Commission, May 24, 2013, No M.6576

I. THE PARTIES

(1) Munksjö is a Swedish-based manufacturer of high value-added paper products in seven product areas: decor paper, abrasive backings, electrotechnical paper, fine art paper, pulp, Spantex and thin paper. Munksjö is controlled by the fund EQT III Limited (2).

(2) Ahlstrom is a Finnish manufacturer of high performance materials, divided in four business areas: building and energy, filtration, food and medical, label and processing. The transaction only concerns Ahlstrom's Label and Processing Business ('ALP'). Within this business segment, the areas of overlapping activities concern decor paper, abrasive paper backings and electrotechnical paper.

(3) Munksjö and Ahlstrom will be referred to as 'the Parties'.

II. THE OPERATION

(4) Following the transaction, a newly created company ('NewCo') will acquire sole control over Munksjö and ALP within the meaning of Article 3(1)(b) of the Merger Regulation. Ultimately, NewCo will be renamed 'Munksjö Oyj' and listed on the Nasdaq OMX Helsinki Stock Exchange.

(5) In consideration for contributing businesses to NewCo, Munksjö's shareholders, Ahlstrom and Ahlstrom's shareholders will receive shares in NewCo. Following completion of a series of transactions, Munksjö's current controlling shareholder EQT III Limited will hold 25 % of the shares in NewCo. Ahlstrom will hold a shareholding of 15 % while Ahlstrom's shareholders will in aggregate hold 50 % of the shares in NewCo.

III. THE PROCEDURE

(6) The transaction was notified to the Commission on 31 October 2012. Based on the results of the first phase market investigation, the Commission raised serious doubts as to the compatibility of the transaction with the internal market and adopted a decision to initiate proceedings pursuant to Article 6(1)(c) of the Merger Regulation on 7 December 2012. The Parties submitted their written comments to the Article 6(1)(c) decision on 18 December 2012.

(7) On 17 December 2012, at the request of the Parties, the time limit for adopting a final decision in this case was extended by 10 working days.

(8) On 21 February 2013, the Commission adopted a Statement of Objections. Access to the file was subsequently granted. The Parties did not reply to the Statement of Objections and did not request an Oral Hearing.

(9) On 19 March 2013, the Parties submitted a first set of commitments, which was subsequently modified on 22 March 2013, triggering an automatic extension of the time limit for adopting a final decision in this case of an additional 15 working days.

(10) A market test was launched on 25 March 2013. On 17 April 2013, the Parties submitted an improved set of commitments, which the Commission considered to remove the significant impediment to effective competition that would otherwise have resulted from the proposed transaction.

(11) The draft Decision was discussed with Member States during the Advisory Committee on Concentrations on 6 May 2013, which provided a favourable opinion. The Hearing Officer provided his favourable opinion on the proceedings on 13 May 2013.

IV. EXPLANATORY MEMORANDUM

(12) Both Parties produce specialty paper products in various segments. Their activities overlap horizontally in the markets for (i) pre-impregnated paper, a sub-market of the wider decor paper market; (ii) abrasive paper backings; and (iii) to a minor extent, in electrotechnical paper.

A. The relevant product markets

(13) Abrasive paper backings are used to act as carriers for abrasive devices (such as grits) to produce final abrasive products (such as belts or discs). Those abrasive products are generally used to sand or polish different substances such as wood, metals, plastics, glass, ceramics or stone.

(14) The Commission found that there was a distinct market for abrasive paper backings, as opposed to the wider market encompassing all backing materials advocated by the Parties. Moreover, the Commission concluded that the overall abrasive paper backings market had to be further subdivided between heavy and light weight paper backings. This finding was based on the limited demand-side and supply-side substitutability between those two types of paper backings.

(15) Pre-impregnated decor paper ('PRIP') is a specific type of decor paper (3). It is already pre-impregnated and needs no further impregnation before application, whereas the other types of decor paper need to be impregnated with resin in subsequent processing stages. This results in differences between PRIP and other types of decor papers in terms of physical characteristics, end-uses, price and specialisation of producers in the supply chains.

(16) The Commission concluded that PRIP did not belong to an overall decor paper market but constituted a distinct product market. This was due to a lack of demand-side substitutability among the direct customers from the printing industry, limited demand-side substitutability among indirect customers from the furniture manufacturing and furniture retail industry and limited supply-side substitutability.

(17) Electrotechnical paper is used for insulation of cables (such as high voltage submarine cables), transformers (such as for isolating the transformer core from the windings), motors, generators and bushings. There are two types of electrotechnical paper: (i) oil-impregnated electrotechnical paper used for cables, transformers and bushings; and (ii) dry electrotechnical paper used for rotating electrical equipment such as motors and generators. The Parties' activities only overlap with respect to oil-impregnated paper.

(18) The Commission found that there were indications that there was an overall product market for the different types of oil-impregnated electrotechnical papers for different end applications (for cables, transformers and bushings). However, this question was ultimately left open since there was no significant impediment to effective competition even under narrower product market definitions.

B. The relevant geographic markets

(19) With regard to the market for heavyweight abrasive paper backings, the Commission concluded that this market was likely to be EEA-wide in scope. However, the question whether the market was EEA-wide, worldwide excluding China or worldwide in scope was ultimately left open, because the question did not alter the outcome of the competitive assessment in this case.

(20) With regard to the market for PRIP, the Commission concluded that this market was likely to be EEA-wide in scope. However, the question whether the market was EEA-wide in scope or worldwide excluding China was ultimately left open, because the question did not alter the outcome of the competitive assessment in this case.

(21) With regard to electrotechnical paper, the Commission concluded that the question whether the market was EEA-wide, worldwide excluding China or worldwide in scope could ultimately be left open, because no competition concerns arose even under the narrower geographic market definition.

C. Competitive assessment

(22) The Commission found that the proposed transaction would lead to a significant impediment to effective competition, in particular through the creation of a dominant position, in (a) heavyweight abrasive paper backings, regardless of the geographic market definition; and (b) PRIP, regardless of whether the market were to be defined as EEA-wide or worldwide excluding China. As regards electrotechnical paper, the Commission concluded that the transaction did not lead to a significant impediment to effective competition under any plausible market definition.

(23) With regard to the market for heavyweight abrasive paper backings, the transaction would bring together the two major suppliers, granting NewCo monopolistic - or near-monopolistic - power. This market is characterised by high barriers to entry, namely extensive know-how, lengthy qualification procedures and significant capital investments to acquire ad hoc machinery. Therefore, post-transaction the merged entity would wield unmatched market power and be able to raise prices.

(24) With regard to the PRIP market, the transaction would lead to a dominant position with a post-transaction market share of more than (70-80 %) at both EEA and worldwide excluding China levels. Moreover, the number of suppliers would be reduced from three to two, with only one competitor remaining in the market, Technocell. Although Technocell would have had the ability to switch capacity to PRIP, its incentives to defeat any price increases by the merged entity would be low. Finally, market entry would be unlikely and customers were not seen as having sufficient bargaining power to constrain the behaviour of the merged entity.

(25) As regards the electrotechnical papers market, prior to the transaction, Munksjö was the market leader under any plausible product and geographic market definition. However, the increments brought by ALP were low at less than 5 %. ALP only produced electrotechnical papers in small volumes and as a filler product when its machines were not producing any other type of specialty paper and therefore had spare capacity. In addition, market participants found that following the concentration, the combined entity would continue to face strong competition in the market for oil-impregnated electrotechnical papers.

(26) The Commission therefore concluded that the notified concentration resulted in a significant impediment to effective competition in the internal market with regard to (a) heavyweight abrasive paper backings regardless of the geographic market definition; and (b) PRIP in the EEA as well as worldwide without China. As regards electrotechnical paper, the Commission concluded that the transaction did not lead to a significant impediment to effective competition under any plausible market definition.

D. Commitments

(27) The Parties submitted modifications to the transaction on 19 March 2013, 22 March 2013 and 17 April 2013 to address the competition concerns identified by the Commission.

(28) The commitments of 19 and 22 March 2013 consisted in a carve-out of Ahlstrom's abrasive paper backings and PRIP business situated in Osnabrück, Germany.

(29) Ahlstrom offered to sell the two paper machines producing abrasive paper backings and PRIP to one or more third party purchasers together with all related tangible and intangible assets (such as further production equipment, patents and trademarks), all customer contracts and all personnel currently solely employed for the production of abrasive paper backings and PRIP. This structure foresaw Ahlstrom keeping the ownership of the Osnabrück plant itself as well as the third paper machine producing non-overlap products (poster paper, wallcover paper and silco), and the shared facilities such as the power plant, the water handling system and the R&D facilities.

(30) Given that the carved-out assets would have had to be operated by the purchaser at Osnabrück, the proposed commitments of 19 and 22 March also foresaw a number of ancillary agreements between the purchaser and Ahlstrom to ensure operational cooperation in the plant and access to strategic inputs and core functions.

(31) The market test of the commitments of 22 March provided largely negative results. Respondents, both customers and paper manufacturers, raised a number of concerns, the most important of which will be summarised here. First, respondents considered that the proposed structure would give Ahlstrom the ability to hinder the purchaser's business because the purchaser would depend on Ahlstrom for a number of strategic inputs and core functions. Second, respondents suggested that Ahlstrom would have incentives to interfere with the purchaser's business, given the structural links existing between Ahlstrom, its shareholders and NewCo as described in paragraph (5). Third, respondents requested safeguards be implemented to prevent the flow of confidential information from the purchaser to Ahlstrom and NewCo.

(32) On the basis of its assessment and taking into account the results of the market test, the Commission concluded that the commitments of 22 March 2013 were insufficient to remove the significant impediment to effective competition identified in the markets for heavyweight abrasive paper backings and PRIP.

(33) The Parties subsequently submitted modified commitments on 17 April 2013 which consisted of the sale of the entire Osnabrück plant to a third party purchaser with the exception of (i) the non-overlap business carried out by Ahlstrom on the third paper machine which would be kept by Ahlstrom; and (ii) the energy and water facilities which would be put into a jointly controlled, non-profit joint venture between the purchaser and Ahlstrom.

(34) The Commission considered that the commitments of 17 April 2013 addressed the issues raised by the Commission as well as by market participants with regard to the commitments of 19 and 22 March. The improvements of the commitments related in particular to a reduced dependence of the purchaser on Ahlstrom, a reduced complexity of operations at the shared plant and additional safeguards against Ahlstrom's access to the purchaser's confidential information.

(35) Consequently, the modifications of the proposed transaction through the commitments of 17 April were considered to be adequate and sufficient to eliminate the significant impediment to effective competition in the markets for heavyweight paper backings and PRIP.

V. CONCLUSION

(36) The Article 8(2) decision of 24 May 2013 concludes that, subject to compliance with the commitments of 17 April 2013, the proposed concentration would not significantly impede effective competition in the internal market or in a substantial part of it. Consequently, the Commission declared the concentration compatible with the internal market and the EEA Agreement, in accordance with Articles 2(2) and Article 8(2) of the Merger Regulation and Article 57 of the EEA Agreement.

NOTES

(1) OJ L 24, 29.1.2004, p. 1 ('the Merger Regulation').

(2) M.3699 - EQT/Smurfit/Munksjö, 16 February 2005.

(3) Decor paper is a type of surface material for decorative applications. Other decorative surface materials are veneer, varnish, lacquer and thermoplastic foils. Decor paper's end-use is mainly in the furniture, interior-design and construction and renovation industries.