Linde- Praxair Merger: Competition Assessment in the Industrial Gas Market

[Vaidehi Soni is a 4thYear B.A., LL.B. (Hons.) student at The National University of Advanced Legal Studies, Kochi]

Background

Linde Aktiengesellschaft (Linde) and Praxair, Inc. (Praxair), both international gasses and engineering companies primarily active in industrial gases, specialty gases, medical gases, related engineering and services sectors, entered into a business agreement wherein the proposed transaction relates to a combination of both the companies under a newly incorporated holding company (New Hold Co). Such a combination was envisaged to be achieved through a co-ordinated and parallel approach including voluntary exchange offers to shareholders of Linde to acquire shares of New Hold Co. and the merger of the wholly owned subsidiary of New Hold Co with Praxair resultant of which all Praxair shareholders will become shareholders of New Hold Co. Following such a proposed combination, both Linde and Praxair shall become indirect subsidiaries of New Hold Co.

Competition Assessment by CCI

Pursuant to a notice under section 6(2) of Competition Act 2002, the Competition Commission of India (CCI) formed a prima facie opinion as follows:

(i) such a combination was likely to cause an appreciable adverse effect on competition (AAEC) in India; and

(ii) CCI proposed some modifications in terms of section 31(3) of Competition Act so that the likelihood of the adverse effect on competition can be eliminated.

Assessing Factors Determining AAEC

With regard to the first issue, to ascertain the AAEC, the CCI determined and assessed factors in accordance with section 20(4) of the Competition Act, which primarily refers to identifying the level of combination in the market, likelihood of a removal of vigorous and effective competitor and substantial increase in profit post the proposed combination, market share in the relevant market, degree of countervailing power in the market, extent of entry barriers, nature and extent of innovation and essentially the effect of the agreement on the existing structure of that market as to whether the benefits of the combination outweigh the adverse impact of combination.

In the present case, the CCI revealed the likelihood of AAEC concerns emerging from the proposed merger due to the overlap product segments, related product segment of construction and supply of plants for production of industrial gases to the relevant product market and relevant geographic market and it assessed the portfolio effects of the competition as follows.

Firstly,that Linde and Praxair (collectively, the Parties) are market leaders for tonnage supplies of industrial gases, viz, oxygen (T-GOX), nitrogen (T-GAN) and argon (T-GAR) in India and the proposed combination would significantly cause increase in concentration and weakening of other competitors thus resulting in a wide gap between market leader and other competitors. Since the market shares of the Parties depict very strong position in tonnage gases, the other competitors seem to only reflect a small segment of the market. Further, the CCI examined the factors leading to an incumbency advantage that the successful bidders of tonnage contract would have at the time of renewal of tender and the Parties’ ability to retain early mover advantage.

Secondly,since the Parties have a substantial presence in the bulk gases markets, the proposed combination would strengthen transportation and distribution network which would further reinforce their position in both tonnage and bulk market. Tonnage, bulk and cylinder modes are inter-related wherein quantities supplied in the bulk market are produced in tonnage plants and gases supplied in cylinders are derived from bulk supplies. Thus, if a party has a strong position in bulk and cylinder markets, they may be in a position to foreclose rivals in the tonnage market. Considering parties to be incumbent in most of the renewal bids and high presence in bulk market, the CCI observed that the Parties would be in a position to foreclose their rivals in tonnage markets.

Further, the CCI observed that the Parties have a significant presence in cylinder markets in the east and south regions which would lead to substantial change in the market structure of various cylinder markets in those regions. Thus, the market for bulk gases in the eastern and southern regions in India and the market for cylinder gases in eastern (excluding LAR and LCO2) and southern region in India would be affected.

Thirdly, having emphasised by the parties on the role of technology in the gases sector, the CCI observed that industrial gases are relatively homogeneous products with little or no differentiation. As regards the removal of a close and effective competitor, the CCI was of the view that Indian tonnage market primarily consists of three major players i.e. Linde, Praxair and Inox AP and it is clear that the proposed merger would lead to elimination of most significant competitive constraints.

Fourthly, the key factor for considering the countervailing buying power is the availability of options to the buyers in case of an attempt to increase the market prices, i.e., price and non-price factors (background, experience of gas company, etc.) by the merging entities and the fact that parties have maintained strong market shares for a long duration clearly limits the buyer power in tonnage gas market.

Fifthly, regarding bulk supplies of industrial gases, viz. argon (LAR), the India LAR market is highly concentrated and the proposed combination would significantly increase the degree of concentration in the market thereby widening the gap with Inox AP being a distant second having less than half the share of the combined entity. Thus, the said combination would likely cause an AAEC in the market for LAR in India.

With respect to the market for specialty gases and medical engineering services, the proposed combination is not likely to result in an AAEC unlike in the industrial gas market.

Modifications to Address AAEC Concerns and Determination of a Suitable Proposal

To address AAEC concern, the CCI opined that the competitors must have an integrated presence in each relevant market and maintain an existing level of competition in tonnage, bulk,and cylinder business. The CCI proposed a modification to the combination in accordance with section 31(3) of the Competition Act which states that:

Where the Commission is of the opinion that the combination has,or is likely to have, an appreciable adverse effect on competition but such adverse effect can be eliminated by suitable modification to such combination, it may propose an appropriate modification to the combination, to the parties to such combination.

Such modification is aimed to create viable, independent and long-term competitors in the relevant market and ensure the availability of necessary components to the buyer of divestment asset so as to compete effectively with the combined entity in the relevant market. In the present case, the CCI observed the following aspects to determine a suitable modification proposal:

(i) that the tonnage, bulk and cylinder supplies of gasses are interlinked.

(ii) a good presence in tonnage market supports operation in bulk market and vice versa and the extent of overlaps in various markets.

(iii) the requirement of ending the existing structural link between Parties and competitors and extent of concentration of markets.

The CCI, after considering the aforesaid particularity of the industrial gases market, proposed a divestiture of Praxair’s on-site plants in the eastern region and Linde’s stake in Belloxyin the southern region involved in production and supply of bulk and tonnage gases and cylinder filling stations engaged in production and supply of cylinder gases to the purchaser who has to comply with east/south region purchaser requirements. In the east/south region divestment business, the transitional support shall be provided as may be required by the approved purchaser. Further, divestiture of the divestment business shall come into effect within the first divestiture period only with the approval of the CCI regarding the sale and purchase agreement. Until closing, the Parties shall preserve the economic viability, competitiveness, and marketability of the divestment business. Such selling of assets is aimed at protecting the interest of local players in the market.

For the supervision of the modifications proposed, the CCI can appoint a monitoring agency in accordance with regulation 27 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (the Combination Regulations). Thus, in carrying out such proposed modifications, the Parties shall comply with the provisions of the Competition Act, the Combination Regulations and the Competition Commission of India (General Regulations) 2009, failing which the proposed combination would be deemed to have caused an appreciable adverse effect on competition.

Concluding Remarks

The CCI provided its view on the Linde-Praxair deal taking into consideration anti-competitive effects resulting from the merger. Being a fair-trade watchdog, it investigated the substantial overlap of the proposed merger and its appreciable adverse effect on the competition which attracted modifications from the commission paving way for the merger of German group Linde and U.S. based Praxair. The case succinctly probes the role of the CCI in analyzing the proposed combination both at the black box level and the level of strategy prior to the approval of any proposed combination. Such a mega-merger being one of its kind in the industrial gas market tends to improve sales and ensure proper synchronization and co-ordination in the global industrial gases market.

Vaidehi Soni

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