On September 5, 2018, Judge Trevor N. McFadden of the United States District Court for the District of Columbia granted the Federal Trade Commission’s request for a preliminary injunction preventing Tronox Ltd. (“Tronox”) from completing its proposed $2.4 billion acquisition of National Titanium Dioxide Company Ltd. (“Cristal”) until after a final ruling in the FTC’s administrative proceedings challenging the deal. Federal Trade Commission v. Tronox Ltd. (D.D.C. Sept. 12, 2018). It is a huge victory for the FTC.
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.
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. The FTC was challenging Tronox’s acquisition of Cristal over significant concerns that the deal would substantially lessen competition for chloride-process titanium dioxide in the United States and Canada. Titanium dioxide is an industrial chemical primarily used as a white pigment in paints, coatings, and specialty paper products. 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 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.
The FTC Alleged A 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.
According to the FTC, the transaction would “combine two of the three largest producers” and result in “increase[d] concentration in an already concentrated market.” The FTC alleged that the deal would increase the likelihood of coordination in an oligopolistic market and allow Tronox to “discipline its output” to influence supply and increase prices. Id. The administrative trial was completed on June 22, 2018, but Administrative Law Judge D. Michael Chappell has not yet issued a ruling.
All Global Antitrust Agencies Have Cleared the Deal
Despite a challenge in the United States, the European Commission cleared the deal on July 4, 2018, contingent on Tronox’s agreement to divest its global titanium oxide operation for pigment used in paper laminate. The transaction also has received approvals in Australia, China, Colombia, New Zealand, Saudi Arabia, South Korea and Turkey. The United States is the only outstanding jurisdiction where clearance is required.
D.C. District Court Opinion: Internal Company Documents Support FTC’s Market Definition and Chinese Entry Would Not Occur Soon Enough to Prevent Anticompetitive Harm
On July 10, 2018, the FTC filed its complaint in federal court seeking a preliminary injunction because it was concerned that the companies would close the transaction “as soon as July 16, 2018”. Complaint, FTC v. Tronox Ltd., No. 18-1622, at 2 (D.D.C. July 10, 2018). After an evidentiary hearing, Judge McFadden announced his decision to preliminarily enjoin the transaction until the FTC’s administrative law judge issues his opinion.
On September 12, Judge McFadden released a redacted version of the decision, which finds that the FTC has shown that the Tronox-Cristal merger will likely result in high concentration in the North American chloride-process TiO2 market and that the merger will increase the merged firm’s incentives to engage in strategic output withholding. Moreover, the district court agreed with the FTC’s market definition of North American chloride-process titanium dioxide. Judge McFadded rejected Tronox’s argument that the market definition should be expanded to include worldwide chloride-process and sulfate-process titanium dioxide. Judge McFadden was persuaded by Tronox and Cristal internal company documents, which supported the existence of both a separate chloride-process submarket and a distinct North American regional market. Judge McFadden found that internal documents and the economic realities of the market favored the FTC’s market definition.
Tronox also argued that competition from Chinese producers would reduce or negate any anticompetitive effects from increased market concentration. Judge McFadden rejected this argument because the Chinese producers are really not in the U.S. market and there was no evidence that their entry would be quick enough to prevent a merged Tronox-Cristal firm from reducing output or increasing prices in the interim.
The FTC’s successful challenge of the Tronox/Cristal merger in federal court demonstrates that President Trump’s FTC will take action to preserve competition and protect consumers when the facts support a lawsuit. The case is interesting because the federal court hearing only delays the Tronox deal for a short time and allows for the administrative trial process to be completed. Indeed, the parties after completing post-trial briefs and oral arguments, are now simply awaiting the decision from the administrative law judge. The district court opinion, however, confirms that internal company documents are the best evidence to support market definition and that merging parties that want to use entry as a defense need to have evidence that the entry is likely and can occur quickly. When defendants argue against their own internal company documents and against market realities they are likely to lose that argument in front of the antitrust agencies and a district court.