Tronox/Cristal Deal Painted Anticompetitive by Administrative Law Judge

Monica M. Castillo van Panhuys
Kesselman Brantly Stockinger LLP

After nearly two years of investigation and litigation, the Federal Trade Commission (“FTC”) blocked the $1.7 billion merger between Tronox Limited (“Tronox”) and National Titanium Dioxide Company Limited (“Cristal”) in late December 2018. The Administrative Court of the FTC ruled in favor of Commission staff, finding that “the planned Acquisition may substantially lessen competition in the relevant market for the sale of chloride TiO2 in North American in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act.” Despite changes in Commission leadership since the start of the investigation, the traditional nature of the markets and historically coordinated market dynamics suggest that the decision will be upheld during de novo review by the Commission. A possibility of settlement also exists, depending on whether Tronox renews the divestiture offer that it attempted to make in late December, on the eve of the administrative ruling.

Unique Procedural Posture

The case is notable for its unique procedural posture.When the FTC voted out Commission staff’s complaint in December 2017, only two sitting Commissioners remained, Acting Chairman Maureen Ohlhausen, a Republican, and Democrat Commissioner, Terrell McSweeny. The Commission’s unanimous vote authorized staff to seek both a preliminary injunction in a United States District Court, as well as to proceed in an administrative hearing before the FTC’s administrative law judge for a full trial on the merits.

In such a circumstance, and absent a hold-separate agreement between the parties and the government stating that the parties will not consummate their deal before adjudication, Commission staff normally seeks a preliminary injunction first, or concurrent to its filing of an administrative complaint. The preliminary injunction hearing typically concludes sooner than a full administrative trial on the merits would, and typically resolves a merger challenge more quickly than a full trial on the merits would.

Here, the parties were initially prevented from consummating their deal because the European Commission’s investigation of the merger had not concluded. Therefore, Commission staff filed its administrative complaint on December 5, 2017, but waited until July 10, 2018 to file its temporary restraining order and preliminary injunction motion in the United States District Court for the District of Columbia, anticipating that the parties would be cleared to consummate their deal by the European Commission as early as July 16, 2018. By then, the parties had extended past the initial closing date stipulated in their merger agreement, the administrative court had heard a full trial on the merits and post-trial briefing was in progress. On August 20, the European Commission cleared the deal.During the preliminary injunction hearing, the FTC and the parties each presented three witnesses and submitted the administrative trial record. On September 12, 2018, Judge McFadden of the District of DC granted the preliminary injunction motion, and in December 2018, administrative law Judge Chappell of the FTC ruled in favor of Commission staff.

The case awaits automatic de novo review by the full Commission, which consists of five new Commissioners, two Democrats and three Republicans, who were confirmed and sworn in in mid-2018.Normally, some of the Commissioners would have been in place during the investigatory stage, and therefore would have evaluated specific evidence, and the strength of the government’s potential suit to block a merger before voting for or against authorizing staff to initiate the complaint. These intertwined workings of the Commission as the investigative and adjudicative body would typically dampen the suspense of waiting for the Commission’s de novo review. Not so here.

Adding to the suspense, the case is currently stayed “for the duration of the shutdown and for an additional five business days thereafter.” Notwithstanding, this case involving a mature market with a history of coordinated behaviors seems likely to survive review.

On the other hand, Tronox may offer divestitures and resolve the FTC’s concerns before the Commission’s decision and its March 2019 merger agreement expiration. In early December, Tronox publicly announced efforts to present a divestiture to the Commission of Cristal’s North American plants to prospective buyer, INEOS, a privately-held chemical manufacturer, in advance of the administrative decision. Such a divestiture could resolve the Commission’s competitive concerns.While the administrative judge declined the request to certify Tronox’s proposed consent decree only days before his ruling, Tronox may well be negotiating this, or other settlement offers, with Commission staff today.

Basis for decision

The Administrative Law Judge for the Federal Trade Commission, D. Michael Chappell, ruled that Commission staff had presented a “strong prima facie” case of coordinated anticompetitive effects in the event of the merger between Tronox and Cristal. Having carried its burden to show market concentration and anticompetitive effects evidence that the merger would “substantially lessen” competition in the chloride titanium dioxide market, Commission staff also persuaded Judge Chappell that Tronox and Cristal failed to show that entry or merger-specific efficiencies would lessen any such anti-competitive effects.

Prevailing on market definition and concentration numbers appears to have been dispositive to the outcome in this case. Judge Chappell adopted Commission staff’s allegations that sulfate-processed titanium dioxide occupies a different market than chloride-processed titanium dioxide, which predominates in North America. The court also accepted market share estimates that suggest that this 5 to 4 merger would result in market dominance and even market shares for Tronox/Cristal, and current market leader, Chemours, who would own about 35% to 40% of the chloride titanium dioxide market each. Finally, elimination of the only privately-held titanium dioxide competitor in North America, Cristal, also proved troubling as the court suggested that Tronox, Chemours, Kronos and Venator would be better able to monitor one another’s pricing and capacity given the required public disclosures.

Titanium Dioxide Industry Generally

Titanium dioxide is a prevalent white pigment used in paper, paint, industrial coating, and plastics manufacturing for color, brightness and opacity. Titanium dioxide resists discoloration and UV radiation. Paints or coatings and plastics manufacturers are predominant customers in North America, making up about 85% of titanium dioxide consumed in North America.Other customers include paper, ink, food, cosmetic and pharmaceutical manufacturers.

Customers must optimize their manufacturing to either chloride or sulfate titanium. In North America, the predominant standard is chloride titanium dioxide. The chloride titanium dioxide manufacturing process is newer, more efficient, more environmentally friendly, and produces a higher quality product. The chloride process imparts a bluer tint to titanium dioxide, while the sulfate process imparts a yellower tint. The chemical composition of chloride titanium dioxide differs from that of sulfate titanium dioxide, and the products differ in their durability. All titanium dioxide slurry (a product used in the coatings industry) purchased in North America is chloride titanium dioxide.

The titanium dioxide industry has been the subject of numerous accusations of coordination and price fixing in the past. Most recently, the court in Valspar Corp. v. EI DuPont de Nemours & Co, 873 F. 3d 185 (3d Cir. 2017) found that the titanium dioxide industry was an oligopoly “primed for anticompetitive interdependence” and is characterized by “substantial barriers to entry.”

Players in the North American Titanium Dioxide Market

Tronox, headquartered in Stamford, Connecticut, and has a North American titanium dioxide business of about $410 million annually. Its sole manufacturing operation in the United States is located in Hamilton, Mississippi.All of Tronox’s plants produce titanium dioxide through a chloride process. Tronox proposed to acquire Cristal, the only privately-held titanium dioxide producer in North America.

Cristal is headquartered in Jeddah, Saudi Arabia, is held by several entities including TASNEE, Gulf Investment Corporation, and an undisclosed private investor. Cristal’s manufacturing in North America occurs in Ashtabula, Ohio. 80% of Cristal’s titanium dioxide production is through the chloride process and its titanium dioxide sold in North America is chloride processed.

The court recognized only three other meaningful players in North America – Chemours, Kronos and Venator – and a de minimis 0.5% share for Chinese titanium dioxide. Chemours is currently largest titanium dioxide producer in North America, with plants in Mississippi, Tennessee, and Mexico, and a market share of about 35% to 40%. All of Chemours’s production is of chloride titanium dioxide.

Kronos operates a titanium dioxide plant in Canada, along with a joint venture plant in Louisiana that it co-operates with Venator. Venator is a spin-off of Huntsman, and is the smallest producer in North America. It’s only plant in the region is the Louisiana joint venture. While not a focus of the court’s decision, the competitive significance of Venator’s market presence as the fifth player may be limited given that its participation depends on cooperation and shared capital costs with its competitor, Kronos.

The court found that the merger would have made Tronox the second largest titanium dioxide producer in North America, giving it shares roughly equal to market leader, Chemours, or between 35% to 40% market share.Moreover, the court adopted the government expert’s opinions regarding HHI and change in HHI, 3000 and 700, respectively, which are supportive of a prima facie case under the Merger Guidelines.

Chloride Titanium Dioxide Market

The court also adopted findings describing the product market as containing only titanium dioxide made via the chloride process, effectively eliminating Tronox’s arguments that sulfate titanium dioxide exports could ameliorate anticompetitive effects. Evidence supporting this finding included contemporaneous business documents describing chloride titanium dioxide as a separate market, customer testimony regarding the non-substitutability of sulfate titanium dioxide, and testimony that one significant coatings customer, Sherwin Williams, did not substitute sulfate titanium dioxide even in the face of a 40% price difference between chloride and sulfate titanium dioxide.

Significantly, the court clarified that a customer’s theoretical ability to switch to a product was not the test of product market, but rather whether a market could “reasonably substitute” in the face of a 5% or greater price increase, the so-called small but significant non-transitory increase in price (SSNIP) described in the Merger Guidelines.

North American Market

The government also prevailed in persuading the administrative court that the geographic market was North America. Judge Chappell cited party admissions that prices differed by regions and were higher in North America. In addition, the court adopted findings that arbitrage imposed prohibitive costs, with duties alone increasing costs by more than 5%. The court also dismissed the notion that arbitrage was possible, citing minimal exports, 3%, and long lead times.

Coordinated Effects Likely

The administrative court found coordinated effects likely given the commodity nature of chloride titanium dioxide.Citing various precedents, the court held that the homogeneity of products, and ease of monitoring rendered coordination more likely than in non-homogenous markets.In addition, Judge Chappell gave weight to documents and testimonies describing “mutually recognized interdependence,” or the impact of competitor pricing behavior across the market.

While not specifically mentioned, the Third Circuit’s finding that there had been 31 separate instances of parallel price announcements over 11 years in the North American chloride titanium dioxide market in the Valspar case supports the ALJ’s findings.

Defenses Unpersuasive

Finally, Judge Chappell found the parties’ rebuttals to Commission staff’s prima facie case unavailing. While Tronox posited Lomon Billions, among others, as potential Chinese entrants who could replace lost competition, customer and party statements about the inferior quality of Chinese titanium dioxide, and the difficulty of chloride titanium dioxide manufacturing persuaded the court that timely and sufficient entry was unlikely. Moreover, the court found claimed efficiencies disconnected to benefits to the North American market.