Competition Bureau statement regarding the merger between Dow and DuPont

On June 27, 2017, the Commissioner of Competition entered into a consent agreement with E.I. du Pont de Nemours and Company (DuPont) and The Dow Chemical Company (Dow) to resolve competition concerns related to their proposed merger, including the impact on innovation.

Dow and DuPont develop, manufacture, and sell agricultural products, such as seeds, herbicides, insecticides and fungicides and specialised plastics products (ethylene acrylic acid copolymers and ionomers) used in packaging.

The agreement requires that the parties sell certain assets and businesses related to:

  1. herbicides used by Canadian farmers in the cultivation of cereal crops, including wheat, oats and barley; and
  2. the production of specialised plastics products (ethylene acrylic acid copolymers and ionomers) used to manufacture high performance packaging products.

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

In the course of its review, the Bureau conducted interviews with numerous market participants, including customers, suppliers and competitors. It also reviewed documents and data produced by the parties and third parties.

The Bureau recognized the central role that innovation plays in the agricultural sector. Competition, regulation, chemical resistance issues, climate change and the nutritional needs of a growing global population induce firms to discover, develop and commercialize agricultural products of increasing efficacy. In examining the proposed transaction’s likely impact on innovation the Bureau considered:

  1. the degree of innovation rivalry among the parties and third-parties;
  2. the likelihood, both with and without the proposed transaction, that their innovation efforts would yield commercialized products;
  3. the timeframe, both with and without the proposed transaction, within which the commercialization of innovations would likely occur;
  4. the extent to which the proposed transaction would impact the merging parties’ ability to profit from the economic benefits resulting from their innovations.
  5. the pace of technological change in the relevant markets and the rate at which older technologies become obsolete; and
  6. submissions from the parties on the degree to which combining complementary assets would likely enhance their innovation capabilities.

The Bureau relied on a formal economic model to guide its innovation analysis. It primarily used qualitative information to apply that model to the facts of the case and to make a prediction about the proposed transaction’s likely impact on innovation. Qualitative information used by the Bureau included documents created by the parties in the normal course of business describing:

  1. their innovation assets;
  2. the strategic objectives of their innovation efforts;
  3. the timelines associated with the commercialization of their innovations;
  4. the likelihood that commercialization would occur;
  5. the anticipated competitive impact of their innovations should commercialization be successful; and
  6. their expectations regarding the future evolution of the relevant markets.

The Bureau used demand estimation and merger simulation techniques to predict the quantifiable competitive effects likely to result from the merger.

During its examination, the Bureau worked closely with the European Commission, the United States Department of Justice and the Australian Competition and Consumer Commission.

Background

DuPont is an international conglomerate headquartered in Wilmington, Delaware, that researches, develops, produces, distributes and sells a variety of chemical products, polymers, agro-chemicals, seeds, food ingredients and other materials. In Canada, DuPont operates in the agriculture, performance materials, electronics and communications, safety and protection, nutrition and health, and industrial biosciences sectors.

Dow is a multi-national manufacturer of plastic, chemical, agricultural, hydrocarbon and energy products headquartered in Midland, Michigan. Its Canadian operations include crop inputs (such as seeds and pesticides), petrochemical and energy products, and building and construction materials.

The Bureau’s concerns in this matter related to the loss of rivalry between the parties in:

  1. Two agricultural product markets in Western Canada:
    1. broadleaf herbicides for cereal crops;
    2. pre-seed burn-off additives for cereal crops; and
  2. Two specialized plastics markets, which the Bureau determined to be North American in scope:
    1. acid copolymers; and
    2. ionomers.

Analysis

i. Cereal Broadleaf Herbicides

Broadleaf weeds are a large family of weeds that can infest cereal crops. This family includes weeds such as Canada thistle, dandelions, kochia, hemp-nettle, and wild buckwheat.

Cereal broadleaf herbicides are used by Canadian farmers to kill broadleaf weeds without killing a cereal crop.

Dow and DuPont have each pioneered chemicals for such purposes and have built portfolios of herbicide products around those chemicals. Key products in the Dow portfolio are OcTTain XL, Stellar and Prestige XC while DuPont’s leading products include Barricade, Travallas and Refine. DuPont’s position in this market is also supported by a proprietary herbicide dispensing system called PrecisionPac that enables crop input retailers to create customized blends of DuPont herbicides for individual farmers.

The Bureau’s investigation revealed that Dow and DuPont are two of the three principal suppliers—with Bayer AG being the third—of cereal broadleaf herbicides used by Western Canadian farmers. Given the closeness of competition between their products, the Bureau determined that the merger of the parties’ portfolios would likely negatively impact competition. The information obtained over the course of the review indicated that these negative effects were unlikely to be effectively constrained by the entry or expansion of new or existing competitors.

The Bureau’s review also revealed that each of the parties has innovation efforts directed at expanding and enhancing their respective cereal broadleaf herbicide portfolios. In light of this, the Bureau also determined that competition would be harmed because the loss of innovation rivalry would reduce the incentive to innovate and to bring new and more effective products to market in a timely manner.

ii. Cereal Pre-seed Burn-off Additives

Prior to seeding a crop in the spring, most farmers on the Canadian prairies will carry out a “pre-seed burn-off,” meaning that they will apply a herbicide to their fields prior to seeding in order to kill off early season weeds that could potentially infest a crop. However, because of increasing chemical resistance in certain weeds, application of a single herbicide may not suffice and farmers may need to use a second herbicide, or “additive”, in combination with the first.

Dow, with its PrePass herbicides, and DuPont, with its Express herbicides, are the two leading suppliers of additives for pre-seed burn-off in cereal crops and are long-time rivals.

The Bureau determined that the loss of this rivalry would likely result in higher prices for farmers leading some to adopt less effective weed management strategies. The Bureau’s review revealed that these effects were unlikely to be mitigated by entry or expansion of current or future competitors.

iii. Acid Copolymers and Ionomers

Acid copolymers and ionomers are two types of performance plastics that are purchased by packaging manufacturers for use as adhesives and sealants. They are derived from ethylene, manufactured in specialized facilities and typically sold as pellets.

Acid copolymers are often used as an adhesive layer in food and pharmaceutical packaging, particularly for adhesion to aluminium foil.

Ionomers are used as a surface layer for golf balls and ski boots, and as a sealant for cosmetic and food packaging.

The Bureau’s review indicated that each of acid copolymers and ionomers has a particular set of performance properties (e.g., adhesion, sealability, durability) and aesthetic properties (e.g., clarity, gloss) that are optimal for specific uses. These properties are difficult to replicate through alternative materials and therefore other products do not adequately meet the needs of packaging manufacturers. Furthermore, the production of these specialized plastics at a consistently high level of quality requires technical expertise that potential entrants have said is challenging to achieve.

The Bureau determined that Dow and DuPont are the only effective competitors in the North American market for acid copolymers and ionomers.

The loss of competition would likely have resulted in higher prices for packaging firms.

Conclusion and Remedy

In order to address the competition issues described above, the consent agreement requires DuPont to divest its global cereal herbicides business to FMC Corporation. The divestiture includes:

  1. the DuPont portfolio of cereal broadleaf and pre-seed burn-off herbicides in Canada and the chemical ingredients contained in those herbicides;
  2. an experimental farm in Hanley, Saskatchewan;
  3. a packaging facility in Calgary, Alberta;
  4. a chemical manufacturing facility in Manati, Puerto Rico;
  5. the PrecisionPac herbicide dispensing system; and
  6. the Stine discovery facility in Newark, Delaware, which houses DuPont’s primary herbicide discovery and development efforts for Canadian markets.

Furthermore, Dow will sell its global acid copolymer and ionomer business, including its dedicated North American acid copolymer manufacturing facility in Freeport, Texas, to SK Global Chemical Co., LTD.

FMC Corporation is a United States based company specialised in chemical technologies and products for agricultural and pharmaceutical uses. SK Global Chemical is a South Korean petrochemical company. Its parent company, SK Group, is a conglomerate with activities in various industries including telecommunications and energy.

The Commissioner concluded that both proposed purchasers are acceptable buyers, as they have the managerial, operational and financial capability to compete effectively in Canada.

In light of these divestitures and the terms of the consent agreement, the Bureau is satisfied that the proposed transaction is unlikely to result in a substantial lessening or prevention of competition. This resolves competition concerns including the impact on innovation.

The 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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