Aerojet-General Corporation / Atlantic Research Corporation
OFT closed case: Completed acquisition by Aerojet-General Corporation of Atlantic Research Corporation.
Affected market: Monopropellant thrusters (for satellites etc)
No. ME/1526/03
The OFT's decision on reference under section 22(1) given on 2 March 2004.
PARTIES
Aerojet-General Corporation (Aerojet) – a subsidiary of GenCorp Inc – is active in the research, development, manufacture and sale of propulsion products and systems for aerospace and defence applications. Aerojet produces a full range of a specific category of propulsion products known as in-space propulsion thrusters at a facility located in the US (Redmond, Washington). Atlantic Research Corporation (ARC) – a subsidiary of Sequa Corporation – is also a supplier of propulsion products and systems and it too produces a full range of in-space propulsion thrusters at two facilities: one in the US (Niagara, New York), and one in the UK (Aylesbury, Buckinghamshire). Operations in the UK are conducted by a subsidiary company, ARC UK Limited (ARC UK).
TRANSACTION
On 2 May 2002, Aerojet agreed to acquire substantially all of the assets of ARC, as well as the shares of ARC UK, for $133 million (£71 million). This resulted in the US Federal Trade Commission (FTC) issuing a formal Complaint based on its view that the proposed acquisition would be in violation of Section 7 of the Clayton Act. Section 7 prohibits mergers whose effect 'may be substantially to lessen competition or to tend to create a monopoly in the relevant markets'.
On 15 October 2003, the FTC announced that it had accepted a Consent Agreement submitted by GenCorp and designed to remedy the anti-competitive effects of the merger. This Consent Agreement allowed Aerojet to proceed with its acquisition of ARC provided that GenCorp divest ARC's in-space propulsion business – including all of ARC UK – within six months of completing the deal. In order to protect competition while the divestiture is pending, the FTC has issued a Hold Separate Order to ensure that ARC's in-space liquid propulsion business (again, this specifically includes ARC UK) is preserved as a viable, competitive and ongoing operation until divestiture is achieved. A Hold Separate Trustee (a Mr Charles Wilkins of KPMG LLP) has been appointed and all rights, powers and authorities necessary to permit the Trustee to perform his duties have been transferred to him.
The merger of the Aerojet and ARC enterprises was completed on 17 October 2003 and the statutory deadline for considering this merger was extended in accordance with section 25(1) of the Enterprise Act 2002 (the Act). A satisfactory submission was received on 22 January 2004. The administrative target in this case is therefore 18 March 2004.
JURISDICTION
As a result of this transaction – but subject to the FTC's Hold Separate Order – the Aerojet and ARC enterprises have ceased to be distinct. The turnover test in the Act is not met. However, the parties overlap in the supply in the UK of monopropellant in-space propulsion thrusters and the share of supply test in section 23 of the Act is met. A relevant merger situation has therefore been created.
RELEVANT MARKET
The parties overlap in the supply of in-space propulsion thrusters. These essentially are engines that are used to manoeuvre spacecraft, such as satellites, through space after a launch vehicle has delivered them to the upper atmosphere. Such thrusters allow for the spacecraft to be placed into their intended orbits (a process known as apogee insertion), or for their positions in orbit to be maintained (attitude control).
Product market
There are two primary types of in-space propulsion thruster: monopropellant and bipropellant. One essential difference between the two types is that monopropellant thrusters draw from a single liquid fuel source (typically hydrazine), whereas bipropellant thrusters operate using a combination of both a liquid fuel (typically monomethylhydrazine) and an oxidiser. Monopropellant thrusters generally produce between one pound to five pounds of thrust, thus making them well suited for pulsed operations of short duration and therefore ideal for attitude control. The process of apogee insertion requires considerably more thrust (ranging between 90 to 140 pounds of thrust). A typical bipropellant propulsion system consists of separate thrusters for attitude control and for apogee insertion. As well as having considerably greater propulsion force, bipropellant thrusters are generally more fuel efficient and expensive than their monopropellant counterparts. The two types of thruster are therefore not considered substitutable.
Each of the parties produces the full range of in-space propulsion thrusters (see [note 1]). In the UK, however, the only area of horizontal overlap between the parties is in the supply of monopropellant in-space propulsion thrusters.
Geographic market
The FTC concluded that, for the purposes of its analysis, the relevant geographic market was the US. Foreign suppliers of in-space propulsion thrusters are not considered effective competitors for US customers since they face a number of regulatory restrictions concerning importation and (particularly for Department of Defence programmes) national security issues.
The parties have submitted that they view the supply of in-space propulsion thrusters to be largely worldwide. Third party comments, however, suggest that European suppliers of in-space propulsion thrusters are preferred for projects involving the launch of European spacecraft. Taking due account of these submissions, the scope of the geographic market in this particular case would appear to be at least Europe-wide. However the overlap between the parties in the wider European market is limited as Aerojet supplied only (see [note 2]).
HORIZONTAL ISSUES
Market shares
Within the UK, there is currently only one purchaser of monopropellant thrusters: Astrium (part of the EADS group). The parties' joint share of supply (see [note 3]) is 25-35 per cent (see [note 4]) – an increment of 5-15 per cent. The remaining 65-75 per cent of the supply to Astrium is accounted for by DASA (itself also an associate company within the EADS group).
Barriers to entry and expansion
The FTC concluded that there are significant impediments to new entry into the supply of in-space propulsion products. A potential new entrant would firstly need to develop the expertise needed to successfully design, manufacture and market the products. R&D costs in the manufacture of in-space propulsion thrusters are high and highly skilled technical capabilities are required. Thrusters must be rigorously tested before marketing and any new entrant would have to establish a successful track record in order for customers to readily incorporate the products as vital components in any spacecraft.
Barriers to entry in the supply of in-space propulsion thrusters are therefore considered to be very high.
Buyer power
The sales opportunities available to manufacturers are relatively limited. Astrium has submitted that it is possible to exert buyer power – particularly where orders are sizeable.
VERTICAL ISSUES
No vertical issues are raised by this case.
THIRD PARTY VIEWS
The OFT did not receive any third party responses suggesting that the completed merger raises competition concerns or would have done so but for the FTC's divestiture order.
VIEWS OF OTHER GOVERNMENT DEPARTMENTS
The MOD was consulted and had no issues or concerns arising from the merger.
ASSESSMENT
The parties overlap in the supply of in-space monopropellant thrusters in the UK, with combined shares of supply amounting to 25-35 per cent. There is only one UK purchaser of this type of product. Neither that third party customer nor the MOD expressed any concerns over the merger.
ARC currently supplies monopropellant in-space propulsion thrusters through its UK manufacturing subsidiary, ARC UK. In response to a Complaint filed by the FTC, Aerojet's parent company, GenCorp, negotiated a Consent Agreement whereby it is committed to divest ARC's liquid propulsion business, including ARC UK, by mid-April 2004 – pending which it is currently being 'held separate' from the merged entity by an approved Trustee.
The Hold Separate arrangements preclude the possibilities for the parties to exercise any potential post-merger market power in the UK supply of monopropellant in-space propulsion thrusters. Any overlaps between the parties will be removed following the forthcoming divestment.
Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
DECISION
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
NOTES
- The FTC's market analysis defined various categories of in-space propulsion thrusters: monopropellant, bipropellant apogee, dual mode apogee, bipropellant attitude control – all of which formed separate product markets.
- Details excised at the request of the parties for reasons of commercial confidentiality.
- Exact figures replaced by ranges at parties' request.
- Based on sales value figures supplied by Aerojet. The market for the sale and purchase of monopropellant in-space thrusters is 'lumpy' – some customers may have no requirement to purchase such thrusters from one year to the next. Share data is therefore based on the parties' knowledge of the total sales achieved by the three sources of UK supply.