EN Official Journal of the European Union C 107/6

Summary of Commission Decision

of 13 July 2011

declaring a concentration compatible with the internal market and the functioning of the EEA Agreement

(Case COMP/M.6101 — UPM/Myllykoski and Rhein Papier)

(notified under document C(2011) 4997)

(Only the English text is authentic)

(Text with EEA relevance)

2012/C 107/04

On 13 July 2011 the Commission adopted a Decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (1), and in particular Article 8(1) of that Regulation. A non-confidential version of the full Decision can be found in the authentic language of the case and in the working languages of the Commission on the website of the Directorate-General for Competition, at the following address:

http://ec.europa.eu/comm/competition/index_en.html

I. THE PARTIES

(1) UPM is a worldwide company headquartered in Finland which develops, produces and markets paper products. It also produces pulp, electricity, label-stock, sawn timber and wood panel products.

(2) Myllykoski is a privately-owned Finnish company. It develops, produces and markets paper products. It also produces pulp. It has mills in Finland, Germany and the United States and sales activities worldwide.

(3) Rhein Papier, located in Germany, produces paper products in Germany and has sales worldwide. It is managed by Myllykoski and is controlled by the same shareholders that own Myllykoski. Myllykoski and Rhein Papier are referred to as the Myllykoski Group.

II. THE OPERATION

(4) On 28 January 2011, the Commission received a formal notification pursuant to Article 4 of the Merger Regulation by which UPM-Kymmene Corporation (‘UPM’) acquires within the meaning of Article 3(1)(b) of that Regulation sole control over Myllykoski Corporation (‘Myllykoski’) and Rhein Papier GmbH (‘Rhein Papier’).

III. UNION DIMENSION

(5) The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 000 million (2). Each of them has an EU-wide turnover in excess of EUR 250 million, but they do not achieve more than two-thirds of their aggregate Union-wide turnover within one and the same Member State. The notified operation therefore has a Union dimension.

IV. THE PROCEDURE

(6) By decision of 4 March 2011, the Commission raised serious doubts as to the compatibility of the concentration with the internal market and initiated proceedings pursuant to Article 6(1)(c) of the Merger Regulation (‘the Article 6(1)(c) Decision’). UPM submitted its written comments on the Article 6(1)(c) decision on 22 March 2011.

(7) On 15 April 2011, UPM submitted a set of documents called ‘Papers on a number of key issues’ and announced submitting another economic study. The study was submitted on 18 April 2011.

(8) On 5 May 2011, the Commission adopted a Statement of Objections pursuant to Article 18 of the Merger Regulation. By submission of 20 May 2011 UPM responded to the Statement of Objections and asked for an Oral Hearing.

(9) On 27 May 2011 an Oral Hearing took place. As third parties, the Myllykoski Group, its lending banks and Bertelsmann AG including subsidiaries of the Bertelsmann Group attended the Oral Hearing.

(10) The meeting of the Advisory Committee took place on 1 July 2011.

V. EXPLANATORY MEMORANDUM

A. Relevant markets

(11) Both parties are active in the production and distribution of magazine paper and newsprint. The parties’ activities overlap in acquisition of recovered paper, wood procurement and wood pulp production. The concentration also gives rise to several vertical relationships.

1. Magazine paper

(12) As regards magazine paper both parties are active in all grades except for wood-free paper (‘WFC’) and machine finished coated paper (‘MFC’), which the Myllykoski Group does not produce.

(13) As can be seen from the graph above, the various grades and specifications of magazine paper make up a continuum of different qualities and prices, which in general terms runs from WFC paper (used mainly for magazine covers or very high-quality corporate presentations such as annual reports), through coated mechanical reels (‘CMR’), and supercalendered paper grades (‘SC’). CMR and SC papers are primarily used for publication of consumer magazines, catalogues and advertising/ direct marketing materials (3).

(14) These paper grades can be further segmented into sub-grades, so that CMR is subdivided into light weight coated (‘LWC’), medium weight coated (‘MWC’) and heavy weight coated (‘HWC’). In between SC and CMR there is machine-finished coated (‘MFC’) paper which may be considered as a different category (4). SC paper includes a number of sub-grades such as SC-A+ (and even SC-A++), SC-A, and SC-B. Recently, a number of products have been introduced on the market which, although not produced on SC machines and not necessarily classified as SC papers, compete at the lower end with the SC grades and are referred to as SC-B Equivalent papers or SC-C grades.

(15) The Commission, as in previous cases, considered that WFC should not be included in the magazine paper market in view of the different paper characteristics, different applications, price differences and limited — if any — supply side switches between WFC and other types of magazine paper.

(16) The Commission also considered that newsprint is not to be included in the magazine paper market as the market investigation has shown that both the demand and supply side substitution is limited.

(17) The Commission's investigation confirmed that the SC paper segment should not be further sub-divided as all SC paper grades belong to the same market based on considerable demand and supply side substitution.

(18) Further, the Commission considered that based on very similar product characteristics, the identical applications, price ranges and the switching between the SC-B Equivalent and the SC grades, SC-B Equivalent should be included within the SC paper segment and thus considered part of the magazine paper spectrum.

(19) Based on the above, the Commission concluded that the market for magazine papers does not include newsprint and WFC papers, but may comprise all of the CMR (and including MFC) and SC grades (including SC-B Equivalent) (5). In any event, given that no competition concerns arise from the concentration to which this Decision relates, when considering either a wider magazine paper market comprising CMR and SC, or even the a narrow SC market alone, the exact market definition can be left open.

(20) In the light of the evidence as regards the appreciable trade flows within the EEA and Switzerland, the absence of significant barriers to intra-EEA trade, the fact that transport is both possible and actually undertaken over long distances, and that sales prices are uniform across this space, the Commission considered that the relevant geographic market is the EEA plus Switzerland.

2. Newsprint

(21) Both UPM and Myllykoski Group are active in the market for newsprint. Newsprint is a type of paper used mainly for the printing of newspapers. It is distinguished by its relatively low cost and high strength, which allows it to be run through large printing presses at high speed and in large volumes. Newsprint comes in various grades and specifications. The two primary segments of the newsprint market are standard newsprint and improved newsprint (6).

(22) UPM submitted that, in accordance with Commission precedents (7), there is a market for newsprint taken as a whole. It is considered that there is a high degree of demand-side substitutability of different grades of newsprint. In particular, there is common usage of different grades in multiple applications and consumers can and do switch between different grades. In addition, UPM submitted that improved newsprint can be used for magazine applications; in particular it could replace SC paper.

(23) Given that competition concerns would not arise on any reasonable alternative market definition, the Commision left open the exact product market definition in relation to newsprint market.

(24) The Commission concluded that the relevant geographic market for newsprint is the EEA and Switzerland.

3. Other markets

(25) The Commission concluded that there is no need to precisely define the relevant product and geographic market in relation to: (i) acquisition of recovered paper and (ii) wood procurement and (iii) production of wood pulp, (iv) wood panel products and (v) sawn timber as in this case no competition concerns would arise under any reasonable alternative market definitions.

(26) The Commission also concluded that it is not necessary in the present case to define the scope of the product and geographic market in respect to the generation and wholesale supply of electricity as the concentration does not give rise to competition concerns.

B. Competitive assessment

1. Magazine paper

(27) Market shares in the paper industry are typically based on capacity data, for which independent sources (8) exist. In line with this practice, UPM submitted capacity based market shares for an overall magazine paper market and for the SC market segment which were generally confirmed during the market investigation.

(28) For the an overall magazine paper market comprising SC, MFC and CMR the following are capacity based market shares: Company Share of capacity UPM 20-30 % Myllykoski Group (9) 10-20 % Combined 40-50 % Stora Enso 10-20 % Norske Skog 5-10 % SAPPI 5-10 % Burgo 5-10 % SCA Forest 5-10 % Leipa 0-5 % Others 5-10 % Total 100 %

(29) These market shares do not yet include the SC-B Equivalent papers, as these are recent introductions to the market. Including those products in the above capacity figures would lead to a combined market share of the parties of some 30-40 %.

(30) Competition from the recently introduced SC-B Equivalent papers has already had a significant constraining effect on the SC products where the parties have a relatively strong position. These new products compete directly with SC papers, their sales are growing rapidly and it is expected that the pressure coming from the SC-B Equivalent paper producers will increase in the near future.

(31) Considering the SC paper segment (including the SC-B Equivalent the combined market shares would amount to 40-50 % of total capacity, with a number of competitors remaining: Stora Enso (20-30 %), Norske Skog (10-20 %), Holmen (10-20 %) and SCA (5-10 %).

(32) The ability of competitors to expand production in reaction to a possible capacity reduction resulting from the transaction is determined to a great extent by their spare capacity and on the evolution of the demand.

(33) Based on the demand trends forecasts, the Commission considers that demand in the EEA for magazine paper (including SC) will be stable or even decreasing in the next three to five years.

(34) At the same time, the analysis of competitors' spare capacities on an average annual basis showed that competitors hold significant spare capacity in the market. Indeed, the yearly average utilisation rate of the competitors in the overall market for magazine paper as well as for the narrower SC paper segment was around 88 % in 2010.

(35) Competitors have a strong interest in filling their capacities as paper making involves very high fixed costs. For this reason, producers seek to fill their capacities and therefore will have the incentives to increase capacity utilisation rates and sales in response to price increases or capacity reductions by UPM.

(36) In conclusion, the competitors have both the ability as well as the incentive to counteract any price increases or any likely capacity reductions contemplated by UPM following the merger.

(37) In view of the considerations that have been set out above and elaborated in detail in the proposed decision, the Commission considers that the proposed concentration will not lead to a significant impediment of effective competition in the magazine paper market or in any of the segments thereof.

2. Newsprint

(38) The parties' share of newsprint capacity would not exceed 20-30 %, irrespective of whether the market is considered to be a single market for all newsprint or on separate markets for standard and improved newsprint. The proposed concentration would have no effect on a separate market for super-improved newsprint or SC-B Equivalent as neither UPM nor Myllykoski produce this type of paper.

(39) In terms of shares of sales the parties would have had combined market shares in 2010 of 20-30 % and 20-30 % for standard and improved newsprint respectively (10). On a market for improved newsprint excluding all the capacity used for the production of SC-B Equivalent papers the Commission estimated that the parties' combined market share would have been 20-30 %.

(40) UPM claimed that the proposed concentration would not create competition concerns as a result of that horizontal overlap because: (i) there are strong players on the market capable of competing with the merged entity; (ii) smaller players can successfully compete for contracts given the multi-sourcing practices in the market and (iii) imported paper plays an important role in satisfying EEA demand in newsprint.

(41) After the proposed concentration the combined entity will continue to face competition from Stora Enso which will remain the largest player overall (based on capacity) and for improved newsprint. In addition there are four other important players, Norske Skog, SCA, Holmen and Palm.

(42) Concerning the risk of potential coordination, the Commission noted that is is unlikely that the concentration would increase the incentives to collude, particularly as there would be no reduction in the number of significant players. Myllykoski is only the sixth largest player and is less than one fifth the size of the current market leader Stora Enso.

3. Other markets

(43) The Commission concluded that the proposed concentration would not give rise to a significant impediment to effective competition in relation to: (i) the market for newsprint and its potential narrower segments; (ii) the market for the acquisition of recovered paper and its potential narrower segments; (iii) the market for wood procurement and its narrower segments and (iv) the market for wood pulp and its narrower segments.

(44) In addition, the Commission concluded that the proposed concentration would not give rise to a significant impediment to effective competition as concerns the following vertical relationships: (i) the vertical relationship between wood procurement and pulp; (ii) the vertical relationship between pulp and magazine paper under any alternative market definition; (iii) the vertical relationship between the generation and wholesale supply of electricity and magazine paper under any alternative market definition; (iv) the vertical relationship between wood procurement and wood panel products; (v) the vertical relationship between wood procurement and sawn timber; and (vi) the vertical relationship between the acquisition of recovered paper and pulp.

VI. CONCLUSION

(45) For the reasons mentioned above, the decision concludes that the proposed concentration will not significantly impede effective competition in the Internal Market or in a substantial part thereof.

(46) Consequently the notified operation whereby UPM-Kymmene Corporation acquires sole control of Myllykoski Corporation and Rhein Papier GmbH within the meaning of Article 3(1)(b) of Regulation (EC) No 139/2004 is hereby declared compatible with the Internal Market and the functioning of the EEA Agreement, in accordance with Article 2(2) and Article 8(1) of the Merger Regulation and Article 57 of the EEA Agreement.

(1) OJ L 24, 29.1.2004, p. 1.

(2) Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (OJ C 95, 16.4.2008, p. 1).

(3) Both CMR papers and the SC papers are produced from natural (wood containing) pulp. For the lower qualities pulp from recycled paper may also form part of the input. SC papers, in contrast to CMR papers, are not coated. The production of all kinds of paper involves the use of calenders at the end of the manufacturing process to smooth the surface. A calender is a pair of rolls that applies pressure to the paper. In SC paper production at least two pairs of rubber covered rolls (soft nips) are used and often more.

(4) MFC is of minor importance in terms of volume and usually not reported separately, but included in LWC. Myllykoski Group does not produce MFC paper.

(5) Further in this document the expression ‘magazine paper market’ is supposed to include SC, MFC and CMR.

(6) MFS (synonym for improved newsprint), including UMI (uncoated mechanical improved) and UMO (uncoated mechanical-other).

(7) See Case COMP/M.646 Repola/Kymmene, 30 October 1995, para. 12; Case COMP/M.2498 UPM-Kymmene/Haindl, 21 November 2001, para. 13; Case COMP/M.3822 Stora Enso/Schneidersöhne Papier, 25 July 2005, para. 16.

(8) Jaakko Pöyry Databank, RISI; CEPI Print is an association of publication paper producers.

(9) Myllykoski Group's capacity was downwards corrected in the amount of 93 kt by UPM (Response to the Statement of Objections (see pages 9 and 63).

(10) Based on parties own sales and CEPIPRINT overall sales.