Three recent mega-deals – the merger of Dow and DuPont, ChemChina’s acquisition of Syngenta, and the merger of Bayer and Monsanto – as well as a less publicised transaction involving Bunge and Cargill – have turned the European Commission’s spotlight on the agricultural sector. Two of the three mega-mergers, Dow/DuPont and ChemChina/Syngenta, were approved with extensive remedies.1 Part of the remedy, FMC Corporation’s purchase of pesticide and agrochemical businesses divested by DuPont, raised significant issues in its own right and will lead to another extensive Commission merger decision, likely later this summer.2 By contrast, the Bunge/ Cargill transaction was approved without remedies after a thorough but relatively quick review.3 The third industry megamerger, Bayer/Monsanto, was notified recently4 after extended pre-notification discussions.
These cases are likely to guide the Commission’s review of mergers in major parts of the agricultural sector for years to come. Although the full decision in Dow/DuPont has not yet been published, and Bayer/Monsanto and FMC/DuPont divestment business are still under review, it is already possible to draw some useful inferences about the Commission’s current approach to strategic mergers in the agricultural sector. These cases reflect the Commission’s focus on innovation, the possible need for an up-front buyer for divested businesses, and the treatment of competition between patented and generic products in the agricultural sector.
Agriculture is a large sector comprising many different businesses, ranging from the seed business, to crop protection (e.g. pesticides), to various forms of processing to distribution at multiple levels of the value chain. When examining a merger, the Commission takes a case-by-case approach and tends to define narrow markets based on whether the products in question are interchangeable or substitutable by the consumer in view of the products’ characteristics, prices and intended uses. For example, the pesticides sector has been subdivided into herbicides, insecticides and fungicides and subdivided yet again based on more narrow use cases (e.g. separate markets for cereal herbicides, soybean herbicides and rice herbicides).
The Commission’s approach to market definition in a particular case is often critical to its analysis of any substantive issues. Generally speaking, when the Commission defines markets narrowly, fewer products are likely to be considered overlapping, but when products do overlap, the parties are likely to have higher combined market shares, and the Commission is more likely to raise concerns. The Commission also examines the parties’ pipelines and the effects of combining broad portfolios of products, in particular where the merging parties offer a wider range of products than their competitors. It is relatively rare for these aspects to become a focus of concern, however, because any anti-competitive effects are likely to be more speculative than the effects of combining existing products. Also rarely, the Commission may be concerned about a transaction’s effect on innovation in general.5
Where the Commission has serious doubts about the effects of a notified transaction on competition, the parties may try to address these doubts by offering remedies. While the most suitable remedy varies depending on the nature of the concern, the Commission generally prefers a divestiture of all of the overlapping products of one of the parties, potentially with other assets needed to make the divested business viable. Where divestiture remedies are required, the Commission normally allows merging parties a reasonable period after closing to complete the divestiture. In rare cases, typically where it has doubts about the merging parties’ ability to find a suitable buyer, the Commission can require that merging parties not complete their deal until they have entered into a binding sales agreement with an approved purchaser (a socalled “up-front buyer” remedy).
The Commission’s approach in the recent agricultural transactions has confirmed its traditional narrow approach to market definition. On the other hand, the Commission has taken innovative approaches to other issues, including innovation competition and remedies. Each of these cases is summarized briefly below.
US-based chemical companies Dow and DuPont notified their proposed merger to the Commission on June 22, 2016. The deal would create the largest integrated crop protection and seeds company in the world and a leading integrated producer of certain petrochemical products (i.e. polyolefins and monomers) used in packaging and adhesive applications.
The Commission found that the merged entity would have held very high market shares for a number of pesticides, with few other competitors remaining. Its concerns related to certain selective herbicides for cereals, oilseed rape, sunflower, rice and pasture, in the case of herbicides; products controlling chewing and sucking insects in fruits and vegetables and some other crops, in the case of insecticides; and rice blast fungicides. The Commission also found that the merger would significantly reduce the number of competitors for certain acid co-polymer products from four to three and strengthen DuPont’s dominant position in the ionomer market.
From an upstream market perspective, the Commission was concerned that Dow and DuPont were competing head-to-head in a number of important pesticide innovation areas. The Commission found evidence that the merged entity would have lower incentives and a lower ability to innovate than they would have had separately, and that the merged entity would decrease its investment on developing innovative products. It also found that, after the merger, only three global integrated players would remain to compete with the merged entity in an industry with very high barriers to entry. The Commission’s concerns about innovation competition are familiar from its approach to recent mega-mergers in other sectors, such as GE/Alstom and Halliburton/Baker Hughes, but Dow/DuPont is the first agricultural merger to raise such issues.
The Commission approved the merger on March 27, 2017, slightly more than 15 months after the deal was announced. The Commission required the divestiture of most of DuPont’s pesticide business, relevant assets in its petrochemical business and almost its entire R&D capabilities. Unusually, the Commission insisted on an up-front buyer remedy. DuPont promptly reported that it is selling its crop protection business and R&D capabilities to FMC Corporation, a US-based chemical manufacturing company,6 suggesting that DuPont started negotiating in parallel with the Commission’s review. FMC notified its acquisition of pesticide and other agrochemical products from DuPont on June 8. That transaction raised antitrust issues of its own, leading to the submission of commitments on July 6, 2017, reflecting the complexity involved in obtaining antitrust clearances in major strategic mergers.
On September 23, 2016, ChemChina notified to the Commission its proposed acquisition of the Swiss-based global seeds and crop protection company Syngenta. ChemChina is a Chinese state-owned company, active in Europe through its subsidiary Adama Agricultural Solutions, an Israeli company primarily active in the manufacturing and distribution of offpatent formulated crop protection and pest control products and the largest producer of generic crop protection products in the world.
The Commission approved the acquisition on April 5, 2017, about 14 months after ChemChina’s offer was announced. The Commission took a typically narrow approach to market definition. The Commission regarded each raw material and active ingredient as a separate market, with broad geographic markets (global or EEA-wide). The Commission divided herbicides between non-selective herbicides and selective herbicides by crop; insecticides based on the relevant crop and application segment and again based on the type of insect targeted; fungicides based on application segment, crop and disease level; and plant growth regulators between insecticides, fungicides and by crop. The Commission defined the geographic markets for these products as national in view of the regulatory barriers.
Following this narrow approach to market definition, the Commission identified 462 markets in which the parties competed and had combined shares over 20 per cent, making them so-called “affected markets” requiring further investigation. The Commission applied two filters to identify markets where concerns were unlikely to arise, one based on market concentration as measured by the Hirschmann-Herfindahl index, and a second where the parties’ combined market shares were below 30 per cent and at least three significant alternative competitors were present. The Commission was able to rule out issues in other markets based on individual assessments. It also ruled out concerns in merchant active ingredients, in view of the existence of spare capacity in the market and the presence of alternative suppliers, as well as vertical concerns arising from the combination of upstream and downstream activities from merchant active ingredients to downstream crop protection product markets.
The remaining concerns involved 115 markets covering seven crop categories. The Commission focused on these markets based on the parties’ market shares, the closeness of competition between their products, the existence of pipeline products and the lack of generic competition (other than from Adama) in those markets. To address these issues, the parties agreed to divest a significant part of Adama’s existing pesticide business, including 29 of its generic pesticides under development, its seed treatment business, its plant growth regulators business, all relevant assets underpinning its pesticide and plant growth regulators businesses and some of Syngenta’s pesticides.
Although ChemChina agreed to significant divestitures to win approval, the Commission was relatively flexible in its requirements. The Commission did not require an up-front buyer for the divested business, suggesting that it was more confident a suitable buyer could be found than in it was in Dow/DuPont. The divestiture package consisted of a varied group of assets, contracts and personnel (including a mix of Adama and Syngenta assets), not a stand-alone business. The Commission raised no concerns about innovation competition and did not require divestiture of R&D capabilities. On the other hand, the fact that several of the divested products were pipeline products indicates that the Commission did not limit its scrutiny to overlaps in existing products.
Another noteworthy aspect of the case is the Commission’s approach to competition between patented and generic products. The Commission found that Adama is a close competitor of Syngenta in many pesticide markets. The Commission considered Syngenta’s branded products and Adama’s generic products as part of the same markets. This approach is in line with the Commission’s approach in the pharmaceutical sector, where it has held that originator drugs and generic copies belong to the same relevant product markets, as generics can effectively substitute originator drugs after patent expiry.7
On September 14, 2016, Bayer and Monsanto announced that they had reached an agreement under which Bayer will acquire Monsanto in a US$66 billion deal. The transaction was notified to the Commission on June 30, 2017, almost ten months after signing. The transaction reportedly raises overlap issues in a number of markets, including cotton seeds, vegetable seeds, herbicide-tolerant seeds, soybeans and canola, as well as possibly herbicides.8
While it is premature to say whether the Commission will raise concerns about the transaction, and if so in which markets, the parties are reportedly already in talks with possible buyers.9 This pro-active approach may reflect the parties’ concern that the Commission may require an up-front buyer remedy to secure approval, or their hope that addressing key overlap markets early could help them avoid a lengthy “Phase II” investigation.
It is unclear whether the Commission will raise concerns about innovation competition in the Bayer/Monsanto review. The Commission did not list Monsanto as an important innovative pesticide producer in Dow/DuPont, but Monsanto was identified as a considerable and innovative competitor to Syngenta when Syngenta acquired Monsanto’s sunflower seed business in 2010. Possibly to head off such a line of inquiry, Bayer and Monsanto have stressed their deep commitment to innovation, noting that the combined entity would have an annual R&D budget of approximately US$2.5 billion.10
Bunge/European Oilseed Processing Facilities
Bunge notified its proposed acquisition of two Cargill oilseed processing facilities and dedicated bulk terminal assets on December 23, 2016, and the Commission cleared the transaction without remedies on February 6, 2017. Both parties sell and produce soybean meal, crude soybean oil and bulk refined soybean oil, primarily to animal feed, the food industry and biodiesel customers. The assets involved consisted of oilseed crushing and seed oil refining facilities in the Netherlands and facilities for oilseed crushing and storage in France. Both facilities can handle either soybeans or rapeseed.
The Commission updated its analysis of markets for oilseed products, focusing on soybean meal, crude soybean oil and refined soybean oil. The Commission’s market investigation suggested that soybean meal should be viewed as a separate product market, rather than part of a broader market for non-grain feed ingredients. Similarly, the Commission’s investigation suggested that crude soybean oil might be a separate market, rather than part of a broader market for crude vegetable oils, but the market test results were less clear regarding whether refined soybean oil could be considered part of a broader market for bulk refined seed oil. The Commission’s market tests were also inconclusive regarding the definition of geographic markets, which could be local, national, regional or even EEA-wide.
Despite some locally high market shares (in particular for soybean meal in France and crude soybean oil in Portugal), the Commission found that the proposed acquisition did not raise serious competition concerns because of the presence of several alternative competitors, including importers, in the relevant markets. Although this case was much less complex than the three mega-mergers discussed above, and no remedies were required, the decision sheds light on the Commission’s approach to market definition in relation to different types of oilseed products and reflects a pragmatic approach to competitive assessment even in hypothetical markets with high combined shares.
Depending on the timing of the Bayer/ Monsanto review, the Commission seems set to adopt five detailed merger review decisions in the agricultural sector this year. Although the Dow/ DuPont decision has not so far been published and FMC/DuPont divestment business and Bayer/Monsanto are still under review, the Commission’s approach to these cases has a number of lessons for agricultural companies considering entering into M&A activity.
First, obtaining EU approval for large, complex mergers requires significant time and planning; approval of the Dow/DuPont and ChemChina/Syngenta transactions each required well over a year. Bayer and Monsanto may be aiming to accelerate the process by negotiating divestitures in parallel with the notification process, but the process still seems likely to require a year or more. By contrast, smaller, narrowly focused transactions like Bunge/European Oilseed Processing Facilities can be approved much more quickly, but even in these cases the Commission’s narrow approach to market definition in the agricultural sector can be expected to trigger close scrutiny of any overlaps.
Second, as in other sectors, the Commission will closely scrutinize the impact of agricultural mergers on innovation competition. Since such effects are speculative by nature, this can be a difficult issue for merging parties to address. Depending on the results of its market investigations, the Commission may require divestiture not only of overlapping products, but also pipeline products and R&D capabilities.
Third, at least in large, complex transactions, the Commission may require divestitures to be negotiated with approved, up-front buyers, not in the normal post-closing process. Whether or not an up-front buyer is required, addressing overlaps that are expected to be problematic early in the process may help expedite approval. However, identifying the relevant businesses and negotiating a divestiture in parallel with the moving target of a Commission review can be challenging.
See the Commission’s decision.
Guidelines on the assessment of horizontal mergers under Council Regulation (EC) No. 139/2004 of 5 May 2004 on the Control of Concentrations Between Undertakings, paras. 20(b) and 38, 2004 O.J. (C 31) 7, 9.
See e.g. Case COMP/M.6969 – Valeant Pharmaceuticals International/Bausch & Lomb Holdings (5 August 2013), para. 14; Case COMP/M.5778 – Novartis/Alcon (9 August 2010), para. 15.
See The Financial Times.
See Bayer, Monsanto start $2.5 billion asset sale to get merger clearance: sources - Reuters, March 9, 2017
See Bayer and Monsanto to Create a Global Leader in Agriculture - Bayer, September 14, 2016
How will latest changes to Volcker Rule affect non-US banks?
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.