers to entry, the transaction was unlikely to result in a substantial lessening or prevention of competition.
Compliance Program Required for Parrish and Heimbecker
On May 29, 2015, the Bureau announced that Parrish and Heimbecker, Limited agreed to adopt a compliance program intended to ensure that it complies with competition laws after a recent failure to notify the Bureau of two proposed acquisitions. Management of the agri-business company voluntarily alerted the Bureau of its failures to notify upon becoming aware of the oversight. In response, the Bureau worked with the company to design a compliance program that would ensure employee familiarity with the Competition Act, designate two senior executives as compliance officers, require the company to seek a legal opinion regarding the notification requirements of all transactions exceeding $5 million and require that the Bureau be kept apprised of the compliance program’s implementation.
More generally, the Bureau continues to focus on competition law compliance, reflecting much of the Bureau’s recent efforts in this area including the establishment of the Competition Promotion Branch as part of the Bureau’s new organizational structure, the release of a draft Competition and Compliance Framework bulletin for comment and the release of an updated Corporate Compliance Programs bulletin.
Merger Review Statistics
The Bureau recently released merger review statistics for its most recent fiscal year, completed on March 31, 2015. The highlights are as follows:
- A total of 240 filings were made in 2014-15, which is the most number filings in the post-recession period and a 10.6% increase over 2013-14.
- Of the 225 reviews which were completed in 2014-15, the proportion of “complex” reviews increased by nearly 3% and the average review time for “complex” files was reduced by nearly three days.
- The Bureau met more than 96% of its service standards in 2014-15, missing only seven service standards as compared to 22 in the prior year.
- While the Bureau conducted reviews across various sectors, real estate and upstream oil and gas constituted approximately 33% of the reviews.
Please contact a member of our Competition & Foreign Investment Group if you have questions regarding this Antitrust Advisory.
Authored by: Michelle Lally, Peter Glossop, Peter Franklyn, Shuli Rodal, Christopher Naudie, Kaeleigh Kuzma