SUGAR CRUSHED
By: Samantha Poblacion on March 7, 2019
The past month rendered an important and interesting decision from the Philippine Competition Commission (PCC). On Feb. 12, 2019, the PCC denied the prospective acquisition by Universal Robina Corp.-Balayan (URC) of the sugarcane milling and refinery assets of Central Azucarera Don Pedro Inc. (CADPI) and its parent entity Roxas Holdings Inc. (RHI).
In a 29-page decision, the PCC relied on an analytical framework which compared the counterfactual and the anticipated state of competition that would supposedly result from the acquisition. A counterfactual is a tool used in different fields, such as philosophy, statistics and, as in this case, anti-trust economics, when it is necessary to determine the causal effect of an intervention (e.g., a transaction, policy change or state interference) on a certain situation. Two states of the world are compared: the world in which the transaction, intervention or policy occurred and the world in which it did not. The latter is the counterfactual world. In a counterfactual analysis, the proponent has the discretion to determine the context which will populate the counterfactual scenario.
In the case before the PCC, the counterfactual proposed by the Mergers and Acquisitions Office (MAO) in its statement of concerns (SOC) and adopted by the PCC is the pre-transaction competitive situation, i.e., the scenario wherein URC and Cadpi will continue to operate independently and compete with each other for the supply of sugar cane from Batangas, Cavite, Laguna and Quezon. The PCC decided to populate its counterfactual with pre-transaction data from the following: a) the structure of the relevant markets concerned; b) the market position of the entities concerned; c) the actual or potential competition from entities within or outside of the relevant market; d) the alternatives available to suppliers and users, and their access to supplies or markets; and e) any legal or other barriers to entry. The PCC went on to conclude that “the prevailing competitive situation in the relevant market without or prior to the transaction is one where the parties are engaged in a head-to-head competition to secure sufficient or even bigger share in the supply of sugar cane from the planters.” In other words, the PCC deemed the pre-transaction scenario as positive.
nterestingly, one of Cadpi and RHI’s allegations in their verified comment to the SOC was that the counterfactual adopted by the MAO “does not constitute a logical projection given the prevailing financial constraints suffered by RHI and Cadpi and the current undersupply of sugar cane.” This appears to be true. The financial constraints suffered by RHI and Cadpi were not included in the counterfactual. In other words, it seems that the PCC did not give much weight to what would have been the effect if RHI and Cadpi continue their respective operations without the benefit of the transaction. It only assumed they can.
According to the PCC, “the argument that Cadpi and URC-Balayan were undercapacitated does not negate the resulting market power of URC-controlled mills post-transaction. Even assuming that the claim of undercapacity is true, data submitted by RHI showed that the supposed undercapacity had been existing prior to the transaction. But even in such case, the parties were able to command a sharing agreement favorable to them—lower than the sharing ratios provided in R.A. 809.”
However, it was precisely the argument of Cadpi and RHI that without the transaction, their respective continuous operations may not be sustainable.
Given the PCC’s mandate, it is understandable that it emphasized on the alleged harmful effects of URC’s possible unilateral control over the sugar market. However, this view may have effectively eclipsed Cadpi’s and RHI’s statutorily protected right under the Civil Code to enter into agreements for the preservation and pursuance of their business. There is no provision in the decision which addresses the financial constraints of the companies involved if the transaction was not entered into. While it is not the PCC’s mandate to assist in the financial woes of Cadpi’s and RHI’s business, we believe it should not also ignore a prospective solution to a current financial crisis. Perhaps, it should provide or consider alternative solutions and make such approach part of a policy consideration.
During the European Chamber of Commerce of the Philippines luncheon meeting held on Feb. 18, 2019, the PCC Chairman Arsenio Balisacan mentioned PCC’s priority for competition enforcement, research and policy advocacy on the businesses of manufacturing, rice, pharmaceuticals, air and land transport, logistics, e-commerce, retail/supermarket, telecommunications, agricultural credit, poultry and livestock, milk products, fertilizers and pesticides, logistics supply chain, corn milling and trading, refined petroleum and, in this case, sugar.
On a final note, in its discussion of the efficiency argument raised by the parties to defend the transaction, the PCC noted that efficiency gains must be merger specific—which means they should likely to be accomplished with the transaction, and unlikely to be accomplished in the absence of the transaction, as shown by detailed and verifiable evidence. With this decision, perhaps the parties in a notification proceeding, in the interest of fairness, should now be allowed to utilize counterfactuals in proving sustainability and efficiency gains resulting from the transaction, as well as the financial debacle they would be facing without it.
#PhilippineCompetitionCommission #Sugarcane #PhilippineLaws #Merger #Acquisition
From the The Manila Times website on March 7, 2019