The EU Commission (‘Commission’) announced on 13 January 2022 that it had prohibited Hyundai Heavy Industries Holdings (HHIH) from acquiring Daewoo Shipbuilding & Marine Engineering (DSME).1
The Commission blocked the acquisition on the basis that it would have led to ‘(i) the creation of a dominant position by the merged company in the market for the construction of large LNG carriers, (ii) a reduced choice in suppliers and (iii) higher prices for EU customers and ultimately for energy consumers.’ 2
Concerns in worldwide market for large LNG carriers
The Commission’s analysis centered on the worldwide market for the construction of large liquefied natural gas (‘LNG') carriers, on which it said the combined entity would have had a market share of at least 60% in this market worth €40 billion in the last 5 years.3 Such large carriers can carry quantities of LNG of 145 000 m3 and above, and the Commission explained that half of all orders for these ‘highly complex and sophisticated products’ come from European customers. It also noted that there would have only remained one competitor on this market post-merger, and downplayed the relative importance of a fourth independent shipbuilder which, according to it, has limited activities in large LNG carriers and focuses on domestic projects.
HHIH reacted to the decision by saying that market shares are not a proper indicator of market power in the shipbuilding industry given the heavy reliance on tenders and bidding, and pointed to the presence of other major shipbuilders such as Samsung Heavy Industries (South Korea), Hudong Zhonghua Shipbuilding (China), Mitsubishi Heavy Industries, Kawasaki Heavy Industries (Japan), and Zvezda Shipbuilding Complex (Russia).4
A rare veto
The Commission’s decision to block the acquisition came after the Consumer Commission of Singapore and State Administration for Market Regulation of China had given the go-ahead to the deal. Significantly, at the time of the Commission’s verdict, the transaction was still awaiting decisions from the Korea Fair Trade Commission and the Japan Fair Trade Commission. The EU’s competition chief, Commission Executive Vice-President Margrethe Vestager, when commenting on the decision to block the acquisition, was quick to stress that the Commission only rarely prohibits transactions, saying this was only the tenth merger blocked by the Commission in the last ten years.
Whilst this may formally be true, the Commission is known to regularly extract remedy packages – most often structural – as a condition for approving transactions it views as raising competition concerns. In the case at hand, the Commission explains that the parties did not formally put forward remedies, although reports have suggested that the parties at least floated with the Commission the idea of putting forward non-structural remedies, involving capping prices for LNG carriers and sharing LNG shipbuilding design and technology with rivals.5 HHIH explains in its response to the Commission decision that containment system technology, which according to it is the key element on which the ability of shipyards to build LNG carriers depends, could be obtained by thirty already-qualified shipyards from France’s GTT and Norway’s MOSS Maritime, who hold the exclusive rights to this technology.6
The Commission’s statement also does not account for transactions that are notified to the Commission but ultimately abandoned by the parties in the face of the scope of remedies likely needed to assuage the Commission’s concerns, without ever formally being blocked, nor for transactions that are dropped due to factors principally external to the Commission review process, but which have been affected by the scope and length of the Commission review.
A recent example of a transaction which was dropped after it became clear the Commission was unlikely to approve it without remedies, and a lengthy ‘stop the clock’ period, is the recent failed shipbuilding acquisition of Chantiers de l’Atlantique by Fincantieri, a transaction between two majority state-owned companies which initially had the backing of the French and Italian governments. A sale agreement had originally been signed in February 2018, before the transaction was aborted in January 2021. Proponents of the acquisition had notably argued that the transaction could have led to the creation of a ‘European champion’, something which (they claimed) was desirable and necessary to face increasing competition from China. The parties cited the then-current economic context as the official reason for aborting the merger.7
In the case under consideration, a definitive agreement to acquire DSME was signed in March 2019 and the transaction was formally notified to the Commission in November 2019. The review was suspended 3 times, for a total period of more than 18 months, most recently from July 2020 to November 2021,8 after the Commission sent a Statement of Objections to the parties in June 2020.9 The Commission asserts that these delays are due to HHIH not providing requested information in a timely manner. It also explains that in reaching its decision it considered the effects of the ongoing pandemic, but that the latter did not materially impact competitive dynamics in the relevant markets.
Although the deal’s fate – in light of the acquirer’s apparent reluctance to propose extensive structural remedies10 – would have to a large extent already been sealed from the Commission’s perspective for some time, the ongoing rise in gas prices in Europe is likely to have strengthened its resolve.
The decision illustrates the importance of the European merger rules to structural transactions in the LNG carrier markets and beyond. The EU Commission’s veto is good news for LNG carriers who raised concerns about the prospect of diminished competition and higher prices. The decision also demonstrates that the Commission does not shy away from taking bold decisions in a political context, even where a number of well-established competition enforcement agencies have already reached opposite conclusions. On a more technical level the Commission’s decision highlights the analytical difficulties that bidding markets may present in the review of mergers and acquisitions.
HHIH has indicated it would consider whether to appeal the decision before the EU courts.
4. HHIH press release, ‘The Decision of the European Commission is Not Reasonable and Disappointing.’
5. Mlex, Hyundai Heavy declines to offer remedies in Daewoo deal, likely sealing its fate (8 December 2021)
6. HHIH press release, ‘The Decision of the European Commission is Not Reasonable and Disappointing.’
9. Mlex, Hyundai Heavy declines to offer remedies in Daewoo deal, likely sealing its fate (8 December 2021)
10. It has been reported that the parties were not willing to e.g. divest a full-service shipyard, see Mlex, Hyundai-Daewoo shipbuilding deal risks EU prohibition as remedies fail to convince (8 October 2021)
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