On 18 January 2019, the European Commission ("Commission") cleared the proposed acquisition of Solvay’s polyamide (nylon) business by BASF following an in-depth investigation, leading to what European Commissioner for Competition Margrethe Vestager called “the creation of a significant European player”. The approval is conditional upon full compliance with a range commitments agreed with the parties to remedy the Commission's concerns in relation to access to key inputs in the nylon production chain.
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- The vast majority of mergers notified to the Commission are approved during an initial 25 working day investigation ("Phase 1").
- Where the Commission identifies serious competition concerns, it may decide to open an in-depth "Phase 2" investigation, providing it with an additional 90 working days to adopt a decision.
- The Commission decided to approve the present transaction following a Phase II investigation, but that decision was conditional upon wide-ranging behavioural and structural commitments offered by the parties which had the effect of removing overlaps between BASF and Solvay in the areas where competition concerns had been identified.
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The Commission investigation
On 19 September 2017, BASF announced that it had agreed to purchase Solvay's polyamide (nylon) business. Both companies manufacture nylon fibers (used for clothing and sportswear) and heat-resistant engineering plastic that is used in the automotive and electronics industries. The transaction was notified to the Commission on 22 May 2018.
The nylon value chain stretches from the essential upstream input Adiponitrile ("ADN") at the top to nylon 6.6 engineering plastics at the bottom. Before the transaction, Solvay and BASF both had strong market positions at multiple levels of the chain and, in particular, in the higher-margin- business of engineering plastics. At the time of the notification, however, Solvay was the only manufacturer in the EEA active at all levels of the nylon 6.6 value chain. Most importantly, BASF did not own any production capacity for the key precursor ADN, which is arguably the most important compound in the whole nylon value chain. Therefore, the acquisition of Solvay’s polyamide business would provide BASF with access to the only European production site for ADN. BASF considered that securing access to ADN production capacity was of particular strategic importance as it expected there to be shortages in supply in the short term due to a lack of production capacity.
In the light of these facts, the Commission was concerned that the transaction would give rise to horizontal and vertical effects at multiple levels of the nylon value chain in the EEA.
As a consequence, in June 2018, the Commission decided to open an in-depth probe Phase 2 investigation into the transaction as it was concerned that the transaction might:
- lead to input foreclosure, as only a few manufacturers provide key inputs (including ADN and adipic acid) required to manufacture nylon products; and
- reduce competition in the supply of key inputs in the nylon production chain and lead to price increases in a number of markets related to the nylon industry, including the markets for ADN and for adipic acid.
The Commission noticed that due to high barriers to entry in these upstream markets, there was no indication that the existing level of competition could be maintained by new entrants.
The commitments
To resolve the competition concerns identified by the Commission, BASF and Solvay offered to:
- divest Solvay's facilities located in France, Poland, and Spain producing certain essential inputs downstream of ADN for the production of nylon to a single suitable buyer;
- create a production joint venture in France between the combined entity and the buyer of the divested assets, for the production of adipic acid; and
- conclude long-term supply agreements for ADN to meet the divestment business' requirements.
The Commission found that this combination of structural and behavioral remedies fully removes the overlap between BASF and Solvay in the markets where it had identified competition concerns. Thus, it concluded that the transaction, as modified by the commitments, would no longer raise competition concerns in the EEA.
This case demonstrates that the Commission is willing to approve transactions giving rise to significant competitive overlaps. However, in order to obtain the Commission's approval to implement such transactions, the Commission will require the parties to offer clear-cut remedies that comprehensively address any competition concerns in relation to the risk of higher prices, reduced choice and possible input foreclosure. As regards the final point it may be necessary for the parties to combine both structural and behavioural commitments so that any divested business can continue to access the key inputs it requires to compete effectively with the merged business.
With thanks to Jessica Bracker of Ashurst for her contribution
