UNITED STATES OF AMERICA
In the Matter of
DEGUSSA AKTIENGESELLSCHAFT, a corporation, and DEGUSSA CORPORATION, a corporation.
DOCKET NO. C -
The Federal Trade Commission (Commission), having reason to believe that Degussa Aktiengesellschaft (Degussa A.G.), through its wholly-owned subsidiary, Degussa Corporation (Degussa), entered into a letter of intent to acquire hydrogen peroxide production assets of E. I. du Pont de Nemours & Co. (DuPont), and that the acquisition, if consummated, would have resulted in a violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and Section 7 of the Clayton Act, 15 U.S.C. § 18, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its complaint, stating its charges as follows:
A. THE RESPONDENTS
1. Respondent Degussa A.G. is a corporation organized, existing, and doing business under and by virtue of the laws of Germany with its principal executive offices located at Weissfrauenstrasse 9, D-60287 Frankfurt am Main, Germany.
2. Degussa A.G. had worldwide sales exceeding $8.7 billion in 1997. Degussa A.G. engages in the development and manufacture of chemicals, pharmaceutical specialties, and precious metals.
3. Respondent Degussa is a wholly-owned subsidiary of Degussa A.G. with its principal executive offices located at 65 Challenger Road, Ridgefield Park, New Jersey 07060.
4. Degussa has manufacturing and distribution facilities situated throughout the United States, Canada, and Mexico, and produces widely diverse products in the markets for chemicals, pigments, metals, and dental materials. One of its major products is hydrogen peroxide. In 1996, Degussa had sales in excess of $2.3 billion, to which sales of hydrogen peroxide contributed $65 million.
5. DuPont is a publicly-traded corporation with reported revenues in 1996 of $43.8 billion and net income of $3.6 billion. DuPont is one of the largest chemical companies in the world, operating about 175 manufacturing and processing facilities in approximately 70 countries. DuPont is engaged in diverse businesses including chemicals, fibers, films, polymers, petroleum, agricultural products, biotechnology, and pharmaceuticals. In 1996, DuPont posted sales of hydrogen peroxide of $156 million in North America.
6. At all times relevant herein, Respondents Degussa A.G. and Degussa have been and are now engaged in commerce, as commerce is defined in Section 1 of the Clayton Act, 15 U.S.C. § 12, and are corporations whose business is in or affecting commerce as commerce is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. § 44.
B. THE PROPOSED ACQUISITIONS
7. On July 30, 1997, Degussa A.G., through its wholly-owned subsidiary, Degussa, and DuPont signed a Letter of Intent setting out the principal elements of a proposed transaction, whereby Degussa would acquire the assets of DuPonts worldwide hydrogen peroxide business, including its North American production facilities in Memphis, Tennessee; Maitland, Ontario; and Gibbons, Alberta, in exchange for $325 million.
8. After being advised by Commission staff of potential competitive issues and concerns in connection with the proposed acquisition of all of DuPonts North American hydrogen peroxide production, Degussa and DuPont modified their original proposal, to an acquisition by Degussa only of DuPonts Gibbons, Alberta hydrogen peroxide plant, in exchange for approximately $147 million.
C. RELEVANT MARKET
9. The relevant line of commerce in which to analyze the effects of Degussas proposed acquisition of DuPonts hydrogen peroxide production assets is the manufacture, marketing and sale of hydrogen peroxide.
10. Hydrogen peroxide is an inorganic chemical that is used in disparate applications as an oxidizing agent to encourage different chemical reactions. The paper and pulp industry is by far the most significant consumer of hydrogen peroxide in North America, where hydrogen peroxide is used in the pulp bleaching process. Other significant users include textile manufacturers, which also use hydrogen peroxide as a bleach; chemical manufacturers, which use hydrogen peroxide to initiate reactions that yield organic peroxides; and mining companies, which use hydrogen peroxide to detoxify waste by-products from mining operations.
11. A small but significant and non-transitory price increase would not affect the current level of consumption in any of the significant end-use applications.
12. The relevant geographic market in which to analyze the effects of Degussas proposed acquisition of DuPonts hydrogen peroxide production assets is North America. Hydrogen peroxide is a volatile substance that must be transported in an aqueous solution. As a result, between thirty and seventy percent of all volumes shipped are composed of water. Thus, transportation costs make transoceanic shipment commercially impractical and impede imports from rising above a de minimis level.
D. MARKET STRUCTURE
13. The North American market for hydrogen peroxide is highly concentrated. Seven manufacturers currently possess all of the North American production capacity. Moreover, the North American manufacturers are also the major hydrogen peroxide manufacturers in the world. The proposed acquisition, as originally proposed, would rest control over approximately eighty- one percent of production capacity with the three largest manufacturers, Degussa, Solvay Interox and FMC Corporation, and increase the Herfindahl-Hirschman Index by 575 points, from 1969 to 2544. The proposed acquisition, as modified, would result in virtually no change in market concentration.
14. Degussa has a single hydrogen peroxide manufacturing facility in Mobile, Alabama, and distribution centers located throughout the United States and Canada. Degussas Mobile facility affords Degussa a North American capacity share in excess of eleven percent.
15. DuPont has one hydrogen peroxide production facility in the United States and two facilities in Canada, in the provinces of Ontario and Alberta, which together constitute nearly twenty-six percent of the North American hydrogen peroxide production capacity.
E. CONDITIONS OF ENTRY
16. De novo entry or fringe expansion into the relevant market would require a substantial sunk investment and a significant period of time, such that new entry would be neither timely, likely, nor sufficient.
17. The minimum viable scale of a hydrogen peroxide production facility, which is necessary to ensure a reasonable rate of return and to deter or counteract potential anticompetitive effects, likely precludes new entry. The prevailing hydrogen peroxide technology demands large-scale production, relative to market size, in order to operate efficiently. This technology has but a single use -- i.e., the production of hydrogen peroxide. It can not economically be shifted toward another use. Therefore, all returns on investment must be derived from hydrogen peroxide sales. Because economic entry would require that a new producer capture a significant market share from existing producers, and because the costs of such entry would be sunk, such entry is inherently risky. Furthermore, current overcapacity, as well as announced expansions by existing producers, serve as additional deterrents to new entry.
18. Small-scale on-site production technology may at some indeterminate time facilitate small-scale production by large consumers of hydrogen peroxide. However, today such technology remains higher cost than large-scale hydrogen peroxide production and commercially suspect. Most consumers, moreover, view hydrogen peroxide production as a business separate and apart from their own and are resistant to incurring either the risk or the costs associated with on-site production. For these reasons, the price of hydrogen peroxide would need to rise substantially from existing levels before on-site production would become economical. In any event, few customers have sufficient demand to support efficiently even a small-scale on-site production facility. This technology, therefore, fails to provide an adequate deterrent against potential anticompetitive behavior.
F. EFFECTS OF THE PROPOSED ACQUISITION
19. The proposed acquisition, as originally proposed and if consummated, would likely have led to a substantial lessening of competition in the North American hydrogen peroxide market by enabling the firms remaining in the market after the acquisition to engage more successfully and more completely in coordinated interaction, in the following ways, among others:
G. VIOLATIONS CHARGED
20. The acquisition of DuPonts hydrogen peroxide production assets by Degussa, if consummated as originally proposed, would have violated Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18.
WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this day of , 1998, issues its complaint against said Respondents.
By the Commission.
Seal Donald S. Clark