Addressing Competitive Concerns in Core Markets, FTC Approves Bayer AG'S Acquisition of Aventis CropScience Holdings S.A.

The Federal Trade Commission today announced a proposed consent order with Bayer AG (Bayer) and Aventis S.A. (Aventis) that will allow Bayer's proposed purchase of Aventis's subsidiary Aventis CropScience Holdings S.A. (ACS) while remedying the potential anticompetitive impacts of the transaction in: 1) markets for new generation chemical insecticide products, including insecticides for use as non-repellant termiticides, flea control for companion animals, and for use on an array of crop applications such as corn, cotton, citrus, cole crops, grapes, vegetables, for turf and ornamental uses, and as protection for seeds and seedlings; 2) markets for the research, development, manufacture, and sale of new generation chemical insecticide active ingredients and related technologies for various insecticide and animal health products; 3) post-emergent grass herbicides for spring wheat; and 4) cool weather cotton defoliants. Under the terms of the order, Bayer will be required to divest businesses and assets in each of the four product markets.

The FTC has also issued an Order to Hold Separate and Maintain Assets that requires Bayer and ACS to maintain all assets to be divested (that do not have an up-front buyer) pending their sale to a Commission-approved buyer. The FTC's conditional approval of the $6.2 billion acquisition follows the European Commission's approval of the transaction, which was announced on April 17, 2002.

"In addition to preserving the competition currently existing in each of these major product markets, the Commission's order is particularly important because of its forward-looking aspect," said Joseph Simons, Director of the FTC's Bureau of Competition. "These new

generation product markets are on the forefront of pesticides, insecticides, and herbicides that will be significant in the future due to their improved effectiveness and reduced environmental impacts. With increasing frequency, consumers will use them to preserve the quality of the agricultural products grown and sold in the United States."

Bayer is a German corporation with its world headquarters in Leverkusen, Germany, and its U.S. headquarters in Kansas City, Missouri. A diversified international research and manufacturing firm focused primarily in the health care, agriculture, polymer, and specialty chemical markets, Bayer employs more than 122,000 people worldwide and had sales of 30 billion ($27.6 billion) in 2001. The firm is comprised of approximately 350 separate companies, with most operations taking place in Europe, North America, and Asia. The main focus of the company's agricultural divisions are crop protection, animal health products, and environmental sciences.

ACS, headquartered in Lyon, France, was formed in 1999 through the merger of ArgEvo (a combination of Hoechst AG and Schering AG) and the agriculture division of Rhone-Poulenc. A joint venture among its sole shareholders, Aventis S.A. (48 percent), Hoechst (28 percent), and Schering (24 percent), ACS's parent firm is Aventis S.A. ACS divides its operations into four businesses: 1) crop protection; 2) environmental science; 3) bioscience and field seeds; and 4) nunza (vegetable seeds). Of the four businesses, crop protection provides the vast majority of the firm's sales and profits, and ACS focuses most of its attention on research, marketing, and manufacturing in this area. ACS employs 14,400 people worldwide in more than 120 countries, and had sales of more than 4 billion ($3.7 billion) in 2001.

According to the Commission's complaint, Bayer's acquisition of ACS, as proposed, would violate Section 5 of the FTC Act and Section 7 of the Clayton Act by illegally reducing competition in the U.S. markets for: 1) new generation chemical insecticide products; 2) new generation chemical insecticide active ingredients; 3) post-emergent grass herbicides for spring wheat; and 4) cool weather cotton defoliants. The FTC's competitive concerns in each of these markets is described below.

New Generation Chemical Insecticide Active Ingredients and Products. These insecticide products include, but are not limited to: 1) crop-specific end uses such as corn, cotton, citrus, cole (cabbage) crops, grapes, vegetables, and seed treatments; 2) flea control products for companion animals sold through veterinarians; and 3) non-repellant liquid termiticides. The new generation products are designed to kill undesirable insects, but are less harmful to human health and the environment than earlier products. These products are based on new generation active ingredients, of which the most important are Bayer's imidacloprid, ACS's acetamiprid and fipronil, and Syngenta's thiamethoxam.

The Commission's complaint contends that the importance of such new generation active ingredients and products is increasing, as the Environmental Protection Agency (EPA) removes older insecticides from the market because of their effects on human health and the environment. Therefore, new generation insecticide products are displacing older insecticide products in the marketplace.

Further, Bayer and Aventis are two of the only three firms currently competing significantly in the market for such products, with only one other company, Syngenta, producing these insecticides. The complaint states that Bayer and Aventis are the only firms that have developed and successfully sold such products for veterinarian use in controlling fleas, and for non-repellent liquid termite control. Therefore, according to the complaint, the transaction as proposed would result in the elimination of both actual and potential competition in these markets, increased barriers to entry, reduced innovation competition for certain products, an increased possibility of coordinated interaction between competitors, and a substantial increase in market concentration.

Post-Emergent Grass Herbicides for Spring Wheat. These herbicides are designed to kill or control grasses that interfere with crop production. According to the complaint, Aventis is the largest supplier of such herbicides, with almost 70 percent of U.S. sales in 2001. Aventis's leading post-emergent herbicide for spring wheat is Puma, which contains the active ingredient fenoxaprop. In 2001, the complaint states, Bayer introduced Everest, a similar herbicide which contains the active ingredient flucarbazone and accounted for seven percent of all U.S. sales in 2001. According to the FTC, the transaction as proposed would eliminate competition in the market for these herbicides, increase the companies' ability to unilaterally increase prices, and increase the likelihood and degree of coordinated interaction among competitors.

Cool Weather Cotton Defoliants. These defoliants are chemical harvest aids designed to remove leaves from cotton plants without drying them out. Such cool weather products are needed for the economical harvesting of premium grade cotton, the relevant product market in which the Commission analyzed the effects of the proposed transaction. The FTC's complaint contends that Bayer and Aventis are the only two suppliers of cool weather cotton defoliants, and that both offer products containing the active ingredient in such defoliants, with Bayer producing DEF and Aventis producing Folex. Accordingly, the complaint alleges that Bayer's proposed acquisition of ACS would eliminate direct competition between the companies in the market for such cool weather cotton defoliants in the United States, substantially increasing the level of concentration, increasing the likelihood that the companies will unilaterally exercise market power and increase barriers to entry. The complaint also alleges that in the post-transaction environment, U.S. consumers of such defoliants would be forced to pay higher prices.

In each market described above, the FTC contends that there are significant barriers to entry, such as the need for significant research, development, testing, registration, and commercial-scale production ability, that would prevent such entry from alleviating the allegedly anticompetitive impacts of the transaction as proposed.

The proposed consent order is designed to remedy the anticompetitive impacts of the proposed transaction as identified by the Commission. This will be accomplished by the required divestiture of businesses in the relevant product markets. In the markets for new generation chemical insecticide active ingredients and products, acetamiprid and fipronil must be divested; in the market for post-emergent grass herbicides for spring wheat, flucarbazone must be divested; and in the market for cool weather cotton defoliants, Folex must be divested.

The acetamiprid, fipronil, and flucarbazone businesses must be divested to Commission-approved buyers within 180 days of the date the order is accepted for public comment. If the divestitures have not occurred by this time, the proposed order would allow the FTC to appoint a trustee to oversee the sale of the assets to be divested to approved buyers. The Commission has already approved Amvac as a buyer of the Folex assets. Specific details of the order with regard to each product market are provided below.

Acetamiprid. The proposed order would require Bayer to divest ACS's acetamiprid business, including all of ACS's intellectual property relating primarily to the acetamiprid business, all pending and issued governmental authorizations, inventories, contracts, and other tangible and intangible assets relating to the business. While the proposed order requires Bayer to divest ACS's worldwide assets related to the acetamiprid business, the company's businesses in Mexico, South America, Central America, and Africa would be excluded if Nippon Soda, which licenses acetamiprid to ACS, does not consent to the assignment of the agreements relating exclusively to these regions. In addition, the proposed order would not prevent Bayer from obtaining the exclusive rights to develop, make, sell, or import any new insecticide products that are in the same chemical family as acetamiprid. This will ensure competition between Bayer and the acquiring company in the manufacture, sale, and importation of these products. Finally, the order also would allow the FTC to require Bayer to divest the assets related to Bayer's thiacloprid business, a new chemical insecticide active ingredient that Bayer plans to introduce, at no minimum price if Bayer fails to divest acetamiprid. The order also contains language concerning FTC approval of any thiacloprid supply agreement, licenses, and divestitures.

Fipronil. The proposed order details each of the fipronil assets to be divested, including intellectual property and ACS's production facility in Elbeuf, France, and the products ACS makes with fipronil, including its Termidor® termite product. It would also allow Bayer to license back any intellectual property included in the fipronil assets for non-agricultural use to increase competition in these markets by enabling Bayer and the fipronil acquirer to bring fipronil products to the market. In addition, the order would allow Bayer to enter into a supply agreement with the acquirer of these assets for two years (with the possibility for extension), which would allow the acquirer to supply intermediate products to Bayer until the patents on these products expire, so that Bayer may use these intermediates to develop its own competing non-agricultural products.

Flucarbazone. The proposed flucarbazone assets to be divested would include all intellectual property relating primarily to the flucarbazone business, all pending and issued governmental authorizations, inventories, contracts, and other tangible and intangible assets relating to the business. The divestiture would exclude the manufacturing facility in Kansas City where flucarbazone is manufactured, as this facility is also used to make Bayer herbicides that are not sold in the spring wheat herbicide market. If Bayer divests the Everest (flucarbazone) assets to an FTC-approved buyer in the time required, the order would allow it to retain all intellectual property rights to its Olympus (propoxycarbazone) business. In such a case, the order would allow both Bayer and the approved buyer to invent, patent, and develop compounds in the flucarbazone and propoxycarbazone businesses. However, if Bayer does not divest the Everest assets within 180 days, the order would require Bayer to divest both the Olympus and Kansas City plants to an approved buyer who would not be allowed to license the businesses back to Bayer. Finally, the order would allow Bayer to supply the approved buyer of the Everest assets with flucarbazone products for 30 months, as the buyer is unlikely to have its own capability to manufacture such products in time for the 2003 spring wheat crop.

Folex (tribufos). Through the proposed order, Bayer would be required to divest ACS's Folex business to Amvac Corporation (Amvac), which has been pre-approved by the FTC for the purchase of ACS's Folex (tribufos) cool weather cotton defoliant business. Bayer would be required to divest ACS's Folex business to Amvac within 20 days of the date the FTC accepts the proposed order for public comment. However, if, at the time the order becomes final, the Commission notifies Bayer that it does not approve the proposed divestiture to Amvac, or of the manner of the divestiture, Bayer would be required to terminate or rescind the sale within 180 days at no minimum price and divest the Folex assets to a new pre-approved buyer.

Other Proposed Terms. In addition to the Order to Hold Separate and Maintain Assets, the proposed order would allow the Commission to appoint Richard Gilmore as a monitor trustee to oversee Bayer's compliance with the terms of the proposed order. It also contains reporting and monitoring provisions designed to ensure Bayer and ACS's compliance. In addition, Bayer must provide the Commission with advance notice before acquiring any interest in, or entering into a joint venture with Merial, a joint venture between Aventis S.A. and Merck (unless such notification is already required under the Clayton Act). The goal of this provision is to allow the Commission to investigate, if necessary, whether such a partnership between Bayer and Merial regarding certain animal health insecticides (such as flea and tick products) would provide the benefits of joint development, without negatively impacting downstream competition in this market. Finally, the order contains various requirements regarding the provision of technical assistance to the asset acquirers, as well as the transfer of key personnel between the companies.

The Commission vote to accept the proposed consent order and place a copy on the public record was 5-0. The order will be subject to public comment for 30 days, until July 1, 2002, after which the Commission will decide whether to make it final. Comments should be sent to: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580. At the time the Commission accepted the proposed consent order, Commissioner Mozelle W. Thompson issued a separate statement. He stated that he joined the Commission's vote to accept for public comment the proposed consent agreement and order because he believes the Commission's concerns are adequately addressed. He further stated that divestiture provisions that do not identify buyers up front will be closely scrutinized and in situations "where there are questions about asset sufficiency or buyer qualifications, or where the Commission determines that there are risks to the proposed divestiture, I believe that presentation of an up front buyer will be required."

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent order, an analysis to aid public comment, and Commission Thompson's statement are available on the FTC's Web site at www.ftc.gov. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. 011-0199)