Antitrust Lawyer Blog
On December 28, the Commission announced its decision to challenge General Dynamics’ proposed $275 million acquisition of SNC Technologies, Inc. and SNC Technologies, Corp. (collectively, SNC). The FTC’s complaint alleged that the deal would undermine competition by bringing together two of only three competitors providing the U.S. military with melt-pour load, assemble, and pack (LAP) services used during the manufacture of ammunition for mortars and artillery.
General Dynamics currently has a 50 percent interest in American Ordnance, L.L.C., a joint venture with Day & Zimmerman, Inc. (DZI), which provides mortar and artillery ammunition LAP services to the U.S. military. SNC also provides LAP services for the U.S. and Canadian military from its plant in Quebec, Canada. The only other supplier of mortar and artillery melt-pour LAP services to the U.S. market is currently using a facility that is slated for closure. Absent relief, the proposed acquisition would likely force the U.S. military to pay higher prices for these munitions. Under a consent order settling the complaint, General Dynamics will be required to sell its interest in American Ordnance to an FTC-approved buyer within four months of acquiring SNC.
Melt-pour LAP services are the final step in producing and delivering ammunition for mortars and artillery to the U.S. military. LAP services consist of filling mortar and artillery shells with molten TNT, assembling the components needed to finish the munitions, and packing the rounds for delivery. LAP services other than melt-pour, or those using a different explosive than TNT, are either too expensive or too cumbersome to be used for mass-produced munitions.
Each of the companies in the relevant market – SNC, American Ordnance, and DZI – provide LAP contract services to the U.S. Army. SNC’s melt-pour operations are located in its privately owned facilities in Le Gardeur, Quebec. American Ordnance and DZI both operate Army-owned ammunition plants (AAPs) with melt-pour facilities for the U.S. Government. American Ordnance, which is jointly owned by General Dynamics and DZI, has the contract to operate two such plants until the end of 2008 – the AAP in Milan, Tennessee and the AAP in Middletown, Iowa. In addition to its ownership share in American Ordnance, DZI operates the AAP in Parsons, Kansas. The future of DZI’s Kansas plant is in doubt, however, because the plant has been designated for closure. Therefore, while three companies competed for the current Army contract for melt-pour LAP services for mortar rounds and artillery shells, when the next round of contracts are bid, it is likely that only SNC and American Ordnance will compete.
On February 23, 2006, General Dynamics entered into an agreement to acquire SNC from SNC-Lavalin Group for approximately $275 million. According to the Commission’s complaint, the acquisition as proposed would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by eliminating competition in the markets for melt-pour LAP services in the production of mortar rounds and artillery shells in the United States and Canada. In its complaint, the Commission contends that the transaction would bring together two of only three competitors for LAP services in the U.S. and Canada.
In addition, according to the FTC, the market for melt-pour LAP services for mortar rounds and artillery shells is highly concentrated, and after its acquisition of SNC, General Dynamics would own 100 percent of SNC, while at the same time retaining its 50 percent interest in American Ordnance. The competitive concerns raised by these combined holdings are compounded by the fact that DZI appears likely to lose access to the Kansas AAP and may be unable to compete for the next round of government contracts for melt-pour LAP services. This possibility raises the likelihood that General Dynamics could unilaterally raise prices or otherwise engage in anticompetitive conduct for the provision of LAP services. The proposed acquisition also raises the possibility that General Dynamics could share confidential American Ordnance business information with SNC, which would increase the likelihood of coordination between the two companies.
The competitive problems associated with the proposed transaction, according to the FTC, would affect both the current round of competition for melt-pour LAP services for 120 mm, 60 mm, and 81 mm mortar rounds, as well as future purchases of mortar and artillery ammunition. More detailed information about the potential anticompetitive impacts of the transaction is provided in the analysis to aid public comment that can be found on the Commission’s Web site as a link to this press release. Finally, the Commission contends that the anticompetitive effects of the proposed transaction are unlikely to be reversed by timely entry into the market for melt-pour LAP services used to make ammunition for mortars and artillery.
The FTC’s consent agreement is designed to remedy the competitive harm resulting from General Dynamics’ proposed acquisition of SNC. Under its terms, General Dynamics is required to divest its interest in American Ordnance to a Commission-approved buyer within four months of completing its acquisition of SNC. The divestiture requirement will ensure that American Ordnance and a combined General Dynamics/SNC will remain independent competitors after the acquisition is completed.
The consent agreement also contains a hold separate order requiring General Dynamics to keep the American Ordnance business separate and apart from its other businesses while the divestiture is pending. The hold separate order also requires that General Dynamics’ members of American Ordnance’s board of managers be replaced with independent managers who are not affiliated with the company. No employees, officers, or directors of General Dynamics may be involved in the operations of American Ordnance while the order is in effect.
Finally, the consent agreement allows the FTC to appoint an interim monitor to oversee General Dynamics’ compliance with its terms and, if appointed, to file periodic reports with the Commission. The agreement also contains a provision that requires General Dynamics to notify the FTC within five days of submitting a proposal to obtain the facilities use contract for either the Iowa AAP or Tennessee AAP. This will allow the FTC to consult with the Department of Defense and the Army regarding possible competitive concerns that may arise in the future if General Dynamics is awarded contracts to operate these melt-pour facilities.
The Commission vote to approve the consent order and place a copy on the public record was 5-0. On January 3, General Dynamics requested Commission approval to divest its interest in AO to Day & Zimmerman, Inc. (DZI), or one or more direct or indirect wholly owned subsidiaries of DZI. As noted in the press release announcing the agreement and order, DZI currently owns the other 50 percent interest in AO, which operates the Milan Army Ammunition Plant (AAP) in Tennessee and the AAP in Middletown, Iowa.
Authored by
Robert W. Doyle, Jr.
202-589-1839
rdoyle@dbmlawgroup.com