The European Commission has prohibited the proposed takeover of Cemex Croatia by HeidelbergCement and Schwenk under the EU Merger Regulation. The Commission had strong concerns that the takeover would have significantly reduced competition in grey cement markets and increased prices in Croatia.
Today's decision follows an in-depth investigation by the Commission of the proposed deal. Through the deal HeidelbergCement and Schwenk, two German cement companies, would acquire Cemex's assets in Croatia via their joint venture company Duna Dráva Cement (DDC).
Commissioner Margrethe Vestager, in charge of competition policy, said: "We had clear evidence that this takeover would have led to price increases in Croatia, which could have adversely affected the construction sector. HeidelbergCement and Schwenk failed to offer appropriate remedies to address these concerns. Therefore, the Commission has decided to prohibit the takeover to protect competitive markets for Croatian customers and businesses. We will continue enforcing competition rules equally across the European Union, no matter where companies are based. "
The Commission's investigation analysed competition between the parties in the Croatian cement markets. Like most construction materials, such as aggregates and ready-mix concrete, cement is sold within a relatively short distance from the site where it is manufactured. Because of high transport costs and security of supply issues, cement plants will not be competitive if they are located too far away from customers. In this specific case, the investigation found that each cement plant had a catchment area of about 250 kilometres around it.
Cemex Croatia is currently the largest cement producer in the country, operating three profitable and valuable plants in southern Croatia, near Split.
DDC and HeidelbergCement are the largest cement importers in Croatia. DDC imports grey cement into Croatia from its plants in Hungary and Bosnia-Herzegovina (the closest competing plant to Cemex's plants in Split). HeidelbergCement imports grey cement into Croatia from a plant in Italy.
The Commission investigated the overlaps in the Croatian cement markets between, on the one hand, Cemex Croatia and, on the other hand, HeidelbergCement and DDC.
The Commission's concerns
The Commission had serious concerns that the takeover would have reduced competition in the Croatian markets for grey cement currently served by Cemex's cement plants in Split. This would have led to higher prices for cement customers.
The takeover would have eliminated competition between companies that were competing head-to-head for the business of Croatian cement customers and could have led to a dominant position in the markets. The combined market shares of the parties would have been around 45-50% in the markets and reached more than 70% in parts of the country (notably in Dalmatia).
The Commission's investigation also found that DDC had been pursuing a strategy to increase sales in Croatia, resulting in more competitive prices for Croatian customers in recent years. The takeover would have eliminated this competition. Furthermore, the Commission found specific evidence forecasting appreciable cement price increases after the deal.
The Commission's assessment revealed that remaining domestic cement suppliers and importers would not have been able to compete effectively with the merged company after the takeover. This is because other suppliers have limited potential for sales expansion and are located further away, facing higher transport costs to reach customers in the relevant markets. Furthermore, there are no independent terminals available on the Croatian coast for seaborne imports.
Finally, the merged entity would have had the possibility to make market entry by competitors difficult and costly.
The parties' proposed remedies
Remedies proposed by merging companies must fully address the Commission's competition concerns on a lasting basis. In cases where there are competition concerns because merging companies compete on the same markets, remedies providing a structural solution, such as selling a business unit, are generally preferable to other types of remedies. This is because they immediately replace the weakened competition in the markets resulting from the merger. These types of structural solutions were offered by parties and accepted by the Commission in past cement mergers such as Holcim's acquisition of Lafarge and HeidelbergCement's acquisition of Italcementi.
However, in this case, the parties did not offer to divest an existing cement business. The proposed remedies concerned the granting of access to a cement terminal in Metković in southern Croatia. The terminal, a storage facility for cement located on the Neretva river, is currently leased by Cemex Croatia.
The Commission's investigation concluded that the proposed remedies would not have allowed a supplier to compete effectively and on a lasting basis with the merged company.
The Commission had concerns that the proposed remedies would have offered only an uncertain possibility for a competitor to build up a new cement business in southern Croatia rather than divest an existing viable business. This is because the remedies offered only access to a storage facility without existing customers, brands, sales staff or established access to cement.
The Commission found that the new competitor would have been limited in its ability to compete with HeidelbergCement, Schwenk and Cemex, which would have combined their entire production and sales activities for Croatia:
- Any company leasing the storage facility in Metković would have had higher costs to reach customers in the Croatian markets, making it less competitive than the parties. This is mainly due to the transport costs to ship cement from a more remote production plant to the terminal before delivering it to final customers.
- The proposed remedies would also have been insufficient in scale because the terminal's cement capacity was limited. Moreover, due to the terminal's location, it is likely that the terminal's capacity would also have been used to sell to customers outside the Croatian markets that the Commission was concerned about.
Therefore, the Commission concluded that the remedies offered would not have been able to prevent the likely price increases in grey cement in Croatia after the transaction.
As a result, the Commission has prohibited the proposed transaction. The Commission's decision will have no effect on the ability or incentives of HeidelbergCement, DDC and Cemex to continue operating their respective plants and to continue supplying the Croatian cement markets.
On 5 September 2016, HeidelbergCement and Schwenk notified to the Commission their joint acquisition of two target companies within the same transaction, Cemex Croatia and Cemex Hungary. Today's decision of the Commission covers the entire transaction.
Although the acquisition is implemented through DDC, HeidelbergCement and Schwenk were the drivers of the transaction and were significantly involved in the initiation, organisation and financing of the deal. Therefore their respective turnovers were taken into account in assessing the Commission's jurisdiction. HeidelbergCement and Schwenk are challenging the Commission's jurisdiction of this case at the General Court (cases T-902/16 HeidelbergCement v Commission and T-907/16 Schwenk v Commission).
Concerning Cemex Hungary, which was also part of the same transaction, the Commission referred the analysis of the deal's potential effects in Hungary to the Hungarian competition authority.
The Commission received no request for referral for any other part of the transaction, including Croatia.
Companies and products
HeidelbergCement and Schwenk are both construction material producers based in Germany. Together they jointly control Duna Dráva Cement (DDC), a Hungarian company. DDC, among other activities, operates grey cement plants in Beremend (Hungary) and in Kakanj (Bosnia-Herzegovina).
Cemex Croatia (Cemex Hrvatska dd) is a subsidiary of the Cemex Group, also a global construction material supplier. Cemex Croatia sells grey cement, ready-mix concrete, clinker and aggregates, in Croatia and the Western Balkans but also supplies cement to Italy, Slovenia, Malta and other export markets. Cemex Croatia operates three cement plants in Split and several cement terminals and ready-mix concrete plants in Croatia.
Cemex Hungary (Cemex Hungária Építőanyagok Kft) mainly produces and sells ready-mix concrete in Hungary.
Merger control rules and procedure
The Commission has the duty to assess mergers and acquisitions involving companies with a turnover above certain thresholds (see Article 1 of the Merger Regulation) and to prevent concentrations that would significantly impede effective competition in the EEA or any substantial part of it.
The vast majority of notified mergers do not pose competition problems and are cleared after a routine review. From the moment a transaction is notified, the Commission generally has a total of 25 working days to decide whether to grant approval (Phase I) or to start an in-depth investigation (Phase II).