Archived — Asset Acquisition by PaperlinX Canada Ltd. from Cascades Resources Fine Papers Group Inc.

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Technical Backgrounder

August 2006


This technical backgrounder is intended to summarize the main findings of the Competition Bureau’s review of the acquisition by PaperlinX Canada Ltd. ("PaperlinX")1 of the assets of the Cascades Resources fine paper merchant and distribution division ("Cascades") of Cascades Fine Papers Group Inc. ("CFPG") (the "transaction").

Readers are advised to exercise caution in interpreting the Competition Bureau’s assessment of this transaction. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner of Competition (the "Commissioner). The legal requirements of section 29 of the Competition Act and the Bureau’s policies and practices regarding the treatment of confidential information limit the Bureau’s ability to disclose certain information obtained during the course of a merger review. Moreover, portions of the Consent Agreement (the "Agreement") entered into by PaperlinX and the Commissioner are confidential.

Background

In September 2005, PaperlinX contacted the Bureau regarding its interest in acquiring the assets of Cascades. The Bureau conducted an extensive merger review to determine the competitive effects of the transaction. The transaction was classified as "very complex" in accordance with the Bureau’s service standards. In conducting its review, the Bureau collected information by conducting market contacts and obtaining orders pursuant to section 11 of the Competition Act that were directed to PaperlinX and CFPG (collectively, the "Parties") and to various industry participants. Economic and industry experts were also retained.

As a result of its review, the Bureau concluded that the transaction would likely prevent or lessen competition substantially in the distribution of fine paper by full-line merchants ("FLMs") to commercial printers ("printers") in regional western Canadian markets. To resolve these concerns, the Bureau entered into negotiations with PaperlinX. On February 28th, 2006, PaperlinX and the Commissioner reached an Agreement pursuant to section 105 of the Competition Act. The Agreement requires PaperlinX to divest all of the Cascades assets relating to the fine paper merchant business in British Columbia and Alberta2 (e.g. property, inventory, intellectual property, all rights under any contract with respect to the assets, personnel currently employed in British Columbia and Alberta, etc.). On March 1st, 2006, the Agreement was registered with the Competition Tribunal.

The Parties

PaperlinX is an FLM owned by PaperlinX Limited, an Australian based international paper merchant distributor. Headquartered in Vancouver, BC, PaperlinX operates nine warehouse facilities throughout most of Canada’s major urban centres. It does not have any merchant operations in Atlantic Canada.

Cascades is also an FLM and was privately owned by CFPG, a subsidiary of Cascades Inc.3 Aside from the Cascades business, CFPG owns and operates fine paper manufacturing and converting facilities. Cascades operates fifteen sales offices/warehouses across Canada. While Cascades does not have a physical warehouse in Saskatchewan, it does supply Regina and Saskatoon from its other operations.

Product Market

The Bureau concluded that the relevant product market was the distribution of fine paper by FLMs to printers.

The merger review considered different end users of fine paper (e.g. printers and copy shops) as well as their suppliers (e.g. mills and FLMs). The Bureau found that printers require many unique product and service offerings that only FLMs are able to provide on a reliable and consistent basis. In particular, they require a large variety of fine papers, consistent quality and quantity of fine papers, and the reliable and frequent delivery of fine papers. The Bureau concluded that other end users do not require this level of product and service offerings and, as a result, can obtain their fine papers from alternative sources.

With respect to suppliers, the Bureau found that the business model of FLMs focuses on providing high quality services and a complete line of papers to customers, particularly printers. Other fine paper distributors, however, operate under different business models and are not able to fulfill the requirements of printers with respect to product and service offerings.

As a result of the above findings, the Bureau determined that no acceptable substitute exists for the service and product offerings provided by FLMs to printers.

Geographic Market

The Bureau defined the geographic market for full-line distribution of fine papers to printers as regional centred around major urban centres where the parties’ warehouses are located. The need for just-in-time ("JIT") delivery by printers was considered an important factor in the development of the geographic market definition. The JIT services offered by FLMs reduce inventory costs for printers and, at the same time, enable printers to meet the demands of their clients in a timely fashion.

Barriers to Entry and Entry Deterring Factors

The Bureau found that economic barriers to entry and entry deterring factors exist in the FLM market in Canada.

Upstream Issues

As part of the inquiry, the Bureau considered the difficulties a new fine paper distributor or an expanding fine paper distributor would encounter in accessing a varied and consistent supply of fine paper. It found that fine paper mills tend to maximize volume shipments and geographic market coverage while minimizing risk and distribution costs by forming relationships and working closely with one or two FLMs. The Bureau was concerned that these entrenched and long-standing relationships could result in a limited access to the supply of fine paper for new or expanding firms.

In terms of sourcing paper from offshore mills, it found that there were logistical issues (e.g. long shipping periods) which would effectively prevent new entrants from relying primarily on offshore paper.

Downstream Issues

Since FLMs are the only source of supply that can reliably fulfill the requirements of printers, many printers also have entrenched, long-standing relationships with existing FLMs. The Bureau was concerned that these relationships would pose severe difficulties for new FLMs to obtain customer business in the printing market.

Capital Requirements

The Bureau concluded that a significant amount of financial capital is required in order to operate as an FLM. Of the capital requirements for FLMs, the provision of credit terms to printers is the most financially capital intensive. Some of the other capital requirements incurred by FLMs include high levels of inventory, assets and experienced sales and technical staff.

Remaining Competition

The Bureau found that post-merger, there would be only two FLMs lefts in British Columbia, Alberta and Saskatchewan. Other than the merged entity, Unisource Canada, Inc. would have been the only remaining FLM in these provinces.

Coordinated Effects

The Bureau was concerned that the paper distribution market in Canada has certain structural characteristics which augment the propensity for coordinated effects. These structural characteristics include, but are not limited to, the following:

  • significant barriers to entry;
  • few FLMs in western Canada;
  • a degree of transparency in pricing;
  • frequent purchases by many small printers; and
  • competitors compete in multiple markets (i.e. fine paper and graphics arts distribution).

Remedy Implementation

The Agreement requires PaperlinX to take all reasonable steps to ensure that the divested business is independent of PaperlinX’s own operations. The Commissioner has appointed an independent manager who is responsible for managing the divested assets, independently of PaperlinX, until the completion of the divestiture. Furthermore, the independent manager and the officers of the divested business have executed a confidentiality agreement which stipulates that they shall not communicate any confidential information acquired in the performance of their duties to PaperlinX or other third parties, except to the extent permitted by the Agreement. The Commissioner has also appointed an independent person (a "Monitor") who is responsible for monitoring the independent manager and PaperlinX to ensure that they are in compliance with the terms of the Agreement. The Monitor reports regularly to the Commissioner.

The Agreement also provides that if PaperlinX is unable to divest Cascades assets relating to the fine paper merchant business in British Columbia and Alberta, a trustee will be appointed to complete the sale process.

To remedy the Bureau’s concerns regarding access to supply, the Agreement provides that PaperlinX will continue to arrange for the supply of fine paper to the divested business pending completion of the divestiture. The Agreement also provides that PaperlinX shall not object to or obstruct the supply of fine paper by any fine paper mill to the purchaser of the divested business. Furthermore, Cascades Fine Papers Group Inc. has agreed to supply its fine paper brands to the divested business before and after the divestiture.

Conclusion

The Bureau is satisfied that with the implementation of the divestitures required by the Agreement, the transaction is unlikely to result in a substantial lessening or prevention of competition in the market of fine paper distribution by FLMs to printers.

Footnotes

1 Formerly Coast Paper Ltd.

2 excluding the graphics arts business of Cascades.

3 Cascades Inc. is an integrated paper company that is based in Quebec and that manufactures and distributes a wide range of paper products, including packaging materials, tissue and fine papers.

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