On April 10, 2007, the Federal Trade Commission (FTC) approved a complaint in opposition to Western Refining, Inc.’s (Western) acquisition of Giant Industries, Inc (Giant). The proposed acquisition, which is valued at approximately $1.4 billion, would combine two of the five bulk suppliers of light petroleum products to northern New Mexico.
The FTC voted 5-0 to initiate the complaint and the Agency’s staff has been authorized to seek a preliminary injunction and temporary restraining order. In the complaint, the Commission alleges that consummation of the merger agreement would violate Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and Section 7 of the Clayton Act, 15 U.S.C. § 18. The FTC contends that the merger would reduce competition in the bulk light petroleum products market of northern New Mexico, eliminate any incentives for Giant to increase production in its two New Mexico refineries, and increase concentration of the already-concentrated New Mexico market. The FTC further argues that new entry into the petroleum market is unlikely to alleviate the anticompetitive effects of the merger. Presumably, the FTC will condition future approval of the merger on the parties’ assent to divestitures in the New Mexican market.
In response to the FTC’s complaint, Giant and Western have claimed that a merger of the two companies will create refinery efficiencies that will increase production. In addition, according to the companies, the merger will enhance competition in the already-competitive New Mexican petroleum market and will reduce the risk of petroleum shortages. The companies have also noted that the proposed merger implicates less than 1.5 percent of U.S. refining capacity. Based on the relatively small size of the merger and its perceived benefits, the companies contend that the merger will promote competition in New Mexico’s petroleum market. In a recent press release, Giant and Western reiterated their commitment to consummating the merger and voiced their intent to "vigorously challenge the FTC in court."
Implications of the FTC’s Complaint
The FTC’s announcement comes on the heels of the Commission’s challenge to another energy-related transaction, Equitable Resources, Inc.’s acquisition of Peoples Natural Gas Co. In its challenge to the Peoples Natural Gas Co. acquisition, the Commission voiced similar concerns about the effect of the merger on the market for distribution of natural gas to non-residential consumers in Pennsylvania. The Commission contended that the acquisition would reduce competition in the relevant markets, facilitate coordinated interaction between distributors, and eliminate incentives to provide consumer discounts. Although the Equitable Resources-Peoples Natural Gas Co. acquisition might constitute a merger-to-monopoly in certain markets, the merger is similar to the Giant Industries, Inc. acquisition in that both transactions involve energy companies merging to take advantage of perceived efficiencies.
In reviewing each of the transactions, the FTC has expressed concern that the merger will reduce competition within a narrow geographic market, resulting in increased market rates. Further, in its opposition to each transaction, the FTC has expressed concern about the effect that the merger will have on the merging parties’ incentives to compete. In the Equitable Resources acquisition, the FTC was concerned that the merger would eliminate the parties’ incentive to continue offering customer discounts. Similarly, in the Giant Industries, Inc. acquisition, the FTC is concerned that the merger will eliminate Giant’s incentive to increase production in two of its New Mexico refineries. Thus, in both transactions, the FTC is anticipating future conduct that may not exemplify rigorous competition on the merits.
Lastly, these recent complaints reflect the FTC’s ongoing commitment to preserving competition in energy markets throughout the United States. As energy resources become increasingly scarcer, it is likely that the FTC will continue to closely scrutinize transactions that combine multiple distributors of such resources. In remarks at a recent Washington, D.C. conference on competition policy in energy markets, FTC Chairman Deborah Platt Majoras emphasized the fact that the FTC has devoted significant resources to energy markets in recent years, is actively watching the industry, and is continuing to advocate for policies that enhance competition and benefit consumers rather than raising barriers and preferring special interests. For distributors of energy resources, this means it will be imperative to carefully analyze the antitrust implications of transactions and be prepared to make divestitures in certain markets to obtain Commission approval.
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