ISLAMABAD (January 27, 2011) : The Competition Commission of Pakistan (CCP) on Wednesday issued conditional no objection to the bidding by Fauji Fertiliser Company Limited (FFC) for the proposed acquisition of 75 percent to 79.87 percent shares of Agritech Limited. The CCP bench which issued the NOC for the FFC-Agritech merger comprises Chairperson of the CCP Rahat Kaunain Hassan and CCP Member Advocacy & OFT Vadiyya S Khalil.
According to the landmark order of the CCP, top officials of the commission are confident that decision will help achieve economies of scale in the fertiliser industry leading to decrease in consumer prices without substantially lessening competition. The free trade ensures competition, keeps competitive pressure on the local industry and protects consumers from possible exploitation, the order added.
Details revealed that the FFC had submitted its pre-merger application on August 2, 2010 for the acquisition of 75 percent to 79.87 percent shares of Agritech Limited (formerly Pak American Fertilisers Limited). The Commission intimated FFC vide its letter dated August 12, 2010 that the Commission has decided to move the case to Phase 2 Review, with the view to determine whether the merger situation is likely to substantially prevent or lessen competition in the market and to ascertain the probability that the merged entity in the post-merger market will behave competitively or co-operatively.
The Commission on Wednesday issued its NOC for the proposed merger with the following conditions importantly requiring FFC to file its commitment within four weeks from the date of issuance of this decision to comply with all the conditions stipulated in the order, in letter and in spirit and the clearance/approval given by CCP shall only be deemed effective upon the filing of such commitments:
1. FFC shall maintain "tara" and "sona" brands separately for two years and there shall be a price cap on the price increase of "tara" product by FFC for a period of one year (although with efficiencies claimed it is expected that the price for 'tara' shall go down). The maintenance of the two brands shall be subject to review after a period of one year or any time later but prior to two years; provided the market share of Urea acquired by FFC ie, 6 percent drops from the existing market share through distribution or redistribution amongst existing and upcoming players in the fertiliser sector.
2. FFC shall maintain transparency for any change in price in all its fertiliser products and shall for the period of three years intimate to the Commission any price escalation along with reasons for such price increase (if any) within seven days of such increase.
3. Subject to review of this decision as stipulated below, the Commission if deemed necessary may require FFC to divest a portion of shareholding in Hazara.
4. In terms of sub-section 11 (b) of Section 11 this approval is subject to review within one year under sub-section 13 of the said section. For the purpose of review, the following shall be considered as a yardstick which may include but shall not be limited to the monitoring of:
a. unexplained escalation in price levels;
b. tendency of price parallelism;
c. changes in market share and levels of concentration;
d. new investments made in Balancing Modernisation Replacement of the target firm by the acquirer leading to enhancement of production capacity; and
e. commitment to non-discriminatory behaviour.
The Bench has observed that while competition generally drives undertakings to achieve efficiencies internally, the primary benefit of the mergers to the economy is their potential to produce substantial efficiencies by enhancing its ability and incentive to compete.
Efficiency claim, however, should not be vague or speculative and should be verifiable by reasonable means. Be it incremental cost reduction which may control the incentive to increase prices or leading to new and improved products or the ability of merged firms to conduct research or development which may encourage innovation.
The eventual benefit, from the consumer's perspective, is to see whether these efficiencies would result in lower prices, improved quality, enhanced services or new products. The Commission hopes that this decision will help achieving economies of scale in the fertiliser industry leading to decrease in consumer prices without substantially lessening competition.
The Commission is also of the view that free trade ensures competition, keeps competitive pressure on the local industry and protects consumers from possible exploitation.
According to the CCP order, the fertiliser industry in Pakistan is (admittedly) a duopolistic market dominated by FFC and Engro, together having more than 80 percent of market share.
The FFC has pre-merger market share of more than 50 percent in the relevant product market of Urea and DAP before the proposed merger. The market shares of FFC in the relevant product markets, in per-merger and post-merger scenario as provided by FFC in its application.
The order said that all the arguments and submissions made by the FFC and Azgard-9 have been carefully analysed, and the commission do not agree with the methodological assumptions, assertions and general findings. It is not clear how FFC has revised its estimates for urea from 45.9 percent to 39.8 percent.
Similarly, FFC's estimate of Agritech's SSP production has been revised downwards from 59 percent to 21 percent by changing the production from actual sales percentage to declared production capacity of competitors. As for DAP, the parties claimed that the import of DAP is dictated by the government, hence revising the market share on the basis that there is no likelihood of import is not tenable. The Commission does not agree with the assumptions made in terms of input cost and incremental projections in administrative and brand expenses as well as apparent accounting inconsistencies.
Notwithstanding the analytical problems apparent in the application and subsequent arguments by FFC, the CCP is of the considered view that the proposed acquisition/merger, if allowed, will not substantially lessen competition. Although, the pre-merger HHI for urea alone reflects a highly concentrated market (much greater than 2000 - a yardstick for measuring the high concentration level in the market) and any further consolidation will further raise the concentration the market, which may give rise to serious competition concerns but we are taking into account the fact that Engro has launched a major expansion plan which as purported by the Applicant indicates 'the dynamic characteristics of the market including growth, innovation and product differentiation' the dominance it is maintained by the Applicant 'would be off set by its competitors'.
On behalf of FFC it was urged that in the US the Court of Appeals had allowed a merger where the merger led to a duopoly. The CCP appreciate that the Court of Appeals in the said case upheld the decision of the Transportation Board. However, the Board noted that: "the outcome where just two companies offer the only significant competitive alternatives in a market may range all the way from intense rivalry to collusion, depending on the circumstances of the industry."
What was presented before the Board as empirical evidence of competitiveness in the nation's rail systems was that the competitive pressures had been sufficient to enhance productivity by adopting efficient operating and management systems, and their costs had gone down each year because of increased productivity gains. The gains had been passed along to shippers in the form of lower rates and more responsive service.
In addition, there was no evidence that railroads had colluded overtly or tacitly to maintain "inefficient operations, unresponsive service or above market rate levels." Although there is no evidence of collusion in the fertiliser industry so far, but no empirical evidence is provided as to how mere expansion on part of Engro or Fatima is likely to result in rivalry.
Nonetheless, the Commission takes the claims made by FFC with respect to the positive impacts of this merger for the industry and the national economy on their face value and considers them as clearly stipulated conditions of the merger. Furthermore, the monitoring conditions are imposing will deter possible collusion and enable the Commission to take any necessary corrective action to alleviate anti-competitive concerns, CCP order added.
This news was published in Business Recorder on January 27, 2011
