FTC Alleges Gencorps Proposed Purchase of the Propulsion Business of Sequas Atlantic Research Corporation Would Violate Clayton Act

The Federal Trade Commission will allow GenCorp Inc. (GenCorp) to proceed with its $133 million acquisition of Atlantic Research Corporation (ARC), it announced today, provided GenCorp divests ARC’s in-space liquid propulsion business within six months of completing the deal. To protect competition while the divestiture is pending, the FTC will enforce an Order to Hold Separate and Maintain Assets (Hold Separate Order) to ensure that no competitively sensitive information is transferred between GenCorp and the ARC in-space liquid propulsion business and to ensure that GenCorp maintains that business as a competitively viable entity.

“The remedy achieved by the Commission in this matter fully addresses the competitive concerns raised by the proposed transaction, and while allowing the parties to complete their transaction, preserves competition that would otherwise have been lost in several in-space liquid propulsion markets,” said Susan Creighton, Director of the FTC’s Bureau of Competition.

Parties to the Proposed Transaction

GenCorp is a technology-based manufacturing company headquartered in Rancho Cordova, California. Its businesses are concentrated in three areas: aerospace and defense, fine chemicals, and automotive. Through its Aerojet-General Corporation (Aerojet) subsidiary, GenCorp researches, develops, manufactures, and sells propulsion products and systems for space and defense applications, as well as armament systems for precision tactical weapon systems. Aerojet produces a full range of in-space propulsion thrusters at its facility in Redmond, Washington.

Sequa, the parent company of ARC, is a diversified industrial company that produces a broad range of products through operating units in five business segments: aerospace, propulsion, metal coating, specialty chemicals, and other products. The propulsion segment of Sequa’s business consists of the ARC business. Headquartered in Gainesville, Virginia, ARC is a leading supplier of liquid and solid fuel propulsion products and systems for military, commercial, and civil applications. ARC produces a full range of in-space liquid propulsion thrusters at its liquid propulsion facilities in Niagara, New York, and Westcott in the United Kingdom.

On May 2, 2003, Aerojet, a subsidiary of GenCorp, entered into an asset-purchase agreement with ARC to acquire substantially all of ARC’s assets, as well as the shares of ARC UK, for $133 million in cash.

The Commission’s Complaint

According to the FTC’s complaint, GenCorp’s acquisition of ARC, if consummated, would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by lessening competition in the U.S. markets for the research, development, manufacture and sale of four different types of in-space propulsion thrusters: 1) monopropellant thrusters, 2) bipropellant apogee thrusters, 3) dual mode apogee thrusters, and 4) bipropellant attitude control thrusters.

Detailed descriptions of each of these products and their U.S. markets are contained in the Analysis to Aid Public Comment that accompanies the proposed consent order in this matter. It is available on the FTC’s Web site as a link to this press release. In general, however, each of the products is an in-space propulsion thruster – essentially an engine – that is used to maneuver spacecraft, such as satellites and interplanetary research spacecraft, through space after a launch vehicle has delivered them to the upper atmosphere. In-space propulsion thrusters are essential components of in-space propulsion systems, which include valves, fuel tanks, fuel lines, and other parts necessary to generate the thrust needed to move a spacecraft in space.

For all four types of thrusters mentioned above, the FTC alleges that the U.S. market is highly concentrated. Aerojet and ARC are the only viable suppliers of monopropellant, bipropellant apogee, and dual mode apogee thrusters to commercial, civil, and defense customers in the U.S. for most spacecraft programs. They also are the closest competitors for the research and development, manufacture, and sale of monopropellant, bipropellant apogee, and dual mode apogee thrusters, and the FTC contends the proposed acquisition would eliminate direct competition between the companies in each of these markets, to the detriment of customers.

According to the complaint, with regard to bipropellant attitude control thrusters, ARC is the only firm with recent sales to U.S. customers, and, for many customers, essentially has a monopoly position within the market. While Aerojet does not currently produce bipropellant attitude control thrusters, it has substantial expertise and technology in this area, has produced these thrusters in the past, and is a likely potential entrant into this market. The FTC contends Aerojet’s acquisition of ARC’s in-space liquid propulsion business, therefore, would eliminate

the most likely potential entrant into the bipropellant attitude control thruster market, and would leave many customers with only one viable supplier for the foreseeable future.

Finally, the FTC contends that there are significant barriers to new entry into each of the relevant product markets; any such entry would be difficult and expensive to undertake; and any new entrant would need far in excess of two years before it could achieve a significant market impact. In addition, new entry into any of the relevant markets (other than Aerojet’s potential entry into the bipropellant attitude control thruster market) is unlikely to occur due to the significant costs and limited sales opportunities associated with the production of in-space liquid propulsion thrusters.

The Proposed Consent Order

The proposed consent order effectively remedies the alleged anticompetitive effects of the proposed transaction. Under its terms, GenCorp is required to divest ARC’s in-space liquid propulsion business, as this term is defined in the order. This business consists of – among other things – ARC’s Niagara and Westcott production facilities; specialized manufacturing and testing equipment; technical drawings; advertising and training materials; customer lists; intellectual property; and other assets at the production facilities used in the research, development, manufacturing, testing, marketing, customer support, and sale of ARC’s in-space liquid propulsion business.

The proposed order requires GenCorp to divest these assets to a Commission-approved buyer, at no minimum price, within six months of the date of the acquisition. If GenCorp has not successfully divested the required assets in this time, the FTC may appoint a divestiture trustee to oversee their sale to a Commission-approved buyer. The divestiture trustee will then have six months to accomplish the divestiture, with this time period subject to extension by the Commission. During this time, GenCorp would be required to provide the divestiture trustee with any information needed to accomplish the sale of ARC’s in-space liquid propulsion business.

The proposed order also contains a Hold Separate Order that requires GenCorp to hold separate and maintain the competitive viability of the ARC in-space liquid propulsion assets pending their divestiture. It also contains measures designed to ensure that no confidential information is exchanged between GenCorp and ARC’s in-space liquid propulsion business, as well as provisions designed to prevent interim harm to competition in the relevant markets while the divestiture is pending. The Hold Separate Order provides for the Commission’s appointment of a Hold Separate Trustee who will monitor GenCorp’s compliance with its terms prior to the divestiture.

The Commission vote to accept the proposed consent order and place a copy on the public record, to issue the complaint and Hold Separate Order, to approve a Hold Separate Trustee Agreement, and to appoint a Hold Separate Trustee was 5-0. The proposed consent order will be subject to public comment for 30 days, until November 13, 2003, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

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, Hold Separate Order, and an analysis to aid public comment are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. 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, DC 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.