Mixed signals? Dissecting FTC’s decision to clear Energizer-Spectrum deal
By Kirk Victor. Originally published on FTCWatch™ on April 24, 2018
Recent news that the Federal Trade Commission didn't issue a second request in Energizer’s acquisition of Spectrum Holdings surprised some longtime antitrust practitioners.
Their surprise stemmed from the FTC’s decision not to seek more detailed information about a $2 billion deal that leaves two consumer battery brands with a dominant share of the market.
In reaction to this and other recent transactions, some of those experienced lawyers see mixed signals from the FTC and the Justice Department’s antitrust division, making it more difficult for them to gauge when a proposed merger will trigger a challenge.
“There are a lot of mixed signals,” said a seasoned lawyer, who, like other critics, declined to speak for attribution to avoid provoking ill will at the FTC or the DOJ. “There are a lot of weird outcomes. Things are getting generally unpredictable.”
“My headline to clients is it is not nearly as predictable in this administration as I thought it would be,” this lawyer added. “I had a deal back in January — it was a [decrease in competitors from] three to two, and we thought we could explain it. We didn’t think they would ultimately challenge it, but we thought for sure it would get a pretty heavy look. The phone never rang.”
As for the Energizer-Spectrum deal, one lawyer familiar with it also was surprised at the speed with which the agency acted. The deal was announced on Jan. 16 and cleared on March 29.
In assessing the impact of the transaction, SunTrust analyst William Chappell told Reuters that once it is consummated, Energizer will control more than 40 percent of the US battery market and more than 85 percent of the total market. Duracell controls a similar portion of the US market or a bit more, with private label and online alternatives covering the remainder.
By acquiring Spectrum, which is known for its Rayovac and Varta brands, Energizer also will become the largest supplier of hearing aid batteries, with a world market share topping 60 percent.
“We believe having the category controlled by two rational players as a ‘functional duopoly’ should yield pricing and margin benefits for both companies for years to come,” Chappell told Reuters.
Those results seem good for the firms, but what about the impact on consumers?
So, given that the deal will leave two dominant market players in the US, it is not surprising that some concluded that the transaction appears, on its face, to scream out for a second request. Chappell, according to a Bloomberg report, had written that Energizer expected a second request and even anticipated the process to "drag out" into the summer.
“We were pleasantly surprised,” Matthew Reilly of Kirkland & Ellis, the lead antitrust counsel for Spectrum, noted in an interview when asked about the FTC’s decision not to seek a second request.
“You are prepared for a long investigation, and I give a lot of credit to the FTC for working very hard … talking to a lot of industry participants and engaging with us on a constant basis to get to the right outcome,” Reilly said.
He praised the commission for not simply reacting reflexively to challenge the deal.
“Former Commissioner [Joshua] Wright has always said we shouldn’t be doing merger analysis by counting fingers,” Reilly noted. “Everyone says that market share is just a starting point, but it is really refreshing and heartening when the agency takes that to heart and really asks the key question rather than having a visceral, gut reaction.”
That question, he said, is whether there is “meaningful competition here that benefits consumers that will be lost. We thought the answer is clearly no, and they got there, too, in a very efficient way.”
“We know for a fact that the FTC checked in with customers from all different segments, and customers were quite supportive of this deal,” Reilly added. “Competition between Rayovac and Energizer was not significant enough that it was benefiting consumers. There are some very strong synergies and efficiencies from this deal as well.”
Still, the contrast is striking between the FTC’s decision not to even issue a second request in the Energizer-Spectrum deal and its outright challenge, last month, to Crisco owner J.M. Smucker’s $285 million deal to acquire Conagra Brands’ Wesson cooking oil brand.
In that case, the commission argued that the transaction would lessen competition by giving Smucker’s 70 percent of the market for branded canola and vegetable oils sold to grocery stores and other retailers.
Advocates for that deal, just as those in the Energizer-Spectrum transaction, argued that private label brands provided significant competition. In the Conagra deal, they pointed out that private label offerings account for about 50 percent of all cooking oil sales and have an even higher market share at some retailers.
But facing the FTC challenge, the companies pulled the plug, deciding it wasn’t in their best interests to expend significant time and resources in litigation.
In that case, however, the companies had another reason to end the deal: damning internal documents.
“Smucker’s own internal documents acknowledge that eliminating price competition between Crisco and Wesson is a central part of its rationale for the acquisition,” the FTC said in the press release announcing the lawsuit. “The transaction would give Smucker the ability to raise prices to retailers, ultimately leading to higher prices for U.S. consumers.”
“I can’t speak to the Conagra matter, but what I can say is that the facts and evidence in the Energizer-Spectrum transaction demonstrated that the parties were not close competitors and that there was ample competition post-transaction,” Norman Armstrong Jr. of King & Spalding, Energizer’s lead antitrust counsel, said in an interview. “So I don’t think the staff is sending mixed signals.”
“In retail transactions, parties often argue that private label is a significant constraint on pricing but rarely are able to provide compelling evidence to back up that argument,” Armstrong added. “Here, however, the parties were able to demonstrate that private label competition is significant through econometric analysis, documentary evidence and customer testimony.”
Maybe so, but some attorneys are still scratching their heads over when the agencies will pull the trigger and challenge a deal.
“You don’t want to rack up huge bills preparing for something that never happens,” said the attorney who has had several surprises in the past year. “Clients really don’t like that.”
Others are more sanguine. “It is the job of the agencies to make the best decision they can based on the facts before them,” said Jonathan Grossman of Cozen O’Connor. “Look at Target, Walmart, Walgreens, Rite Aid, Albertsons, CVS, Safeway and Kroger — you see that each is big enough to make their own house battery. What role does Rayovac play? The FTC probably concluded that it was not very competitively significant.”
“Every case rests on its own facts,” he concluded.