Competition Bureau statement regarding Superior’s proposed acquisition of Canexus

Position statement

OTTAWA, June 28, 2016 — On June 27, 2016, the Bureau issued a No Action Letter (NAL) with respect to the proposed acquisition by Superior Plus Corp. ("Superior") of Canexus Corporation ("Canexus"), indicating that the Commissioner of Competition does not, at this time, intend to make an application under section 92 of the Competition Act ("Act") in respect of the proposed acquisition. Upon reviewing and analyzing the substantive efficiencies analyses provided by Superior, the Bureau concluded that the efficiency gains would be clearly greater than the likely significant anti‑competitive effects of the transaction.

Section 96 of the Act mandates that the Competition Tribunal shall not make an order under the merger provisions of the Act where a merger is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that are likely to result from the merger, and that the gains in efficiency would not likely be attained if the order were made. The efficiencies defence set out under section 96 of the Act is unique to Canada.

This statement summarizes the approachFootnote 1 taken by the Bureau in its review of the proposed transaction.

The Bureau’s conclusions were supported by interviews with numerous stakeholders, including customers, competitors and distributors of the parties’ chemical products, as well as analyses carried out by independent economic and efficiencies experts.

In conducting its review, the Bureau cooperated closely with the United States Federal Trade Commission (FTC). Each authority reviewed the effects of the transaction under its distinct legal framework. On June 27, 2016, the FTC filed an administrative complaint challenging the transaction.

Background

Superior and Canexus are Canadian‑based participants in the global chemicals industry, primarily serving the pulp and paper industry. The parties operate specialty chemicals manufacturing facilities in North and South America.

Analysis

The Competitive effects of the proposed transaction

Following its review, the Bureau concluded that the proposed acquisition would likely result in a substantial lessening of competition for the supply of sodium chlorate in both Eastern and Western Canada. Sodium chlorate is a chemical primarily used to produce chlorine dioxide, an environmentally preferred bleaching agent used by pulp and paper manufacturers. Additionally, the Bureau concluded that the acquisition would likely result in a substantial lessening of competition for the supply of each of chlorine, caustic soda, and hydrochloric acid (collectively referred to as "chlor‑alkali" chemicals) in Western Canada, where the Parties are the sole producers of these chemicals.Footnote 2 Caustic soda is used in the pulp and paper industry to digest and bleach wood pulp, and also has applications in the oil and gas, chemical and steel industries. Chlorine is used in the production of plastics, other chemicals and construction materials, as well as in the water treatment industry to disinfect water supplies and ensure safe drinking water. Hydrochloric acid is used in the steel, chemical, food and oil and gas industries.

Through its investigation, the Bureau learned that customers of Superior and Canexus could face materially higher prices for these chemical inputs and would have limited options for alternative supply as a result of the merger. The Bureau’s conclusions were supported by the lack of effective remaining competition that would remain if Canexus were eliminated as an independent competitor. In particular, the Bureau observed the minimal presence of foreign imports of sodium chlorate, hydrochloric acid and chlorine into Canada. Although significant amounts of these products are exported for consumption outside of Canada, market contacts confirmed that foreign suppliers generally cannot competitively supply in Canada due to factors such as freight costs and higher costs of production outside of Canada. The Bureau further concluded that due to, among other things, market maturity and the significant sunk costs associated with chemicals manufacturing, entry by new competitors or the expansion of existing competitors in the production of these chemicals would not be sufficiently timely or likely to constrain an exercise of market power by Superior.Footnote 3

The efficiency exception under the Act

There is an efficiency exception in the Act that involves an assessment of the trade‑off between anti‑competitive effects and efficiencies. In this case, the Bureau considered factors such as the elimination of overhead costs, freight optimization, and the elimination of duplicate corporate services.Footnote 4

Superior provided detailed analyses prepared by an expert to support its claims of efficiency gains resulting from the proposed transaction. The Bureau retained an external economic expert to model the likely effects of the proposed merger and, in particular, to estimate the deadweight loss (allocative inefficiency) that would likely result from the merger, as well as an external efficiencies expert to evaluate Superior’s claims.Footnote 5 The Bureau concluded that the anti‑competitive effects of the merger would be clearly outweighed by the efficiency gains from the transaction.Footnote 6

Conclusion

After assessing the competitive impact of the proposed transaction in Canada as well as the application of the efficiency exception in section 96(1) of the Act, the Bureau concluded that the proposed acquisition would likely result in a substantial lessening of competition as described above. However, after assessing the efficiency gains that were likely to be brought about by the merger, the Bureau issued a No Action Letter confirming that it will not challenge the proposed transaction before the Competition Tribunal under the merger provisions of the Act at this time.

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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