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April and May have seen antitrust regulatory authorities shift their focus towards developments in the gas industry following two separate developments.
In April, it was announced that Dutch listed Shell is to acquire British based British Gas (BG) for £47bn excluding debt, a 50 per cent premium to its current share price. BG was, said Ben van Beurden, Shell’s chief executive, a “terrific fit” for the Anglo-Dutch major. “It is bold and strategic moves that shape our industry,” he added. Commercially, the acquisition would create the largest producer of Liquid Nitrogen Gas in the World, as well as aggregating enormous gas reserves under the same corporate control.
Because of its enormous cross-border influence, the deal is dependent on merger control clearance from the EU Commission, the Brazilian Competition Authority (“CADE”), the Chinese Ministry of Commerce (“MOFCOM”) and the Australian Competition and Consumer Council (“ACCC”).
The general purpose of these review processes will be to examine how the merger would affect the structure of markets and whether it would cause concerns from a competition perspective that the new entity could act to the detriment of competition or of consumers within the industries affected. Each review body will have the ability either to prohibit the deal outright, to allow it or to allow it subject to conditions. The parties may also offer concessions in order to placate competition concerns. For example, this could include the offer of structural undertakings (usually binding promises to sell off part of the merged company in order to avoid it becoming too powerful). It could also include the imposition of “behavioural” undertakings, binding promises to avoid acting in a way that would be anti-competitive. Essentially, this is an exercise in economic assessment.
In terms of the markets affected by the deal, regulators are likely to look at the effect of the consolidation in the following areas (based on other similar cases):
Shell has been working particularly hard to secure the consent of MOFCOM, a central government body. The Chinese watchdog is notorious for taking into account industrial policy factors as part of its decision making process. This can mean leveraging the review process in order to secure outcomes which benefit domestic Chinese industry. For example, when, in 2012, commodities giants Glencore and Xstrata proposed to merge, MOFCOM made clearance conditional on an undertaking to sell off a highly valuable copper mine in Peru to a Chinese consortium, ostensibly to address concerns that the merged company would be too powerful in the process. As gas is a valuable input for many Chinese businesses, there is a similar possibility of MOFCOM “playing hardball” in negotiations over the BG-Shall tie up, requiring the imposition of onerous undertakings. These could include capping price increases or requiring the merged company undertaking to provide secure supplies of gas to Chinese industry players.
The view of most commentators is that BG-Shell should face fewer difficulties in other jurisdictions. Indeed, in the EU, the Commission may even view the creation of an LNG gas giant as a useful counterweight to the Russian gas giant, Gazprom. In a separate move in May, the Commission’s new Director General of Competition, Margot Westager, announced it had opened up an investigation into Gazprom for alleged abuse of its dominant market position in relation to its supply of gas products in Eastern Europe. Gazprom stands accused of fragmenting the gas market and charging disproportionately high prices. In Bulgaria and Poland—Gazprom may also have linked the supply of gas to control over key infrastructure, such as the now-abandoned South Stream pipeline. The inquiry is highly sensitive politically, at a time when relations between Russia and the EU are already strained over events in Ukraine and Syria. Gazprom is a key supplier of gas to many parts of the EU. Since coming to power, Russian President Vladimir Putin has refused to break up Gazprom, preferring to maintain it as a national gas monopoly, enabling the Russian Federation to use it as an important lever to further foreign policy objectives.
If the EU concludes its initial concerns are well-founded, this could result in Gazprom being fined up to 10% of its global worldwide turnover, an eye-watering figure that could run to billions of Euros. An appeal by Gazprom against such a penalty would be highly likely.
BG-Shell is an interesting case study into the application of merger control into a large cross-border consolidation. Competition advice on the key considerations and strategy for obtaining consents is vital in order to ensure that the deal can progress to a conclusion. Even before the corporate negotiations have begun, competition advisers should determine those regulators who have jurisdiction to examine the deal, as well as predicting the likely concerns they will have, and whether (and at what cost) clearance can be obtained. BG-Shell is unlikely to be the last word in consolidation in the gas industry. Commentators are predicting other gas producers will follow suit, paving the way for a string of mergers amongst gas and oil producers.
The Gazprom inquiry is a real statement that Ms Vestager means business in enforcing EU antitrust laws and will not be deterred by political or diplomatic considerations. With this in mind, now is a good time for businesses in dominant positions to be reviewing their market practices and terms of business, as well as considering whether their competition compliance programs require an update.