Competition Bureau statement regarding Evonik’s proposed merger with PeroxyChem

Position Statement

See the news release that corresponds to this position statement.

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On this page:

• Introduction
• Background
• Competitive Effects Analysis
• Remedy

Introduction

On January 28, 2020, the Commissioner of Competition (Commissioner) registered a consent agreement with Evonik Industries AG (Evonik) requiring the divestiture of assets in British Columbia to remedy competition concerns related to Evonik’s proposed merger with PeroxyChem Holding Company LLC (PeroxyChem).

The Bureau’s review of the deal spanned over 10 months and involved extensive consultations with a wide range of stakeholders including Canadian customers in the pulp and paper, mining, and oil and gas sectors as well as competitors. The Bureau also engaged an economic expert to assist in its review. Given that the merging parties’ production facilities located in Western Canada supply customers in both Western Canada and the Pacific Northwest U.S., the Bureau coordinated extensively with the U.S. Federal Trade Commission (FTC) throughout its merger review.

The Bureau’s consent agreement is necessary to remedy the likely substantial lessening of competition that would have resulted from the proposed transaction with respect to the supply of hydrogen peroxide in British Columbia, Alberta and Saskatchewan (Western Canada).

Background

Evonik is a publicly traded global specialty chemical manufacturer active in over 100 countries and producing a wide range of chemicals, including hydrogen peroxide. Evonik is based in Essen, Germany and generated € 13,3 billion in fiscal 2018. In Canada, through its wholly-owned subsidiary Evonik Canada Inc., and among other Canadian operations, Evonik operates hydrogen peroxide manufacturing facilities in Gibbons, Alberta and Maitland, Ontario.

PeroxyChem is a privately owned global manufacturer of hydrogen peroxide, peracetic acid and persulfates. In Canada, PeroxyChem operates, through its subsidiary PeroxyChem Canada Ltd., a hydrogen peroxide manufacturing facility in Prince George, British Columbia.

In Western Canada, the only region in Canada where the parties overlap, Evonik and PeroxyChem supply hydrogen peroxide to industrial customers, primarily in the pulp and paper, oil and gas, and mining sectors. The product is used as a bleaching chemical by the pulp and paper industry, and for treatment purposes in the oil and gas and mining sectors.

On November 7, 2018 Evonik signed an agreement with One Equity Partners, the owner of PeroxyChem, to acquire PeroxyChem for US$625 million. The acquisition includes PeroxyChem’s hydrogen peroxide facility in Prince George, British Columbia. The Bureau’s Merger Intelligence and Notification Unit became aware of the proposed transaction by way of a complaint from a customer in the pulp and paper industry.

Competitive Effects Analysis

Owing to a lack of competitive overlap elsewhere in Canada, the Bureau’s review focused on assessing the loss of competitive rivalry between Evonik’s facility in Gibbons, Alberta and PeroxyChem’s facility in Prince George, British Columbia. In Western Canada, both Evonik and PeroxyChem manufacture and supply standard grade hydrogen peroxide to industrial customers primarily in the pulp and paper, oil and gas, and mining sectors. Although hydrogen peroxide can vary by grade and concentration, the parties’ facilities in Western Canada manufacture solely standard grade hydrogen peroxide. Customers of the parties consistently indicated that there were not any viable alternatives for hydrogen peroxide as a bleaching chemical for pulp and paper or as a treatment chemical in the oil and gas and mining sectors. Hydrogen peroxide was found to be the most suitable, cost-effective and environmentally friendly chemical available to the parties’ customers. For these reasons, the Bureau determined that standard grade hydrogen peroxide, referred to herein as hydrogen peroxide, was the appropriate product market for its analysis.

In evaluating the geographic market, the primary consideration was the significant freight costs of transporting hydrogen peroxide given that it is shipped, either by rail or truck, as a diluted solution mixed in water. Customers and internal documents and data obtained from the parties corroborate that hydrogen peroxide supply in North America can be divided into distinct regions, with one region encompassing customers and competitors in Western Canada and the Pacific Northwest U.S. The Bureau determined that competitors who did not have production facilities in Western Canada or the Pacific Northwest U.S. would not have been able to constrain the merged entity from increasing prices substantially post transaction. Arkema and Nouryon, two other North American hydrogen peroxide producers with facilities located in the Southeast U.S., were found to be ineffective competitors in Western Canada because of the prohibitive freight costs of shipping product long distances. For these reasons, the Bureau determined that Western Canada and the Pacific Northwest U.S. was the appropriate geographic market for its analysis.

Using these product and geographic market frameworks the Bureau compared the levels of pre-merger and anticipated post-merger competition. The Bureau’s analysis concluded that Evonik and PeroxyChem competed directly, were close rivals and have historically constrained each other’s pricing during bidding processes. There was significant evidence from customers and the parties’ internal documents of competition between the parties being leveraged by customers to obtain lower pricing for hydrogen peroxide. The Bureau’s competitive analysis determined that absent a remedy, Solvay, with a production facility in Longview, Washington, would have been the sole remaining competitor in the market. The proposed transaction would have created a duopoly market structure, with the merged entity having high combined market shares, whether measured by capacity or sales. Given Solvay’s finite capacity, it was found to be unlikely that it would have provided a sufficient constraint on the merged entity’s ability to increase prices to hydrogen peroxide customers in Western Canada post-transaction. The Bureau’s analysis of likely competitive effects was also informed by upward pricing pressure and merger simulation analyses conducted by its economic expert. The Bureau concluded that the loss of rivalry resulting from the proposed transaction would likely substantially lessen competition for the supply of hydrogen peroxide in Western Canada.

The Bureau determined that de novo barriers to entry for the production of hydrogen peroxide are high due to the significant capital costs and time to build a production facility, the requirement for regulatory approvals and permits, and the mature nature of the market in Western Canada. It was determined that timely, likely and sufficient entry would not be likely to constrain the substantial lessening of competition that would likely result from the proposed transaction.

Remedy

In order to remedy the likely substantial lessening of competition, Evonik has agreed to divest the Prince George facility to United Initiators, a global specialty chemicals manufacturer based in Pullach, Germany. To assess the suitability of United Initiators as a purchaser, the Commissioner considered their independence from the merged entity, whether they have the managerial, operational, and financial capability to compete effectively in the market, whether they are committed to competing in the market, and what the likely impact on competition would be resulting from their proposed purchase of the Prince George facility. To assess these criteria the Bureau reviewed internal business documents and sworn testimony from United Initiators. The Bureau also conducted interviews with a comprehensive set of relevant stakeholders including, but not limited to, hydrogen peroxide customers and suppliers in Western Canada and other potential purchasers of the divestiture business. Following this review process, the Bureau concluded that United Initiators is a suitable buyer who is committed to competing vigorously in Western Canada’s hydrogen peroxide market. In the event that Evonik fails to complete the divestiture to United Initiators or another purchaser approved by the Bureau during a confidential initial sale period, a divestiture trustee shall be appointed to complete the divestiture.

The Commissioner is satisfied that this consent agreement addresses the competitive issues arising from the proposed transaction.

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