Divestments – the preferred antitrust remedy for mega deals in Europe
September 2014 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Mega deals are back. The total value of announced global mergers and acquisitions is at its highest level since 2007, hitting $1 trillion by April on a worldwide basis. Deals are perhaps less numerous but growing larger. This trend is also clear in Europe, where companies are taking advantage of more favourable market conditions and a consolidation drive in a number of sectors. Only this year, to cite just a few, telecom giant Telefónica took over German mobile operator E-Plus for €8.6bn ($11.7bn); Solvay and Ineos created a joint venture that has created a world scale leader in chlorvinyl activities; and Cemex is in the process of acquiring Holcim assets in Europe.
Mega deals are very likely to hit the turnover or market share thresholds that trigger antitrust scrutiny in many jurisdictions. Closing can thus only take place once the pertinent competition authorities have given their consent, which may require a lengthy and complex review and might involve conditions. In Europe, parties will have to notify the transaction under EU merger control rules to the European Commission and expect that the transaction is approved, preferably in a first phase or worst case, in a second phase. This scrutiny is, however, not exclusive of transactions between European companies or acquisition of European companies. Transactions between global parties, which fulfil the turnover thresholds under EU merger control rules, will also be subject to the Commission assessment and approval before their implementation.
But such deals often raise competition concerns. Antitrust authorities will thus require the parties to offer remedies, which can be structural or merely behavioural, to counterbalance any distortive effects in those markets affected. In the EU, the Commission shows a clear preference for structural commitments and lately has been mostly asking parties for divestments. For instance, in the Telefonica/E-Plus or the Solvay/Ineos cases where, among other commitments, the parties had to divest radio wave spectrum and certain assets in the first case and S-PVC plants and related assets in the second. Structural remedies may, however, form part of a complex package, which may also include other measures that aim to ensure a smooth transition or the success of the divested business for a significant time after the sale through, for example, the provision of raw material supplies or support services.
Parties, therefore, need to take into consideration the procedure and risks in relation to potential divestments under EU merger control rules, whether in the course of a first or a second phase. To start with, the divestment procedure will require the parties to deal not just with the European Commission, but also with the trustee in charge of the divestment, usually the same as the monitoring trustee, as well as the potential purchaser. But they will also have to take care of timing and other issues relating to the divestment business that will have an impact on the implementation of the main transaction.
The Commission’s experience and research have shown that short divestiture periods (of six months or less) contribute to the long-term success of the divestiture and the effectiveness of the commitments. Longer divestment periods, through factors such as the uncertainty created among customers and employees, have an increasing negative impact on the effectiveness of the remedy. Therefore, the Commission will normally agree to a period of around six months for the normal divestiture period and an additional period of three to six months. However, such an extension will be granted in exceptional occasions, only if the parties can demonstrate that the delays to the sales process were due to events which were outside their control and which they could not mitigate.
Recent experience shows that the Commission is moving towards requiring an upfront buyer to acquire the divestment business before it will allow the main transaction to be completed. Although the differences between an upfront and post-decision buyer may appear to be relatively straightforward, they bring a different dynamic to the divestiture process. This is because in standard divestiture cases, the parties can complete the main transaction and manage the sale of the divestment business in parallel to but separately from the process of post-merger integration of the retained business. Instead, in cases involving an upfront-buyer requirement, the parties will not be able to close the main transaction before the Commission has approved a suitable purchaser.
This gives rise to a number of significant challenges. For instance, parties will be forced to sell the divestment business within a particular timetable, which may be difficult to meet. The Commission may also decide to hold the divestment business separate during the upfront sales process from the retained business of the seller. Implementing hold separate measures, such as firewalls and the appointment of a hold separate manager, may be particularly challenging when the divestment business includes part of the target – which by definition has not come under the control of the acquirer.
The Commission will also request the inclusion of a non-compete clause in the commitments in order to protect the customers of the divestment business for a start-up period. The duration of any non-compete provision will very much depend on the market structure. In highly concentrated markets, for example, the Commission will not be likely to countenance a non-compete obligation if it may tend to restrict competition.
One element that is essential for the viability and competitiveness of the divestment business is the ability to maintain the key personnel, at least for a significant period. To that end, parties will be required to encourage the key personnel to remain with the divestment business. Moreover, they will have to commit to the Commission and the trustee that any key personnel that decide to leave the business (for whatever other reason) will be replaced by suitably qualified and experienced personnel. These replacement appointments must also take place under the supervision of the monitoring trustee, who in turn is required to report to the Commission.
However, this is a challenge for the parties as they have limited control over the decisions of staff to resign and replacements may not be readily available.
Mega deals are likely to require divestments and other commitments before they can be implemented. Parties should therefore foresee potential commitment packages, including the assets or business that can be divested early in the process, and beware of the additional risks and potential delays in the closing. The divestment process will include the appointment of a trustee and will often require an upfront buyer. Other requirements will include specific measures for the transitional phase until the divested business is transferred, such as firewalls to avoid confidentiality issues, non-compete clauses and incentives to keep or replace key personnel of the divested business.
Dr Salome Cisnal de Ugarte is an antitrust partner at Crowell & Moring (Brussels). She can be contacted on +32 2 214 2837 or by email: email@example.com.
© Financier Worldwide
Dr Salome Cisnal de Ugarte
Crowell & Moring