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From Antitrust Law Daily, September 13, 2018

Decision blocking Tronox/Cristal merger released as FTC continues challenge

By Robert B. Barnett Jr., J.D.

The federal district court in Washington, D.C. has unsealed its decision holding that the FTC was entitled to a preliminary injunction preventing Tronox Limited and National Titanium Dioxide Company from merging their TiO2 business (used in the manufacture of paints, plastics, and paper). The court explained that the proposed transaction was likely to substantially lessen competition in the North American chloride-process titanium dioxide market and that a preliminary injunction was in the public interest. The opinion sets forth for the first time the court’s reasons for granting the preliminary injunction. Meanwhile, an FTC administrative law judge has scheduled closing arguments for September 14 in the agency’s Part 3 litigation challenging the combination on the merits (FTC v. Tronox Ltd., September 12, 2018, McFadden, T.).

The FTC commissioners voted in December 2017 to block the Tronox-Cristal transaction (Cristal is the name for the part of National Titanium Dioxide Company’s business that is proposed to be merged with Tronox) on the ground that it would violate Section 7 of the Clayton Act. The FTC then filed an administrative complaint challenging the deal. An administrative law judge held a month-long administrative trial on the merits of the proposed merger, which concluded on June 22, 2108. The parties have filed post-trial briefs, and a decision is expected soon. The ALJ’s decision will presumably be reviewed by the FTC’s commissioners and then probably by a federal appeals court. Meanwhile, on July 10, the FTC filed a separate petition in federal court seeking a temporary restraining order and a preliminary injunction.

Presumption of anticompetitive effects. The court first considered whether the FTC established a presumption of anticompetitive effects. To reach a decision on that question, the court sought to define the relevant product market. It determined that the appropriate market was the chloride-process titanium dioxide market. In so determining, the court rejected Tronox’s argument that the proper market included both chloride- and sulfate-process TiO2. The economic realities of the industry, the court said, as described by TiO2 producers, TiO2 consumers, and expert economists, defined the market as including only chloride-process TiO2. Chloride-process TiO2 is instantly recognizable from sulfate-process TiO2. It is brighter and more reflectively white, with better durability, scrubability, and other performance characteristics.

The court next sought to define the relevant geographical market, and it concluded that the relevant market was North America. In rejecting Tronox’s argument for a worldwide market, the court noted distinct differences in the North American market, including that prices are somewhat higher in the North American market than they are in the European, Asian, and Latin American markets. Evidence established that the producers segment their customers by location, which typically includes North America as a single location. Furthermore, the court concluded that quantitative evidence and the hypothetical monopolist test (which seeks to determine whether a hypothetical company that is the only seller could profitably impose a price increase) both supported a finding that North America was a separate market. If a single worldwide market existed, the court noted, customer arbitrage would equalize prices over time, which has not occurred. Even though the TiO2 market includes a considerable global trade, North America was the relevant market in which to assess any potential anticompetitive effects of the merger.

Next, the court determined that the TiO2 market in North America was concentrated and that this transaction would substantially increase that concentration. Tronox and Cristal are two of the five companies that dominate the chloride-process TiO2 market in the U.S. and in Canada. Those five companies are responsible for 99.5% of annual sales in the market. If the merger were to be completed, the court noted, the top two companies would control 73% of total production capacity.

The court concluded that a reasonable probability existed that the industry’s remaining companies would engage in anticompetitive behavior if the merger were to go through. Specifically, they would have an incentive to manage prices by withholding TiO2 supplies. The incentives exist, the court concluded, as did evidence of a history of strategic output withholding in this industry under similar situations.

As a result, for all of those reasons, the court concluded that the FTC had established a prima facie case by proving that the Tronox-Cristal merger will likely result in undue concentration in the North American chloride-process TiO2 market. Its arguments were strengthened, the court said, by a showing that the merger will increase already prevalent incentives to undertake strategic output withholding, and, as a result, the FTC had established a presumption that the proposed transaction would violate the Clayton Act.

Rebuttal evidence. Tronox and Cristal had the right to rebut the presumption by (1) discrediting the data or (2) affirmatively showing why the deal was unlikely to substantially lessen competition. The court, however, rejected their arguments that (1) the current market was fiercely competitive and (2) consumers will benefit from the transaction’s output-enhancing synergies. Neither argument, the court said, overcame the strong presumption of anticompetitive effects. While it might be true someday, the court noted, that Chinese TiO2 producers will redefine the North American market, the evidence suggests that their current market power was not substantial enough to alleviate concerns about anticompetitive effects. Substantial barriers to entry, among other factors, do not lead one to conclude that other companies are ready to replace Cristal as a competitor.

Furthermore, the purported synergies that Tronox and Cristal allege must be merger-specific and reasonably verifiable. The synergies that Tronox and Cristal offered, which focused on increased global production, were merger-specific but not verifiable. The two companies showed, for example, that they desired operational efficiencies but they failed to show that the merger would actually increase overall output. Also, the two companies’ contention that the merger would result in sizable cost savings synergies was similarly less than convincing because it was unverifiable.

Equities. Even though the FTC established a presumption in favor a preliminary injunction, the court must still weigh the relative equities involved. The court concluded that the public equities weighed in favor of injunctive relief, citing the lessened competition and the possible increased prices. Furthermore, the private equities involved did not outweigh the public equities. For example, Tronox was particularly unhappy that the FTC waited until after the administrative proceedings to seek injunctive relief, a delay that Tronox contended cost it an extra $130 million. While acknowledging that preliminary injunctions are typically sought prior to trial, the court refused to ascribe venal motives to the FTC’s decision. The court also expressed skepticism that the deal would have been consummated but for the preliminary injunction request, citing approvals required by the EU and other regulators. Furthermore, any harm caused by the delay would be lessened by the fact that the term of the preliminary injunction would be shorter than the term typically applied.

As a result, the court granted the FTC’s motion for preliminary injunction on the ground that it had successfully established a presumption of anticompetitive effects and that the equities favored injunctive relief.

This case is No. 1:18-cv-01622 (TNM).

Attorneys: Dominic Vote for the FTC. Aaron L. Nielson (Kirkland & Ellis LLP) for Tronox Ltd. James L. Cooper (Arnold & Porter Kaye Scholer LLP) for National Industrialization Co., National Titanium Dioxide Co. Ltd. and Cristal USA Inc.

Companies: Tronox Ltd.; National Industrialization Co.; National Titanium Dioxide Co. Ltd.; Cristal USA Inc.

MainStory: TopStory AcquisitionsMergers Antitrust DistrictofColumbiaNews FederalTradeCommissionNews

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