Delaware District Court Highlights Pricing Behavior and Lack of Effort to Find Alternative Bidders in Decision to Block Radioactive Waste Cos.’ Merger

A Delaware district court recently blocked the proposed merger of EnergySolutions, Inc. (“Energy Solutions”) and Waste Control Specialists LLC (“WCS”).  U.S. District Judge Sue L. Robinson, siding with the United States Department of Justice (“DOJ”), found that the merger is substantially likely to lessen competition in the market for disposal of higher-activity low-level radioactive waste (“LLRW”) and lower-activity LLRW.  Judge Robinson also dismissed the merging parties’ failing firm defense, indicating the merging parties failed to demonstrate that Energy Solutions is the only available purchaser.

DOJ alleged that the merger would substantially lessen competition for disposal of LLRW and asserted four product markets for such disposal:  1) higher-activity operational LLRW; 2) lower-activity operational LLRW; 3) higher-activity decommissioning LLRW; and 4) lower-activity decommissioning LLRW.  The Court collapsed these into two markets, finding that the disposal options are essentially the same for operational waste and decommissioning waste.

The merging parties asserted that Energy Solutions and WCS have different methods for disposing of higher-activity LLRW.  Higher-activity LLRW can be sent to WCS’s compact waste facility for direct disposal, but Energy Solutions’ facility cannot directly dispose of higher-activity LLRW.  Higher-activity LLRW must go through a process called concentration averaging before it can be disposed of at Energy Solutions’ facility.  The merging parties also argued that DOJ’s alleged market for lower-activity LLRW was overbroad, because WCS’s exempt cell facility can only accept lower-activity LLRW that is below certain radioactive concentrations.

While recognizing that Energy Solutions and WCS have different methods for accepting and disposing of higher-activity LLRW, the Court concluded that the merging parties were the only competitive alternatives for the disposal of higher-activity LLRW.  In its analysis, the Court states that the “most significant indicator that WCS and Energy Solutions offer competitive alternatives for disposal of higher-activity LLRW is that Energy Solutions charges its customers a single price for both processing [concentration averaging] and disposal” and that Energy Solutions has changed its prices to win higher-activity LLRW disposal business from WCS.  The Court cites to several examples and corroborating internal reports that indicate Energy Solutions lowered its price in response to competition from WCS and that customers switched back and forth between Energy Solutions and WCS due to price discounts.

The Court also found that Energy Solutions and WCS compete for lower-activity LLRW.  It concluded that customers have been able to negotiate better prices due to competition between Energy Solutions and WCS’s exempt cell and have switched back and forth between the two merging parties to get lower prices.  Again, the Court cited to several customer examples and internal reports as evidence of this price competition.

The Court’s conclusions affirm the importance of pricing behavior in considering whether two firms compete in the same market.  The Court considered specific examples of pricing, price changes and customer responses to price changes as the strongest indicators of whether the merging parties competed in the same product markets.

The Court’s decision also highlights the difficulties in successfully asserting a failing firm defense.  The U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (§11) state that a merger is not likely to enhance market power if imminent failure of one of the merging firms would cause the assets of that firm to exit the relevant market.  A showing of failure typically requires the following three conditions: (1) the firm would be unable to meet its financial obligations in the near future; (2) it would not be able to reorganize successfully (Chapter 11); and (3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that pose a less severe danger to competition than does the proposed merger.

The Court considered the merging firms’ argument that WCS is a failing firm. The Court highlighted several facts concerning WCS’s financial situation, including WCS’s failure to make an operating profit since it entered the business in 2012. The Court also recognized that it is uncertain whether WCS will become profitable in the future. However, the Court also considered the arguments made by DOJ concerning WCS’s position as an ongoing firm, including, for example, the credit extended to WCS by its parent Valhi, WCS’s current ability to meet payroll and pay bonuses and WCS’s investment in future growth opportunities. The Court concluded that it would require careful and time intensive consideration to weigh the evidence presented by each side. The Court further concluded that it need not decide the issue of whether WCS would be able to meet its financial obligations in the near future or be able to reorganize under Chapter 11, because the merging parties failed to demonstrate that Energy Solutions is the only available purchaser. Specifically, the Court found that WCS’s parent, Valhi, essentially engaged in a single bidder process in 2015 and then agreed to several deal protection clauses that made it impossible to entertain other offers. These deal protection clauses included a no-talk provision without a fiduciary out, a provision prohibiting WCS from furnishing non-public information to others, and a no-shop provision which prohibits WCS from taking any action that would facilitate or encourage any alternative bidders. The Court also highlighted the existence of an alternative potential bidder that was “left in the dark” once WCS agreed to Energy Solutions’ offer.

The Court’s conclusion reflects its concern that there existed another potential bidder that was not given the time or information needed to prepare an alternative bid, and that contractual restrictions imposed by Energy Solutions made it impossible for WCS to respond to other companies that expressed interest in purchasing WCS after the transaction was announced. The Court’s decision indicates that merging firms should carefully consider the efforts to solicit reasonable alternative offers if a failing firm defense is anticipated.

Stephanie M. Mirrow has worked on numerous mergers and acquisitions across a broad range of industries. She previously was an economist in the Antitrust Division of the U.S. Department of Justice.