Taking market share too seriously
The European competition authorities have clamped down on SCA's proposed takeover of Metsä Tissue, but was it really such a bad decision?
by Rhiannon James
Under normal circumstances, a comment about "taking market share too seriously" in PPI would probably refer to a pulp or papermaker that was bent on trying to expand its slice of a particular market, possibly with an associated impact on price levels. But this time around, it is the European Commission (EC) competition authorities that appear to have become obsessed with size and seem to be taking the issue of market share too seriously.
As most market followers will know, SCA of Sweden tried to continue its ongoing tissue crusade last year by taking over Finland's Metsä Tissue from Metsä-Serla. And, as most followers of the tissue market will also know, SCA appeared to have finally met its match in this particular takeover battle as the opponent came in the form of the EC's competition gurus.
The EC recently decided to block SCA's latest expansion crusade on the basis that the new company would have "created or strengthened dominant market positions in a total of 26 hygienic tissue products in Sweden, Norway, Denmark and Finland". According to the authorities, the merger would have resulted in market shares of up to 90% in some countries and high market shares in the Nordic region as a whole.
In its official statement on the matter, the EC was at pains to point out that it had in fact cleared other Nordic deals recently and had given SCA and Metsä Tissue ample opportunity to make further concessions to push the merger through. On top of that, the authorities also stressed that it was only the 14th time that it has turned down a merger since 1990. Judging by the fact that the EC has investigated over 1,500 cases, the SCA/Metsä Tissue linkup must have really thrown the competition authorities into a panic.
So, were the papermakers at fault for being stubborn or did the EC rule too harshly in this case? According to SCA, the competition authorities made the mistake of analyzing each country as an individual market, rather than looking at the European picture as a whole. Commenting on the decision, SCA’s executive vice president, Michael Bertorp, said, "It is unfortunate that the commission are taking this narrow view of assessing each European market as an individual sector rather than viewing Europe as a single market."
The analysts were rather less forgiving, accusing the EC of slowing down the much needed consolidation process in the European paper industry with its decision.
On the face of it, this does seem to be a rather strange standpoint for the EC to take. As the supposed nerve center of pro-European thoughts, this institution is the last one that would be expected to take a nationalist viewpoint. Of course, the EC would argue that it is protecting the rights of consumers in each of the countries that it oversees, but what about safeguarding the future of pan-European business interests? For the paper industry in particular, the danger is that decisions such as these will ultimately jeopardize the industry's consolidation moves on a regional scale.
Silver lining
Ironically, the EC decision has prompted SCA to expand on a global basis, rather than sticking to familiar territory within the European Union. Instead of channeling its investment war chest into Europe, SCA went off and spent a fair chunk of it in the US. The Swedish company had planned to pay Euro 295 million ($272 millon) for 65% of Metsä Tissue. But as the deal looked increasingly unlikely to materialize, SCA ended up spending $850 million buying assets from Georgia-Pacific (G-P) and in turn capturing a sizeable 17% share of the US away-from-home (AFH) tissue market.
It is also perhaps ironic that these mills came on sale as a result of an anti-trust ruling in the US on the Fort James/G-P merger. Under the deal, the US authorities made it clear that G-P would have to sell its commercial tissue business before linking up with its rival Fort James. Unlike SCA, G-P thought that the authorities' demands were reasonable and got on with its divestments in order to push the deal through.
In SCA's case, it could be argued that the company would have snapped up G-P's tissue leftovers even if the Metsä Tissue deal had been approved. SCA had showed an interest in the US assets long before the EC ruling. In any case, SCA cleverly managed to deflect the blow of the EC's unfavorable decision by snapping up G-P's tissue assets just before the decision was announced. As a result, investors and industry watchers received the good news about SCA's first real foray into the US instead of focusing on the failed Metsä Tissue deal.
With this deal in the bag, SCA has joined the ranks of the world's tissue giants, realizing an acquisition of a major portfolio of assets in the US. Added to that, it is unlikely that the EC ruling will stop SCA on its expansion trail. Judging by the company's startling growth rate over the past few years, it would take a strong force to stop SCA in its tracks.
In SCA's case, the EC ruling does not appear to have been too much of a setback for the company, but the implications for the paper industry as a whole could be more important. On a negative note, decisions such as these could stop companies from consolidating their operations on a European basis for fear of getting tangled up in EC paperwork and eventually facing a rejection. But looking at it more positively, the ruling may not present such a massive brake on the expansion potential of European groups. Instead, it could merely encourage companies to look elsewhere in terms of expansion, following in the footsteps of SCA, UPM-Kymmene and Stora Enso in buying up North American assets.
For SCA at least, the company managed to find a silver lining in this competition ruling. But for other European pulp and paper groups, it could mean that they will just have to work harder and focus on other deals, which for many will mean working out how to bring down the price tag of potential acquisition targets across the Atlantic.
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