COMMISSION DECISION of 11/06/98 declaring a concentration to be compatible with the common market (Case No IV/M.1006 - ** UPM-KYMMENE / APRIL) according to Council Regulation (EEC) No 4064/89

(Only the English text is authentic

The paper version of the decision is available through the sales offices of the Office of Official Publications of the European Communities.

PUBLIC VERSION

MERGER PROCEDURE

ARTICLE 6(1)(b) DECISION

To the notifying parties

Dear Sirs,

Subject: Case No IV/M.1006 - UPM-Kymmene/APRIL

Notification of 16.03.1998 pursuant to Article 4 of Council Regulation No 4064/89. Notification declared incomplete on 03.04.1998 - Notification complete on 05.05.1998.

1.On 16.03.1998, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EEC) No 4064/89 by which the undertakings UPM-Kymmene Corporation ("UPM-Kymmene") and the Asian Pacific Resources International Holdings Limited ("APRIL") acquire within the meaning of Article 3(1)(b) of the Council Regulation joint control of both UPM-Kymmene Fine Paper ("FPC") and APRIL Fine Paper ("AFP").

2.The notification was declared incomplete on 03.04.1998 according to Article 4 of Commission Regulation (EC) No 447/98. Complete information was obtained on 05.05.1998 and the notification thus became effective within the meaning of Article 4(2) of the Commission Regulation (EC) No 447/98 on 06.05.1998.

3.After examination of the notification, the Commission has concluded that the notified operation falls within the scope of Council Regulation (EEC) No 4064/89 and does not raise serious doubts as to its compatibility with the common market and with the EEA Agreement.

I. THE PARTIES AND THE OPERATION

4.UPM-Kymmene (Finland) is active primarily in the forest products industry, in particular the sale and production of paper, packaging materials etc. Furthermore, it has activities in the engineering industry.

5.APRIL (Bermuda) is one of Asia's leading pulp and paper companies, producing pulp, viscose fibre and paper targeted mainly at the Asian market. APRIL is related to Raja Garuda Mas International Corporation ("RGM") which is a management service company with business interests in forest products, agro industry, among other things.

6.The operation consists of the formation of two newly created joint venture companies, FPC and AFP, with core businesses in Europe and Asia, respectively. In Europe, FPC will become the holding company for UPM-Kymmene's existing pulp and fine paper production business in Kymi Paper Oy (Finland) and its fine paper production business in Nordland Papier (Germany) and thus UPM-Kymmene will withdraw from the fine paper market.[For a transitional period UPM-Kymmene will retain its existing fine paper production unit Papeteries de Docelles in France (producing about 1% of UPM-Kymmene's total fine paper production) which is in the process of specialising its production entirely in envelope paper.] In Asia, AFP will be established as a holding company for APRIL's existing subsidiaries which are in the process of setting up fine paper production and converting projects in China and Indonesia. By the time AFP starts its fine paper production which will be completed in 1998, APRIL will not have any fine paper activities outside AFP.

II. CONCENTRATION

A. Joint control

7. The two joint ventures will be set up simultaneously by way of a 30% share swap of the parents' respective fine paper businesses, i.e. UPM-Kymmene will hold 70% and APRIL will hold 30% of FPC's share capital, while APRIL will hold 70% and UPM-Kymmene will hold 30% of AFP's share capital.

8. Appointment of management and strategic decisions relating to budgets, business plans, investments and funds in FPC and AFP will be made by the Board of Directors ("Board") in each company. Each Board will consist of five members. Three of the five members of the FPC Board will be appointed by the shareholders following a binding recommendation by UPM-Kymmene and two will be appointed following a binding recommendations of APRIL and vice versa for AFP's Board.[However, the first members of FPC's and AFP's Boards will be directly appointed by the parties and thereafter the subsequent nominations will be solely determined by the shareholders.] The Chairman of the FPC Board will be appointed by UPM-Kymmene, which will assume the industrial leadership of FPC while the Chairman of the AFP Board will be appointed by APRIL, which will assume the industrial leadership of AFP. However, the Chairman will not be granted any special voting rights and all strategic decisions of each Board will be taken unanimously. In the event of a deadlock situation, the matter concerned will be referred to the CEO of UPM-Kymmene and the Chairman of APRIL for resolution. In addition, the unanimous advance approval of each of UPM-Kymmene and APRIL is required with regard to decisions on [Deleted for publication] Accordingly, both FPC and AFP will be jointly controlled by UPM-Kymmene and APRIL.

B. Full function on a lasting basis

9. FPC will be established for an indefinite period and will take over all UPM-Kymmene existing pulp and fine paper production business in Kymi Paper Oy and its fine paper production business in Nordland Papier. Given that all operating assets of the plants will be transferred to FPC, it will have all necessary resources, including finance, staff and assets (tangible and intangible). Initially, FPC will conduct the sales and distribution of fine paper through personnel presently employed by UPM-Kymmene, which may be transferred to FPC on a case-by-case basis. UPM-Kymmene will, however, only act as an agent of FPC which will set the prices autonomously and bear the economic risk of the fine paper distribution. In addition, FPC will have the exclusive responsibility for the marketing, sales and distribution of the fine paper products manufactured by it and AFP in Europe.

10. While Kymi Paper will produce its own pulp, Nordland Papier will enter into a supply agreement for pulp with UPM-Kymmene to cover about [Deleted for publication: less than 500,000 t] of its pulp requirements while another [Deleted for publication: less than 250,000 t] will be acquired on the open market. The purpose of the arrangement is to secure the supply of raw materials to Nordland Papier. However, at all times, Nordland Papier will be free to purchase its pulp requirements from third parties. Furthermore, given that UPM-Kymmene's pulp production is not sufficient to satisfy the demand of UPM-Kymmene's own paper production and that of Nordland Papier, the latter will in any event purchase a substantial part of its raw material requirements on the open market. Therefore, the supply arrangements do not call the full function character of FPC into question.

11. Similarly, AFP will be established for an indefinite period and will take over APRIL's existing subsidiaries which are in the process of setting up fine paper production and converting projects in China and Indonesia. AFP will have all necessary resources for producing fine paper, including finance, staff and assets (tangible and intangible). AFP will also have the exclusive responsibility for the marketing, sales and distribution of, and price-setting for, the fine paper products manufactured by it and FPC in certain Asian countries.

12. Finally, it is foreseen in Article 6.5 of the Share Exchange Agreement that all purchases and sales of goods and services by FPC and AFP from or to the parent companies and their subsidiaries will be made on an arm's length basis, provided that UPM-Kymmene and APRIL will be granted a preferred supplier status with respect to the goods and services that they are able to supply, and in turn FPC and AFP will be granted a preferred customer status. The goods and services in question are for example electricity, water, maintenance, spare parts, transport, logistics, group services, wood etc.

C. Conclusion

13. Based on the above, FPC and AFP will perform on a lasting basis all the functions of autonomous entities. Given that the joint ventures will be set up simultaneously and that completion of one joint venture is conditional upon completion of the other, the joint ventures constitute a single concentration. In addition, the joint ventures will be active in the same product markets. Thus, the notified operation constitutes a concentration witin the meaning of Article 3(2) of the Merger Regulation.

III. COMMUNITY DIMENSION

14. The combined aggregate world-wide turnover of the undertakings concerned exceeded 2,500 million ECU in 1997 (UPM-Kymmene: 8,416 million ECU; APRIL: 2,300 million ECU). The combined aggregate turnover of the undertakings concerned was more than 100 million ECU in each of at least three Member States in which the aggregate turnover of each of the undertakings concerned was more than 25 million ECU ( [Deleted for publication] ). The aggregate Community-wide turnover of each of the undertakings concerned was more than ECU 100 million. Furthermore, the undertakings concerned do not achieve more than two-thirds of their aggregate Community-wide turnover within one and the same Member State. The notified operation therefore has a Community dimension within the meaning of Article 1(3) of the Merger Regulation.

III. COMPETITIVE ASSESSMENT

A. Relevant product markets

(i) Fine paper

15. Fine paper is made from chemical pulp and used mainly for business applications such as office printers and copiers. There are two basic types of fine paper, namely wood-free uncoated (WFU), and wood-free coated (WFC). The primary end-uses of WFC are for printing such as advertising, magazine covers, catalogues, manuals, books, etc. WFU is used for photocopying and reproduction purposes. The Commission has to date left open the question, as to whether these types of fine paper represent distinct markets.[Case No. IV/M.166 - Torras/Sarrio; Case No. IV/M. 499 - Jefferson Smurfit/Saint-Gobain; and Case No. IV/M. 549 - SCA/PWA.] The precise delineation can also be left open in the present decision because, in all alternative market definitions considered, effective competition would not be significantly impeded in the EEA or any substantial part of that area.

(ii) Chemical pulp

16. The raw material used for the production of fine paper is chemical pulp. Chemical pulp is made from wood. Although pulp exhibits different properties depending on the type of wood used - softwood results in a stronger pulp, whereas hardwood results in more opaque pulp and hence more opaque paper - the Commission has recognised that pulp forms a single product market.[Case No. IV/M.210 - Mondi/Frantschach; and Case No. IV/M. 166 - Torras/Sarrio]. This has been confirmed by the Commission's investigation in the present case.

B. Relevant geographic markets

(i) Fine paper

17. In previous decisions the Commission has defined the market for the production and direct sale of fine paper as at least EEA wide since the product can be efficiently and cheaply transported.[Case No IV/M.210 - Mondi/Frantschach; Case No IV/M. 499 - Jefferson Smurfit/Saint-Gobain; Case No IV/M.549 - Svenska Cellulosa/PWA.]. This has been confirmed by the Commission's investigation in the present case. It is however not necessary to further delineate the relevant geographic markets because, in all alternative geographic market definitions considered, effective competition would not be significantly impeded in the EEA or any substantial part of that area.

(ii) Chemical pulp

18. The Commission has found that, to the extent that pulp is traded on the open market, it is an internationally traded product and the geographic dimension of the confirmed market is at least Community-wide.[Case No IV/M.210 - Mondi/Frantschach, and Case No. IV/M. 166 - Torras/Sarrio] This has been confirmed by the Commission's investigation in the present case. It is however not necessary to further delineate the relevant geographic markets because, in all alternative geographic market definitions considered, effective competition would not be significantly impeded in the EEA or any substantial part of that area.

C. Assessment

(i) Fine paper

19. According to the parties, the fine paper activities which UPM-Kymmene is transferring to FPC constitute about [Deleted for publication: less than 15%] of the overall EEA fine paper market. This figure breaks down to about [Deleted for publication: less than 10%.] of the WFC market and [Deleted for publication: less than 15%] of the WFU market. These figures have been confirmed by the Commission's investigation of competitors and customers in the present case. In the short-term at least, there will be no addition of market shares in this market, since the fine paper plants which April is contributing to AFP are still under construction. In the longer-term it is unlikely that AFP will be a significant supplier of fine paper in the EEA, given the geographic distance between AFP's plants in Indonesia and China and EEA customers. The Commission's investigation in the present case has revealed that imports of fine paper into the EEA are relatively small and that this situation is not likely to change soon because of the low quality of overseas products. In any event, there are financially strong competitors supplying the EEA market, such as KNP, International Paper, Meträ Sera and Stora.

(ii) Chemical pulp

20. In 1996 the UPM-Kymmene pulp production facilities produced a total of [Deleted for publication] kt of pulp, whereas the internal pulp consumption of UPM-Kymmene was [Deleted for publication] kt. Thus, most of UPM-Kymmene's pulp production has been used internally and only marginal amounts were sold on the open market. According to the parties, historically such sales by UPM-Kymmene have amounted to less than [Deleted for publication: less than 5%.] of EEA consumption. This situation will continue, in that the Kymi plant will produce and consume its own pulp, whereas the Nordland plant will either purchase its pulp from UPM-Kymmene, or purchase it from elsewhere, on the open market. April's sales of chemical pulp in the EU in 1996 were less than [Deleted for publication] kt, which corresponds to a share of EEA consumption of less than [Deleted for publication: less than 5%.].

(iii) Conclusion

21. In view of the above, the operation will have no significant impact on competition in the EEA. Consequently, the proposed concentration does not create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the EEA or any substantial part of that area.

IV. ANCILLARY RESTRICTIONS

22. The parties have requested that the following provisions should be considered ancillary to the concentration.

23. According to the parties, FPC will enter into supply agreements with its parents for chemical pulp used to produce fine paper. Given that the final agreements have not yet been concluded, they are not covered by the present decision. In addition, it is foreseen in article 6.5 of the Share Exchange Agreement that UPM-Kymmene and APRIL will be granted a preferred supplier status, and in turn FPC and AFP will be granted a preferred customer status, as explained above (para 12). Although this provision appears directly related to the concentration, it is not necessary for the concentration to take place. Accordingly, it cannot be considered as an ancillary restriction and is thus not covered by the present decision.

24. UPM-Kymmene and APRIL will be prevented from competing with FPC and AFP on a world-wide basis as long as the joint venture is in existence. In so far as this provision simply expresses the reality of the lasting withdrawal of the parents from the market assigned to the joint ventures it is covered by the present decision.

V. CONCLUSION

25. For the above reasons, the Commission decides not to oppose the notified operation and to declare it compatible with the common market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EEC) No 4064/89.

For the Commission,