CELEX: 32018M8823
Language: en
Date: 2018-07-20 00:00:00
Title: Commission Decision of 20/07/2018 declaring a concentration to be compatible with the common market (Case No COMP/M.8823 - NESTE / Int. Handelsmaatschappij Demeter BV) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

EUROPEAN COMMISSION
                                                                 Brussels, 20.7.2018
                                                                 C(2018) 4931 final
  In the published version of this decision, some
  information has been omitted pursuant to                                 PUBLIC VERSION
  Article 17(2) of Council Regulation (EC)
  No 139/2004 concerning non-disclosure of
  business secrets and other confidential
  information. The omissions are shown thus
  […]. Where possible the information omitted
  has been replaced by ranges of figures or a
  general description.
                                                                 To the notifying party
Subject:             Case M.8823 — Neste/Demeter Animal Fats and Proteins
                     Commission decision pursuant to Article 6(1)(b) of Council
                     Regulation No 139/20041 and Article 57 of the Agreement on the
                     European Economic Area2
Dear Sir or Madam,
(1)       On 15 June 2018, the European Commission received notification of a proposed
          concentration pursuant to Article 4 of the Merger Regulation by which Neste Oyj
          ("Neste") intends to acquire within the meaning of Article 3(1)(b) of the Merger
          Regulation sole control of the whole of Int. Handelsmaatschappij Demeter BV
          ("Demeter"), which will regroup the animal fats and proteins sourcing and supply
          activities of the Demeter group ("the Transaction").3 Neste and Demeter are
          collectively referred to as "the Parties", whilst the undertaking resulting from the
          Transaction is referred to as "the merged entity".
1         OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty
          on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the
          replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The
          terminology of the TFEU will be used throughout this decision.
2         OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').
3         Publication in the Official Journal of the European Union No C 218, 22.6.2018, p. 34.
Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE
Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË
Tel: +32 229-91111. Fax: +32 229-64301. E-mail: COMP-MERGER-REGISTRY@ec.europa.eu.
 ---pagebreak--- 1.  THE PARTIES
(2) Neste is a refining and marketing company focusing on low-emission, high-
    quality traffic fuels. For its production of renewable fuel, Neste uses a variety of
    renewable feedstock, including animal fats.
(3) Neste shares are listed and traded on the NASDAQ OMX Helsinki exchange.
    While, based on the information provided by the Parties, the Finnish State
    holds 44.75% % of Neste’s shares, the Parties argue that the company operates
    independently from the State, as evidenced by the following facts:
    (a)     all strategic decisions relating to the commercial or business policy
            (including budget, business plan, major investments or the appointment of
            senior management) are taken by the Board of Directors of Neste and the
            Neste President and CEO;
    (b)     all members of the Board are independent, non-executive directors and
            also independent of the company’s significant shareholders in accordance
            with the Finnish Corporate Governance Code 2010;
    (c)     the Finnish State only has the right to attend Neste’s annual General
            Meeting, whose power of decision is limited to matters belonging to the
            General Meeting by law, primarily (i) the adoption of the annual financial
            statements, (ii) the payment of dividends, (iii) the discharging from
            liability of the members of the Board of Directors, President and CEO, and
            (iv) the appointment of the Board of Directors and of the external auditors.
            As mentioned, those Board members are all independent from the main
            shareholders and their independence is re-assessed every year, in
            accordance with the Finnish Corporate Governance Code 2010.
(4) In any event, the competitive assessment of the Transaction would not be
    materially affected by a combination of the activities of other Finnish state-owned
    enterprises with those of Neste, given that there is no other Finnish state-owned
    enterprise that has any horizontal or vertical links with Demeter.
(5) Demeter is active in the purchase and resale of processed animal fats and of
    processed animal proteins. Demeter is a trader: it buys processed animal fats and
    proteins from renderers4 and sells them to different industries that use those
    materials as an input in their production of biofuels, oleo-chemical products,
    animal feed and pet food.
2.  THE OPERATION AND CONCENTRATION
(6) Pursuant to a Share Sale and Purchase Agreement ("SPA"), Neste will
    acquire 51% of Demeter shares and voting rights (the remaining 49% will be held
    by Demeter's current owners, the Ebeli brothers). According to the Shareholders
    Agreement, unanimity will only be required to protect the minority shareholders’
4   'Rendering' refers to the processing of animal by-products, mainly obtained from slaughterhouses
    and meat packing plants, to produce animal fats and protein meals as final products. This is done
    by cooking, grinding and drying the material in order to separate the fat from the protein.
                                                    2
 ---pagebreak---        financial interests.5 Demeter will therefore be solely controlled by Neste within
       the meaning of Article 3(1)(b) of the Merger Regulation.
(7)    The notified operation therefore consitutes a concentration pursuant to
       Article 3(1)(b) of the Merger Regulation.
3.     UNION DIMENSION
(8)    The undertakings concerned have a combined aggregate world-wide turnover of
       more than EUR 5 000 million6 (Neste: EUR 13 216 million;
       Demeter: 328.8 million). Each of them has a Union-wide turnover in excess of
       EUR 250 million (Neste: […] million; Demeter […] 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 within the meaning of […]∗.
4.     COMPETITIVE ASSESSMENT
4.1.   Relevant product market definition
(9)    Neste's and Demeter’s activities overlap in the purchase of category 3 animal fats.
       In addition, there is a vertical link due to the fact that Neste is active downstream
       in the production of diesel-compatible biofuel for which it purchases category 3
       animal fats7.
4.1.1. Purchase of Category 3 animal fats
(10)   The Parties present a narrow product market for just Category 3 animal fats,
       noting however that animal fats may be replaced by other feedstocks in many
       applications. They claim that Category 1, 2, and 3 animal fats, used cooking oil,
       and vegetable oils are all substitutable feedstocks for the production of biofuels.
       They contend that, in any case, no competitive concerns arise even under the
       narrowest market definition, which is Category 3 animal fats, for which they have
       provided market shares and sales figures. In addition, the Parties consider that
       food grade Category 3 animal fats should be included in Category 3 animal fats.
5      For example: the approval or changes of constitutional documents (e.g. Articles of Association);
       any issue of shares, option rights or other rights entitling to any kind of shares or options related to
       the shares in the capital; any decision on liquidation, winding up, dissolving, bankruptcy,
       restructuring or other insolvency proceedings; and approval or amendment of a commercial
       contract between Neste and Demeter whereby Neste commits to buy Demeter's animal fats at
       arm's length (and not purchase price) in order not to destroy value for the minority shareholders. It
       will be Neste and not the minority shareholders who will decide from whom and at what price
       feedstock shall be purchased from the renderers. Moreover, Neste has no obligation under the
       Commercial Contract to purchase any defined quantity.
6      Turnover calculated in accordance with Article 5 of the Merger Regulation and the Commission
       Consolidated Jurisdictional Notice (OJ C 95, 16.4.2008, p. 1).
∗      Should read: Article 1(2) of the Merger Regulation.
7      Neste also purchases category 2 animal fats in Finland, where Demeter is not present. Demeter
       also purchases small amounts of used cooking oil. In 2017 100% of its purchases were sold to
       Neste. Neste buys used cooking oil from Demeter and third parties. However, the combined share
       of Demeter and Neste’s purchases of used cooking oil in the EEA are below 5 %.
                                                          3
 ---pagebreak--- (11)    Purchasers of Category 3 fats from renderers use these fats for animal feed and
        pet food production, in the oleo-chemical industry or for the production of
        biofuels (as the Neste group does). Purchasers can also be traders, such as
        Demeter, who then sell the fats to the said users.
(12)    In its previous decisional practice, the Commission has distinguished three
        categories of animal by-products according to the risk that they pose to public and
        animal health: Category 1 (highest risk), Category 2 (high risk) and Category 3
        (low risk) by-products8. Furthermore, the Commission has considered the
        existence of a separate market for animal fats, with a possible further distinction
        between Category 3 fats and food grade fats.9
(13)    The Commission has also distinguished between the upstream market for
        (i) sourcing Category 3 animal by-products from slaughterhouses, the so-called
        “collection” of animal by-products from slaughterhouses and its processing,
        which is done by renderers; and (ii) the downstream market for the sale of
        processed animal by-products, such as possibly the sale of Category 3 fats.
(14)    The Commission's market investigation in the present case sought more
        information as to the product dimension of the relevant markets for the purchase
        of animal fats.
4.1.1.1. Category 3 animal fats vs Category 1 and 2 animal fats
(15)    A majority of biofuel competitors, animal fat customers and animal fat
        competitors indicated that Category 3 animal fats are not substitutable with
        Category 1 or Category 2 animal fats for the production of diesel compatible
        biofuel. Respondents pointed to quality and regulatory differences. A biofuel
        competitor commented: "Category 3 is a better feedstock but as it is not a waste it
        cannot be considered as such in the sustainability documentation delivered with
        the biodiesel produced."10
(16)    Several respondents cited differences in government incentives based on EU
        legislation. Unlike Category 1 and Category 2 animal fats, Category 3 animal fats
        are not listed in Annex 9 to the Renewable Energy Directive, which identifies the
        feedstocks and fuels which can be counted towards national quotas for the use of
        renewable energy sources.11 A biofuel competitor commented: "Biofuels from
        animal fats of Category 1 and 2 are included in Annex IX Part B of Directive
        2009/28/EC. Consequently, these biofuels can be counted twice towards the
        renewable transport target of 10 % in 2020 laid down in Article 3 (4) of the
        afore-mentioned Directive. Consequently, the use of biofuels of these feedstocks
        are additionally incentivized in several EU member states."12
8       Commission Decision of 7.10.2016 in Case M.7930 - ABP Group/Fane Valley Group/Slaney
        Foods, para. 188.
9       Ibid, at para. 190.
10      Responses to Question 11 of Q1 to Biofuel competitors.
11      Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the
        promotion of the use of energy from renewable sources and amending and subsequently repealing
        Directives 2001/77/EC and 2003/30/EC, OJ L 140, 5.6.2009, p. 16–62.
12      Responses to Question 11.1 of Q1 to Biofuel competitors.
                                                      4
 ---pagebreak--- (17)    Another biofuel competitor responding to the market investigation underscored
        the difficulty for customers to switch to other categories of animal fats: "Once a
        HVO plant is set up and has received the corresponding regulatory approvals, it
        is almost impossible in practice to change the process and switch to other
        categories of Animal Fats."13
4.1.1.2. Category 3 animal fats vs vegetable oils
(18)    A majority of biofuel competitors indicated that animal fats are not substitutable
        with vegetable oils for the production of diesel compatible biofuel. A biofuel
        competitor commented: "Unlike vegetal oils, animal fats require pre-treatment
        facilities and processes; lead to a different output (from a regulatory/tax
        standpoint); have a different greenhouse gas footprint due to government
        incentives and tax regulations"14
(19)    Nonetheless, some replies to the market investigation indicated that there is some
        substitutability between animal fats, in particular Category 3 animal fats, and
        vegetable oils in the production of biofuel. A competitor noted that additional
        regulatory incentives apply only to Category 1 and 2 fats, and not to Category 3
        fats and vegetable oils: "Both biofuels from vegetable oils and animal fats can be
        counted towards blending obligations to increase the use of renewable energies
        in transport. However, in contrast to vegetable oil-based biofuels, biofuels of
        animal fats of Cat. 1 and 2 are additionally incentivized by double counting
        schemes and/or a beneficial GHG accounting methodology."15
4.1.1.3. Category 3 animal fats vs used cooking oil
(20)    A majority of biofuel competitors indicated that animal fats are not substitutable
        with used cooking oil for the production of diesel compatible biofuel. A biofuel
        competitor highlighted the price difference: "UCO16 are much more expensive
        than animal fat, less traceable and contain a high level of variability of
        contaminants components. They are subject to two different types of
        regulation/tax."17
(21)    In any event, for the purpose of this Decision, the exact delineation of the market
        for purchase of Category 3 animal fats can be left open as the outcome of the
        competitive assessment remains the same under any plausible product market
        definition.
4.1.2. Sale of Category 3 animal fats
(22)    Demeter is a trader and is thus active as a seller of Category 3 fats. The Parties do
        not see this selling activity as different from the selling activities of renderers on
        the grounds that users of Category 3 fats can purchase indifferently either directly
        from renderers and/or from traders. Moreover, the Parties claim that most
        purchases, whether from renderers or from traders, are, to their knowledge, spot-
        based and that they do not know what quantities transit or not through traders and
13      Responses to Question 11 of Q1 to Biofuel competitors.
14      Responses to Question 12 of Q1 to Biofuel competitors.
15      Responses to Question 12 of Q1 to Biofuel competitors.
16      Used Cooking Oil.
17      Responses to Question 13 of Q1 to Biofuel competitors.
                                                     5
 ---pagebreak---        whether the traders act as agents or independent sellers for the end-users. Finally,
       if there were to be a separate market for the sale by traders of processed
       Category 3 fats, the Parties submit that only Demeter would be active on this
       market and that Demeter would already today sell close to all of its Category 3
       fats to Neste.
(23)   The market investigation confirmed that sales of animal fats by renderers and
       sales of such fats by traders are part of the same market. Biofuel competitors and
       other purchasers of animal fats source animal fats from both traders and
       renderers, while pointing out certain advantages of one supply channel over the
       other.18 Some respondents mention that traders are able to blend animal fats from
       different sources to meet the final quality standard required by the customer,
       while others comment that renderers offer superior control of the supply chain
       and consistent supply of the feedstock structure. A biofuel competitor concluded:
       "Therefore, often the chain is the combination of smaller and spread operators
       with specific know-how for managing from rendering point to a terminal, and
       different operators with specific know-how in trading."19
(24)   In addition, the Commission found that the blending operations conducted by
       traders are not very cost-intensive. The blending process involves the discharging
       of fats from different origins into storage tanks which have a heating system to
       prevent the animal fat from solidifying in the tanks. Such tank capacities can be
       easily rented by any third party on the market. Demeter's storage costs
       (rental/handling/cleaning) required for blending came to EUR […] in 2017, out of
       EUR […] in total costs of sales (i.e. approximately [0-5]%).20
(25)   In the light of the results of the market investigation and taking account of all
       evidence available to it the Commission considers, for the purpose of this
       Decision, that the sale of Category 3 animal fats should not be further segmented
       into sales by renderers and sales by traders.
4.1.3. Production of diesel-compatible biofuel
(26)   As mentioned in recital 2, Neste is active downstream in the production and (ex-
       refinery) sale of diesel-compatible biofuels21. Neste uses all Category 3 fats (and
       other feedstock) internally for the production of renewable fuels used in the
       transport sector mainly by the fossil fuel suppliers (the major oil companies), and
       to some extent also by fleet operators and airlines.
(27)   The Parties submit that the different types of biofuel (ethanol, FAME22 and
       HVO23) all compete with fossil fuels and no segmentation is warranted. However,
       since Category 3 fats are only used in biofuels, and since Neste's market share on
       a broader biofuel + fossil fuel market is lower than on a market limited to biofuels
       only, the Parties focus on the market for biofuels alone.
18     Responses to Question 23 of Q1 to Biofuel competitors and Question 6 of Q3 to animal fat
       customers.
19     Responses to Question 23 of Q1 to Biofuel competitors.
20     Response to Question 2 of RFI No 1.
21     Neste also produces small quantities of gasoline-compatible biofuels.
22     Fatty Acid Methyl Ester.
23     Hydrotreated Vegetable Oil.
                                                       6
 ---pagebreak--- (28)    Neste also provide details on the narrower market for the production and sale of
        diesel-compatible biofuels, to include both HVO and FAME, as well as the
        market for only HVO diesel-compatible biofuels.
(29)    In its previous decisional practice, the Commission has considered biodiesel to be
        part of the fuel market. The Commission has left open both the distinction
        between diesel fuel and biodiesel, and the distinction by application.24
4.1.3.1. FAME vs HVO diesel-compatible biofuels
(30)    The main types of diesel-compatible biofuels currently produced on a commercial
        scale are HVO fuels and FAME fuels, which are also known under various other
        names and acronyms, such as biodiesel, RME25, SME26 or PME27).
(31)    The market investigation was inconclusive as regards the substitutability between
        FAME diesel-compatible biofuel and HVO diesel-compatible biofuel: a majority
        of biofuel competitors28 considered those types of biofuel to be interchangeable,
        while a majority of biofuel customers did not consider that this is the case.
(32)    Competitors pointed to similarities of use between FAME and HVO, as both
        products can be used towards biofuel mandates, but cited differences with regard
        to price and blending limitations. A competitor commented: "Economically, HVO
        is more expensive than FAME on the market. From this point of view, FAME and
        HVO are not interchangeable. Technically, FAME and HVO are
        interchangeable; both match biodiesel mandate. But there is a maximum spec
        content for FAME into diesel. So, when the mandate requires additional biofuel
        blending than FAME, HVO becomes the only feasible alternative."29
(33)    Customers cited differences in product characteristics between HVO and FAME,
        in particular with regard to cold properties. A customer commented: "FAME
        needs special engines/vehicles and cannot be used during the winter period in
        Sweden."30 The same customer suggested that, in contrast to FAME, HVO is fully
        substitutable with fossil diesel: "HVO diesel is fully interchangeable with
        standard diesel. It has the same or higher specifications regarding temperature
        and cfpp31 etc."32
(34)    In any event, for the purpose of this Decision, the exact product market definition
        for the production of diesel-compatible biofuels can be left open as the outcome
        of the competitive assessment would remain the same under any plausible product
        market definition.
24      Commission Decision of 04.02.2009 in Case M.5388 - Diester Industrie/Oleon, para.13.
25      Rape Seed Methyl Ester.
26      Soybean Methyl Ester.
27      Palm Oil Methyl Ester.
28      Responses to Question 18 of Q1 to Biofuel competitors and Question 6 of Q2 to Biofuel
        Customers.
29      Responses to Question 18 of Q1 to Biofuel competitors.
30      Responses to Question 7 of Q2 to Biofuel customers.
31      CFPP stands for Cold Filter Plugging Point, which is the lowest temperature, expressed in degrees
        Celsius (°C), at which a given volume of diesel type of fuel still passes through a standardized
        filtration device in a specified time when cooled under certain conditions.
32      Responses to Question 7 of Q2 to Biofuel customers.
                                                         7
 ---pagebreak--- 4.2.   Relevant geographic market definition
4.2.1. Purchase and sale of Category 3 animal fats
(35)   With regard to the geographic market and based on the Commission precedent in
       SARIA/Danish Crown/Daka JV33, Neste distinguishes three regions in which
       Category 3 fats are traded: North of Europe (comprising Austria, Benelux,
       Germany, France, Ireland, UK and the Nordic countries); South of Europe
       (comprising Croatia, Greece, Italy, Portugal, Slovenia and Spain); and Eastern
       Europe (comprising Bulgaria, Czech Republic, Estonia, Hungary, Latvia,
       Lithuania, Poland, Romania and Slovakia). However, Southern Europe and
       Eastern Europe are not affected markets since the Parties have minimal purchases
       and sales in those areas. With regard to the North of Europe, the Parties have also
       provided information at national level.
(36)   In SARIA/Danish Crown/Daka JV the Commission left the exact geographic
       market definition open, while considering the market for the purchase of
       Category 3 animal fats to be broader than national, particularly in view of cross-
       border sales. The Commission considered that the market investigation had
       suggested the market to be regional, in particular covering certain Northern
       European Member States, namely Denmark, the Netherlands, Poland
       and Germany.34
(37)   The market investigation in the present case has confirmed that customers source
       Category 3 animal fats at least on a regional basis, if not wider.35 A customer
       commented: "Considering economical, sustainable and technical constraints, we
       prefer to source from neighbouring countries."36
(38)   In any event, for the purpose of this Decision, the question as to the scope of the
       geographic market for the purchase and sale of Category 3 animal fats may ultimately
       be left open as the outcome of the competitive assessment would remain the same
       under any plausible geographic market definition.
4.2.2. Production of diesel-compatible biofuel
(39)   As regards the geographical market, Neste submits that the relevant market for
       biofuels is at least EEA-wide. Nonetheless, it also provides data for the possible
       narrowest definition – national – in the countries where it is active.
(40)   In its previous decisional practice, the Commission has considered markets for
       biofuel that were at least regional37 or at least EEA-wide38 in scope, but ultimately
       left the exact geographical market definition open.
33     Commission Decision of 29.6.2012 in Case M.6285 - SARIA/Danish Crown/Daka JV,
       para. 48-51.
34     Commission Decision of 29.6.2012 in Case M.6285 - SARIA/Danish Crown /Daka JV, para. 51.
35     Responses to Question 16 of Q1 to Biofuel competitors, Questions 7 and 8 of Q3 to Animal Fat
       Customers and Questions 8 and 9 of Q4 to Animal Fat Competitors.
36     Responses to Question 16 of Q1 to Biofuel competitors.
37     Commission Decision of 08.01.2009 in Case M.3876 - Diester/Bunge and Commission Decision
       of 30.01.2003 in Case M.3039 - Soprol/Cereol-Lesieur.
38     Commission Decision of 04.02.2009 in Case M.5388 - Diester Industrie/Oleon.
                                                    8
 ---pagebreak--- (41)   The market investigation in the present case has been inconclusive with regard to
       the definition of the geographic market for biofuels as opinions diverged between
       competitors and customers. A majority of biofuel competitors stated that there is
       no maximum distance beyond which transport of diesel-compatible biofuel is
       economically non-viable. A competitor explained: "Diesel compatible biofuel can
       be transported all around the world as it can be stored easily and shipped in big
       vessels to be delivered where the demand is. This is already the case and we can
       consider that biodiesel and HVO markets are already global."39
(42)   By contrast, a majority of biofuel customers considered that there is a maximum
       distance beyond which transport of diesel-compatible biofuel is economically
       non-viable. Several replies seemed to suggest that the relevant market would be
       regional. A biofuel customer explained: "There is no technical maximum distance
       but economically, the cost of transportation can be significant versus that of the
       product and effectively render some source locations uneconomical."40
(43)   In any case, the question as to the scope of the geographic market for the supply
       of diesel-compatible biofuels can ultimately be left open as the outcome of the
       competitive assessment would remain the same under any plausible geographic
       market definition.
5.     COMPETITIVE ASSESSMENT
5.1.   Introduction
(44)   Under Article 2(2) and (3) of the Merger Regulation, the Commission must assess
       whether a proposed concentration would significantly impede effective
       competition in the internal market or in a substantial part of it, in particular
       through the creation or strengthening of a dominant position.
(45)   In this respect, a merger can entail horizontal and/or non-horizontal effects.
5.1.1. Horizontally affected markets: purchase of Category 3 animal fats
(46)   As regards horizontal effects, the Commission guidelines on the assessment of
       horizontal mergers under the Merger Regulation (“the Horizontal Mergers
       Guidelines”)41 distinguish between two main ways in which mergers between
       actual or potential competitors on the same relevant market may significantly
       impede competition, namely non-coordinated or coordinated effects. Non-
       coordinated effects may significantly impede competition by eliminating
       important competitive constraints on one or more firms, which consequently
       would have increased market power, without resorting to coordinated behaviour.
(47)   The Horizontal Merger Guidelines list a number of factors which may influence
       whether or not significant non-coordinated effects are likely to result from a
       merger, such as the large market shares of the merging firms, the fact that the
       merging firms are close competitors, the limited possibilities for customers to
39     Responses to Question 19 of Q1 to Biofuel competitors.
40     Responses to Question 7 of Q2 to Biofuel competitors.
41     Guidelines on the assessment of horizontal mergers under the Council Regulation on the control
       of concentrations between undertakings, OJ C 31, 5.2.2004 p. 5.
                                                     9
 ---pagebreak---      switch supplies, or the fact that a merger would eliminate an important
     competitive force. That list of factors applies equally if a merger would create or
     strengthen a dominant position, or would otherwise significantly impede effective
     competition due to non-coordinated effects.
(48) This Decision will analyse whether the Transaction is likely to raise serious
     doubts as to its compatibility with the internal market by the creation of non-
     coordinated effects in those markets on which the Parties’ activities lead to
     horizontal overlaps.
(49) The only horizontal overlap between the activities of the Parties in the EEA is in
     the procurement of processed Category 3 fats. Demeter is a trader and is thus
     active as purchaser and seller of Category 3 fats. The Neste group is not active in
     selling, as it uses the Category 3 fats it purchases as an input for its production of
     renewable fuels.
(50) Given that there is no overlap in the supply of Category 3 fats, and even Demeter
     itself does not produce or process this material, the only anti-competitive effect
     the Transaction could potentially bring to the markets in the purchase and sale of
     Category 3 animal fats due to horizontal overlaps would be excessive buying
     power that would harm suppliers and other customers of Category 3 fats.
(51) For the following reasons, the Commission considers that it is not likely that post-
     merger Neste could exert significant bargaining power towards suppliers of
     Category 3 animal fats (renderers), who would still have a vast customer base.
(52) First, the Parties' combined market share in the purchase of Category 3 animal
     fats amounted to [10-20]% (Demeter [10-20]%, with a low increment from Neste
     at [0-5]%) in the EEA and [20-30]% (Demeter [20-30]%, with a low increment
     from Neste at [5-10]%) in Northern Europe in 2017. At Northern European level,
     other purchasers of Category 3 animal fats include oleo-chemical producers
     Oleon ([5-10]%), KLK Emmerich ([5-10]%), Baerlocher ([0-5]%); AAK, a
     producer of high-value added vegetable oils and fats ([0-5]%); and animal fat
     traders MW Beer, Van Wijk & Olthuis, and Harris Tobias (each at [0-5]%).
     Within Northern Europe, the Parties' combined purchase shares would amount to
     circa [30-40]% of procurement for Category 3 animal fats in [countries]
     (Demeter [10-20]%, with a low increment from Neste at [10-20]%) and [country]
     (Demeter [20-30]%, with a low increment from Neste at [5-10]%) and circa
     [60-70]% in [countries] (Demeter [50-60]%, with a low increment from Neste
     at [5-10]%).
(53) Second, given that Category 3 animal fats are sourced for different applications,
     there are many other customers in the market who will continue to compete with
     the merged entity. Industry data show that biodiesel represents only
     approximately 20% by volume of the end uses of edible and Category 3 fats in the
     EU.42 In, addition, there are also other traders who have been identified by the
     market investigation respondents as close competitors to Demeter in the purchase
42   Based on the figure 'Destination of edible and category 3 fat', page 85 of the Form CO, taken from
     "Presentation material in EFPRA annual conference 2017 (Hamburg), Dirk Dobbelaere,
     "Statistical overview of the Animal By-Products Industry in the EU in 2016”. The edible fats
     included in this statistical figure refer to edible tallow and lard, which make up about 5% of the
     'edible and category 3 fats' category.
                                                       10
 ---pagebreak---         of animal fats: Van Wijk en Olthuis, Robie/Noba, Saria, Soleval, Leo Group,
        Darling, and Sapi.43
(54)    Third, purchases are made on a spot basis, without long term supply agreements.
        As suppliers are free to sell to any customers there is no risk of being locked in.
        An animal fat supplier commented: "The market will keep selling the material
        there where it brings the best money. Like it has always been".44
(55)    Fourth, none of the animal fat suppliers responding to the market investigation
        identified any impact from the Transaction on their business or the market.45 For
        example, an animal fat supplier described the potential impact of the Transaction
        as follows: "none. Market remains the same, the function of Demeter remains the
        same towards the market and Neste."46
(56)    For the reasons set out in recitals (49) to (55) the Commission concludes that the
        Transaction does not raise serious doubts as to its compatibility with the internal
        market as regards the market for the purchase of Category 3 animal fats.
5.1.2. Vertically affected markets
5.1.2.1. Introduction
(57)    A vertical merger may result in anti-competitive effects due to foreclosure.
        Foreclosure concerns a situation where actual or potential rivals' access to
        supplies or markets is hampered or eliminated as a result of the merger, thereby
        reducing these companies' ability and/or incentive to compete.47
(58)    Two forms of foreclosure can be distinguished in a vertical relationship: input and
        customer foreclosure. The first is where the merger is likely to raise the costs of
        downstream rivals by restricting their access to an important input (input
        foreclosure). The second is where the merger is likely to foreclose upstream rivals
        by restricting their access to a sufficient customer base (customer foreclosure).48
(59)    Input foreclosure arises where, post-merger, the new entity would be likely to
        restrict access to the products or services that it would have otherwise supplied
        absent the merger, thereby raising its downstream rivals' costs by making it harder
        for them to obtain supplies of the input under similar prices and conditions as
        absent the merger.49
(60)    Customer foreclosure may occur when a supplier integrates with an important
        customer in the downstream market. Because of this downstream presence, the
        merged entity may foreclose access to a sufficient customer base to its actual or
        potential rivals in the upstream market (the input market) and reduce their ability
43      Responses to Question 11 of Q3 to animal fat customers and Question 13 of Q4 to animal fat
        competitors.
44      Responses to Question 12 of Q4 to animal fat suppliers.
45      Responses to Question 14, 15 and 16 of Q4 to animal fat suppliers.
46      Responses to Question 14 of Q4 to animal fat competitors.
47      Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the
        control of concentrations between undertakings, OJ C 265, 18.10.2008, p. 6 (‘Non-Horizontal
        Guidelines’), paragraphs 29–30.
48      Non-Horizontal Guidelines, paragraphs 29–30.
49      Non-Horizontal Guidelines, paragraph 31.
                                                      11
 ---pagebreak---         or incentive to compete. In turn, this may raise downstream rivals' costs by
        making it harder for them to obtain supplies of the input under similar prices and
        conditions as absent the merger.50
(61)    For an input or customer foreclosure scenario to raise competition concerns, three
        cumulative factors need to be taken into account: (i) the ability of the merged
        entity to engage in foreclosure; (ii) the incentives of the merged entity to do so;
        and (iii) whether a foreclosure strategy would have a significant detrimental effect
        on competition in the downstream market.51
(62)    The Transaction gives rise to vertically affected markets as a result of Demeter's
        position in the supply of Category 3 animal fats in the Benelux, Germany, the UK
        and Ireland (upstream), and Neste's activities in the production of HVO biofuel,
        where it has market shares above 30% in a number of countries (downstream).
5.1.2.2. Input foreclosure
(63)    Three market participants expressed concerns that Neste could use the acquisition
        of Demeter to foreclose competing biofuel producers from access to Category 3
        animal fats. Among them, a biofuel customer argued that the acquisition of
        Demeter could create an entry or expansion barrier to actual or potential HVO
        competitors and ultimately enable Neste to increase its prices of HVO.
(64)    However, on the basis of the results of the market investigation, the Commission
        considers that such input foreclosure is unlikely to arise, mainly since the merged
        entity will lack the ability to foreclose competing biofuel producers from access
        to Category 3 fats. Accordingly, the Commission also considers that the
        acquisition of Demeter will not create a barrier to entry or expansion.
        Ability to foreclose
(65)    Post-merger, Neste will not have the ability to foreclose access to Category 3
        animal fats. First, Demeter had a market share in the sale of Category 3 animal
        fats of [20-30]% in the North of Europe, (Austria, Benelux, France, Germany,
        Ireland, Nordic countries, and the UK) in 2017. While its market share was high
        in Finland ([…]%) and the Netherlands ([…]%), this is where Neste has its
        refineries and where already today Demeter only sells to Neste.52
(66)    Second, already today [90-100]% of Demeter's Category 3 fats are sold to Neste
        and already today Demeter does not sell to any other biofuel producer. Therefore
        none of Neste’s competitors in biofuel production currently relies on purchases of
        Category 3 Animal Fats from Demeter.
(67)    Third, Demeter is a trader and not a renderer; therefore the number of available
        producers of Category 3 animal fats will not change post-Transaction. Some
        market participants, and in particular those who voiced concerns, referred to the
        competitive advantages that Demeter has over its competitors, namely its
50      Non-Horizontal Guidelines, paragraph 58.
51      Non-Horizontal Guidelines, paragraphs 32, 59.
52      Demeter does not have material sales in other countries. For instance, in 2017, its only other sales
        of Category 3 fats were in […] (for about EUR […]), […] (for about EUR […]) and […] (for
        about EUR […]).
                                                       12
 ---pagebreak---      blending capabilities and its vast network of contacts with renderers. However, as
     mentioned above, the cost of Demeter's blending operations is in the region of
     [0-5]% of its overall sales costs.53 Moreover, even though blending is important,
     Category 3 animal fat still needs to go through a pre-treatment process to make it
     suitable as a feedstock for HVO. This pre-treatment is always carried out by the
     HVO manufacturer and not by the supplier of the animal fat.
(68) Fourth, the market investigation and data provided by the Parties bear out the
     presence of various alternative suppliers of animal fats that meet the requirements
     of a producer like Neste or its competitors. Asked to identify close competitors to
     Demeter, able to supply very similar products and services in terms of
     characteristics, functionality and quality, an animal fat supplier replied: "There
     are various direct sellers to Neste, like Leo Group, Darling, Van Wijk en Olthuis.
     Besides that everybody is free to sell to Neste."54 The Commission contacted three
     suppliers of animal fats, who currently do not supply Neste, to enquire whether
     they would have the capacity, knowledge and know-how to serve any current or
     future producers of HVO biofuel with Category 3 animal fats in the EEA. All
     three indicated that they would be able to supply Category 3 animal fats to other
     HVO producers or increase their supplies to current HVO customers.55
(69) Fifth, Category 3 fats are just one of the possible feedstocks for both FAME and
     HVO processes. The ability and extent to which fats of any category can be used
     as feedstock depend on the technical set-up of a plant, and the preference of end
     markets for certain materials based on double counting towards biofuel mandates.
     This technical ability combined with end-market preferences differs for each
     producer, therefore affecting its choice of optimal feedstocks.
(70) Industry data shows that waste-based feedstocks, including animal fats, made up
     51% of feedstocks used in the overall production of HVO in Europe in 2017, with
     the remaining 49% coming from vegetable oils.56 The market investigation has
     shown that Neste's competitors use a combination of feedstocks, while one
     competitor does not use Category 3 animal fats in its production at all. A
     competitor stated that it "only uses crude tall oil (residue from chemical pulp
     process) as feedstock for its HVO production, and it has no plans to use animal
     fats or UCO in the future".57 Among the three companies who voiced concerns,
     two also recognised that Category 3 animal fats are not, or will not be, their main
     feedstock for HVO production. This even applies to those who indicated that they
     required, or were interested in, the use of Category 3 animal fats as a feedstock.58
(71) A potential entrant into the HVO market who is not currently a customer of
     Demeter claimed that the Transaction would discourage it from starting a supply
     relationship with Demeter. The company contended that following the
     Transaction, even if Demeter was willing to supply it, Demeter could provide less
     good quality animal fat. In addition, Demeter would gain access to commercially
53   Response to Question 2 of RFI No 1.
54   Responses to Question 13 of Q4 to animal fat suppliers.
55   Responses to request for information sent to three animal fat suppliers on 4 July 2018.
56   Form CO, p. 36.
57   Non-confidential minutes of a call with a competitor of 30 May 2018.
58   Non-confidential minutes of a call with a competitor of 12 June 2018 and non-confidential
     minutes of a call with a competitor of 7 June 2018.
                                                     13
 ---pagebreak---         sensitive information regarding its animal category 3 fat requirements and could
        pass it on to Neste.
(72)    This company has publicly announced its entry into the HVO market. Based on
        the available evidence, the Commission considers that the Transaction is unlikely
        to stop that company from entering the market. When asked to substantiate their
        claim on how important Demeter was for them as a supplier of Category 3 animal
        fat, the company did not provide such evidence.59 In addition, in the country
        where the potential entrant’s new refinery is based, Demeter's share of purchases
        is below 10% and the combined share of purchases of Demeter and Neste is
        below 15%. Moreover, the number of producers of Category 3 animal fats will
        not be reduced and there are close competitors of Demeter who are capable of
        providing similar offerings of Category 3 animal fat.
(73)    In the light of the results of the market investigation, it can be concluded that the
        merged entity is unlikely to have the ability to foreclose Neste's competitors from
        access to the sourcing of Category 3 animal fats.
5.1.2.3. Customer foreclosure
(74)    With regard to ability, first, Neste already today sources more than [70-80]% of
        its total sourcing of Category 3 fats from Demeter. Second, there is no shifting to
        in-house supplies post-merger as Demeter has no production activities of
        Category 3 fats and all Category 3 fats will continue to be purchased from
        renderers by both traders and users of Category 3 fats. Third, there is a wide base
        of companies interested in the purchase of animal fats, not only biofuel producers
        but also producers of animal feed and pet food and oleo-chemical companies. As
        mentioned in recital 53, biodiesel represents only approximately 20% by volume
        of the applications of edible and category 3 fats in the EU.
(75)    With regard to incentive, already today Neste sources [20-30]% of its needs from
        other Category 3 fat suppliers. Even if Neste were to expand Demeter's activities,
        as Demeter is a trader (and not a producer), Neste, directly or through Demeter
        would still be active in purchasing Category 3 animal fats. It has no incentive not
        to purchase animal fat that it needs for its HVO production.
(76)    This was confirmed by the market investigation, in which no animal fat suppliers
        raised any concerns on customer foreclosure, as none of them identified any
        impact from the Transaction on the market or their business.60
(77)    In the light of the results of the market investigation and taking account of all the
        evidence available to it, the Commission considers that the merged entity is
        unlikely to have the ability or incentive to foreclose Demeter's competitors from
        access to a sufficient customer base.
(78)    For the reasons set out in recitals (63) to (77), the Commission concludes that the
        Transaction does not raise serious doubts as to its compatibility with the internal
        market as regards the markets vertically affected by the Transaction.
59      The company did inform the Commission that it plans to have 30% to 40% of its feedstock from
        waste and residues, and that it plans to have at least 15% of its total feedstock from Category 3
        animal fats.
60      Responses to Questions 14,15 and 16 of Q4 to animal fat suppliers.
                                                       14
 ---pagebreak--- 6.   CONCLUSION
(79) For the above reasons, the European Commission has decided not to oppose the
     notified operation and to declare it compatible with the internal market and with
     the EEA Agreement. This Decision is adopted in application of Article 6(1)(b) of
     the Merger Regulation and Article 57 of the EEA Agreement.
                                                  For the Commission
                                                  (Signed)
                                                  Margrethe VESTAGER
                                                  Member of the Commission
                                            15