Competition Bureau statement regarding the proposed acquisition by Louisiana Pacific of Ainsworth

OTTAWA, May 16, 2014 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition by Louisiana-Pacific Corporation (LP) of Ainsworth Lumber Co. Ltd. (Ainsworth) pursuant to an agreement dated September 4, 2013.

On May 14, 2014, LP and Ainsworth terminated their agreement after the Bureau expressed serious concerns that the transaction was likely to substantially lessen competition for the sale of oriented strand board (OSB) in British ColumbiaFootnote 1. The Bureau concluded that the abandonment of the transaction thwarts a substantial lessening of competition to the benefit of British Columbians who purchase OSB for purposes such as the remodelling or construction of new homes.

In conducting its review, the Bureau cooperated and worked very closely with the United States Department of Justice (U.S. DOJ). The Bureau’s long standing relationship with the U.S. DOJ ensured an efficient and coordinated review of the transaction, consistent with the agencies’ agreement on Best Practices on Cooperation in Cross-Border Merger Investigations. In conducting its review, the Bureau obtained information from the parties, as well as a range of market participants including competitors and customers.

Background

On September 4, 2013, the parties entered into an arrangement agreement in which LP would acquire all the outstanding common shares of Ainsworth.

LP and Ainsworth both manufacture OSB, a product made by layering strands of wood in specific orientations. OSB is primarily used in the construction or renovation of homes. As OSB is strong and rigid, it is used as sheathing in walls, flooring, and roof decking. It is also used in other commercial and industrial applications such as the construction of furniture. OSB is normally sold on a delivered basis.

Ainsworth has OSB mills in 100 Mile House, B.C. and Grande Prairie and High Level, Alta. LP has OSB mills in Dawson Creek and Peace Valley, B.C., and Swan Valley, Man., as well as elsewhere in North America. All of these mills sell OSB into British Columbia.

The OSB industry is transparent due to the presence of price reporters and industry associations. Price reporters survey market participants and report OSB prices by production region and destination city twice weekly. Industry associations survey producers on their costs and provide annual statistics. When information about prices, rival firms and market conditions is readily available to market participants, it is easier for rivals to monitor one another’s behaviour, which in turn makes effective coordination more likely. The existence of organizations that facilitate communication and dissemination of information among market participants may also make it easier for firms to coordinate their behaviour.

Relevant markets

The Bureau assessed whether OSB competed in a broader structural panel market that includes plywood, and determined that the provision of OSB constituted a separate product market from other structural panels. While plywood is a functional substitute for OSB, it is significantly more expensive to produce and typically sells for a substantially higher price than OSB.

Economic analysis performed by the Bureau revealed that consumers in British Columbia are paying more for OSB (net of freight) than consumers in more competitive markets. Though producers ship OSB from Western Canada to many destinations in North America and the world, the ability to charge higher prices to customers in British Columbia led the Bureau to conclude that it is a distinct geographic market.

Analysis

Ainsworth is the largest producer of OSB in Western Canada and the transaction would have significantly increased LP’s market share and the overall concentration of the market. The proposed transaction would have given the parties control of approximately 60% of the market and would have eliminated the significant competition between the parties. With a greater share of capacity and sales, LP would likely have an ability and incentive to restrict output to keep prices higher.

The Bureau considered whether existing competitors or entry by a competitor would be likely to counteract these potential anti‑competitive effects. The parties are two of only four producers that regularly sell OSB into British Columbia and the only producers with mills located in British Columbia. The Bureau believes that the parties’ two remaining competitors would likely not constrain the parties from charging higher prices to consumers in British Columbia. Thus it was concluded that these competitors likely would not constrain the parties as a combined entity. Further, all of the competitors’ mills are outside of British Columbia and therefore likely face a freight disadvantage.

As barriers to entry and expansion in this industry are high, it is unlikely that entry would have been timely and sufficient. Building a new OSB mill costs approximately $300 million or more and takes over three years. A new entrant must obtain the required environmental approvals and negotiate long-term fibre supply agreements. OSB manufacturers in North America currently have no publicly announced plans to open a new mill in Western Canada. Before reopening an idled mill, an OSB manufacturer would likely require a sustained increase, or expected increase, in demand or price. After the decision is made to restart the idled mill it can still take over two years and $15 to $30 million to bring the mill to full capacity, depending on the length of time it has been idled.

Conclusion

The Bureau concluded that had the proposed transaction proceeded it would have likely resulted in a substantial lessening of competition given the parties’ high post-merger market share, the high barriers to entry and expansion and the lack of effective remaining competitors, among other factors.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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