Competition Bureau statement regarding Couche-Tard’s acquisition of CST and divestiture of certain assets to Parkland

OTTAWA, July 6, 2017 — The Competition Bureau (Bureau) announced on June 27, 2017 that it has reached separate consent agreements with Alimentation Couche‑Tard Inc. (Couche‑Tard) and Parkland Industries Ltd. (Parkland) that benefit Canadians by preserving competition for the retail sale of gasoline in Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador.Footnote 1

Following a detailed review, the Bureau determined that Couche‑Tard’s acquisition of CST Brands, Inc.,(Couche‑Tard/CST Transaction) would likely result in a substantial lessening of competition in numerous local markets in Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador. To remedy these concerns, Couche‑Tard agreed to divest 366 retail gasoline sites and dealer contracts to Parkland, as well as one retail gasoline site in Quebec to Philippe Gosselin & Associés Limitée (FILGO).

In addition to these retail gasoline sites and dealer contracts divested to Parkland and FILGO to resolve competition concerns, Couche‑Tard also agreed to sell to Parkland a number of sites and contracts in markets that did not raise competition concerns in respect of the Couche‑Tard/CST Transaction. The Bureau determined that Parkland’s acquisition of some of these additional sites and contracts would likely result in a substantial lessening of competition in seven local markets in Ontario. To remedy these concerns, Parkland agreed to divest nine dealer contracts to MacEwen Petroleum Inc. (MacEwen) or McDougall Energy Inc.

There were also two markets in Ontario in which the Bureau concluded that Parkland was not a suitable purchaser of certain dealer contracts, with the result that Couche‑Tard would have been required to either retain them or divest them to a third‑party purchaser approved by the Bureau. In order to address these concerns, Parkland divested certain of its own assets in and around Trenton and Peterborough prior to the Bureau entering into a consent agreement with Couche‑Tard, to MacEwen. This solution resolved the Bureau’s concerns with respect to the suitability of Parkland, thereby allowing Parkland to purchase the dealer contracts in question from Couche‑Tard.

Background

On August 22, 2016, Couche‑Tard announced that it had agreed to purchase all of the issued and outstanding shares of CST. CST is involved in retail fuel and related businesses at locations throughout Eastern Canada and certain parts of the United States. In particular, in Canada it operates

  1. a heating oil business;
  2. a cardlock business;
  3. a non‑corporate retail gas business from 497 agent, dealer and lessee sites (ADL Sites); and
  4. a corporate retail gas business from 307 company‑operated sites (Corporate Sites). These sites primarily sell gasoline under the Ultramar brand.

Couche‑Tard also announced that, as part of a separate transaction, it had entered into an agreement with Parkland pursuant to which Parkland would acquire the majority of CST’s Canadian assets from Couche‑Tard, including the heating oil business, the cardlock business, all of the supply contracts for the ADL Sites (ADL Supply Contracts) and a number of Corporate Sites to be determined following the Bureau’s review of the Couche‑Tard/CST Transaction (Parkland/Couche‑Tard Transaction).

The Bureau’s sequential review of the two transactions focused primarily on assessing whether the transactions were likely to substantially lessen competition in local geographic markets where the parties overlap, either through the presence of a corporate station and/or the supply of gasoline to a dealer station. The Bureau analyzed both the unilateral and coordinated effects of the transactions, including how much they would impact both the ability, and the incentive, of remaining competitors to more effectively coordinate on pricing, to the detriment of competition.

During the course of its review, the Bureau conducted hundreds of interviews with various market participants, including retail gasoline station operators, municipal agencies and industry experts; reviewed documents and information provided by the parties and third parties; and analyzed transaction‑level data, as well as data on prevailing retail gasoline pricing in specific regions of interest.

The Bureau determined that neither transaction was likely to result in a substantial lessening or prevention of competition with respect to either the home heating business or the cardlock business.

Approach

The Bureau analysed each transaction as a separate stand‑alone transaction.

First, consistent with the parties’ pre‑merger notification filings and request for an advance ruling certificate seeking clearance for the Couche‑Tard/CST Transaction, the Bureau reviewed Couche‑Tard’s proposed acquisition of all of the ADL Supply Contracts and Corporate Sites in order to determine the local markets in which the Couche‑Tard/CST Transaction was likely to result in a substantial lessening or prevention of competition. The Bureau did not take Couche‑Tard’s proposed divestiture of the ADL Supply Contracts into account, as doing so would not have allowed it to identify all of the local markets in which there would likely be a substantial lessening or prevention of competition. As such, the Bureau considered more than 800 sites in the context of the Couche‑Tard/CST Transaction.

Second, in each of the local markets in which the Couche‑Tard/CST Transaction was likely to result in a substantial lessening or prevention of competition and divestitures were required, the Bureau assessed whether Parkland was a suitable purchaser. This is consistent with the approach in the Information Bulletin on Merger Remedies in Canada (Remedies Bulletin) and the consent agreement template, which requires, among other things, that assets subject to a consent agreement be divested to a purchaser that does not raise competition concerns. The Bureau considered about 450 sites during this part of its review.

Third, the Bureau considered whether Parkland’s acquisition of sites not included in the consent agreement was likely to result in a substantial lessening or prevention of competition. The Bureau considered about 220 sites during this part of its review.

As noted above, the scope of the Parkland/Couche‑Tard Transaction was subject to change based on the Bureau’s review of the Couche‑Tard/CST Transaction. Accordingly, once the Bureau’s review of the Couche‑Tard/CST Transaction was largely complete and the assets to be acquired by Parkland were defined, the Bureau was able to conduct its review of the Parkland/Couche‑Tard Transaction.

Analysis

Market Definition

The Bureau conducted an analysis consistent with the framework established in its review of prior retail gasoline cases.Footnote 2 As in those cases, the relevant product market was determined to be the retail sale of gasoline, as vehicle operating specifications constrain consumers in their ability to switch to other fuels. The relevant geographic markets considered were local, given transport and opportunity costs associated with purchasing gasoline at more distant stations.

The Bureau conducted a detailed analysis of numerous local markets in Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador, in order to determine which stations should be included in a given local market, and closely evaluated the effectiveness of each competing station. In this regard, the Bureau relied on interviews with local market participants; internal documents provided by the parties and third parties, including price monitoring, pricing strategy and competitor assessment reports; data analysis; and an industry expert. It also took into account work done in the context of prior retail gasoline mergers.

Consistent with previous cases, the broad factors examined by the Bureau in its local analyses included, among other things, consumer traffic patterns, demographic information and evidence on prevailing pricing strategies.

Unilateral Effects

For each transaction, the Bureau considered both price and non‑price effects, including advertising and other forms of promotion. The Bureau found that, pre‑merger, the parties competed for the retail sale of gasoline in local markets where they each operated a corporate station and/or supplied gasoline to a dealer station. The Bureau also found that the parties are able to increase retail prices at their corporate stations because they decide the price at the pump and, due to the provisions in the dealer contracts, are able to control or influence the retail gasoline prices set by their dealers. In addition, the Bureau found that, particularly in the provinces where gasoline prices are regulated, stations compete through non‑price promotions (e.g., programs that link gasoline purchases to grocery or convenience store purchases). The Bureau’s analysis ultimately led it to conclude that each transaction would likely result in a substantial lessening of competition in a number of local markets, as the parties would have an increased incentive to raise the retail prices at their corporate stations, raise the prices charged to the third party dealer stations that they supply, or reduce their use of non‑price promotions.

Coordinated Effects

Evidence gathered by the Bureau suggests that, without the consent agreements, the transactions would have increased the level of concentration in the retail supply of gasoline in a number of local markets, significantly increasing the extent, likelihood, frequency and duration of tacit coordination among some or all of the retail gas stations in those markets.Footnote 3 Importantly, the Bureau considered coordinated effects separate and apart from unilateral effects. This resulted in divestitures being required in several local markets in which coordination became more likely, notwithstanding that the parties’ combined pre‑merger market share did not exceed 35% unilateral effects threshold set out in the Merger Enforcement Guidelines.

Barriers to Entry

The Bureau determined that significant barriers to entry and expansion exist in the relevant markets, including, but not limited to, high fixed costs, and the need for environmental and regulatory approvals. Previous analysesFootnote 4 have found that constructing a new retail gasoline station can cost from $2 to $4 million, and the process may take 18‑32 months, including financing, regulatory approvals and construction.

Remedy and Conclusion

In order to remedy the Bureau’s concerns, each of Couche‑Tard and Parkland entered into a consent agreement with the Commissioner, which require that they divest a number of sites or dealer contracts. In particular:

  • In order to remedy concerns in respect of the Couche‑Tard/CST Transaction, Couche‑Tard agreed to divest to Parkland 366 stations and dealer contracts in Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador.Footnote 5
  • As noted above, there were two local markets in Ontario in which the Bureau concluded that Parkland was not a suitable purchaser a result of existing competitive overlap. To be considered a suitable purchaser, Parkland divested certain of its own assets to MacEwen, a purchaser approved by the Bureau, prior to the Bureau entering into a consent agreement with Couche‑Tard. This solution resolved the Bureau’s concerns with respect to the suitability of Parkland, thereby allowing it to purchase the dealer contracts from Couche‑Tard.
  • In order to remedy concerns in respect of the Parkland/Couche‑Tard Transaction, Parkland agreed to divest nine dealer contracts in Ontario to a third party to be approved by the Bureau.

The Bureau actively monitors developments in the gasoline industry. Where there is sufficient evidence to demonstrate a violation of the Act, the Bureau has taken, and will continue to take, appropriate enforcement action to address such concerns.

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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