UNITED STATES OF AMERICA
In the matter of
Docket No. C-3852
The Federal Trade Commission ("Commission"), having reason to believe that
Lafarge, S.A., through an entity it controls, Lafarge Corporation (collectively "Respondents"), has entered into an agreement to acquire cement production assets of Holnam, Inc., that the agreement violates Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and that the acquisition, if consummated, would result in a violation of Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its complaint, stating its charges as follows:
A. THE RESPONDENTS
1. Respondent Lafarge, S.A., is a corporation organized, existing and doing business under and by virtue of the laws of France with its principal executive offices located at 61 rue des Belles Feuilles, F-75782 Paris, France. Lafarge, S.A., is an international corporation engaged in the manufacture and sale of building materials: cement, aggregates, concrete and concrete admixtures.
2. Respondent Lafarge Corporation ("Lafarge") is a corporation controlled by Lafarge, S.A., with its principal executive offices located at 11130 Sunrise Valley Drive, Reston, Virginia 20191. Lafarge is one of North America's largest suppliers of cement for residential, commercial, institutional and public works construction. Lafarge operates 14 cement plants in the United States and Canada and had sales of $1.6 billion in 1996.
3. Holnam, Inc. ("Holnam"), headquartered in Dundee, MI, is the number one supplier of cement for residential, commercial, institutional and public works construction in the United States. It operates 19 cement plants in North America and had sales of $983 million in 1996. Holnam is a wholly owned subsidiary of Holderbank Financiere Glaris, Ltd., a Swiss-based holding company.
4. At all times relevant herein, Respondents have been and are now engaged in commerce, as "commerce" is defined in Section 1 of the Clayton Act, 15 U.S.C. § 12, and are corporations whose business is in or affecting commerce as "commerce" is defined in Section 4 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 44.
B. THE PROPOSED ACQUISITION
5. On February 4, 1998, Lafarge and Holnam signed a Letter of Intent setting out the principal elements of a proposed transaction, whereby Lafarge would acquire Holnam's Seattle, Washington cement plant and related assets.
C. RELEVANT MARKET
6. The relevant line of commerce in which to analyze the effects of Lafarge's proposed acquisition of Holnam's Seattle cement plant and related assets is the manufacture, marketing and sale of portland cement.
7. Portland cement is the essential binding ingredient in concrete. Portland cement is a construction raw material that users mix with water and aggregates (crushed stone, sand, or gravel) to form concrete. Portland cement is a closely controlled chemical combination of calcium (normally from limestone), silicon, aluminum, iron and small amounts of other ingredients. It is made by quarrying, crushing and grinding the raw materials, burning them in huge kilns at extremely high temperatures and finely grinding the resulting marble-size pellets (called "clinker") with gypsum into an extremely fine, usually gray, powder. Portland cement produced by one manufacturer is virtually indistinguishable from that manufactured by another.
8. The relevant geographic market in which to analyze the effects of Lafarge's proposed acquisition of Holnam's Seattle cement plant and related assets is the Puget Sound area of the state of Washington. This area, whose commercial center is the city of Seattle, consists of the portion of Washington state south from the Canadian border to the area just south of the state capital of Olympia (roughly halfway between Seattle and Portland, Oregon) and east from the Pacific Ocean to the Cascade mountains, plus two adjacent counties just east of the Cascade Mountains. The 13 counties in this market west of the Cascades are Clallum, Grays Harbor, Island, Jefferson, King, Kitsap, Mason, Pierce, San Juan, Skagit, Snohomish, Thurston, and Whatcom, and the two counties east of the mountains are Chelan and Kittitas.
D. MARKET STRUCTURE
9. The Puget Sound market for portland cement is highly concentrated with only five suppliers -- Lafarge, Holnam, Ash Grove Cement Company, CBR Cement Corporation and Lone Star Northwest. The first four companies operate cement plants in or contiguous to the Puget Sound market. The fifth company, Lone Star Northwest, which is also a large user of cement, does not operate a cement plant in this area; instead, it imports cement into the market from Asia and South America and purchases cement from other suppliers in the market. Based on 1997 sales, the acquisition would increase the Herfindahl-Hirschman Index by 329 points from 2260 to 2589.
E. CONDITIONS OF ENTRY
10. Entry under any of the three methods that an entrant could use to enter the Puget Sound cement market -- building a cement plant, building a rail terminal or building a deep-sea importing terminal -- would not be timely, likely or sufficient to offset reductions in competition resulting from the acquisition.
11. The minimum viable scale of a cement plant likely precludes new entry. The prevailing cement production technology demands large-scale production, relative to market size, in order to operate efficiently. This technology has but a single use -- i.e., the production of cement. It cannot economically be shifted toward another use. Therefore, all returns on investment must be derived from cement sales. Because economic entry would require that a new producer capture a significant market share from existing producers, and because the costs of such entry would be sunk, such entry is inherently risky. Current overcapacity, as well as announced expansions by exiting producers, serve as additional deterrents to new entry.
12. De novo entry into the Puget Sound cement market by building a rail terminal is also very unlikely. Cement producers that are not currently in the Puget Sound market are at least 800 miles away. If these producers shipped cement to Puget Sound via rail, they would encounter a freight cost of approximately $20 per ton. This cost, which is not faced by the current suppliers, would put the new entrant at a severe cost disadvantage. Moreover, these producers are currently operating their cement production plants at full capacity and selling this production near their plants. For these reasons, the price of cement would need to rise substantially from existing levels before another producer would find building a rail terminal economically attractive.
13. In order to enter the Puget Sound market via a deep-sea terminal, the entrant needs a terminal that can receive deep-drafting ocean-going vessels. Currently, and for the foreseeable future (more than two years), the commercial ports in the Puget Sound area do not have such sites available. Thus, de novo entry via a deep-sea terminal is unlikely.
F. EFFECTS OF THE PROPOSED ACQUISITION
14. The effects of the acquisition, if consummated, may be to substantially lessen competition in the Puget Sound cement market. Absent the proposed acquisition, Holnam likely would significantly increase the supply of cement to the market resulting in a decrease in cement prices. As originally structured, the proposed acquisition contains a contractual provision that imposes a significant cost penalty on Lafarge for quantities of cement produced at the Holnam cement plant in excess of the amount Holnam currently supplies to the market. The proposed acquisition thus would give Lafarge the incentive to unilaterally restrict the output of cement at the Holnam plant in order to avoid the additional contractual cost. This would prevent any increase in supply of cement to the market and thus avoid a significant decrease in the price of cement in the Puget Sound market.
G. VIOLATIONS CHARGED
15. Lafarge's agreement to acquire Holnam's Seattle cement plant and related assets violates Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and the proposed acquisition would, if consummated, violate Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and Section 7 of the Clayton Act, as amended, 15 U.S.C.§ 18.
WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this twelfth day of February, 1999, issues its complaint against said respondents.
By the Commission.
Seal Donald S. Clark