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March 26th, 2010
Univar/Quaron dilemma: Oligopoly or Duopoly?
Univar/Quaron dilemma: Oligopoly or Duopoly? DistriConsult analysis 26.03.10
On February 10th, the good news came over the ticker that Univar had reached agreement with private equity house Bencis and management to acquire Dutch owned Quaron. The market started immediately buzzing with questions like “Are acquisitions coming back? Are bankers again supporting M&A? Will distributor markets be further consolidated?
Univar, to our knowledge, has made no sizeable acquisition since CVC took them private late 2007. Not so long ago, Univar Europe publicly stated their strategy to strengthen their position on the specialty markets, while extending their market coverage to the Middle East and North Africa. Therefore the Univar decision to acquire Quaron initially seemed contradictory to their affirmed specialty strategy. In reality, it is both a very logical and sensible move.
Univar Europe, which actually has Dutch roots, had a constrained market position in Holland in comparison to the bigger local players such as Azelis, Barentz, Brenntag, Caldic and IMCD. Furthermore, Univar had no site for bulk chemicals there. In Belgium, they serve the market from the former Roland site on the outskirts of Brussels, which is situated in an urban area in the vicinity of residential and high rise buildings. In France, their logistics network results from the Lambert Riviere Group acquisition in 1994 and looks reasonably obsolete, particularly when compared with Brenntag’s and Quaron’s infrastructure. Quaron has modern and well maintained sites in strategic locations such as Worvermeer and particularly Zwijndrecht with direct access to waterways and an unloading pier for sea-going bulk vessels. In addition they have a good Belgian site in Tournai acquired from Holvoet and in France with several sites in Hautbourdin, Rennes, Montereau and Bordeaux, acquired from Solvadis. This acquisition when completed will firmly establish Univar as a leading player in bulk industrial and specialty chemicals on the important markets of France, Belgium and Holland.
In the Univar announcement, a conventional sentence was mentioned, namely: “The Quaron acquisition is subject to regulatory approval by the EU Commission”. This is a standard statement which clearly states that for an acquisition of this size, regulatory clearance from the EU competition authorities is required. In this instance, it seems likely that the merger clearance process will be led by the European Competition Authorities in Brussels which will coordinate the merger authorisation process with the National Competition Authorities of Holland, Belgium and France.
As Quaron is mostly active in industrial commodity chemicals, the pertinent markets to consider in order to assess the competitive scenario are the direct delivery and warehouse businesses segments for industrial chemicals which is a very well defined market, according to the established jurisprudence defined in various recent antitrust cases in France, England and Holland and the well publicized presentation given by Dr Thomas Wesserly of Freshfield, Bruckhaus, Diringer at the FECC congress in May 2008.
In Holland, in addition to Quaron, several companies are present on these segments such as Caldic, Brenntag and Helm. In Belgium, we also find Univar, Caldic, Arpadis and Brenntag. The Benelux industrial chemical markets have an Oligopolistic market structure which will not be fundamentally altered by this acquisition as in Holland the number of suppliers will remain the same and in Belgium Holvoet and Univar will merge and will mostly remain in competition with Brenntag, Caldic and Arpadis.
By comparison, the French market for industrial chemicals could be moving from an Oligopolistic position with three main suppliers, namely Brenntag, Univar and Quaron, to a Duopoly with only two mega suppliers both with revenues above EUR 500 Million. Other distributors like Beauseigneur, Platret, Gaches Chimie, Caldic or Ciron only play a limited regional role with considerably lower revenues in comparison with the two giants. To sum it up, the French distributor industrial chemical market which is already the most consolidated in Europe, could eventually be served by what what could become a true duopoly.
This acquisition could become very profitable for the private equity owned duopolistic companies which could benefit from significant upward pricing flexibility. Univar is expected to seek to reduce costs and to increase margins. Cost reductions will come from site closures and supply chain optimization. Margin increases will come from upward pricing moves for chemicals and ancillary services, such as drumming and rental of returnable containers. This could be realized if the European and French competition authorities authorize the further consolidation of the French industrial chemical market, which in our view ought not to be taken for granted.
The merger clearance process is happening at the same time as the imminent publication of the long awaited verdicts regarding the distributors of industrial chemicals antitrust infringements, which are being investigated since 2007. In case these on-going investigations, partly based on pleas for clemency filed by the main industrial chemical players in 2007 in several countries, additionally reveal that various forms of illegal cooperation existed between the two leaders, the European competition authorities might have additional reasons to be reluctant to give clearance to the merger.
The European and National Competition Authorities have two months from the time of the publication of the merger notification to authorize the transaction between Univar and Quaron. In the meantime, both companies continue to operate independently. The decision to authorize the formation of a duopoly in France as well as the imminent antitrust verdicts are expected to have far reaching consequences on the future of “buy and build” strategies and the ongoing chemical distributor market consolidation.
Comment: See the temporary ruling published by the EU Commission on July 19th 2010