The $4.1 Billion Lithium Deal That is Flying Under the Radar of U.S. Regulators
On May 17, 2018, a $4.1 billion cross-border deal was announced that may impact significantly the technology industry, but the deal has mostly flown under the radar in the United States. What is at stake is the future of lithium, which is critical for the batteries that power our portable electronic devices and electric vehicles, grid storage devices and other applications.
Lithium supply security has become a top priority for technology companies in the United States and Asia. Yet in recent years China has come to dominate the lithium-ion industry, and this transaction represents another strategic step by China towards dominating this market.
In this case, Tianqi Lithium (“Tianqi”), a Chinese company, is paying $65 per share, a roughly 15% premium over market share price, to acquire from Nutrien, a U.S.-listed Canadian company, its “A shares” in SQM, a U.S.-listed Chilean company and one of the world’s biggest lithium producers.
The transaction will not give Tianqi outright control over SQM, but it will give it a tremendous amount of influence, with the right to select three out of SQM’s eight directors. Partial acquisitions that do not result in effective control may nevertheless present significant competitive concerns. The stake represents about 24% of the total equity in SQM, and if Tianqi is successful in its acquisition, three “interlocking” entities — Tianqi, SQM and Abermarle — could end up with over 70% of the global lithium market. The proposed transaction could lead to a new (or stronger) oligopoly in the global lithium market, in breach of several antitrust regulations, in addition to posing strategic and national security concerns for the United States.
On the antitrust front, the Tianqi-Nutrien transaction’s size and impact will affect commerce in the United States, and questions should be asked about the competitive effects of the proposed transaction, particularly under a Hart Scott Rodino Act government review. Transactions that increase the Herfindahl–Hirschman Index (“HHI”), a commonly accepted measure of market concentration, by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission (the “Agencies”).
In the case of partial acquisitions, the Agencies can consider any way that the transaction may affect competition, generally focusing on three principal effects:
- First, a partial acquisition can lessen competition by giving the acquiring firm the ability to influence the competitive conduct of the target firm. A voting interest in the target firm or specific governance rights, such as the right to appoint members to the board of directors, can permit such influence. Such influence can lessen competition because the acquiring firm can use its influence to induce the target firm to compete less aggressively or to coordinate its conduct with that of the acquiring firm.
- Second, a partial acquisition can lessen competition by reducing the incentive of the acquiring firm to compete. Acquiring a minority position in a rival might significantly blunt the incentive of the acquiring firm to compete aggressively because it shares in the losses thereby inflicted on that rival. This reduction in the incentive of the acquiring firm to compete arises even if cannot influence the conduct of the target firm. As compared with the unilateral competitive effect of a full merger, this effect is likely attenuated by the fact that the ownership is only partial.
- Third, a partial acquisition can lessen competition by giving the acquiring firm access to non-public, competitively sensitive information from the target firm. Even absent any ability to influence the conduct of the target firm, access to competitively sensitive information can lead to adverse unilateral or coordinated effects. For example, it can enhance the ability of the two firms to coordinate their behavior, and make other accommodating responses faster and more targeted. The risk of coordinated effects is greater if the transaction also facilitates the flow of competitively sensitive information from the acquiring firm to the target firm.
The Federal Trade Commission has jurisdiction over Nutrien, the entity resulting from the recent merger between Agrium and PCS. Yet, while the Chinese (and Indian) regulators mandated that Nutrien divest its SQM stake as a condition of their approval of the Nutrien merger, the Agencies have not issued any opinion or statement over this matter. At least one of the Agencies should initiate a probe into this transaction and mandate approval of the buyer of the SQM stake in order to protect competition and consumers.
On the strategic and national security fronts, the silence from U.S. government officials is particularly surprising at a time when trade negotiations between the U.S. and China are front page news, and when a new bipartisan bill, the Foreign Investment Risk Review Modernization Act (FIRRMA), is being discussed in Congress to modernize and strengthen the Committee on Foreign Investment in the United States (CFIUS) to more effectively guard against the risk to the national security of the U.S. posed by certain types of foreign investment. In effect, lithium is deemed critical under the definition provided in a recent Executive Order from December 26, 2017.
However, other foreign regulators are paying attention. On March 9th, 2018, the Chilean Economic Development Agency (“CORFO”) filed a complaint with the local antitrust regulator to hold up the deal, which is still pending. But it is unlikely that the transaction will be stopped in Chile.
This story also brings into question the modus operandi of cross-border M&A transactions involving Chinese acquirers. In these cases, another dimension should be taken into consideration: China as a “national strategic buyer”, as coined in a recent article. In these deals, the objective may be to further the interests of a nation state in the pursuit of national industrial policy or perhaps national security concerns. A significant fraction of these transactions relate to advanced physical and digital technology, domains of an articulated Chinese state objective to become a world leader.
Soon the implications of the Tianqi-Nutrien transaction in the technology industry may be obvious to everyone, but it will be too late.
Author: Evan M. Epstein
Founder & Managing Partner
Pacifica Global Corporate Governance
Pacifica Global was founded in San Francisco to serve as the leading international advisory firm focused on corporate governance, anti-corruption, and shareholder rights issues. The mission of Pacifica Global is to help multinational public and private companies solve some of their most complex governance problems including cross-border regulatory and compliance challenges.