A big U.S. pigments manufacturer wants to buy a competitor from, of all places, Saudi Arabia, an oil-rich kingdom that’s vastly more likely to purchase our enterprises than vice versa. The deal would make the U.S. producer the global industry’s biggest player—and according to management, create a one-stop, fully integrated, mine-to-customer powerhouse that would swell production of whiteners for paints and auto veneers, and deploy its super-low costs to out-duel Chinese and European rivals.
Sounds like the kind of we’re-buying-them, American-business bolstering showcase that the Trump Administration would love. But that’s not the case. In a highly controversial action, the Federal Trade Commission is attempting to block the pending $2.4 billion merger between Tronox of the U.S. and Cristal of Saudi Arabia on antitrust grounds. Only two commissioners are now serving—three Trump nominees have yet to be approved—and both voted to oppose the transaction. Although today’s two commissioners were appointed by the Obama Administration, it was Trump who named one of the holdovers, Maureen Ohlhausen, as Acting Chairman.
The most alarming signal for future mergers: The FTC’s staff is taking the highly unusual step of deploying a time-consuming legal process that, unless a Tronox counterpunch prevails, virtually guarantees that the agreement will expire before the judge reaches a decision. Just prior to the deadline, Tronox fears, the FTC will demand “remedies” so severe that the Commission’s brinksmanship will effectively scuttle the transaction. “The FTC is trying to run out the clock, using a cynical strategy for delay instead of giving us our day in court,” Tronox’s CEO, Jeff Quinn, told Fortune.
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Over its short life, Tronox has careened from near death to a strong revival—a comeback that’s endangered now that the Cristal deal hangs in limbo. Mining and oil giant Kerr-McGee spun off Tronox as a producer of one of the world’s most widely-used pigments, titanium oxide, in 2005. Pounded by a deep downswing in the highly-cyclical business, Tronox exited bankruptcy in 2011, then struggled through more tough times until mid-2016, when demand for pigments jumped, and prices followed. In February of 2017, still early in the industry’s resurgence, Tronox signed a merger agreement with Cristal, a competitor majority-owned by Saudi petrochemical colossus Tasnee. Since then, pigments have continued to flourish, making the $2.4 billion price look like a bargain.
Tronox’s stock price soared from $3.50 in the dark days of early 2016 to $26.50 in October, when investors were betting that the Cristal tieup would happen. But on December 5 of last year, the FTC announced its strong opposition to the merger. Tronox’s stock now stands at $19.40, reflecting a three month loss of more than $720 million in market cap.
What makes the case different, and so highly intriguing, isn’t so much that the commissioners opposed the merger. It’s that the Commission’s staff departed from its usual course to deploy a legal procedure that puts Tronox at what it perceives as a crippling disadvantage. The Commissioners’ stance to block a takeover doesn’t kill the deal. In most cases, a no-vote is followed by an FTC suit in federal district court seeking a preliminary injunction to stop the transaction. The action is “expedited,” meaning it usually lasts a couple of months, a short enough time that a decision is usually reached before the merger agreement expires.
The FTC also has the option of bringing an administrative proceeding, overseen by an administrative judge. Those actions often involve months of testimony, and hence last far longer than a lawsuit seeking a preliminary injunction. And in practice, when the FTC orders both, it’s the decision in federal district court—the expedited case—that takes precedence, and determines if the deal is approved or nixed. In fact, the commissioners granted the FTC staff the freedom to initiate both an administrative action, and a suit in federal court. But in early December, the Commission’s staff decided to pursue only the administrative action, known as a “Part 3” proceeding, and not the lawsuit, the most common course.
For Tronox, that announcement put the deal on death watch. The merger agreement expires on May 21. Because Tronox negotiated a favorable price, it’s unlikely that Cristal will extend the deadline. And if approvals aren’t secured by May 21, Tronox would most likely walk rather than seek a new agreement at a much higher number. The rub is that the administrative proceeding isn’t scheduled to begin until May 8; Tronox’s lawyers predict that the action will last until at least late 2018. According to Tronox, the FTC’s choice of the administrative route is explicitly designed to push the legal process past the deadline, and snuff the proposed merger. Tronox contends that the FTC can’t rebut Tronox’s arguments that the deal is great for competition, so instead of seeking a trial in federal court, it’s choosing to win not on the merits, but by playing rope-a-dope.
On January 23, Tronox fired back. It filed suit in Mississippi (site of Tronox’s biggest titanium oxide plant) seeking to force the FTC to do what it usually does: Seek a preliminary injunction in U.S. district court. The Tronox suit demands that the FTC launch the suit by February 15. Obviously, the timing is crucial. That federal court would need to reach a decision in Tronox’s favor in just over three months for the Tronox to meet the May 21 deadline.
Though the timing is tight, Tronox is convinced its arguments will win the day, and in short order. In fact, the administrative judge appears to agree with Tronox’s position that an administrative action means death to the deal. As he said at a hearing on December 20, the judge stated, “Everybody involved in these proceedings knows that there’s no way to get through through the [FTC administrative] system before the merger would be consummated. It’s never going to happen.”
The FTC’s attorneys countered that the deal has yet to win approval from the European Commission and other regulatory bodies, and that therefore, “the parties are not currently in a position to close the merger.” The FTC’s lawyers further argue that the administrative venue is the best proceeding “to actually determine the legality of the merger.” Tronox’s attorneys argue convincingly that pending EU investigations haven’t stopped the FTC from its usual course of seeking a preliminary injunction in federal district court in the past, and that, as the judge stated, the real issue is that whatever the merits of the case, the administrative proceeding is an guaranteed, foreordained, deal-killer.
The FTC is asserting that a Tronox-Cristal tie-up would undermine competition in the already cosy industry. In its complaint, filed on December 5, the FTC focuses on the North American market for titanium dioxide. The Commission argues that one of the two main processes for producing the pigment, the “chloride” method, dominates the continent. The merger, says the FTC, would give the new combination an 80% share of North American titanium dioxide production via chloride. It further argues that manufacturers have a long history of curtailing production to support prices, and that the real rationale behind a Tronox-Cristal merger is to slash their combined production, hike what they charge customers (big clients include paint-makers Sherwin Williams and PPG). For the FTC, what’s now a virtual cartel in North America would become a cartel with a far stronger grip on prices.
In its January complaint, Tronox asserts that the FTC is wrong in both isolating North America as the crucial market, and in looking only at the chloride process. According to Tronox, titanium dioxide is a global commodity, and prices are highly correlated around the world, governed by fierce competition. The U.S., for example, exports over half of its production of titanium dioxide, and imports one-third of what it consumes at home. Tronox further contends that the titanium dioxide made from the sole alternative—the sulfate method—is mostly interchangeable with the product made under the chloride system. Given that chloride and sulfate compete directly, if chloride prices rise, big customers will buy more of the sulfate-produced pigment from companies such as sulphate-specialists, and major global players, Lomon Billions and Venator.
Most of all, Tronox insists that the deal’s benefits flow from substantially raising, rather than curtailing, the two companies production of pigment. “The whole idea is to drive down our costs, and drive up production, so our prices would fall, and competitors’ prices would fall as well,” says CEO Quinn.
In fact, Tronox and Cristal specialize in different parts of the business. It’s important to understand the basics of how titanium dioxide is made. The process starts with mining titanium ore from titanium-bearing mineral sands. That process yields several commodities containing titanium dioxide. One of the most prominent is ilmenite. That mineral is then run through “slaggers,” furnaces resembling those used in making steel. The “slag” that emerges is then ground into dry particles resembling rough grains of sand. It’s in that form that titanium dioxide, made from ilmenite, is shipped by freighter and rail to the producers of titanium dioxide.
Tronox, the smaller of the two companies with $1.3 billion in 2016 sales, focuses on the upstream. It makes a lot more ilmenite and other feedstock than Cristal because it runs larger mining operations, and boasts far more slagging capacity. In fact, Tronox, in most markets, produces more feedstock than it can consume in its own pigment plants. In both good and tough times, Tronox always makes more feedstock than it can consume internally, and is at the mercy of the volatile market for selling the excess.
The whole idea is to tap, and expand, Cristal’s bigger upstream operations so that Tronox can maximize its production of feedstocks, and the combined company can make a lot more pigment. Cristal (2016 sales: $1.7 billion) is the larger player, and has much less capacity for making feedstock and a lot more facilities for manufacturing pigment. It owns eight titanium dioxide factories versus three for Tronox. A new Tronox-Cristal could run all of the combined company’s feedstocks through the its plants, and wouldn’t be forced to sell anything to competitors. The new combination would get all of its feedstock at cost, whereas today, Cristal is buying much of its ingredients from outside suppliers who can pocket substantial margins, especially in good markets like today’s.
Besides savings from vertical integration, Tronox forecasts more economies from deploying its superior technology to turn around two of its potential partner’s major facilities. Cristal owns a Jazan, Saudi Arabia, slagging plant that’s one of the world’s largest, and yet, according to Tronox, that’s having significant production problems. Tronox is confident that it can use its expertise in slagging to get the Jazan plant running at full tilt, greatly increasing the combined companies’ output of feedstocks.
Another Cristal factory in Yanbu, Saudi Arabia, this one producing final pigment, is running at only well below capacity. The facility is virtually a copy of a Tronox plant in Mississippi. “We’d send the good old boys from Mississippi to Saudi Arabia, and get the plant running at full capacity,” says Quinn.
Putting such big, underused assets to full use would indeed seem a formula for raising, rather than curtailing, production. Still, it’s extremely difficult to assess the antitrust arguments on both sides from outside the industry. Quinn told Fortune that the FTC’s probable plan is to wait until just before the merger agreement expires, then demand that Tronox-Cristal sell one or the other’s entire U.S. operation, a demand that he says would doom the deal.
So how best to judge whether the merger is a competition-crusher, or a tonic for competition? The administrative approach won’t tell us, because the proposed merger will die before the court weighs the evidence. The way to go is to let freedom ring. The FTC should do what it usually does, sue in district court so that both sides can present all the competitive information before the merger deadline. Under that scenario, the court will decide, based on hard economic data, whether the deal is good or bad for competition in titanium dioxide. And the deal will happen or die based on that determination. What really matters is what the deal means for consumers. And to get the answer, the FTC should give Tronox its day in court.