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Acquisition of Innova by Videolar is approved with restrictions

Merger

Competition remedies were established in agreement signed between CADE and the parties
published: Oct 02, 2014 10:00 AM last modified: May 03, 2016 03:49 PM

At the judgment session of 1 October, the Administrative Council for Economic Defense – CADE approved with restrictions the acquisition of Innova S/A by Videolar S/A (Merger File no. 08700.009924/2013-19). The approval of the transaction is conditioned to the fulfillment of a set of measures foreseen in a Merger Control Agreement (ACC for its acronym in Portuguese) signed between the agency and the merging parties.

The two companies operate in the petrochemical sector and produce, among other products, polyethylene and plastic resin, used as an input to disposable products, packaging, household appliances and electronics white goods.

According to Reporting Commissioner Márcio de Oliveira Júnior, the transactions results in a duopoly in the Brazilian polyethylene market, since there is only one company besides Innova and Videolar that operate in this sector: Unigel. However, it was verified that Unigel has enough productive capacity to compete with them.

Furthermore, the demand for polyethylene is decreasing due to the resin’s life cycle and the increased use of polypropylene and acrylonitrile butadiene styrene (ABS) in some products. These two resins, according to the Commissioner, do not substitute the polyethylene in all the segments in which it is used, but can apply competitive pressure on the input in the national market.

“The decline process of the use of polyethylene limits this resin producers’ capacity to abuse of an eventual market power”, explained Oliveira Júnior.

On the other side, CADE’s Tribunal concluded that the entrance of new companies in this market is unlikely. Importing polyethylene in a significant level to occasionally compete with the national production is also not a viable option to most of the clients due to logistics limitations and to the additional costs derived from this process. This understanding had been already pointed in the General Superintendence’s opinion issued in April.

Remedies - To mitigate the competition problems identified in the transactions, the companies signed an agreement with CADE committing to execute measures that aim to prevent potential anticompetitive effects.

Among the obligations foreseen in the ACC, Innova and Videolar are prohibited to acquire or lease polyethylene plants in the Brazilian market for a five year period. In addition, the companies must maintain minimum production levels of the input in the threshold currently practiced.

The agreement also foresees the adoption of a Compliance Program by the companies, and it must be presented to CADE’s approval within six months after the signature of the ACC. The objective is to develop internal rules to prevent competition infractions. The companies also committed to adopt an open doors policy with the agency, which can request to them technical collaboration and hold inspections in any of its premises.

The companies are obliged yet to present a plan for transfer of efficiency gains to consumers of polyethylene within 60 days from the closing of the transaction. The plan must be approved by CADE and it will inform the expected results, actions, strategies and initiatives derived from the merger. It was also established that the companies will invest in research and development in the sector to foment innovation and the potential competition in the market.

The agreement still foresees the commitment by Innova and Videolar to license, free of charges and not exclusively, its polyethylene and styrene monomer patents, both currently registered in Brazil, and other patents registered in the next five years.

Lastly, CADE will monitor the competition dynamics in the sector for the next 14 years through the receipt of periodical reports from the parties with information of the companies’ actions in this market.