BASF AG and Takeda Chemical Industries Ltd: A report on the acquisition by BASF AG of certain assets of Takeda Chemical Industries Ltd

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On 4 January 2001 BASF AG (BASF) completed the acquisition of the bulk vitamins business of Takeda Chemical Industries Ltd (TCI), referred to in this report as Takeda. The acquisition had been referred to the Competition Commission (CC) by the Secretary of State for Trade and Industry on 15 December 2000. Our terms of reference are set out in Appendix 1.1.

Prior to the merger, BASF and Takeda appeared to overlap in the UK primarily in the supply of vitamins C and B2. These vitamins are mainly used as nutritional additives to animal feed, human food and drink, for vitamin C's antioxidant properties, and in pharmaceutical uses, where they are made into supplements.

Although the geographic market for the supply of vitamins is global, demand charac-teristics can vary between countries. In the UK this is most pronounced in animal-feed-grade vitamin B2, with almost all demand being for 80 per cent pure product which, prior to the merger, BASF and others produced but Takeda did not. Takeda sold a small amount of its 96 per cent pure product in the UK, for specialist end-uses, but few, if any, customers have in the last few years been prepared to substitute it for BASF's 80 per cent pure product.

The merger raises a number of issues in respect of the supply of vitamins C and B2 in the UK. In particular, the removal of Takeda as an independent supplier raises the prospect that the relevant markets would become less competitive and that BASF, either alone or in conjunc-tion with Roche Holding Limited (Roche), previously known as Hoffmann La Roche, the largest producer of vitamins in the world, would be able to raise vitamin prices.

As a result of the merger, the global market shares of the enlarged BASF would be 20 per cent for standard vitamin C (an increment of 16 percentage points), 38 per cent for direct compression grade vitamin C (no increment), 30 per cent for vitamin B2 food/pharmaceutical (food/pharma) grade (an increment of 21 percentage points), and 33 per cent for vitamin B2 feed grade (an increment of three percentage points). BASF would be the second largest supplier of vitamins C and B2, behind Roche. In addition to Roche, BASF would continue to face compe-tition from a number of suppliers, including Chinese producers. Also relevant is the fact that a proportion of Chinese capacity is currently unused, including mothballed plants, especially for vitamin C.

The vitamins industry has a long history of collusion and cartelization. Most recently, in 1999 the US Department of Justice secured fines from, among others, BASF, Roche and TCI for their roles in the global cartels which controlled the worldwide vitamins market for almost a decade. Several executives from BASF and Roche were imprisoned. A number of civil lawsuits are pending in the USA, Canada and Australia.

In 1999, BASF and TCI were fined for violation of Canadian antitrust legislation, and in 2001 the Australian courts imposed fines on certain producers of vitamins for cartel activity. Investigations against local subsidiaries of BASF are being carried out in Japan, Mexico and Brazil.

On 11 July 2000 the European Commission issued a press notice confirming that it had sent statements of objections to 13 producers of bulk vitamins with regard to a suspected price-fixing cartel, including Roche and BASF.

Whereas in the early 1990s vitamin prices were kept artificially high through the cartels, a combination of the break up of the cartels and increased competition, primarily from Chinese producers, has led to significant price reductions over the past five years.

Competition between suppliers of vitamins is primarily on price and we have no reason to believe that this is likely to change in the foreseeable future.

We are satisfied that there is overcapacity in the production of vitamin C, and that producers are switching to new and more efficient technologies. We accept that demand will continue to increase but, nevertheless, think it likely that production capacity will exceed demand for the foreseeable future.

Given the low prices that prevail in the markets for vitamins C and B2, both food/
pharma and feed grades, we would expect them to be unattractive to new entrants. Yet, in the case of vitamin C, we are aware that both Archer-Daniels-Midland Company and Eastman Chemical Company intend to enter the market. We are aware of no new entrants into the vita-min B2 markets.

Clearly conditions in the industry have been favourable for cartel formation in the past. Insofar as the factors that favour a cartel still exist, they appear to do so independently of the merger and are not affected by it. The merger removes one producer and supplier of vita-mins from the industry. However, it is the degree of competitive pressure in the market which determines whether firms are able to form or to enforce a cartel, not simply the number of companies involved in the industry. We expect that there would be a considerable degree of competitive pressure after the merger, particularly because of the presence of Chinese pro-ducers. We also believe that, while it is possible for tacit collusion to exist, any such situation would exist independently of, and would not be affected by, the merger.

A UK subsidiary of BASF, Frank Wright Limited, produces animal feed premixes, which include vitamins. We therefore considered whether the merger might have an impact on the supply of vitamins to other premixers supplying the UK market.

We were told by independent premixers that no unreasonable conditions were placed on purchases of vitamins.

We are satisfied that neither Takeda's 96 per cent pure nor its 90 per cent pure vita-min B2 feed-grade product competed directly with BASF's 80 per cent pure vitamin B2 in the UK. Takeda's products could have an effect on vitamin B2 feed prices in the UK because they competed with 80 per cent pure products in other markets, and because the geographic market for the supply of vitamins is global. However, we do not consider that the merger would impact adversely on the supply of vitamin B2 to customers in the animal premix market or other mar-kets for three reasons: (a) there are alternative sources of vitamin B2 feed-grade product to BASF post-merger; (b) we expect that there will be excess production capacity; and (c) global demand for 96 per cent and 90 per cent pure products is declining.

We received some assertions, denied by BASF, of anti-competitive behaviour in the supply of vitamins and other products to independent premixers. Because they relate to behav-iour alleged to have occurred independently of the merger, they are not relevant to our assess-ment of it.

Accordingly, we conclude that the acquisition by BASF of the bulk vitamins business of TCI may be expected not to operate against the public interest.

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