By Steven D. Cole, J.D.
The European Commission blocked the proposed merger of two South Korean shipbuilding companies which represent two of the three largest players in the heavily concentrated market for large liquified natural gas carriers.
The proposed acquisition of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (DSME) by Hyundai Heavy Industries Holdings (HHIH) would result in an entity with a dominant position in the worldwide market for the construction large liquified natural gas (LNG) carriers, the European Commission has concluded in blocking the transaction. The proposed merger would have an anticompetitive effect in the market for these highly specialized vessels, which are an essential component in satisfying the global demand for natural gas products.
The EC’s role in merger oversight. The EC has the duty to assess mergers and acquisitions involving companies with a turnover above certain thresholds and to prevent concentrations that would significantly impede effective competition in the European Economic Area or any substantial part of it. The EC’s role with European Union (EU) merger control is to prevent the creation of monopolies or dominant players harming competition and business customers or consumers. In the past ten years, the EC has approved over 3,000 mergers. The prohibition of the proposed merger of DSME and HHIH is only the tenth merger that the EC has blocked over the same period.
Large liquified natural gas carriers. DSME and HHIH are South Korean shipbuilders which produce a range of commercial vessels, including large LNG carriers. These are highly sophisticated vessels transporting voluminous quantities of LNG at minus 162 degrees Celsius. Large LNG carriers are an essential element in the supply chain of LNG. Over the past five years, the worldwide market for the construction of large LNG carriers represented around 40 billion Euros, with European customers accounting for almost 50 percent of all orders.
Concerns over a potential merger. The EC’s investigation into the potential merger began in November 2019. Over the course of the investigation, the EC received feedback from several customers, competitors, and other third parties expressing concern that the transaction would create a company with a dominant position in the worldwide market for the construction of large LNG carriers, reduce market competition and choice in suppliers, and increase prices for these vessels, resulting in higher prices for EU customers and energy consumers. Ultimately, the EC determined that these concerns were valid, and that the resulting negative effect on competition in the global market for large LNG carriers justified its decision to prohibit the merger.
More specifically, the EC’s decision was based on several considerations. First, DSME and HHIH enjoy large and increasing shares in the market for large LNG carriers, which combined, amount to at least 60 percent of the market. Second, besides these two parties, only one other large competitor exists in the market, and this competitor’s capacity would not have been sufficient to act as a credible constraint on the new company resulting from the merger. Third, if the merger were allowed, the combined entity would have held a pivotal position in the market, as the capacity of the remaining competitors would not have covered the projected market demand. Fourth, very high barriers to market entry exist, given that these vessels are highly complex and require specific engineering expertise to construct. Thus, the threat of new entry to the market was not a credible restraint.
Additionally, the EC found that not only would the merger remove one independent shipbuilder from the market, but also that the merging parties were very close competitors on all of the parameters that matter for choice in this market—price, quality, slot availability, delivery time, engineering skills, track record, and historical customer relationship.
When the EC has competition concerns, companies can offer remedies to address the potential harm of the merger. In this case, the parties did not formally offer any remedies to address the EC’s concerns.
The EC’s Executive Vice-President, Margrethe Vestager, who is in charge of competition policy, remarked: “Large LNG vessels are an essential element in the supply chain of liquefied natural gas and enable the transport of this source of energy around the globe. LNG contributes to the diversification of Europe’s source of energy and therefore improves energy security. The merger between HHIH and DSME would have led to a dominant position in the global market for the construction of large LNG vessels, for which there is significant demand from European carriers. Given that no remedies were submitted, the merger would have led to fewer suppliers and higher prices for large vessels transporting LNG. This is why we prohibited the merger.”
Companies: Daewoo Shipbuilding & Marine Engineering Co., Ltd.; Hyundai Heavy Industries Holdings
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