EC, October 6, 2008, No M.5327

Dear Sir/Madam:

Subject : Case No COMP/M.5327 – Ashland/ Hercules
Notification of 01.09.2008 pursuant to Article 4 of Council Regulation No 139/20041

1. On 1 September 2008, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (the "EC Merger Regulation") by which Ashland Inc. ("Ashland", USA) acquires sole control of Hercules Incorporated ("Hercules", USA).

2. After examination of the notification, the Commission has concluded that the notified operation falls within the scope of the EC Merger Regulation but does not raise serious doubts as to its compatibility with the common market and the functioning of the EEA Agreement.

I. THE PARTIES AND THE OPERATION

3. Ashland is a US specialty chemical producer active in the manufacturing and supply of composite polymers, adhesives, metal casting consumables, process and utility water treatments, lubricants, automotive chemicals and distribution of chemicals plastics and composite materials. Ashland’s business is divided into four business units, namely (i) Ashland Water Technologies, (ii) Ashland Performance Materials,

(iii) Valvoline and (iv) Ashland Distribution.

4. Hercules is also a US specialty chemical producer. Hercules mainly manufactures and supplies specialty chemicals for the pulp and paper industry, water-soluble polymers (in particular, cellulose derivatives and guar) and wood rosin derivatives. Hercules’ business is divided into two business units, namely (i) Aqualon and (ii) Paper Technologies & Ventures.

5.  Ashland and Hercules are together referred to as "the parties".

II. THE TRANSACTION AND THE CONCENTRATION

6. The transaction consists of the acquisition by Ashland of all outstanding shares in Hercules. Following the transaction, Hercules will be a 100% subsidiary of Ashland. The transaction therefore qualifies as a concentration within the meaning of Article 3(1)(b) of the EC Merger Regulation.

III. COMMUNITY DIMENSION 

7. In 2007, the turnover of Ashland was EUR 5 852 million worldwide and EUR […] million in the EU. In 2007, the turnover of Hercules was EUR 1 561 million worldwide and EUR […] million in the EU. Neither Ashland nor Hercules achieved two-thirds of their aggregate Community-wide turnover within one and the same Member State.

8. The concentration therefore has a Community dimension pursuant to Article 1(2) of the EC Merger Regulation.

IV. RELEVANT MARKETS A. Relevant product markets

9. The parties' operations overlap in the supply2 of certain specialty chemicals to the paper manufacturing industry as well as in the supply of influent and effluent water treatment chemicals and in the supply of water treatment chemicals for cooling and boiling applications.

Supply of chemicals to the paper manufacturing industry

10.  Paper is manufactured from raw materials containing cellulose fibres, generally  wood, recycled paper, and agricultural residues. There are three main steps in the paper manufacturing process: (i) raw material preparation (such as wood debarking and chip making); (ii) pulp cooking/grinding and pulp bleaching; and (iii) the actual paper making process.3

11. The first step is not relevant to this case. The second step starts with pulping, the process of converting wood or non-wood material into pulp fibres used for the production of paper or board. Once the raw pulp is produced, it must be processed to remove residual lignin, spent liquor and other impurities. Fibre bundles are first broken down, then screened and washed to create a more homogeneous fibre mixture. For the production of white paper, the pulp is bleached: the processed and refined  pulp is chemically altered to increase brightness. Once the pulp making process is completed, the finished pulp may be dried for shipment (market pulp) or used to manufacture paper on site (in an integrated mill).

12. The third step, the actual paper making process, consists of two primary stages: dry end operations and wet end operations. In wet end operations, the cleaned and bleached pulp is formed into a homogeneous fiber/water slurry. In the dry end operations, the continuous web is dried and various surface treatments can be applied to the paper. Wet end operations begin with refining the pulp/water slurry and adding fillers along with both functional and process chemical additives to the furnish. After dilution to approximately 1% dry matter, the wet pulp is metered onto a continuously moving screen. That screen passes over a series of vacuums to remove water from it. It is then passed through high speed roll presses to further remove water. The continuous sheet then progresses on to the drying section. In dry end operations, the paper passes through steam-heated rollers to further drive off moisture, and in doing so, the fiber bonding increases. In many paper grades, cooked starch is applied to the surface of the paper in the drying section to enhance strength and printing characteristics. Depending upon the grade of paper, subsequent coatings can be applied to enhance the paper performance. The sheet then typically passes through calendars for surface smoothing prior to cutting and packaging for customer use.4

13. The chemical products used in the paper manufacturing process can be subdivided  into (i) commodity chemicals, (ii) process chemicals and (iii) functional chemicals.5 There is support for this subdivision in previous merger decisions6 and in the market investigation. Neither party produces commodity chemicals.

14.  With respect to process chemicals (i.e. chemicals used to improve the efficiency of  the production process) relevant to the paper production process, the parties' activities overlap in:

• retention / drainage agents,
• defoamers,
• microbiological control agents and
• contaminant control agents.

Each of these categories of process chemicals will be examined below.

15.  With respect to functional chemicals relevant to the paper production process (i.e. chemicals which are used to impart various properties to the finished paper), the different types are surface sizing agents, internal sizing agents, dry strength agents, wet strength agents, tissue specialties, and colorants and brighteners. Of these functional chemicals, only dry strength agents are sold by both parties in the EEA, the others being sold only by Hercules in the EEA. Therefore, amongst the functional chemicals relevant to the paper production process, only dry strength agents will be examined below.

Supply of retention / drainage agents to the paper industry

16. Retention and drainage aids are process chemicals used to affect the water flow at the wet end of the paper production process. According to the notifying party, these agents constitute a distinct product market.

17. Retention aids are used to ensure that adequate amounts of filler are retained in the filler/fibre slurry and not washed away by the water when the pulp is drained. Drainage aids are specialty chemicals added to the water at the wet end to ensure adequate and fast de-watering of the pulp. Faster drainage improves the speed of the production process and the uniformity of the paper density. Retention aids and drainage aids must be compatible with each other and must work together or else one defeats the purpose of the other. Many retention / drainage aids are based on polyacrylamide.

18. The market investigation lends support to defining this product market as the supply of retention / drainage aids to the paper industry. However, no final decision on the market definition is needed as no affected market arises under any  conceivable market definition.

Supply of defoamers to the paper industry

19. According to the notifying party, the supply of defoamers to the paper industry would constitute a narrow definition of the product market and it would be possible to define a broader market covering defoamers required in other industries.

20. Pulp and paper mills use chemical defoamers to prevent excess foaming in processing equipment and to break air bubbles during pulp washing, paper formation, coating operations, and in circulating process water from influent to wastewater / effluent treatment. Foam can impede drainage of the stock and create holes in the finished paper. The products that reduce foam cover a broad spectrum of chemical materials, mainly surface-active materials that tend to concentrate at interfaces, such as the  water surface (i.e. the interface between water and air), because of their particular chemical structure and physical behaviour. These surface-active materials include formulated or customized combinations of some or all of the following: fatty acid amides, polyethylene glycols and polypropylene glycols, fatty alcohols, fatty acid esters, glycols, silicones, waxes, mineral oils and natural oils. The type and amount of chemical defoamers used by each mill varies greatly depending on point of use, type of pulp, operating conditions of the mill and the chemical composition of the defoamer product.

21. The notifying party points out that the supply of defoamer chemicals to the paper industry involves similar expertise to that required for the supply of those products to other industries. However, the parties’ businesses only overlap as regards defoamers for paper mills.

22. The market investigation lends support to the narrower product market definition, limited to the supply of defoamers to the paper industry. However, no final decision on this is needed as no affected market arises under any market definition.

Supply of microbiological control agents to the paper industry

23. The notifying party submits that the market could be construed very narrowly as the supply of microbiological control agents to the paper industry or more broadly as a market for microbiological control for all industrial applications.

24. Microbiological control agents (fungicides, bactericides and biostats) are used to prevent the build-up of microbial deposits on papermaking equipment and in mill processing lines, which are a favourable environment for the development of bacteria and fungi. The most widely used specialty microbiological control agents in the paper production process (next to commodity microbiological control agents such as  sodium hypochlorite, chlorine dioxide, chlorine, peracetic acid) are: (i) bromine- organic compounds, (ii) quaternary ammonium compounds, and (iii) organosulfur compounds. The production of microbiological control agents is regulated by Directive 98/8/EC.7

25. The notifying party points out that microbiological control agents used in the paper production process are the same as, or chemically similar to, those used in other industries, for instance in water treatment, production of paints and coatings, food processing, municipal disinfection and fuel/oil storage.

26. The notifying party's assertions in paragraph 25 have found some support in the market investigation. However, for the purpose of the present decision, the precise definition of this product market can be left open, since it is concluded below under section V.A. that the notified operation does not raise competition concerns in the narrowest reasonable potential product market, namely the supply of microbiological control agents to the paper industry. On wider alternative product markets, the market shares of the parties would be significantly lower and therefore any competition concern would be excluded.

Supply of contaminant control agents to the paper industry

27.  The notifying party submits that the relevant product market should include all deposit or contaminant agents used to prevent contamination during the paper manufacturing process, regardless of the chemistry used.

28.  The notifying party explains that deposit control agents, or contaminant control agents, are used to prevent contamination through particles in the manufacturing process and they come in many forms, according to the type of contaminant in the paper production process they are designed to address. Due to the increased use of paper recycling, adhesives from old envelopes, post-it notes or bits of packaging adhesives (together referred to as "stickies") increasingly create a deposit control problem for paper makers. This problem is tackled by adding chemicals which  remove the adhesive character of the stickies or which break them down into smaller particles which can more easily be washed away. Scale is also a significant deposit control problem in the paper production process, caused by the accumulation of calcium deposits left by mineral compounds.

29.  The market investigation has confirmed the notifying party's assertions regarding market definition. It is therefore concluded that the relevant product market definition is the supply of contaminant control agents to the paper industry.

Supply of dry strength agents to the paper industry

30. The notifying party submits that the market could be defined as covering all dry strength additives that are used in the paper industry and claims that it would be erroneous to define separate (and narrower) markets for synthetic dry strength additives and natural dry strength additives used in this industry.

31. Dry strength additives are used in paper manufacture to increase the strength of paper when dried by enhancing bonding between the fibres.

32. The definition of the product market as covering all dry strength additives used in the paper industry is not put in doubt by the market investigation. However, for the purpose of the present decision, the precise definition of this product market may be left open, since the notified operation does not raise competition concerns under any assumption of markets segmented by application and/or based on technologies.

Chemicals for water treatment in general

33. The notifying party points out that Commission decision M.1631 Suez-Lyonnaise / Nalco of 1999 distinguished between chemicals for municipal water treatment and chemicals for industrial water treatment.8 With regard to chemicals for industrial  water treatment, the notification submits that two markets can be distinguished, namely (i) a market for the supply of influent and effluent water treatment chemicals and (ii) a market for the supply of water treatment chemicals for cooling and boiler applications. These potential markets will be examined below.

34. The notification claims that there is no difference in chemistry or application experience required to service a cooling or boiler system or treat influent or effluent water in a pulp or paper mill as opposed to the servicing of a cooling or boiler system or the treatment of influent or effluent water in other industries, for instance in the food industry or in a refinery.9 Typically, sales and technical staff are not specialised, and the same companies offer water treatment products and services across a wide range of industries. These claims were confirmed by the market investigation.

35. Whereas Ashland and most other competitors serve all industries, Hercules is an exception. In 1998, Hercules acquired BetzDearborn’s water treatment chemicals business.10 In 2002, Hercules sold the BetzDearborn water treatment chemicals business to General Electric (“GE”), and Hercules became a distributor of GE’s water treatment chemicals to its customers, who are mainly in the paper industry.11

Chemicals for water treatment: supply of influent and effluent water treatment chemicals

36. According to the notification, the market for the supply of influent and effluent water treatment chemicals comprises coagulants and flocculants. These are separation  agents which cause the precipitation of suspended solids, which can then be filtered out of the water.12 The Ciba / Raisio decision of 2004 indicated that influent and effluent water treatment chemicals are sold in four main physical forms: dry powders, dry beads, liquid dispersion and emulsions,13 but left open the exact market definition.14

37. According to the notification, it is not necessary to distinguish between various influent / effluent water treatment chemicals.15 This position was supported by the market investigation. For the purpose of the present decision, the precise definition of this product market can be left open, since the notified operation does not raise competition concerns under any assumption of further market segmentation by application and/or by technology used.

Chemicals for water treatment: supply of water treatment chemicals for cooling and boiler applications

38. According to the notification, all water treatment products that serve the preventive treatment of industrial systems form a distinct product market regardless of whether one refers to the paper industry or other industries. In the Suez-Lyonnaise / Nalco decision of 1999, a very similarly described product market was considered as a possible market definition, although in that case it was not necessary to decide on a precise definition.16

39. The notification explains that the water treatment needs of industrial systems comprise (i) corrosion inhibitors, (ii) calcification inhibitors, (iii) microbiological control agents and (iv) dispersing agents, but according to the notification this is not a basis for further sub-segmenting the product market. Typically, customers purchase the service of cooling and/or boiler treatment, and leave it to the water treatment service provider to choose the different chemicals required for the specific application.17

40. The product market definition proposed by the notifying party and summarised in paragraphs 38-39 was supported by the findings of the market investigation. However, for the purpose of the present decision, the precise definition of this  product market can be left open, since the notified operation does not raise competition concerns under any assumption of further market segmentation by customer segment, by application and/or by technology used.

B.  Relevant geographic market

41.  For all product markets concerned, the notifying party submitted that the geographic markets are at least EEA-wide. To support this, the notifying party points to the existence of pan-European product specifications, the absence of national preferences or brands, the presence of the same major competitors and customers in several European countries, the lack of substantial price variations among European countries and the absence of barriers to trade across internal European borders (and beyond).18

42.  In previous decisions, the Commission decided that the geographic market was (at least) pan-European for similarly defined product markets to those at issue in the present case. Specifically, the Commission defined the geographic market as being at least pan-European for the following product markets:

• sizing and creping agents. These are respectively functional and process chemicals;19
• retention agents which are process chemicals for the paper industry;20 and
• organic coagulants and flocculants.21

43.  For a product market defined similarly to that of the supply of water treatment chemicals for cooling and boiler applications,22 an earlier Commission decision found support for at least an EEA-wide market but did not need to decide the issue.

44.  More generally, merger decisions in chemicals cases have tended to conclude that there was a (Western-) EEA-wide geographic markets, although the definition was often left open.23

45.  Regarding paper production, the 1992 Commission decision Torras / Sarrio found an EU-wide market (at that time covering 12 Member States) for the different types of paper (production) it covered.24 More recent decisions regarding the production of paper have concluded that the relevant product markets were EEA-wide.25 In this year's Arjowiggins / Zanders Reflex decision, national markets for the (production and) sale of carbonless paper appeared to exist but in the end the geographic market definition was left open.26

46.  The market investigation has confirmed that all the geographic markets concerned could be considered as EEA-wide. In any event, for the purpose of the present decision the exact definition of the geographic market can be left open, in the absence of any indication that a national market could lead to the identification of a competition problem.

V. COMPETITIVE ASSESSMENT

47.  In the absence of a vertical relationship between the merging parties, the competitive assessment is limited to the markets on which they overlap with a combined market share above 15%. In the present case, the only potential markets where the combined market share is above 15% are the markets for the supply of microbiological control agents to the paper industry and for the supply of contaminant control agents to the paper industry (assuming that such markets exist).

A.  Supply of microbiological control agents to the paper industry

48.  On a potential EEA-wide market for the supply of microbiological control agents to the paper industry, the market shares are as follows:

* Source: Party estimates

49.  The above table reflects Ashland's minimal market share which is [0-5]%. Ashland is not a new entrant. The reference on the table to "others" covers a significant number of suppliers. It appears from the market investigation that these include BIM (headquartered in Sweden but present in many European countries), BK Giulini (Germany), Eka Chemicals (headquartered in Sweden, a division of Akzo), Kolb (Germany) and Woellner (Switzerland). On a market for microbiological control for all industrial applications, the parties' combined market share for sales to end customers is below 15%.

50.  The above market shares were confirmed by the market investigation. The small addition of market shares through the merger and the presence of a number  of credible alternative suppliers make it very unlikely that the merger would cause competition problems. The market investigation has revealed that most paper makers are currently using several suppliers (some of them more than five). The market investigation thus supports the conclusion that the merger does not significantly impede effective competition with regard to the supply of microbiological control agents to the paper industry.

51.  The Commission therefore concludes that the merger does not significantly impede effective competition on an EEA market for the supply of microbiological control agents to the paper industry.

B.  Supply of contaminant control agents to the paper industry 

52.  On a potential EEA-wide market for the supply of contaminant control agents to the paper industry, the market shares are as follows:

*Source: Party estimates

53.  This table shows Ashland's very small market share which is [0-5]%. Ashland is not a new entrant: the Stockhausen water treatment business which it bought from Degussa has been active in contaminant control agents for many years.

54.  The above market shares were not called into doubt by the market investigation. In light of the facts that the market share of the combined entity is relatively low; there  is only a small addition of market share caused by the merger; and various strong alternative suppliers are present on the market, it is very unlikely that the merger would cause competition problems. The market investigation supports this conclusion.

55.  Accordingly the Commission concludes that the merger does not significantly impede effective competition on an EEA market for the supply of contaminant control agents to the paper industry.

VI. CONCLUSION

56.  For the above reasons, the Commission has decided not to oppose the notified operation and to declare it compatible with the common market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of the EC Merger Regulation.

1 OJ L 24, 29.1.2004 p. 1.

2 The word ’supply’ is used because both parties are active as formulators and, to the extent that they do
manufacture the active ingredients concerned, there is no overlap. Form CO, pp. 23 and 31.

3 Form CO, p. 24.

4 Form CO, pp. 24-25.

5 Form CO, p. 25.

6 See Commission decision M.3424 of 26 May 2004, Ciba / Raisio Chemicals, para 8, and implicitly in
Commission decision M.1304 of 5 October 1998, Hercules / BetzDearborn, para 6 ff.

7 Directive 98/8/EC of the European Parliament and of the Council of 16 February 1998 concerning the
placing of biocidal products on the market, OJ 1998, L 123, p. 1.

8 Form CO p. 38, referring to Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco,
point IV.A.0. The major difference between the two types of treatment is that municipal applications require
little or no servicing work apart from the chemical treatment of the water, whereas industrial applications
require the intervention of specialised technical staff.

9 Form CO p. 39.

10 Commission decision M.1304 of 5 October 1998, Hercules / BetzDearborn.

11 Form CO, p. 39.

12 See Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco, point IV.A.2.

13 Commission decision M.3424 of 26 May 2004, Ciba / Raisio Chemicals, para 10.

14 Commission decision M.3424 of 26 May 2004, Ciba / Raisio Chemicals, para 10 & 14-16.

15 E.g. according to the organic / inorganic character of the chemicals: form CO p. 39-40, referring erroneously to Commission decision M.3424 of 26 May 2004, Ciba / Raisio Chemicals. In fact, it is Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco which accepted that distinction.

16 Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco, point IV.A.1.

17 Form CO p. 40.

18   See Commission decision M.1304 of 5 October 1998, Hercules / BetzDearborn, para 18.

19   Commission decision M.1304 of 5 October 1998, Hercules / BetzDearborn, para 19. Referred to in Commission decision M.3424 of 26 May 2004, Ciba / Raisio Chemicals, para 13, where the definition could be left open.

20   Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco, point IV.B.4.

21   Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco, point IV.B.2.

22  Commission decision M.1631 of 20 August 1999, Suez-Lyonnaise / Nalco, point IV.B.1 ("le marché du traitement des installations d'eau industrielles").

23  Commission decisions M.4426 of 20 December 2006, SABIC / Huntsman UK, paras 38-44 and M.4734 of 30 January 2008, Ineos/Kerling, para 153.

24  Commission decision M.166 of 24 February 1992, Torras / Sarrio, para GG (paper manufacture of uncoated wood free paper, coated wood free paper, self-copying paper and self-adhesive paper).

25  Commission decision M.1356 of 9 December 1998, MS/UK Paper, para 15; Commission decision M.1319 of 23 October 1998, Smurfit Condat/CVC, para 7.

26  Commission decision M.4513 of 4 June 2008, Arjowiggins / Zanders Reflex, para 95 ultimately left the geographic market definition open after finding strong evidence that competitive conditions vary significantly between the countries in the EEA.