KS/WRK: DOJ Staff Nearing Decision on Deal
Thu 10/25/2018 14:17 PM
Takeaways
DOJ staff is expected to soon send its recommendation regarding the KapStone/WestRock transaction if it has not already done so, Reorg M&A has learned. It is unclear at this time what the content of the recommendation, which could come as soon as this week, will consist of.
Once the agency’s front office has received the recommendation, the appropriate Deputy Assistant Attorney General, or DAAG, and his team will review it.
Using the guidelines as laid out in the Antitrust Division Manual, the front office will also likely meet with the executives and attorneys for the companies in the week after the recommendation is sent to discuss the matter. The manual states that such recommendations “should be provided to the Front Office one week before any Front Office meeting with the parties.”
Various industry participants said they would not be surprised if the DOJ approved the transaction outright. Most product markets in the paper industry are “competitive in nature,” according to Rosaire Pelletier, Forest Products Industry Liaison for the Maine Department of Economic and Community Development. “It’s a growing industry.” According to a consultant who has decades of experience working in the industry, there are “low barriers to entry” and “lots of mills that are making paper.”
Under the companies’ definitive merger agreement, a burdensome effect is defined as one that would “require (i) the divestiture of any mill that had annual production capacity as of September 30, 2017, of more than 600,000 tons of product ... or (ii) any Divestiture Actions ... that would reasonably be expected to have a material adverse effect on the Company, Parent and their respective Subsidiaries….” While it is unclear whether the agency will approve the deal outright, Reorg M&A’s analysis of WestRock and KapStone’s locations found that divestitures will be few if any.
Figure 1: Kapstone - Westrock Overlap
Historically, the DOJ has applied a national market framework to assess capacity concentration issues associated with mergers in the containerboard industry. According to an industry consultant, the DOJ will likely define the geographic market for any products in its review of the merger as North America. “While there are some regional differences, in the U.S. we have a national market,” the consultant said. An economist familiar with the industry agreed, saying that the geographic market is “often North America” in past DOJ reviews.
However, in terms of a divestiture analysis, the agency may take into account other factors such as local supply chain dynamics and e-retailer distribution locations.
A good starting point to identify potential divestiture assets would be to pinpoint the two companies’ mills that are geographically proximate. Based on geographic proximity alone, out of all of the companies’ mills, the ones with which the DOJ is most likely to find potential competitive issues are KapStone’s Longview, WA, mill and WestRock’s Tacoma, WA, mill in addition to the companies’ mills in the South Carolina-East Dublin (Georgia) region (see Figure 1).
However, in addition to capacity concentration and geographic proximity, the DOJ will likely study the supply chain for containerboard in the fast-growing e-retail market. This analysis is important as location of box plants and paper mills is often driven by demand trends and companies allocate sales and technical resources to optimize their end-to-end supply chain in order to create competitive advantages.
Figure 2 represents the major e-retailer distribution locations across the U.S.
As Figure 2 illustrates, KapStone’s Longview mill and WestRock’s Tacoma mill are two facilities that are geographically proximate and are also close to a major e-retailer distribution location, unlike the companies’ mills in South Carolina and Georgia. This suggests that should the DOJ indeed require divestitures to approve the merger, it is likely that one of these two mills could constitute the final divestiture package.
KapStone’s Longview facility has total annual capacity of 1,450,000 tons per year, while WestRock’s Tacoma facility has total annual capacity of 500,000 tons per year, according to the companies’ respective websites. The fact that the merger agreement views divestiture of any mill that has annual production capacity of more than 600,000 tons of product as “burdensome,” it is likely that the companies will be more comfortable proposing the Tacoma facility as a potential divestiture candidate.
Reorg M&A’s past coverage of this transaction can be found HERE.
--Matt Tracy and Shrey Verma
- DOJ staff is expected to soon send its recommendation regarding the KapStone/WestRock transaction if it has not already done so, Reorg M&A has learned. It is unclear at this time what the content of the recommendation, which could come as soon as this week, will consist of.
- Various industry participants said they would not be surprised if the DOJ grants outright approval to the transaction.
- Reorg M&A’s analysis finds that WestRock’s Tacoma mill is a more likely divestiture candidate should the DOJ indeed condition its approval on a divestiture package.
DOJ staff is expected to soon send its recommendation regarding the KapStone/WestRock transaction if it has not already done so, Reorg M&A has learned. It is unclear at this time what the content of the recommendation, which could come as soon as this week, will consist of.
Once the agency’s front office has received the recommendation, the appropriate Deputy Assistant Attorney General, or DAAG, and his team will review it.
Using the guidelines as laid out in the Antitrust Division Manual, the front office will also likely meet with the executives and attorneys for the companies in the week after the recommendation is sent to discuss the matter. The manual states that such recommendations “should be provided to the Front Office one week before any Front Office meeting with the parties.”
Various industry participants said they would not be surprised if the DOJ approved the transaction outright. Most product markets in the paper industry are “competitive in nature,” according to Rosaire Pelletier, Forest Products Industry Liaison for the Maine Department of Economic and Community Development. “It’s a growing industry.” According to a consultant who has decades of experience working in the industry, there are “low barriers to entry” and “lots of mills that are making paper.”
Under the companies’ definitive merger agreement, a burdensome effect is defined as one that would “require (i) the divestiture of any mill that had annual production capacity as of September 30, 2017, of more than 600,000 tons of product ... or (ii) any Divestiture Actions ... that would reasonably be expected to have a material adverse effect on the Company, Parent and their respective Subsidiaries….” While it is unclear whether the agency will approve the deal outright, Reorg M&A’s analysis of WestRock and KapStone’s locations found that divestitures will be few if any.
Figure 1: Kapstone - Westrock Overlap
Historically, the DOJ has applied a national market framework to assess capacity concentration issues associated with mergers in the containerboard industry. According to an industry consultant, the DOJ will likely define the geographic market for any products in its review of the merger as North America. “While there are some regional differences, in the U.S. we have a national market,” the consultant said. An economist familiar with the industry agreed, saying that the geographic market is “often North America” in past DOJ reviews.
However, in terms of a divestiture analysis, the agency may take into account other factors such as local supply chain dynamics and e-retailer distribution locations.
A good starting point to identify potential divestiture assets would be to pinpoint the two companies’ mills that are geographically proximate. Based on geographic proximity alone, out of all of the companies’ mills, the ones with which the DOJ is most likely to find potential competitive issues are KapStone’s Longview, WA, mill and WestRock’s Tacoma, WA, mill in addition to the companies’ mills in the South Carolina-East Dublin (Georgia) region (see Figure 1).
However, in addition to capacity concentration and geographic proximity, the DOJ will likely study the supply chain for containerboard in the fast-growing e-retail market. This analysis is important as location of box plants and paper mills is often driven by demand trends and companies allocate sales and technical resources to optimize their end-to-end supply chain in order to create competitive advantages.
Figure 2 represents the major e-retailer distribution locations across the U.S.
Figure 2: North American Containerboard Mills (Black), Box Plants (Heat Map), and Major E-Retailer Distribution Locations (Red)
Source: 2017, Fisher International, Inc.
As Figure 2 illustrates, KapStone’s Longview mill and WestRock’s Tacoma mill are two facilities that are geographically proximate and are also close to a major e-retailer distribution location, unlike the companies’ mills in South Carolina and Georgia. This suggests that should the DOJ indeed require divestitures to approve the merger, it is likely that one of these two mills could constitute the final divestiture package.
KapStone’s Longview facility has total annual capacity of 1,450,000 tons per year, while WestRock’s Tacoma facility has total annual capacity of 500,000 tons per year, according to the companies’ respective websites. The fact that the merger agreement views divestiture of any mill that has annual production capacity of more than 600,000 tons of product as “burdensome,” it is likely that the companies will be more comfortable proposing the Tacoma facility as a potential divestiture candidate.
Reorg M&A’s past coverage of this transaction can be found HERE.
--Matt Tracy and Shrey Verma
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