On December 5, 2017, the Federal Trade Commission (“FTC”) issued an administrative complaint challenging Tronox Limited’s proposed acquisition of Cristal, a merger of two of the top three suppliers of chloride process titanium dioxide (“TiO2”) in the North American market.
On February 21, 2017, Tronox inked a deal to buy Cristal for $1.67 billion and a 24% stake in the new entity. The transaction would have created the largest TiO2 company in the world, based on titanium chemical sales and nameplate capacity.
Tronox Limited operates three titanium dioxide TiO2 pigment plants in the United States, Netherlands and Australia. Tronox has a TiO2 plant in Hamilton, Mississippi. Cristal operates eight TiO2 manufacturing plants in the USA, Brazil, United Kingdom, France, Saudi Arabia, China and Australia. Cristal has two TiO2 plants in Ohio.
FTC Has Taken Issue With Consolidation in the TiO2 Market Before
In 1999, the FTC blocked E.I. du Pont de Nemours & Co.’s (“DuPont”) acquisition of Imperial Chemical Industries (“ICI”). At the time, DuPont (25%) and ICI (10%) combined produced 35% of the global supply. DuPont was the leading supplier, both in the United States and the world, of TiO2 pigments and ICI was the second-largest supplier in the world, with plants located in the United States and abroad. The deal was structured so that DuPont would acquire ICI’s TiO2 facilities outside North America, and NL Industries (“NL”), another competitor, would acquire ICI’s TiO2 assets in the United States. The DuPont/ICI transaction, therefore, avoided a production overlap in North America. Nevertheless, the FTC’s concern was that the elimination of an important import competitor like ICI could facilitate or increase the likelihood of coordination. The parties abandoned the deal in January of 1999 when faced with a lawsuit.
Relevant Product and Geographic Market
Titanium dioxide is manufactured using either a chloride process or a sulfate process. The vast majority of titanium dioxide sold in the United States and Canada is made using the chloride process, which produces brighter, more durable coatings than the sulfate process. The FTC alleges that in the North American market, sulfate titanium dioxide is not a viable substitute for chloride process titanium dioxide. The FTC also alleges that major customers for titanium dioxide in the North American market, principally coatings manufacturers, could not easily or cost-effectively shift away from chloride process titanium dioxide in favor of sulfate process titanium dioxide.
FTC Alleges Coordinated Interaction Theory
The FTC’s administrative complaint alleges that the combination would reduce competition in the North American market for chloride process titanium dioxide. The FTC alleged that if the deal is consummated, it would increase the risk of coordinated action among the four remaining competitors, and increase the risk of future anticompetitive output reductions by Tronox. The FTC alleges that without a remedy Chemours and the merged firm would have 80% of the chloride process titanium dioxide market with Venator and Kronos making up the rest of the share.
Under this theory, the FTC needs to prove that the elimination of a competitor may create or enhance the ability of the remaining firms to more easily (either explicitly or through more subtle means) coordinate on price, output, and/or capacity. The FTC alleges that the NA chloride TiO2 industry has a number of characteristics that make it vulnerable to coordination such as commodity like product; concentrated industry with small number of competitors; transparency into the strategic decisions of competitors; customers with long term contracts makes it easy for competitors to detect deviations from past practices; low elasticity of demand; and history of interdependent behavior and allegations of collusion.
Recent Collusion Case
The FTC cites a history of restricting production to support higher prices and past collusive conduct to support its coordinated interaction theory. In its Complaint, it made reference to the September 14, 2017 Third Circuit Court of Appeals decision in Valspar Corp. v. E.I. DuPont de Nemours and Co., 873 F.3d 185 (3rd Cir. 2017), where the court observed that the U.S. titanium dioxide industry has high entry barriers and is dominated by a few firms that closely track one another’s activities and the class action case brought against the entire industry several years ago in a federal court located in Maryland.
Valspar, a large-scale titanium dioxide purchaser, broke away from the class and brought its own claims against the industry for price fixing and settled with everyone except DuPont. Valspar filed its case in Delaware and alleged that the suppliers conspired to increase prices, beginning when DuPont—the largest American supplier—joined the Titanium Dioxide Manufacturers Association (TDMA) in 2002. During a 10 year period, DuPont announced price increases 31 times, which were matched by the other suppliers. The Third Circuit affirmed the summary judgment in favor of DuPont because it found that Valspar’s characterization of the suppliers’ price announcements “neglects the theory of conscious parallelism” and is contrary to the doctrine that in an oligopoly “any rational decision must take into account the anticipated reaction of the other . . . firms.” The Third Circuit noted that price movement in an oligopoly is interdependent and frequently will lead to successive price increases, because oligopolists may “conclude that the industry as a whole would be better off by raising prices.” Valspar did not show that the suppliers’ parallel pricing went “beyond mere interdependence [and was] so unusual that in the absence of advance agreement, no reasonable firm would have engaged in it.” While this all sounds good for DuPont, which is Chemours today, it does not sound so good for Tronox at the FTC. Long story short, the FTC alleges that the proposed merger would make that situation even worse.
Both FTC commissioners voted 2-0 to issue the administrative complaint and to authorize staff to seek a temporary restraining order and preliminary injunction in federal court. The administrative trial is scheduled to begin on May 8, 2018.
Another interesting point is that the FTC and the parties both issued press releases regarding the expiration of the waiting period. The FTC claims it expired in October and Tronox agreed to a timing agreement, whereby Tronox would provide the FTC of 10 business days notice before consummating the transaction. Tronox, however, claims that the waiting period expired on December 1 and that “expiration means that we can proceed toward completion of the transaction” following “antitrust clearance by the European Commission and the Kingdom of Saudi Arabia.” Tronox also noted that while the FTC could “conceivably seek to enjoin the transaction at a later time, but we believe such action would be unprecedented and contrary to the rationale of the pre-merger notification system that is the framework of the U.S. regulatory process.” Clearly, Tronox’s press release was misguided given that it knew that the FTC was about to file a lawsuit and there was no rush to do so given that Tronox is not in a position to actually close the transaction.
A divestiture of Tronox’s Hamilton, MS plant or a divestiture of one if not both of Cristal’s Ohio plants might do the trick. Tronox needs to determine what it is willing to sell and if it is something less than both plants in Ohio, and if the FTC is asking for more, Tronox may just come up with its own solution and take it to the Judge.
The FTC’s challenge of the Tronox/Cristal merger is another demonstration that President Trump’s FTC will take action to preserve competition and protect consumers when the facts support a lawsuit. The FTC action shows that the Trump administration is not simply waving through deals. Though the FTC lacks a full commission, the FTC is still doing its job to protect consumers. This action also demonstrates that firms that propose a merger or acquisition in an industry with a history of past collusion should expect increased scrutiny. As the FTC noted in its Complaint, evidence of past collusion is important to the FTC’s coordinated effects analysis. Merging parties should be prepared to show that market conditions have changed since the past collusion has occurred. Here, the parties were not able to do that and have not to date offered a remedy that the FTC is willing to accept. The FTC’s action also demonstrates that the FTC does not operate in a vacuum as it takes into account not just the timing agreement with the merging parties but outside factors that make clear that the parties are unable to consummate the transaction, which may in some cases allow for the FTC to take advantage of additional time to file a lawsuit.