2003/36/ECSC - Commission Decision of 7 May 2002 authorising RAG Aktiengesellschaft to acquire control of Saarbergwerke AG and Preussag Anthrazit GmbH (Case COMP/ECSC.1350 — RAG/Saarbergwerke/Preussag Anthrazit II) (Text with EEA relevance) (notified under document number C(2002) 1436)
Date: 2002-05-07
Institutions: European Commission
Subjects: Germany, coal industry, competition, economic concentration, merger

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 7 May 2002

authorising RAG Aktiengesellschaft

to acquire control of Saarbergwerke AG and Preussag

(Case COMP/ECSC.1350 — RAG/Saarbergwerke/Preussag Anthrazit II)

Anthrazit GmbH

(notified under document number C(2002) 1436)

(Only the German text is authentic)

(Text with EEA relevance)

(2003/36/ECSC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

to separate the sale of coal mined in Germany from the
sale of imported coal.

Having regard to the Treaty establishing the European Coal and
Steel Community, and in particular Article 66(2) thereof,

Having regard to the notification submitted by the parties by
letter dated 13 November 1997,

Whereas:

By letter dated 13 November 1997, RAG Aktienge-
sellschaft, Essen, (‘RAG’) notified the Commission under
Article 66(1) of the ECSC Treaty that it intended to
acquire the entire share capital of Saarbergwerke AG,
(‘SBW’) and Preussag Anthrazit GmbH,
Saarbrücken,
Ibbenbüren, (‘Preussag’). The purpose of the transaction
was to bring about a merger between the last three
remaining German hard coal mining companies. The
purchase price for SBW was DEM 2, of which DEM 1
was to be paid to Germany and DEM 1 to the Saarland
in their capacity as previous owners.

(1)

(2)

(3)

(4)

In the meantime, the merger had been completed. In
fulfilment of the commitments, SCI had been sold to an
independent French buyer.

On 31 January 2001, in RJB Mining v Commission (1), the
Court of First Instance annulled the Commission deci-
sion of 29 July 1998 in its entirety. The Court found
that the Commission had not assessed whether the total
assets of SBW transferred to RAG corresponded to the
price paid of DEM 2 or whether State resources had
been implicitly transferred to RAG. In the present case,
although the Commission was not required to assess the
legality of the supposed aid, namely the aid inherent in
the merger,
it could
not — according to the Court's judgment — in its
analysis of the competitive situation under Article 66(2)
of the ECSC Treaty, refrain from assessing whether, and
if so to what extent, the financial and thus the commer-
cial strength of the merged entity was strengthened by
the financial support provided by that supposed aid in
the form of the low purchase price (2).

in a formal preliminary decision,

By decision of 29 July 1998 (Case COMP/ECSC.1252 —
RAG/Saarbergwerke/Preussag Anthrazit) (‘decision of 29
July 1998’), the Commission authorised under Article 66
of the ECSC Treaty RAG's takeover of SBW and Preussag
after RAG gave a commitment to sell SBW's coal import
business, Saarberg Coal International GmbH (‘SCI’), and

(5)

On 8 November 2001, the parties submitted all relevant
information for a renewed assessment of the notified
merger.

(1) Case T-156/98 [2001] ECR II-337.
(2) Germany and RAG have lodged an appeal against this judgment

before the Court of Justice.

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(6)

(7)

(8)

(9)

(10)

I. THE PARTIES

Prior to the merger, RAG was active primarily in the
extraction and marketing of coal and in the processing
of coking coal into blast furnace coke. It also held shares
in a number of international mining companies and had
interests in the fields of power generation, chemicals and
plastics, waste treatment and environmental services,
mining technology and real estate.

At the time of the merger in 1998, the shares in RAG
were held by four shareholders (partly through joint
ventures with co-proprietors): VEBA AG, VEW AG,
Thyssen-Krupp-Stahl AG and ARBED SA. RAG's current
shareholders are E.ON AG,
to VEBA
(37,1 %), RWE AG in succession to VEW (30,2 %),
(12,7 %), Montan-Verwaltungsge-
Thyssen-Krupp-Stahl
sellschaft mbH, a joint venture between E.ON and
Thyssen-Krupp-Stahl (10 %), and Verwaltungsgesellschaft
RAG Beteiligung mbH, a joint venture between ARBED
SA and RAG itself (10 %).

the successor

the coal compromise, of the 17 pits still in operation in
1997, 10 or 11, producing some 30 million tonnes of
coal a year and employing around 36 000 people, were
to be retained in the long term.

(11) Under the coal compromise, Germany, in parallel with
the purchase by RAG of the shares in SBW held by the
Federal Government and the Saarland, earmarked a total
of DEM 2,5 billion of aid for future pit closures. As of
1998, this aid was lumped together with the funds from
Germany and the Land of North-Rhine Westphalia for
promoting the sale of domestic power station coal and
coking coal, subject to an overall ceiling. State aid for
the German coalmining industry, which in 1997 totalled
DEM 10,5 billion, was then to be gradually reduced to a
total of DEM 5,5 billion by 2005. In addition to the
contributions from Germany and the Land of North-
is being
Rhine Westphalia, since 2001 DEM […] (*)
provided each year out of the earnings from RAG's non-
coal activities.
the additional
[…]*. Disbursement of
federal resources will be conditional on RAG actually
acquiring the shareholdings of Germany and the Saar-
land in SBW.

SBW carried on business primarily in the following
fields: coal extraction in Germany, coke production,
environmental
power
protection,
the
marketing and trading of coal and the transport and
distribution of oil) and rubber. It was owned 74 % by
Germany and 26 % by the Saarland.

generation, distance heating,
trading and services

(in particular

Preussag was
likewise active in the extraction and
marketing of coal products; its other activities related to
heat generation and water supply. The company oper-
ated a mine at Ibbenbüren. It was wholly owned by the
Preussag AG group.

II. THE TRANSACTION

The notified transaction is part of an agreement,
commonly known as the ‘coal compromise’ (Kohlekom-
reached on 13 March 1997 between the
promiss),
Federal Republic of Germany, the Land of North-Rhine
Westphalia, the Saarland, the German mining and power
station workers' union (deutsche
Industriegewerkschaft
Bergbau und Energie) and the abovementioned three
companies (‘the coal compromise’). Under the agree-
ment, the mining businesses of
the three companies
RAG, SBW and Preussag were to be merged to form a
single company, Deutsche Steinkohle AG, controlled by
RAG. According to the information provided by the
parties and by Germany, the aim was that, as a result of
the merger and the State aid that had been promised,
the politically desirable process of adjustment in the
German coal industry would take place under socially
acceptable conditions and a lastingly viable, efficient
mining industry would be ensured beyond 2005. Under

(12)

(13)

III. CONCENTRATION,

COMPETENCE

OF

THE

COMMISSION

In its decision of 29 July 1998 the Commission estab-
lished that, by acquiring the entire share capital of SBW
and Preussag, RAG would be able to exercise sole
control over those undertakings. In the meantime, the
merger plan had been executed in accordance with the
notification. It can therefore be said that the notified
transaction constitutes an acquisition of control within
the meaning of Article 1 of High Authority Decision No
24/54 of 6 May 1954 laying down in implementation of
Article 66(1) of the Treaty a regulation on what consti-
tutes control of an undertaking (1), and accordingly
brings about a concentration within the meaning of
Article 66(1) of the ECSC Treaty.

The Commission also established in its decision of 29
July 1998 that, as a result of their involvement in the
extraction of and trade in hard coal and hard coal
products, RAG, SBW and Preussag are to be considered
undertakings within the meaning of Article 80 of the
ECSC Treaty, read in conjunction with Annex I thereto.
To the extent that the parties also sell coal to domestic
consumers and small craft industries, pursuant to Article
80 the transaction does not fall under the ECSC Treaty.
As regards the effects in the domestic consumer and
small craft industry sector and the non-mining activities
of the parties to the merger, the transaction was notified
to the German Federal Cartel Office and exempted in
early 1998.

(*) Parts of this text have been edited to ensure that confidential infor-
mation is not disclosed; those parts are enclosed in square brackets
and marked with an asterisk.
(1) OJ 9, 11.5.1954, p. 345/54.

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(14)

The Commission established further that the proposed
merger requires prior authorisation inasmuch as the
annual output of the undertakings involved (approxi-
mately 48 million tonnes of hard coal) exceeds the
maximum amount referred to in Article 1(1)(a) of High
Authority Decision No 25/67 of 22 June 1967 laying
down in implementation of Article 66(3) of the Treaty a
regulation concerning exemption from prior authorisa-
tion (1), as last amended by Commission Decision No
3654/91/ECSC (2). This aspect of the Commission deci-
sion was not contested. The question of the Commis-
sion's competence therefore does not need to be exam-
ined anew. The criterion to be adopted in this respect is
the time of the original notification (3).

IV. ASSESSMENT UNDER ARTICLE 66(2)

(15) After the Court of First Instance annulled the Commis-
sion decision of 29 July 1998 on 31 January 2001, a
renewed competition assessment was needed in the light
of the Court's judgment. For this renewed assessment,
unlike in the case of the question whether the notified
merger falls within the scope of merger control under
the ECSC Treaty, the criterion to be adopted is not the
time of the original notification.
Instead, the decisive
factor is the position at the time of the decision (4). The
Commission must therefore assess whether the merger,
in the shape of the notification as supplemented in the
meantime on the basis of the current market position of
the parties and in the light of any increase in RAG's
financial strength, gives the parties the power within the
meaning of Article 66(2) of the ECSC Treaty

(a) to determine prices, to control or restrict production
or distribution or to hinder effective competition in
the market affected by the
a substantial part of
merger, or

(b) to evade the rules of competition instituted under
the Treaty, in particular by establishing an artificially
privileged position involving a substantial advantage
in access to supplies or markets.

A. GERMAN POLICY ON COAL: GENERAL BACKGROUND

(16)

In the past, the sale of coal to German power generators
and steelmakers was governed by specific agreements
known as the Century Contract (Jahrhundertvertrag) and
(Hüttenvertrag), which
the
imports and
contained extensive rules on State aid,

Steelworks Agreement

(1) OJ 154, 14.7.1967, p. 11.
(2) OJ L 348, 17.12.1991, p. 12.
(3) See Case No IV/M.308 Kali+Salz/MDK/Treuhand, OJ C 275,

3.9.1998, paragraph. 9.

procurement obligations. The Century Contract and the
Law on tariff quotas for solid fuels (Zollkontingentgesetz)
expired on 31 December 1995. The Steelworks Agree-
ment was terminated in 1999.

(17)

The conditions under which the coal industry operates
in Germany are now based essentially on the coal
compromise. Under the coal compromise, there is to be
an overall ceiling for aid to mining. Aid will be granted
only towards using coal in power generation and steel
making. Germany has given assurances that the aid will
be limited to the amount absolutely necessary and is
intended only for output supplied to the power industry
and the Community's coal and steel industry. Under the
coal compromise, aid for coal supplied to the power
industry can compensate for the difference between
production costs in German mines and the average price
for
into Germany. The average price for
imported coal is determined each year, and the actual
selling price is calculated on the basis of that import
price, which includes transport costs. In the case of sales
to the steel industry, the aid compensates for the differ-
ence between the average price for imported coal in the
Community and actual production costs. In both cases
the absolute amount of aid is limited.

imports

(18) Under

the coal compromise, domestic output was
originally to be cut from approximately 47,9 million
tonnes in 1996 to approximately 30 million tonnes in
2005. From a total of DEM 10,5 billion in 1997, State
industry was set to fall to a total of
aid to the coal
DEM 5,5 billion in 2005. In 2000 the coal compromise
was revised. Output is now to be reduced from as early
as 2002 to less than 29 million tonnes. In 2000 output
came to approximately [30 to 40]* million tonnes. For
2000 operating aid of DEM 3,8 billion (2001: DEM 3,8
billion), aid for the reduction of activity of DEM 3,1
billion (2001: DEM 1,9 billion), aid to maintain an
underground labour force of DEM 71 million (2001:
DEM 67 million) and aid to cover exceptional costs of
is provided
DEM 2,1 billion (2001: DEM 2,7 billion)
for (5). The structure of the aid has changed substantially
compared with 1999. The share of total aid accounted
for by sales subsidies, which in 1999 still came to 91 %,
the share of aid
fell
accounted for by aid to cover exceptional costs uncon-
nected with day-to-day mining operations increased. The
reduction in aid is set to continue until 2005 at least.

in 2001 to 66 %. By contrast,

(4) See Case No IV/M.308 Kali+Salz/MDK/Treuhand, loc. cit., paragraph

(5) See Commission decision of 21.12.2000 on German aid to the coal

10.

industry for 2000 and 2001, OJ L 127, 9.5.2001, p. 55.

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(19)

(20)

(21)

industry was subject

to extensive
The German steel
procurement obligations in respect of domestic coking
coal under the Steelworks Agreement, which was first
concluded when RAG was established in 1969. The
agreement was authorised by the Commission under
Article 65 of the ECSC Treaty until the end of 1997 by
means of Decision 89/248/ECSC of 30 March 1989
authorising the agreements on supplies of solid fuels to
six steelworks by Ruhrkohle AG (1). It was amended for
1998, the exclusive procurement obligations in parti-
cular being either discontinued or scaled down. The
Commission closed the proceeding under Article 65 of
the ECSC Treaty in respect of
the 1998 Steelworks
Agreement by administrative letter (2). The agreement
was terminated in 1999 and replaced by bilateral agree-
ments between RAG and the individual steel producers.
These agreements, which are not to run beyond 2005,
no longer contain any exclusivity clauses, procurement
obligations dependent on total requirements or most-
favoured-nation clauses.

B. RELEVANT PRODUCT MARKETS

In its decision of 29 July 1998, the Commission estab-
lished that basically the merger concerned the sale of
coal and coal products.
It based this finding on the
following arguments:

Coal is sold to industrial customers (power generators,
steel manufacturers and other industrial customers) and
to private households and small businesses. The house-
hold and small-business sector is not covered by the
ECSC Treaty and was therefore not affected by the deci-
sion.

(22) Most of the coal used by industry (including steel manu-
facturers and power generators) is supplied direct to the
final consumer by the mining companies or
the
importer. The wholesale trade is of no significance in
these market segments and its role requires no further
discussion in this Decision.

(23)

For large users it is impossible to replace coal by other
fuels in the short term. Power stations are adapted to a
particular energy source, and it is not possible to substi-
tute other sources of energy, such as natural gas, for coal
in the short term. In the steel industry, coke serves a
special metallurgical purpose, which cannot be satisfied
by using other raw materials.

(24)

It is of course possible to divide sales of coal to industrial
customers into three separate categories: power genera-
tors, steelmaking and other industry (sugar mills, cement
works, papermaking). However, since all three types of

(1) OJ L 101, 13.4.1989, p. 35.
(2) Proceeding COMP/E-3/36.779 RAG Hüttenvertrag,

letter

of

8.11.2000.

sales are affected by the same factors, it is not necessary
to consider each one separately in order to assess the
present case.

(25)

Since the decision of 29 July 1998 no changes have
occurred that would require a different assessment. The
sale of coal and coal products is therefore regarded as
the relevant product market in this decision as well.

C. RELEVANT GEOGRAPHIC MARKET

(26)

In its decision of 29 July 1998,
the Commission
assumed that Germany was the relevant geographic
market for the sale of coal and coal products. The deci-
sive factor was that because domestic coal was heavily
subsidised (see section A, recital 16 et seq.) the entire
output was sold in Germany, thereby meeting a consid-
erable proportion of the total German demand for coal
products. In addition, for the German customer, German
coal has certain advantages over imported coal:
the
geographical proximity of the mines and hence the fact
that users need to carry smaller stocks, homogeneous
product characteristics, and the fact that the users' instal-
lations are geared to using domestic coal. There is also
strong political and social pressure in Germany to buy
German coal. This created the expectation that German
coal was always preferred by the customer as long as its
price, as a result of the aid, was on a par with the
average price of coal imported into Germany.

(27) Accordingly, subsidised coal accounted in 1977 for [65
to 75 %]* of the total sales of coal products in Germany,
of which [90 to 100 %]* went to power generation and
steelmaking. Given the sales conditions described, which
meant that in Germany there were only very limited
opportunities for competing importers, the Commission
concluded in its decision of 29 July 1998 that Germany
was a separate relevant geographic market.

(28)

The aid scheme also means that German coal
is not
exported from Germany. The direct consequence of the
aid for domestic coal is that German coal producers can
only align sales
to German power generators and
German steel makers on the average price of coal
imported into Germany. But since the absolute amount
of aid is limited, so is the possibility of selling German
coal at the world market price. Given that the difference
between the German subsidised price and the world
market price (approximately DEM [120 to 250]* per
tonne) is still considerable, there is no incentive to sell
more German coal, i.e. over and above the subsidised
quantities, abroad.

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(29)

(30)

(31)

From the updated information supplied by the parties
for 1998 to 2001 it is clear, however, that subsidised
coal in Germany accounted for a diminishing proportion
of the total German market. In 1997 imports accounted
for about [25 to 35 %]* of the total market, but by
2000, according to the parties, this share had risen to
some [40 to 50 %]*. This proportion can be expected to
increase, since the existing subsidy rules provide for a
further significant decline in current production and
sales until at least 2005.

It can be seen from the above that the market for coal
and coal products in Germany still has specific features
which distinguish it as far as competition is concerned
from other geographical regions. On the other hand
there are indications that the German coal market is
becoming more international. Ultimately, however, the
precise definition of the relevant market for the purposes
of this decision can be left unsettled, since, even if it is
assumed that the market continues to be restricted to
Germany, the merger does not give rise to any reserva-
tions.

D. ASSESSMENT OF THE EFFECT ON COMPETITION

In its decision of 29 July 1998 the Commission based its
reservations (which were allayed by the commitments
given by the parties) in particular on the risk that, as a
result of the merger, the parties' advantageous position
at that time regarding the sale of subsidised German coal
might be transferred to the open market. In view of the
current market situation, and various structural changes
that have taken place since the Commission's decision of
29 July 1998, there is now, in the Commission's view,
no reason for such reservations (see section 1 below,
recital 32 et seq.). Further, even a possible influx of
financial resources in the context of the low selling price
for SBW would not be sufficient to justify any reserva-
tions on competition grounds (see section 2 below,
recital 47 et seq.).

1. POSITION OF THE PARTIES AS REGARDS THE SALE OF

COAL IN GERMANY

(a) The position of RAG with regard to the merger

(1) Domestic (German) coal

(32)

By acquiring control of SBW and Preussag, RAG became
the only German coal producer. It must be remembered
however that, for the reasons mentioned (recital 16 et
seq.), sales of German coal follow the (declining) level of
aid, since the amount of German coal that can be sold

depends on the aid available. Accordingly, the parties'
sales of domestic coal have fallen considerably, from
67,6 million tonnes in 1994 to 32,7 million tonnes in
2001. This trend will continue, since it
follows the
predicted decline in aid. The merger between RAG and
SBW does not alter this: because of the higher produc-
tion costs it is impossible for German coal to compete
with imports without aid, so that the merger has no
effect on the production and sale of German coal.

(2) Total market/imported coal

(33)

In Germany, as in the Community, coal consumption fell
steadily in recent years, and it can be assumed that this
trend will continue (the Verein Deutscher Steinkohleim-
porteure forecasts, for instance, that demand in Germany
will be 60 million tonnes in 2010). This is due particu-
larly to the preference for other – more environmentally
friendly and cheaper – sources of energy and the decline
of German steel production.
In a market where the
volume is falling, the parties' share of the total market,
consisting of domestic and imported coal, has shrunk
since 1994 (see Table 1). RAG, SBW and Preussag
together sold 70,8 million tonnes of coal in 1994, but
only 43,6 million tonnes in 2001.

Table 1

Sales of coal in Germany

[…]*

(34) As regards market share, the parties still have a strong
their shares have
position on the total market, but
clearly declined. When looking at market share, it has to
be remembered that SBW's import business is not
affected (any longer) by the merger, since it was disposed
of by RAG in 1999. The trend of the parties' position in
recent years does not include SBW's import business,
therefore, the aim being specifically to highlight what
has happened to those parts of the business currently
involved in the merger. In 1994 the parties had [80 to
90 %]* of the total market (approximately [80 to 90 %]*,
excluding SBW's imports), but only [80 to 90 %]*
(approximately [70 to 80 %]*, excluding SBW's imports)
in 1997, and [60 to 70 %]* in 2001. This indicates that
RAG has not succeeded in completely offsetting its
losses in German coal by increasing its share of imported
coal.

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Table 2

Parties' share of the total market

[…]*

Source: The parties.

(35)

Taking imported coal separately, the parties succeeded in
increasing their absolute sales of imported coal from
[…]* million tonnes ([…]* million tonnes excluding
SBW's imports) in 1994 to […]* million tonnes in 2001.
However, this increase in absolute quantities reflects the
competitive position of the parties only to a limited
extent, since it was associated with the rise in imported
coal's share of the total market. The parties' share of the
imported coal market did indeed go up from 1994 ([10
to 20 %]*, or [10 to 20 %]* excluding SBW's imports) to
1997 ([30 to 40 %]*, or [30 to 40 %]*, i.e. in the period
preceding the merger. After the merger, however, as
Table 3 shows, it remained stable with slight fluctuations
between 1997 ([30 to 40 %]*, or [30 to 40 %]* and
2001 ([25 to 35 %]*, and latterly shows a downward
trend. RAG, therefore, was unable to defend its slight
increases in market share in 1999 and 2000. It should
also be pointed out that RAG meets only a small portion
of its imports into Germany from its own sources of
production and must buy most of its imports from other
producers. Thus it has no perceptible advantage as
regards access to sources of supply compared with its
competitors in the import field.

Table 3

Parties' share of the imported coal segment

[…]*

Source: The parties.

(36)

It will be seen therefore that
the parties have not
succeeded after the merger in offsetting the decline in
their sales of domestic coal by increasing their import
business. Furthermore, the merger did not to lead to a
perceptible, sustained expansion of the parties' position
in the import coal sector; rather, their current market
share is again below the level which they had before the
merger. Given this trend, it is not expected that there
will be a clear strengthening of the merged company
within the period under consideration.

(b) Position of
conditions

competitors and other

competitive

(37)

Current market conditions, which are distinguished by
certain structural changes that have occurred on the
German coal market since the decision of 29 July 1998,
indicate that RAG's competitive position will not be
strengthened.

(38) One important structural change has been the increasing
share of imports in the total market. In 2001 imports
accounted for about 50 %, compared with about 44 % in
the previous year.
Imports in the power station and
coking coal sector in 2001 exceeded domestic produc-
tion for the first time: 35 million tonnes approximately
as against 33 million tonnes. The volume of imports has
increased by [10 to 20 %]* a year on average, albeit with
significant fluctuations (+[0 to 10 %]* in 1995; + [15 to
25 %]* in 1997 and + [0 to 10 %]* in 1999). Coal
imports are forecast to increase further, since the steadily
falling total volume of aid entails a corresponding fall in
sales of German coal. These sales are clearly falling faster
than the gentle decline in total demand in Germany. The
safe sales position that RAG had on the domestic coal
market compared with its competitors
therefore
increasingly less significant for the total market. This
automatically reduces any possibility that RAG might
have of transferring its position as regards domestic coal
to the imported coal sector.

is

(39)

(40)

In addition, it should again be pointed out that RAG, by
meeting the commitment to sell in the decision of 29
July 1998, has separated itself from the import business
of SBW (SCI). There is thus no overlapping of the parties
in the field of imports — an area which is important for
competition. The merger has not resulted in the combi-
import activities, and there has
nation of the parties'
been no addition of market shares. SCI operates in
today's market as an independent competitor with stable
market shares.

station coal,

The third factor is that, in recent years, there has been a
clear structural strengthening of competitors in the
imported coal sector, which is exposing RAG to stiffer
competition and has already led to the decline of the
parties' shares of the import market. Imports are the
result of direct sales by foreign coal producers and sales
through German coal importers. RAG's largest competi-
tors for imported coal are either international producers
or firms which are associated with coal customers in
Germany. The RWE energy group, one of the largest
customers for power
is RAG's largest
competitor in the import field, with a share of some [25
to 35 %]* in 2001 (RAG:
[25 to 35 %]*. RWE has
in particular
strengthened and expanded its position,
through the takeover in recent years of SSM Coal (Neth-
and Rheinbraun Brennstoff GmbH. Other
erlands)
competitors
include Glencore, BHP-Billiton and Rio
Tinto, which are among the largest coal producers in the
world; to date they have a combined market share of [5
to 15 %]*. SCI — SBW's coal importing business, which
was sold to a French dealer — has shares of about [0 to
10 %]*. The parties estimate that independent dealers
have a share of about [5 to 15 %]* of the coal import
market in Germany.

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(41)

(42)

Since the decision of 29 July 1998 there has also been a
structural strengthening of international coal producers,
which has led to new market entries in Germany. Thus,
the Australian producer, BHP, and the South African
firm Billiton have merged to become the world's largest
coal producer. BHP-Billiton entered the German market
in 1999 and today has a [0 to 10 %]* share of the
imported coal sector. In 2000, Rio Tinto (UK), likewise
one of the largest coal producers in the world, pene-
trated the German imported coal market and in 2000
and 2001 sold some […]* tonnes of coal in Germany,
which amounts to a [0 to 10 %]* share of German coal
imports.

(45)

The German coal market has hardly any barriers to
entry. The transport and storage infrastructure is freely
accessible and available. RAG does have some activities
in the logistics field, but it is not very important in this
sector and there are many other suppliers. Furthermore,
own transport or storage capacity is not essential to
operation on the market. The dealer requires only skilled
labour, a telephone and a PC in order to enter the
market. Coal
is a not very differentiated ‘commodity’
product. Its quality is laid down in ISO standards and
there is no possibility for differentiation between product
qualities or brands. The main relevant factor of competi-
tion, therefore, is price.

(43)

Trends and market conditions indicate therefore that in
the imported coal sector RAG is confronted by a
growing number of strong,
international competitors
who are exerting considerable pressure on its market
position. The level of market entries in recent years
imports into Germany increase,
suggests that, as coal
new competitors will enter the German market.

(46)

(44)

There have been substantial changes on the demand side
as well. Firstly, various steel industry mergers resulted in
international groups with bundled purchaser power,
such as Thyssen-Krupp-Stahl in 1998, or the amalgama-
tion of Usinor, Arbed and Aceralia to form Arcelor in
November 2001. Secondly, as a result of
increasing
liberalisation in recent years, competition in the power
generation market has increased considerably.
In this
new competitive environment, it is essential for power
station operators to procure cheaper coal and make use
of even the smallest price differentials. Greater competi-

thus

reinforces

the
tive pressure among customers
potential of RAG's low-cost competitors. The greater
price sensitivity of large customers also means that the
current terms on which RAG's customers obtain their
long-term supplies of domestic coal no longer provide it
with leverage over the imported coal sector, since in that
sector price is increasingly becoming the decisive factor
of competition.

that

it should be pointed out

Lastly,
the long-term
anticompetitive procurement obligations of the power
and steel
industries, which were contained in the
Century Contract and the Steelworks Agreement have
since been revoked. RAG's contracts with its customers
no longer contain any procurement obligations that are
consequent on the total requirement, or on exclusive
dealing
Today's
contracts with the steel and power industries usually
expire in one year or less and contain normal market-
supply conditions as regards price and quantity.

or most-favoured-nation

clauses.

(c) Conclusion: No danger

of

competition being

distorted under current market conditions

control or

In short, therefore, given current market conditions and
subject to the examination of the effects of a possible
financial strengthening of RAG (see section 2, recital 47
et seq.),
it cannot be assumed that RAG within the
meaning of the first indent of Article 66(2) of the ECSC
Treaty might determine prices,
restrict
production or distribution, or hinder effective competi-
tion in a substantial part of the markets affected by the
merger. Under these conditions, which have changed
since 1998, there is likewise no risk that RAG within
the meaning of the second indent of Article 66(2) might
evade the rules of competition instituted under the ECSC
Treaty, in particular by establishing an artificially privi-
leged position involving a substantial advantage in access
to supplies or markets. This applies both to an indepen-
dent German coal market and to a market that is more
extensively defined in geographical terms. If an interna-
tional coal market is assumed, the parties' market shares
would clearly be smaller, since their activities are focused
on Germany and other competitors would have to be
taken into consideration. On such a wider market, even
less competitive importance would ultimately attach to
RAG's special position in relation to German coal.

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Official Journal of the European Communities

L 12/27

(47)

(48)

(49)

2. POSSIBLE INCREASE IN RAG'S FINANCIAL STRENGTH

In RJB Mining v Commission the Court of First Instance
pointed out that
the Commission had not examined
during the merger proceedings whether the total assets
transferred from SBW corresponded to the price paid of
DEM 2 or whether there had been an implicit transfer
of State resources to RAG. Consequently, the Commis-
sion could not have assessed in its merger decision of 29
July 1998 whether and,
the
purchase price of DEM 2 strengthened the financial and
thus the commercial strength of RAG. Accordingly, the
following questions must be examined below:

to what extent

if so,

(a) whether the financial and commercial strength of

RAG was increased by the merger, and

(b) whether any financial strengthening of RAG raises
competition policy problems under Article 66(2) of
the ECSC Treaty.

For the sake of completeness, however,
it should be
noted at the outset that the financial support which
RAG receives from Germany to bring the price of
German coal into line with the price of imported coal
and for the closure of production sites is not such as to
strengthen the commercial strength of RAG in a manner
that is significant from a competition point of view.
Both the production cost subsidies and the subsidies for
the closure of production sites merely cover at most the
costs actually borne by RAG.

(a) Increase in the financial and commercial strength

of RAG

Instance did not in its judgment
The Court of First
provide any criteria for determining how any discre-
pancy between the purchase price and the actual value
of SBW and any resulting increase in RAG's financial
strength should be established. One possible and appro-
priate approach in the present case (among a number of
conceivable approaches)
is, for the purposes of deter-
mining whether there was any financial strengthening of
RAG, to investigate the effects the merger actually had
on RAG's consolidated balance sheet. This allows retro-
spective insight to be gained into the financial effects of
the merger (1), and makes it possible, particularly in
conjunction with the risks for SBW's coal sector, to
determine at least a maximum value (under a worst-case
scenario) for any financial inflow, which is sufficient for
analysis in the present case.

(50) Accordingly,

the Commission asked the

auditing
company BDO to carry out a study of the effects of the
merger on RAG's consolidated balance sheet. The study
shows that, as a result of the takeover of SBW, RAG
achieved an accounting gain from the merger of DEM [0
to 500]* million. This value
to the
accounting net value of SBW's equity capital at the time
of the takeover (DEM [0 to 500]* million) minus the

corresponds

purchase price (DEM 2) and minus the transaction taxes
directly associated with the
(DEM […]*
million).

takeover

(51)

The gain from the merger contrasts in RAG's consoli-
dated balance sheet on 31 December 1998 with depre-
ciations of SBW's assets amounting to DEM […]*
million. By far the largest depreciations related to power
stations (DEM […]* million) and the stock of solid fuels
(DEM […]* million). In the case of the power stations,
the main item was the advance depreciation of SBW's
energy procurement costs, which were above the market
price. As far as the partial depreciation of the value of
the stock of solid fuels is concerned, the stock, which
had hitherto been valued at list prices, was brought
down in value to the level of the world market price.

(52)

The study thus comes to the conclusion that the (nega-
tive) impact of the merger on RAG's equity capital as
actually shown in RAG's consolidated balance sheet as at
31 December 1998 amounted to minus DEM [0 to
500]* million.

(53) As regards future earnings developments,

the study
points to the possibility that the depreciations affecting
the power stations could at least in part be offset at a
later date by future earnings from power station hold-
ings. The same applies to the depreciations of solid fuel
stocks, where
subsidised
purchase of the stocks which had been devalued to the
world market price. Finally, the study points to a theore-
tical possibility of at least partial utilisation of SBW's
corporation and trade tax loss carryovers by RAG,
though reference is also made to the uncertainty of the
partial non-recognition of the deductibility of the loss
carryovers by the German tax authorities.

the possibility

exists of

(54) According to the study, however, it is not to be expected
that
the abovementioned factors that might possibly
have a positive impact on earnings will result in the
merger having a significant, positive overall impact on
RAG's financial strength.

(55) On the basis of

it

the study,

is assumed that

the
accounting gain of DEM [0 to 500]* million shown in
the merged balance sheet, corresponding to the net value
of SBW's equity capital at
the merger
excluding depreciations, can, applying a hypothetical
worst-case scenario, be regarded as the maximum value
of the increase in RAG's financial strength that is rele-
vant from a competition point of view.

the time of

(1) In contrast to estimates of the ‘value as a going concern’ according
to the conventional procedure for evaluating an undertaking (e.g.
earning capacity value method, discounted cash flow method),
which, particularly for an objective sector such as coal production,
involves substantial subjective assessments of risks and future devel-
opments, and consequently is subject to considerable uncertainties.
It should be mentioned in this context, however, that the studies
available to the Commission, which were drawn up in accordance
with the conventional procedures for assessing the value of under-
takings, come up with substantially smaller assessments of value
(see recital 60).

(56)

It is not necessary to assess the depreciations carried out
by RAG in assessing the present case, since, even
assuming the full value without depreciation, no competi-
tion problems pursuant to Article 66(2) of the ECSC
Treaty arise. On the basis of the study, it can be assumed
there is no need for any upward revaluation in
that
SBW's assets.

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Official Journal of the European Communities

17.1.2003

(57) As regards the availability of the financial strength,

it
can be assumed that the net value of the equity capital
would be available directly following the merger in the
form of liquid resources. This would then correspond to
the premise that SBW's realisation value is equivalent to
its book value. It would of course be more realistic to
assume only gradual, annual availability of the increased
financial strength resulting from the increased earning
power, or only indirect availability through a possible
increase in RAG's credit standing. However, there is no
need to analyse this aspect, since, even assuming full,
direct liquid availability of the book values, no competi-
tion problems pursuant to Article 66(2) of the ECSC
Treaty arise.

(58)

It should be emphasised once again at this point that the
method described in paragraphs 49 et seq. represents a
hypothetical approach to determining a maximum value.
An assessment of the risks of SBW's business activity
was deliberately not carried out, since it would necessa-
rily involve assessing assumptions to be made on the
probability of the risks materialising. This too is not
the hypothetical
necessary,
even assuming
maximum value, no competition problems arise.
It
should, however, be noted in this context that a revalua-
tion of the possible increase in financial strength on the
basis of risk assessment may lead to a substantially
smaller value. On the other hand, any higher value than
the maximum value determined under the worst-case
scenario can be ruled out by the Commission.

since,

(59)

The assumption of a maximum estimated increase in
financial strength of DEM [0 to 500]* million is, more-
over, in line with other studies on SBW's corporate value
commissioned by RAG and Germany. The studies which
RAG commissioned […]* in 2000 both ruled out a posi-
tive corporate value for SBW.

(60) An initial report drawn up by the management consul-
tancy Roland Berger in January 1996 at the request of
the German Government is ultimately uninformative as
regards the questions being looked at here. Germany
commissioned the report two years prior to the merger
in order to examine SBW's recovery strategy. Its purpose
was not to assess corporate value or a price at which the
company might be sold. The report identifies a positive
‘restructuring value’ of SBW's holdings outside the coal
industry. In a letter sent to the Commission in April
2000, however, Roland Berger explained that such value
could on no account be regarded as the probable sales
value of such holdings. Implementation of these restruc-
turing measures — which were geared to SBW conti-
nuing on a stand-alone basis — never took place and,
according to Roland Berger, could have been achieved
only on the basis of substantial investment.

(61) A second report drawn up by […]* in March 1996,
which had also been commissioned by Germany, was
aimed at assessing possible cross-company solutions for
the German coal industry and does not have anything to
say on assessing the value of the company as a whole.
The third […]* report, dating from July 1998, updated
the value estimates for SBW and indicates that, while
there is a positive value for the portfolio of holdings
outside the coal industry, this is offset by a much higher
negative value for the coal-related sector.

(b) Competitive impact of a possible increase in finan-

cial strength

(62) Assuming a maximum increase in financial strength
amounting to DEM [0 to 500]* million, this would not
be sufficient to increase RAG's commercial strength to
such an extent as to enable it to engage in anti-competi-
tive conduct within the meaning of Article 66(2) of the
ECSC Treaty.

(63)

In the first place, the maximum increase in financial
strength resulting from the merger is equivalent to less
than [5 to 15 %]* of RAG's total equity capital according
to the balance sheet as at 31 December 1999.

(64)

Furthermore, RAG's total financial strength including the
possible increase is no greater than the financial strength
of RAG's main competitors in the German imported-coal
sector. The relevant balance sheet figures of its main
competitors, RWE Trading, Glencore International, BHP
Billiton plc and Rio Tinto plc, are broadly similar to or
greater than the figures for RAG.

(65) An increase in RAG's financial strength would have no
impact on the competitive situation as regards German
coal production. The possibility can be ruled out that an
increase in RAG's financial strength would be used to
subsidise additional home-produced coal. The subsidising
of the domestic production of coal is closely linked to
production ceilings. Any exceeding of
these ceilings
would inevitably result in a decrease in subsidies per
tonne of domestic coal, so that in practical terms there
would be no economic advantage for RAG. It must also
be borne in mind that the production costs of domestic
coal are much greater than the price of imported coal,
so that substantial funds would be necessary per tonne
of coal in order to make such coal saleable in Germany
internationally. The assumed maximum financial
or
inflow could be used only once to bring a volume of
some […]* million tonnes of German coal
(whose
production costs amount to some DEM […]* per tonne
more than the imported coal price) down to a saleable
price level. This is equivalent to only [0 to 10 %]* of the
total market volume.

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Official Journal of the European Communities

L 12/29

(66)

Furthermore, the assumed maximum increase in finan-
cial strength would not result in any negative competi-
tive impact on the import business in Germany. Coal is
a product with low value added, and the decisive factor
for customers is to have a low price for the required
quality. All RAG could attempt to do on the basis of its
increased financial strength in order to impede competi-
tion on the German imported-coal market would be to:

— stop actual or potential competition by buying up

efficient coalmines outside Germany, or

— eliminate actual or potential competitors by offering
imported coal at below the competitive price level.

(67)

The possibility that RAG could significantly stop compe-
tition by purchasing coalmines outside Germany can be
ruled out. The maximum increase in RAG's financial
strength that can be assumed could result only in acqui-
sitions of
limited size which would only marginally
increase RAG's worldwide market position. RAG
currently produces [100 to 150]* million tonnes a year
in its German and foreign coalmines compared with an
annual worldwide production total of 3 400 million
tonnes. The removal of a sufficient number of actual or
is
potential competitors in the German coal market
consequently not realistic.

(68) Nor can it be assumed that there would be a significant
and lasting restriction of competition as a result of the
elimination of actual competitors if RAG were, on the
basis of its increased financial strength, to offer imported
coal at below the competitive price level.

(69)

Such behaviour would not have any long-term impact
mainly because of
strength of RAG's
the financial
the low entry barriers for German coal
competitors,
requirements
imports
resulting from the increased amounts of imported coal.

increased financial

and the

(72) As explained, market entry barriers for the German coal
market are low. Investment strength is of little impor-
tance for the imported-coal business, since the main
factor determining commercial success is a skilled and
experienced workforce. Even assuming that RAG could,
by setting prices below cost, squeeze competitors out of
the market in the short term, such competitors could
easily return to the market as soon as RAG increased its
prices again. Consequently,
losses incurred during the
period when competitors are squeezed out of the market
through below-cost prices could not be subsequently
recovered by means of higher prices. The possibility
must therefore be ruled out that RAG would pursue
such a strategy. There would at least be no lasting weak-
squeezing-out
ening of competition,
proved successful
in the short term, the low market
entry barriers would make it possible for competitors to
re-enter
the German coal market as soon as RAG
increased its prices to a level above the competitive price
and to undo RAG's initial market share gains by char-
ging lower prices.

since, even if

(73)

It was also noted that developments in recent years have
resulted in greater price sensitivity on the part of RAG's
main customers, severely restricting RAG's scope for
price increases above the level of international competi-
tive prices (following a hypothetical squeezing-out of
competitors from the German market). Competition
between RAG's main customers, the coal-fired power
station operators (responsible for some [75 to 85 %]* of
total German coal consumption) has grown much
stronger in recent years with the ongoing liberalisation
and internationalisation of the electricity sector. Conse-
quently, the possibility can be ruled out that German
electricity producers would accept coal at higher prices
than those charged to their foreign competitors by inter-
national coal producers. Similarly, German steel produ-
cers will hardly accept prices above the competitive level
since they too are faced with increasingly intensive
competition.

(70) As mentioned in recital 64, the joint financial strength
of RAG and SBW is comparable to, but at all events not
significantly greater than, the financial strength of RAG's
main competitors.
It can therefore be assumed that
RAG's competitors are in a position to counter low-price
strategies on the part of RAG effectively and on a suffi-
ciently long-term basis.

(74)

(71) German coal production has fallen by almost 40 % since
1995 (from 53 million tonnes in 1995 to 32,7 million
tonnes in 2001). Overall German coal consumption has
declined during the same period (see Table 1 in recital
33). The resulting increase in the share of imported coal
in the overall German coal market not only makes it
more attractive for coal importers to enter the German
coal market.
It also means that RAG would have to
expend substantial and increasing resources in order to
supply the increasing demand with subsidised imported
coal.

Lastly, it must be borne in mind that downward subsidi-
sation of coal imports into Germany by RAG in order to
squeeze out competitors would have negative repercus-
sions on the sale of German-produced coal at RAG's
expense. The total amount of subsidies is set for each
year. Subsidies are granted only in order to offset the
difference between RAG's production costs and the
average price of coal
imported into Germany. Conse-
quently, any significant ‘artificial’ reduction of the price
of
imported coal would also increase the necessary
amount of subsidy per tonne of German coal and would
therefore, in view of the ceiling on the volume of subsi-
dies, reduce the amount of domestic coal that could be
sold. Any market share gains by RAG in imported coal
would thus be eroded by sales losses in domestic coal.

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(75)

(76)

(c) Summary on the increase in financial strength

(78)

It must therefore be concluded that, even on the basis of
a hypothetical maximum value, determined on the basis
of several worst-case assumptions, the increase in finan-
cial strength resulting from the merger would not be
such as to strengthen RAG commercially to such an
extent that it would be able to engage in anti-competi-
tive behaviour within the meaning of Article 66(2) of
the ECSC Treaty. It must be borne in mind here that an
assessment of the possible increase in financial strength
that includes full assessment of the risks involved in
SWB's business activities may result in a substantially
lower value.

This Decision concerns only the application of Article
66 of the ECSC Treaty and is without prejudice to any
Commission decision concerning the application of
other provisions of the EC Treaty or of the ECSC Treaty
and the relevant secondary law, in particular the applica-
tion of the provisions on the control of State aid,

HAS ADOPTED THIS DECISION:

Article 1

The acquisition by RAG Aktiengesellschaft of exclusive control
of Saarbergwerke AG and Preussag Anthrazit GmbH is hereby
authorised under Article 66(2) of the ECSC Treaty.

V. CONCLUSION

Article 2

is clear

from the above considerations that

It
the
proposed merger notified does not give the undertakings
concerned the power within the meaning of Article
66(2) ECSC to determine prices, to control or restrict
production or distribution or to hinder effective compe-
tition in a substantial part of the market, or to evade the
rules of competition instituted under the ECSC Treaty, in
particular by establishing an artificially privileged posi-
tion involving a substantial advantage in access to
supplies or markets.

This Decision is addressed to:

RAG Aktiengesellschaft
Rellinghauser Straße 1-11
D-45128 Essen.

Done at Brussels, 7 May 2002.

(77)

Since the conditions laid down in Article 66(2) of the
ECSC Treaty are fulfilled, the notified merger can be
authorised.

For the Commission

Mario MONTI

Member of the Commission