Inco/Falconbridge (European Commission, phase II)
Advisory Services
The Situation
On 11 October 2005, Inco, a Canadian mining company principally active in the mining, processing, refining and sale of various nickel products, copper, cobalt and precious metals, announced its intention to acquire Falconbridge, a diversified Canadian mining company active in the mining, processing, refining and sale of various metals, including nickel, copper, cobalt, lead, zinc, aluminium, and precious metals.
During its initial investigation, the Commission identified serious concerns in relation to nickel and cobalt. Nickel is used in a broad range of applications, including stainless steel, various kinds of alloys, batteries, and plating and electroforming. The main end applications of cobalt are alloys, batteries, hard materials, pigments, and catalysts.
The Commission raised concerns in relation to the supply of nickel for plating and electroforming, and the supply of high purity cobalt and high purity nickel for super alloys (i.e., high performance alloys used in applications in high-temperature and high-stress environments). In addition, the Commission was concerned that the merged entity might delay some of its new mining projects, in view of its large portfolio of existing and future greenfield nickel mining assets.
On 24 February 2006, the Commission opened an in-depth phase II investigation. The parties submitted a remedy package on 16 March 2006, with further revised packages submitted on 5 April 2006, and 7 June 2006, and a final version submitted on 26 June 2006.
The Commission sent the parties a Statement of Objections on 8 May 2006, and an oral hearing was held on 29 May 2006.
The transaction was reviewed in parallel by the Commission and the US Department of Justice, and the two agencies actively cooperated on this case.
NERA's Role
NERA was retained by Inco throughout the pre-notification, phase I and phase II stages of the Commission's investigation, working closely with Inco staff and their legal advisors.
NERA provided economic analysis and advice, and assisted in the research and preparation of a wide range of submissions and presentations before the Commission including the site visit and oral hearing, and covered a wide range of questions from market definition, competitive assessment, entry and expansion, to questions of arbitrage and dynamic optimisation. NERA's work also included an investigation into the incentives for the delay of the development of new mining projects, as well as a shock analysis and event study of the response in global prices to historical developments and announcements.
The Result
On 4 July 2006, the European Commission cleared the merger subject to a divestiture remedy.
Inco had stated in the initial public announcement of the proposed acquisition that it was prepared to divest Falconbridge's Nikkelverk refinery in Norway, together with related assets. In order to ensure the long term competitiveness of the divested business, the Commission required that these assets would be divested to a company active in metal mining and/or processing, with sufficient nickel resources to sustain the viability of the refinery, and to provide the divested business with the option of a transitional supply agreement for intermediate feed materials for up to ten years.
In addition to this investigation, the Commission reviewed four alternative mergers, Teck Cominco/Inco, Phelps Dodge/Inco/Falconbridge, Xstrata/Falconbridge and CVRD/Inco. Ultimately Xstrata acquired Falconbridge and CVRD acquired Inco. NERA continued to provide advice to Inco throughout these investigations.
