Analysis of Proposed Consent Order to Aid Public Comment
The Federal Trade Commission ("Commission") has accepted, subject to final approval, an agreement containing a proposed Consent Order from The Associated Octel Company Limited ("Octel"), which is designed to resolve competitive concerns arising out of Octel's proposed acquisition of Oboadler Company Limited ("Oboadler"). Under the terms of the agreement, Octel will be required, among other things, to supply lead antiknock compounds to Oboadler's current U.S. distributor, Allchem Industries, Inc., for resale in the United States.
The proposed Consent Order has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the proposed Consent Order and the comments received, and will decide whether it should withdraw from the proposed Consent Order or make final the proposed Order.
Pursuant to a Share Purchase Agreement dated June 1, 1999, Octel has agreed to acquire 100 percent of the share capital of Oboadler for approximately $100 million. Oboadler controls three operating companies that, collectively, are engaged in the business of manufacturing and selling lead antiknock compounds: Alcor Chemie AG, Alcor Chemie Vertriebs AG, and Novoktan GmbH. The proposed Complaint alleges that the acquisition of Oboadler, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, in the world market for lead antiknock compounds.
Lead antiknock compounds are gasoline additives that contain tetraethyl lead. The product is used to increase the octane rating of gasoline, and thereby eliminate engine knock during the combustion cycle and improve fuel efficiency. Worldwide use of lead antiknocks has declined substantially since the early 1970's, and a continuing decline in demand is forecast. Driven by public health concerns, nations around the world are requiring refiners to adopt alternative methods of increasing the octane level of gasoline. Currently in the United States, lead antiknock compounds are added to aviation fuel for piston engine aircraft, and to certain motor gasoline for racing cars.
The proposed Complaint alleges that the world market for the manufacture and sale of lead antiknock compounds is highly concentrated. Octel and Oboadler are two of only three firms in the world that manufacture lead antiknock compounds. In the United States, lead antiknock compounds manufactured by Octel are distributed by two firms: Octel America Inc. (a subsidiary of Octel) and Ethyl Corporation ("Ethyl").(1) In the United States, lead antiknock compounds manufactured by Oboadler are distributed by Allchem Industries, Inc. ("Allchem").
The proposed Complaint further alleges that entry into the market would not be timely, likely and sufficient to deter or counteract the adverse competitive effects of the acquisition on competition. Entry is unlikely to occur because of the length of time and expense necessary to construct production facilities, environmental regulations, the ongoing decline in worldwide demand for lead antiknock compounds, and the cost of environmental remediation at the manufacturing site when, due to decline in demand, production is no longer commercially practicable.
According to the proposed Complaint, the effect of the proposed acquisition may be substantially to lessen competition by, among other things, eliminating direct actual competition between Octel and Oboadler in the relevant market, increasing the likelihood of coordinated interaction between the remaining competitors in the relevant market, and increasing the likelihood that consumers of lead antiknock compounds will be forced to pay higher prices.
The proposed Consent Order is designed to protect U.S. consumers of lead antiknock compounds from the exercise of market power resulting from Octel's proposed acquisition. The foundation for the Consent Order is a long-term supply agreement that Octel has entered into with Allchem, Oboadler's U.S. distributor.(2) The Supply Agreement provides that Octel shall provide Allchem with unlimited quantities of lead antiknock compounds for resale to customers in the United States. Further, Allchem shall have the sole right to determine the customers in the U.S. to whom the product will be resold, as well as the terms and conditions of such resale.
The proposed Consent Order requires Octel to supply product to Allchem for fifteen years in accordance with the terms and conditions of the Supply Agreement, and subject to the termination provision thereof.(3) (Paragraph II) In addition, Octel is prohibited from modifying
certain key terms of the Supply Agreement except with the prior approval of the Commission.(4) (Paragraph III)
The wholesale price to be charged to Allchem for lead antiknock compounds is the product of negotiations between Octel and Allchem. If the wholesale price is too high (relative to the price at which Allchem, absent the acquisition, could have obtained product from Oboadler), then prices to U.S. consumers may likewise be supra-competitive. The proposed remedy relies upon Allchem's incentive to negotiate the lowest possible price. The Supply Agreement negotiated by the parties, should it take effect, will afford Allchem a reduction in the wholesale price of lead antiknock compounds (relative to Allchem's existing agreement with Oboadler).
The purpose of this analysis is to facilitate public comment on the proposed Order, and it is not intended to constitute an official interpretation of the agreement and proposed Order or to modify their terms in any way.
1. See The Associated Octel Company Limited and Great Lakes Chemical Corporation, FTC Docket No. C-3815 (1998) (Commission order requiring, inter alia, that Octel supply Ethyl with whatever volumes of lead antiknock compounds Ethyl requires for resale to U.S. customers).
2. Agreement for the Supply of Tetra Ethyl Lead Additive dated July 19, 1999, as amended by the Supplemental Agreement for the Supply of Tetra Ethyl Lead Additive dated July 30, 1999 (hereinafter collectively referred to as the "Supply Agreement"). The Supply Agreement goes into effect when Octel acquires Oboadler.
3. At any time after year ten, Octel can terminate the Supply Agreement provided that Octel has ceased to manufacture lead antiknocks and has exited from the worldwide lead antiknocks business.
4. The purpose of this provision is to prevent Octel and Allchem from modifying the Supply Agreement in a manner that is beneficial to each of them but harmful to U.S. consumers. To take an extreme example, the Commission would likely disapprove a proposed modification in which Allchem received a cash payment in return for surrendering its right to purchase and resell lead antiknocks.