CELEX: 32019M9449
Language: en
Date: 2019-12-03 00:00:00
Title: Commission Decision of 03/12/2019 declaring a concentration to be compatible with the common market (Case No COMP/M.9449 - VAG / VARTA (CONSUMER BATTERY, CHARGERS AND PORTABLE POWER AND LIGHTING BUSINESS)) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

EUROPEAN COMMISSION
                                                               Brussels, 3.12.2019
                                                               C(2019) 8791 final
                                                                                 PUBLIC VERSION
                                                                 In the published version of this decision,
                                                                 some information has been omitted
                                                                 pursuant to 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                                                                 information omitted has been replaced by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.9449 – VAG / VARTA (CONSUMER BATTERY,
                    CHARGERS AND PORTABLE POWER AND LIGHTING
                    BUSINESS)
                    Commission decision pursuant to Article 6(1)(b) in conjunction with
                    Article 6(2) of Council Regulation No 139/20041 and Article 57 of the
                    Agreement on the European Economic Area2
Dear Sir or Madam,
(1)         On 14 October 2019, the European Commission received notification of a proposed
            concentration pursuant to Article 4 of the Merger Regulation by which Varta
            Aktiengesellschaft (‘VAG’, Germany) will acquire, within the meaning of Article
            3(1)(b) of the Merger Regulation, a part of Energizer Holdings, Inc. (‘Energizer’,
            USA) (the ‘Transaction’).
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 (the ‘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’).
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--- (2)  The Transaction takes place as a result of a prior notification to the Commission of
     a proposed concentration between Energizer and Spectrum Brands Holdings, Inc..
     By decision of 11 December 2018, adopted in application of Article 6(1)(b) in
     conjunction with Article 6(2) of the Merger Regulation, the Commission declared
     that concentration between Energizer and Spectrum compatible with the internal
     market and the EEA Agreement (the ‘Energizer/Spectrum Decision’)3, subject to
     full compliance with the commitments annexed to that decision (the
     ‘Energizer/Spectrum Commitments’). Pursuant to the Energizer/Spectrum
     Commitments, Energizer committed to divest certain assets (‘the Divestment
     Business’ or ‘the Target’).
(3)  VAG is referred to in the decision as the 'Notifying Party', and VAG and the
     Divestment Business together are referred to together as the 'Parties'.
1.   THE PARTIES
(4)  VAG, via its subsidiary Varta Microbattery GmbH (‘Varta Microbattery’,
     Germany), manufactures and supplies microbatteries, and via its subsidiary Varta
     Storage GmbH (‘Varta Storage’, Germany), manufactures and supplies energy
     storage devices for private households, customer-specific, large-scale storage
     applications as well as energy solutions for customer-specific and standardised
     lithium-ion batteries. VAG is active on an EEA-wide and global basis.
(5)  The Divestment Business comprises of Spectrum’s former Varta consumer battery,
     chargers and portable power and lighting business in the EMEA region, as detailed
     in the Energizer/Spectrum Commitments. The structure and entities constituting the
     Divestment Business are shown in Figure 1.
    Figure 1 - Divestment Business (circulated in blue) 4
     […]
(6)   The Divestment Business does not include the Rayovac hearing aid batteries
     ('HABs') business that Energizer acquired from Spectrum in the Spectrum
     Transaction. The Divestment Business will have the benefit of a […] exclusive
     supply arrangement for Rayovac-branded HABs specifically for the mass retail
     channel (HABs Supply Agreement), pursuant to the HABs re-branding remedy that
     was approved by the Commission in the Spectrum Decision.
2.   THE OPERATION AND THE CONCENTRATION
(7)  Pursuant to a binding Acquisition Agreement entered into between VAG and
     Energizer on 29 May 2019, VAG will acquire the Divestment Business by way of
3
    M.8988 – Energizer/Spectrum Brands.
4
    Form CO, paragraph 28.
                                               2
 ---pagebreak---       purchase of shares. VAG will thus acquire sole control over the Divestment
      Business that prior to the Transaction constitutes a part of Energizer.
(8)   The operation thus constitutes a concentration pursuant to Article 3(1)(b) of the
      Merger Regulation.
3.    UNION DIMENSION
(9)   The Transaction does not have a Union dimension within the meaning of Article 1
      of the Merger Regulation.
(10)  On 9 August 2019, the Notifying Party informed the Commission, by means of a
      reasoned submission under Article 4(5) of the Merger Regulation, that the
      concentration is capable of being reviewed under the national competition laws of
      at least three Member States (namely Austria, Germany, Poland, Romania and
      Spain) and requested that it should be examined by the Commission.
(11)  The Commission transmitted this reasoned submission to all Member States on
      9 August 2019. The Member States competent to examine the concentration under
      their national competition law did not express their disagreement to the request for
      referral within 15 working days.
(12)  The Transaction is therefore deemed to have a Union dimension pursuant to Article
      4(5) of the Merger Regulation.
4.    COMPETITIVE ASSESSMENT
4.1.  Introduction
(13)  Batteries are devices that store electrical energy by means of a chemical interaction
      between a negative electrode (anode) and a positive electrode (cathode) through a
      conductive material (electrolyte). The resulting electricity can be used to power a
      wide range of devices or installations.5
(14)  The overall battery industry encompasses different categories: (i) industrial
      batteries, (ii) automotive batteries, (iii) batteries that are directly integrated into
      consumer devices and (iv) batteries used in relatively small devices (e.g. power
      tools and toys).6
            Consumer batteries can be distinguished based on their size and overall
             purpose:
            Household batteries: common battery sizes such as AA and AAA typically
             used to power various types of household electric devices. These household
5
     M.8988 – Energizer/Spectrum Brands, paragraph 7.
6
     M.8988 – Energizer/Spectrum Brands, paragraph 8.
                                               3
 ---pagebreak---                  batteries can be (i) disposable (primary), if manufactured for example
                 according to an alkaline or lithium chemistry, or (ii) rechargeable
                 (secondary) if manufactured according to a chemistry that allows recharging
                 (e.g. nickel-metal hydride (NiMH));
                Specialty batteries: batteries that have a coin or a button shape, are most
                 commonly manufactured with chemistries such as lithium and are typically
                 used for electronic watches and photo equipment; and
                Hearing air batteries (‘HABs’): batteries used to power hearing aid devices
                 which are very small button-cell shaped specialty batteries that are most
                 commonly manufactured with a zinc-air chemistry.7
(15)    The Parties are active in a number of markets; however, since their activities are to a
        large extent complementary, the resulting overlaps are limited. From a horizontal
        perspective, the Parties overlap in the wholesale supply of speciality batteries, and
        more specifically in the wholesale supply of primary alkaline coin batteries to the
        original equipment manufacturer (‘OEM’) channel. With respect to vertical links,
        VAG is active in the upstream market for manufacturing and wholesale supply of
        white label8 HABs to battery brands, while the Divestment Business is active in the
        downstream market of wholesale supply of branded HABs to the mass retail
        channel.
4.2.      Market for the wholesale supply of branded primary alkaline coin batteries to
          OEMs
4.2.1. Market definition
4.2.1.1. Relevant product market
(16)    In the recent Energizer/Spectrum case, the Commission concluded that consumer
        batteries9 sold to the OEM channel are part of a product market, separate from that
        of consumer batteries sold to the retail channel.10 The Commission also considered
        that consumer batteries sold to the OEM channel should be distinguished according
        to their rechargeability (primary batteries that are not rechargeable and secondary
        batteries that are rechargeable), to their shape (cylinder or coin), and to their
        chemistry (alkaline, lithium, silver oxide, zinc carbon, etc).11 With respect to the
        distinction between branded and private label consumer batteries, the Commission
7
        M.8988 – Energizer/Spectrum Brands, paragraph 9.
8
        In this context, the word ‘white label’ refers to HAB produced by VAG and re-branded by other
        battery companies.
9
        For the purpose of the present Decision, the expression ‘consumer batteries’ is used interchangeably
        with the expression ‘household and specialities batteries’.
10
        M.8988 – Energizer/Spectrum Brands, paragraph 34.
11
        M.8988 – Energizer/Spectrum Brands, paragraph 57.
                                                      4
 ---pagebreak---         concluded that branded consumer batteries are in a separate product market, distinct
        from private label consumer batteries.12
(17)    The market investigation has not yielded any information that would speak against
        applying the same segmentation in this case as the one used in Energizer/Spectrum.
(18)    The Commission therefore considers that the conclusions referred to in paragraph
        (16) above apply in this case.as well and that the wholesale supply of branded
        primary alkaline coin batteries to OEMs constitutes a distinct relevant product
        market.
4.2.1.2. Relevant geographic market
(19)    In the recent Energizer/Spectrum case, the Commission concluded that the wholesale
        supply of consumer batteries (including its various segmentations)13 to the OEM
        channel is EEA-wide in geographic scope.14
(20)    The market investigation has not yielded any information that would speak against
        the applying the same market definition in this case as the one used in
        Energizer/Spectrum.
(21)    The Commission therefore considers that the conclusions referred to in paragraph
        (19) above apply in this case as well and that the geographic scope of the relevant
        market is EEA-wide.
4.2.2. Competitive assessment
(22)    The present section demonstrates that post-Transaction the Merged Entity will have
        limited market share in the market for the wholesale supply of branded primary
        alkaline coin batteries to OEMs and that a number of credible suppliers would
        continue to compete with the Merged Entity.
(23)    First, the combined market share of VAG and the Divestment Business is small to
        moderate and market share increments are limited. As shown in Table 1, the Parties
        and in particular the Divestment Business have low or moderate market shares in the
        market for wholesale supply of primary alkaline coin batteries to OEMs. In 2018, the
        Parties’ combined market share in the EEA has been [10-20]% in volume and [30-
        40]% in value. Therefore, if only market shares in volume had to be considered, the
        market for wholesale supply of primary alkaline coin batteries to OEMs would not
        be an affected market under the terms of Commission Regulation No 802/2004.15
        With regard to market shares in value, the Transaction would only lead to a small
        market share increment (the Divestment Business only holds [0-5]% of the market)
        despite the fact that the Parties’ combined market share in 2018 has been [30-40]%.
12
        M.8988 – Energizer/Spectrum Brands, paragraph 74.
13
        For the purpose of the present Decision, the expression ‘consumer batteries’ is used interchangeably
        with the expression ‘household and speciality batteries’.
14
        M.8988 – Energizer/Spectrum Brands, paragraph 127.
15
        OJ L 133, 30.4.2004, p. 1 (the ‘Implementing Regulation’).
                                                     5
 ---pagebreak---  ---pagebreak---  ---pagebreak---         has a supply agreement with Energizer, which committed in the Energizer/Spectrum
        Commitments to supply HABs to the Divestment Business, for sale under the
        Rayovac brand, [… ] for […] (extendable for up to […] at the request of the
        purchaser).
(30)    The Transaction gives rise to no horizontal overlaps. However, it gives rise to a
        vertical relationship and a vertically affected market between (i) VAG’s upstream
        activities in manufacturing and supplying white label HABs to battery brands, and
        (ii) the Divestment Business’ downstream activities in the wholesale supply of
        branded HABs to the mass retail channel.
4.3.2. Market definitions
4.3.2.1. Relevant product markets
        (a)      Upstream market: Market for the manufacturing and wholesale supply of
                 white label HABs to battery brands
(31)    In the recent Energizer/Spectrum case, the Commission concluded that HABs belong
        to a product market that is separate from other types of batteries.20 The Commission
        concluded that branded and private label consumer batteries are not part of the same
        product market.21 Finally, the Commission further concluded that the wholesale
        supply of branded HABs to the mass retail channel constitutes a distinct product
        market (as opposed to e.g. wholesale to the audiologist channel).22
(32)    The Notifying Party agrees that HABs constitute a distinct category of batteries.
        Further, the Notifying Party submits that the manufacturing and wholesale supply of
        white label HABs to battery brand businesses constitutes a distinct relevant product
        market, separate from the downstream markets for the wholesale supply of branded
        batteries to the mass retail or audiologist channel.23
(33)    The market investigation has not yielded any information that would speak against
        defining, in line with what has been done in the Energizer/Spectrum decision,
        distinct markets for HABs compared to other batteries or as to the distinction
        between branded and private label batteries.
(34)    The results of the market investigation and the information available to the
        Commission further support the claim of the Notifying Party that the manufacture
        and wholesale supply of white label HABs to battery brands constitutes a distinct
        relevant product market.
(35)    First, the requirements of battery brand businesses are different from the downstream
        customers they serve. In practice, the demand for white label HABs by battery brand
20
        M.8988 – Energizer/Spectrum Brands, paragraph 96, 114 and 135.
21
        M.8988 – Energizer/Spectrum Brands, paragraph 74, 114 and 135.
22
        M.8988 – Energizer/Spectrum Brands, paragraph 106, 114 and 135.
23
        Form CO, paragraph 65.
                                                  8
 ---pagebreak---      businesses is essentially based not on brands but on the technical qualities of the
     batteries supplied and the commercial terms (such as price) on which they are
     supplied. This is in contrast to the demand of (branded) HABs in the mass retail (or
     audiologist) channel where branding plays a role.24
(36) Second, the structure of demand is different. The number of customers is different
     and different entities are customers in the supply of white label HABs to battery
     brands compared to the customers for such branded batteries in the downstream
     markets that the battery brand businesses serve. There are but a limited number of
     brand businesses, namely Duracell and a few others, which make up the demand for
     HABs in the supply of white label HABs to battery brands in the EEA (or globally).
     In contrast, in the supply of branded HABs to for example the mass retail channel (or
     audiologist channel) there is a multitude of different customers in the EEA (or even
     nationally).
(37) Third, from a supply side-perspective, the manufacture and wholesale supply of
     white label HABs to battery brands requires production facilities for HABs. That is
     in contrast to the brand businesses that do not need manufacturing equipment but
     acquire the batteries from the manufacturers (either captively or from third parties).
     At the same time, a manufacturer of HABs would find it difficult to supply the
     batteries directly in the wholesale of branded HABs to the mass retail (or
     audiologist) channel if it did not have a brand to do that.25
(38) Therefore, the Commission concludes that the market for the manufacturing and
     wholesale supply of white label HABs to battery brands constitutes a distinct
     relevant product market.
     (b)      Downstream market: Market for the wholesale supply and distribution of
              branded HABs to the mass retailer channel
(39) In the recent Energizer/Spectrum case, the Commission concluded that HABs
     constitute a separate relevant product market, distinct from other consumer
     batteries.26 The Commission also concluded that the supply of HABs to the mass
     retail channel (that is traditional retailers such as grocery stores, do-it-yourself stores
     and other consumer retail stores where a range of consumer products are made
     available) constitutes a separate relevant product market, distinct from supply to the
     specialist hearing aid retail channel (e.g. audiologists).27 Moreover, the Commission
     concluded that branded and private label consumer batteries are not part of the same
     product market.28
(40) The Notifying Party agrees with the finding of a distinct market for the wholesale
     supply of branded HABs to the mass retail channel.
24
     See for example minutes of a call with a market participant.
25
     See for example minutes of a call with a market participant.
26
     M.8988 – Energizer/Spectrum Brands, paragraph 96, 114 and 135.
27
     M.8988 – Energizer/Spectrum Brands, paragraphs 106, 114 and 135.
28
     M.8988 – Energizer/Spectrum Brands, paragraph 74, 114 and 135.
                                                  9
 ---pagebreak--- (41)    The market investigation has not yielded any information that would speak against
        defining, in line with what has been done in Energizer/Spectrum, a distinct market
        for the wholesale supply of branded HABs to the mass retail channel.
(42)    The Commission therefore considers that the conclusions reached in
        Energizer/Spectrum and referred to in paragraph (39) apply for the purposes of this
        case as well and that the wholesale supply of branded HABs to the mass retail
        channel constitutes a distinct relevant product market.
4.3.2.2. Relevant geographic markets
      (a)      Upstream Market: Market for the manufacturing and wholesale supply of
               white label HABs to battery brands
(43)    The Notifying Party submits that the market for manufacturing and wholesale supply
        of white label HABs to battery brands is global in geographic scope. In support of its
        submission, the Notifying Party explains that there are significant trade flows and
        that a large part of the HABs it manufactures in its plant in Germany is exported
        outside the EEA to customers that are typically active globally and have
        headquarters outside the EEA.29
(44)    The results of the market investigation nonetheless suggests that geographic markets
        are not necessarily global but that the market could be EEA-wide in scope. In
        particular, EEA-customers’ quality expectations are to a certain extent higher than in
        other regions, which is reflected by the fact that certain Asian suppliers are currently
        not able to produce the quality required by customers in the EEA.30
(45)    In any event, it is not necessary for the purposes of this decision to conclude on the
        exact scope of the relevant geographic market for the manufacture and wholesale
        supply of HABs to battery brands as the outcome of the competitive assessment
        remains the same regardless of whether a global or EEA-wide market was
        considered.
      (b)      Downstream: Market for the wholesale supply and distribution of branded
               HABs to the mass retailer channel
(46)    In the recent Energizer/ Spectrum case, the Commission concluded that the market
        for the wholesale supply of branded HABs to the mass retail channel is national in
        scope.31
(47)    The market investigation has not yielded any information that would speak against
        defining, in line with what has been done in Energizer/Spectrum, the market as
        national in scope.
29
        Form CO, paragraphs 75–78.
30
        See for example replies to question 7 of Questionnaire to Battery Companies.
31
        M.8988 – Energizer/Spectrum Brands, paragraphs 125.
                                                     10
 ---pagebreak---  ---pagebreak---  ---pagebreak---  ---pagebreak--- 4.3.4. Competitive assessment: input foreclosure
4.3.4.1. Ability to foreclose
(55)    According to the Non-horizontal Mergers Guidelines32, vertical mergers can lead to
        competition concerns if the parties to this concentration (the ‘merged entity’) have a
        significant degree of market power in the upstream market. 33 In this case, a reduced
        access of upstream products and services might negatively affect the availability of
        inputs for the downstream market.34
(56)    The Commission considers that VAG would have the ability to foreclose its
        downstream competitors in the supply of branded HABs to the mass retail channel
        from their access to HABs (input foreclosure).
(57)    First, VAG has a significant market position in the upstream market for the supply of
        white label HABs to battery brands. As noted in Section 4.3.3, in the EEA VAG is
        the only manufacturer of HABs active in supplying HABs to battery brands. Further,
        even if considering a potential global upstream market, its market share in 2018
        would be very high at [80-90]% in revenue and in [80-90]% in volume. 35
(58)    This suggests that VAG’s market power is not limited to the EEA, but is rather
        global. Also, as will be explained in paragraph (64), there is a certain degree of
        product differentiation for HABs, and battery brands consider that the HABs
        produced by the VAG and Energizer are of superior quality, compared to Asian
        manufacturers. Therefore, even if the Asian suppliers have some but limited market
        share globally, the competitive constraint to VAG that they present is likely less than
        what their (already limited market share) suggests.
(59)    Second, for the battery brand businesses active in wholesale supply of branded
        HABs to the mass retail channel, the supply of HABs is essential; they do not have
        the manufacturing capabilities to produce HABs. Battery brands leverage their brand
        image in consumer batteries to distribute their branded HABs to retailer but are
        entirely dependent on VAG for the supply of HABs.
(60)    Third, it is not likely that Energizer would become a significant merchant supplier of
        white label HABs battery brands. Energizer, which also manufactures HABs and
        supplies them in the EEA, uses most of the manufactured HABs captively for its
        downstream businesses. The Notifying Party claims that Energizer […] and that
        Energizer […] . According to the Notifying Party, Energizer has also […].
        Furthermore according to the Notifying Party Energizer already supplied […] with
32
        Commission Guidelines on the assessment of non-horizontal mergers under the Council Regulation
        on the control of concentrations between undertakings, OJ C 265, 18 October 2008, p. 6 (‘Non-
        Horizontal Merger Guidelines’).
33
        Non-horizontal Mergers Guidelines, paragraph 35.
34
        Non-horizontal Mergers Guidelines, paragraph 36.
35
        Form CO, paragraph 91.
                                                   14
 ---pagebreak---      approx. […] units of white label HABs at the global level (though not in the EEA) in
     the year 2018.36
(61) Nonetheless, the results of the market investigation show that none of the
     downstream market participants have changed their HABs supplier in the last five
     years.37 In addition, referring to potential supply from another HABs manufacturers,
     a market participant explained that former Rayovac-Spectrum (now Energizer)
     indicated a lack of interest in supplying high quality batteries equivalent to those
     supplied by VAG. A customer explained, ‘We had a contact with Rayovac but its
     HAB didn't meet our requirements.’38 A market participant also explained that
     Rayovac was not willing to supply the highest quality batteries ‘The only alternative
     supplier of HAB of similar quality of VAG is Spectrum/Rayovac. However, Spectrum
     indicated a lack of interest in supplying HAB to the Company the required quality
     products. Specifically, these negotiations fell through because they only offered an
     inferior product (not of their best quality and below [name of market participant]’s
     standards)’.39
(62) Therefore, it appears that Energizer if anything is likely not a supplier that
     downstream customers could turn to in order to avoid input foreclosure efforts by
     VAG.
(63) Fourth, HABs manufacturers established outside the EEA do not represent a viable
     source of supply or competitive constraint on VAG in the supply of white label
     HABs to battery brands.
(64) Such suppliers make currently no sales in the EEA and, even if considering the
     global level, their market shares are limited. Moreover, the results of the market
     investigation suggest that these suppliers – mainly Chinese – are not able to deliver
     sufficient quality to be considered as viable alternative. A market participant
     explains: ‘[t]he HAB batteries manufactured by Rayovac and VAG are by far of
     superior performance and quality and reliability in comparison with other products.
     Asian manufacturers able to supply HAB today, cannot match the battery
     performance and experience important quality issues in terms of leakage and battery
     cells corrosion.’40 Another market participant concurs: ‘We think HAB produced by
     VAG and Rayovac have better quality than those produced by Chinese
     manufacturers.’ 41 In any event, even if the sales outside the EEA are considered and
     therefore sales of non-EEA manufacturer in non-EEA countries are considered,
     VAG’s market share in 2018 would be as high as [80-90]% in terms of number of
     units sold, [80-90]% in terms of revenues.42
36
     Form CO, paragraph 223
37
     Questionnaire to customers, question 9.
38
     Questionnaire to customers, question 10.
39
     Minutes of a call with a customer
40
     Questionnaire to customers, question 11.
41
     Questionnaire to customers, question 11.
42
     Form CO, paragraph 87.
                                              15
 ---pagebreak--- (65)    With respect to the possibility of Asian suppliers developing their quality, a market
        participant explained that Asian HABs manufacturers, which already enjoy
        reasonable economies of scale but lack an acceptable level of quality required in the
        EEA could develop the capabilities to produce higher quality batteries but that it
        would only be in the long term: ‘In principle, Asian manufacturers that currently
        produce HAB of lower quality might improve the quality of their HAB, but this of
        course is not a short-term possibility’.43
(66)    Fifth, non-vertically integrated HABs battery brands cannot establish their own
        production capabilities at competitive terms or within short period of time.
(67)    The Notifying Party claims that all its HABs customers used to manufacture HABs
        batteries and could rebuild their own production lines within 1.5 to 2 years.44 The
        Notifying Party nonetheless acknowledges that the reason for these battery brands to
        have discontinued their HABs production is the lack of economy of scale, which
        makes the business not economically viable.
(68)    Nonetheless, the results of the market investigation indicate that a hypothetical new
        HABs production line in the EEA would not be economically viable because it
        would not be able to meet the economies of scales required to be competitive on the
        market.45 A market participant explains that developing the upstream capabilities to
        be able to produce HABs internally is not currently considered as an alternative:
        ‘[t]he Company considers that the investment for becoming a vertically integrated
        HAB supplier (i.e. to start manufacturing its own HAB battery) is simply not an
        economically feasible option at the current stage.’
(69)    Furthermore, the Commission notes that even if a downstream competitor to VAG
        could set up its own production, it would not be adequately immediate to counter the
        anticompetitive effects of the Transaction. The Commission refers in this respect to
        the Notifying Party's own submission of it taking 1.5 to 2 years to set up such
        production capability.
(70)    Therefore, the Commission considers that VAG likely has the capability to engage
        into input foreclosure. Battery brand businesses that supply customers in the EEA
        are likely not able to turn to alternative suppliers to counter such behaviour by VAG.
        VAG is currently the only supplier in the EEA. While there globally are a number of
        other suppliers, their market shares – even combined – are limited and they are likely
        not able to offer such quality HABs that VAG is and that are required by ultimate
        customers in the EEA.
4.3.4.2. Incentive to foreclose
(71) According to the Non-horizontal Mergers Guidelines, the incentive of a firm to
    foreclose its customers depends on the degree to which the foreclosure would be
43
        Replies to question 7 of Questionnaire to customers.
44
        Form CO, paragraph 92.
45
        Minutes with a competitor.
                                                     16
 ---pagebreak---     profitable.46 ‘Essentially, the merged entity faces a trade-off between the profit lost in
    the upstream market due to a reduction of input sales to (actual or potential) rivals and
    the profit gain, in the short or longer term, from expanding sales downstream or, as the
    case may be, being able to raise prices to consumers. The trade-off is likely to depend
    on the level of profits the merged entity obtains upstream and downstream. Other things
    constant, the lower the margins upstream, the lower the loss from restricting input sales.
    Similarly, the higher the downstream margins, the higher the profit gain from increasing
    market share downstream at the expense of foreclosed rivals’.47
(72) The present section demonstrates that the Merged Entity would have an incentive to
    foreclose battery brands active in the downstream market for wholesale supply and
    distribution of branded HABs to the mass retailer channel because the profit lost due to a
    reduction of input sales to these customers would be smaller than the profit gained in the
    downstream market.
        (a)     The Notifying Party’s argument
(73)    The Notifying Party submits that it would not be able to capture an adequate amount
        of sales at the downstream market to make input foreclosure beneficial to it.
        According to the Notifying Party, its assumption is that ultimate customers who lose
        their current HABs brand will purchase from the remaining suppliers (brands)
        according to their current share in the market. This will lead to a […]% recapture
        ratio for VAG-Rayovac on the downstream market. The critical recapture ratio
        defined by the parties as ‘the smallest fraction of sales that would need to be
        recaptured from white label HAB sales to the foreclosed battery brands to Rayovac
        branded HAB sales in the mass retail channel for the input foreclosure strategy to be
        profitable for the combined entity,’ would be […]%.
(74)    However the Notifying Party claims that the ‘[t]he structure of white label supply
        does not allow targeting foreclosure to a specific geography or channel’ and, as a
        result, ‘[t]he cost of foreclosure is not limited to upstream sales in the EEA as
        battery brands purchase from VAG through supply agreements negotiated at a
        global level.’ The Notifying Party then concludes that ‘given that about […]% of
        VAG’s white label HAB sales volume to battery brands is in the EEA. Taking this
        into account, the estimate of the actual recapture rate is about […].’
        (b)     The Commission’s assessment
(75)    For the following reasons, the Commission considers that VAG would, post-
        Transaction, likely have the incentive to engage in input foreclosure.
(76)    First, as a result of the transaction, VAG will become one of the leading downstream
        players by holding a [30-40]% market share in value in the distribution of HABs in
        the mass retail channel in the EEA as a whole, as evidenced in Table 4, with the
        market share being significantly higher in some Member States. VAG will compete
46
        Non-horizontal Merger Guidelines, paragraph 40.
47
        Non-horizontal Merger Guidelines, paragraphs 40 and 41.
                                                  17
 ---pagebreak---  ---pagebreak---  ---pagebreak---      in the downstream market prices, it is not likely that its incentives would change as a
     result of the Transaction. There is thus no likelihood of another supplier
     counteracting an input foreclosure strategy.
(84) It further follows that, were VAG instead of a blocking supplies to increase its prices
     at the upstream level, customers would likely have no alternative but to either
     increase their prices at the downstream level – allowing VAG to increase its prices
     too – or to absorb the additional cost by reducing their own margin.
(85) Fourth, the actual recapture ratio is likely increased by some customers in the
     wholesale supply of branded HABs in the retail channel requiring suppliers to
     provide a complete portfolio of products. Therefore, having an HAB brand allows a
     supplier to bid for more tenders – including those that require a full portfolio of
     batteries including HABs. A market participant explains: 'Moreover, since VAG
     would acquire the VARTA/Spectrum portfolio of batteries that are sold in the mass
     retail channel and it would be competing with the Company for these sales. Indeed,
     it is important to understand that whereas direct negotiations with several branded
     battery suppliers are still a common phenomenon in the grocery retail channel,
     tenders of various kinds are becoming increasingly important in all other channels.
     Such tenders are sometimes for the whole battery category or the whole store and
     thus, if a competitor is not able to supply hearing aids batteries, such could not
     appropriately compete for the tender.’ 52
(86) Fifth, contrary to what the Notifying Party argues, the market investigation indicated
     that the Merged Entity would be able to identify HABs that its customers eventually
     sell in the EEA and to price discriminate between HABs sold in different regions of
     the world. Therefore, in case of input foreclosure of EEA customers, the Merged
     Entity loss of profits would be limited to those HABs ultimately sold to the EEA
     markets. This is for the following reasons.
(87) In the first place, HABs manufactured for the EEA market have some
     distinguishable features in terms of technical specifications and packaging. A market
     participant explains: ‘Battery labels and packaging should need to be adapted to the
     European requirements in terms of safety warnings, language translations, disposal
     advice.’53
(88) In the second place, it has been suggested in the market investigation that VAG
     would have the ability to monitor where its customers ultimately sell their products.
     A market participant explains: ’There is no monitoring per se of the sales we make in
     the non-audiologist channel today as we acquire the products manufactured as
     private label goods for us and then could freely resell them in Europe and Africa.
     However, VAG has certainly good market knowledge and probably tracks general
     market share and presence through external sources like Nielsen, etc.’54
52
     Minutes of a call with a market participant.
53
     Minutes of a call with a market participant.
54
     Questionnaire to battery companies, question 8.
                                                  20
 ---pagebreak--- (89)    Therefore, the Commission considers that the Merged Entity would likely have the
        incentive to engage in input foreclosure relating to the manufacture and supply of
        white label HABs to battery brands as such a behaviour would likely be profitable to
        it.
4.3.4.3. Overall impact
(90)    A merger can raise competition concerns if input foreclosure would lead to a price
        increase in the upstream market.55 The higher the proportion of the proportion of the
        rivals which would be foreclosed on the downstream market, the more likely the
        merger can be expected to result in a significant price increase in the downstream
        market and, therefore, to significantly impede effective competition therein.56
(91)    For the following reasons, the Commission considers that input foreclosure by VAG
        post-Transaction would have an overall impact in the market.
(92)    First, the Merged Entity’s input foreclosure would impact a large part of its
        competitors and a significant share of overall supply in the downstream market for
        the wholesale supply of branded HABs to the mass retailer channel. As already
        explained in Section xxx, all but one major downstream competitor in the EEA –
        Energizer – relies on HABs manufactured by VAG. As set out in Table 4, even if the
        analysis of the market were carried out on the wider EEA level,57 the cumulated
        market shares of the Parties’ downstream competitors excluding Energizer is [40-
        50]% in volume and [30-40]% in value.
(93)    Second, in case of input foreclosure, only Energizer would be able to produce, as a
        vertically integrated player, adequate alternative HABs. All the main companies
        active downstream, excluding Energizer, are fully dependant on the supply of HABs
        by VAG. Therefore, in case of input foreclosure, the Merged Entity would have to
        compete only with Energizer in the downstream market for the wholesale supply and
        distribution of branded HABs to the mass retailer channel. Moreover, by itself the
        foreclosure will be profitable for VAG as explained in paragraphs (76) to (88).
(94)    Third, the result of an input foreclosure behaviour by the Merged Entity would lead
        to a literal duopoly at the downstream market, conducive to higher prices than a
        market with more market participants. In a question to Herbert Schein, Chairman of
        the Executive Board of VARTA AG during an investor call an analyst states:
        ’exclusive supply and licence agreement for Rayovac-branded hearing aid batteries
        produced in the UK and the US. Those are batteries from your direct competitor and
        you have a majority market share in what is almost a duopoly in Europe’. 58
55
        Non-horizontal Mergers Guidelines, paragraph 47.
56
        Non-horizontal Mergers Guidelines, paragraph 48.
57
        Although the geographic market definition is national-wide, an EEA-wide assessment complements
        the national analysis and provides a better overview of the cumulated impact of the input foreclosure
        on each of the EEA markets.
58
        Reply to RFI 17, ‘VARTA AG Update Call 29 May 2019, 10:00 am CEST’.
                                                      21
 ---pagebreak---   4.3.5. Conclusion on input foreclosure
  (95)   For the reasons set out in Section 4.3.4 and considering all evidence available to it,
         the Commission concludes that, post-Transaction, VAG would likely have the ability
         and incentive to engage in input foreclosure, and that such foreclosure would have
         an overall impact in the downstream market for the wholesale supply of branded
         HABs to the mass retail channel.
  (96)   The Transaction, as notified, thus raises serious doubts as to its compatibility with
         the internal market due to an input foreclosure related to the vertical link between (i)
         the upstream market for the manufacture and supply of white label HABs to battery
         brand businesses and (ii) the downstream market for the supply of branded HABs to
         the mass retail channel.
  5.       VAG’S MARKET POWER IN OTHER MARKETS
(97)     During the market investigation, one market participant expressed a concern that the
         Transaction would increase VAG’s market power overall in batteries. According to
         this market participant, such an overall market power would allow VAG to foreclose
         its customers in markets that are not affected by the Transaction. More specifically,
         this market participant is concerned that VAG might stop supplying or supplying at
         less favourable conditions rechargeable batteries for hearing aid devices.59
(98)     Nonetheless, the information made available to the Commission does not allow the
         conclusions that the Transaction would give rise to such competition concern.
         Moreover, as this market participants explained, the Divestment Business is not
         active in the supply of rechargeable batteries for hearing aids. Therefore, post-
         Transaction, the incentives and ability of VAG to foreclose its customers in these
         markets would likely not change materially. Accordingly, the Commission does not
         consider that the Transaction would raise serious doubts with respect to rechargeable
         hearing aid batteries.
  6.       PROPOSED REMEDIES
  6.1.     Introduction
  (99)     On 12 November 2019 the Notifying Party submitted commitments (‘Initial
           Commitments’), pursuant to Article 6(2) of the Merger Regulation, in order to
           remove the serious doubts identified by the Commission and to render the
           Transaction compatible with the internal market and the functioning of the EEA
           Agreement.
  (100)    On 13 November 2019, the Commission launched a market test on the Initial
           Commitments.
  59
         Minutes of a call with a customer on 27 November 2019.
                                                    22
 ---pagebreak--- (101)   On 21 November 2019, the Commission reported to the Notifying Party on the
        results of the market test.
(102)   On 25 November 2019, the Notifying Party submitted revised commitments, which
        they resubmitted in a clarified version on 2 December 2019 (‘Final
        Commitments’).
6.2.    Initial Commitments
6.2.1. Description of the Initial Commitments
(103)   The Initial Commitments consisted of the Notifying Party committing to supply
        HABs globally to any undertaking currently or potentially active in the wholesale
        supply of HABs under its own brand, such brand being used for batteries of any
        kind or for hearing aid devices, provided that the customer would purchase a
        certain minimum volume of HABs from the Notifying Party.
(104)   The term of the supply obligation under the Initial Commitments was set to ten
        (10) years from the Commission’s decision. However, any supply agreements with
        customers would have been made for an initial five-year term (in maximum up to
        the ten years from the Commission’s decision) whereafter a monitoring trustee
        would have annually reviewed the need to extend the agreement with the particular
        supplier, given the prevailing market situation at that time.
(105)   The Initial Commitments further set other key terms of the supply, among others
        price, volumes and quality. As to price, the Initial Commitments provided a ceiling
        price based on the prices previously charged from a given customer or, in case of a
        new customer, based on the prices charged for existing customers, such ceiling
        prices being subject to annual indexation on the basis of inflation and other rules
        set out in the Initial Commitments. As to volumes, a threshold was set in the Initial
        Commitments at 120% of the volumes supplied to a given customer in the
        preceding year, with the possibility for a monitoring trustee to review requests for
        any excess quantities. As to quality, the Initial Commitments provided certain
        standards that the HABs to be supplied by the Notifying Party would need to fulfil
        and certain further guarantees of a maintained quality.
(106)   Further, the Initial Commitments provided for an obligation for the Notifying Party
        to supply any possible new products that it might start to produce during the term
        of the Initial Commitments.
6.2.2. Notifying Party’s position
(107) According to the Notifying Party, the Initial Commitments are clear-cut and they
       would eliminate any serious doubts of competition concerns related to the
       Transaction.60
60
       Form RM.
                                             23
 ---pagebreak--- 6.2.3. Results of the market test
(108) On balance, the results of the market test were positive and they suggest that the
       Initial Commitments are in principle capable of the removing the serious doubts
       identified by the Commission.
(109) In particular, the majority of market participants taking a position submit that the
       Initial Commitments would ensure their continued access to HABs in adequate
       volumes and reasonable terms.61 The results of the market test further show that
       most market participants responding do not expect significant increases in the overall
       market demand and, even the market participant that is expecting demand increases,
       expect them to be at most in line with the 120% threshold or lower.62
(110) Further, the results of the market test suggest that the term of the Initial
       Commitments are adequate to ensure that customers currently active in the wholesale
       of branded HABs to the mass retail channel can develop alternative supply sources
       for HABs of adequate quality before the end of the duration of the Initial
       Commitments.63
(111) Finally, multiple market participants indicated that they would be interested in
       entering into a supply agreement with the Notifying Party under the terms set out in
       the Initial Commitments either as they are, or subject to certain limited
       amendments.64
(112) Nonetheless, market participants referred to a limited number of technical
       clarifications and improvements to the Initial Commitments that they suggested were
       necessary to ensure the effectiveness of the remedies. The clarifications and
       improvements mentioned relate to for example indexation of the price, packaging
       options made available and an explicit confirmation that – in order to achieve
       adequate volumes – customers can sell the HABs sourced from the Notifying Party
       to any downstream customer including those not active in the mass retail channel.65
6.2.4. Commission’s assessment
(113) The Commission considers that the Initial Commitments are in principle capable of
       removing the serious doubts raised by the Transaction. This is because:
(114) First, the Final Commitments cover supplies to all existing customers as well as to
       any potential new entrants that are active in nearby markets such as batteries or
       hearing aid devices. The Commission considers that the inclusion in the Initial
       Commitments of all current suppliers as well as any potential supplier already active
       in nearby markets increases the likelihood that competitive conditions in the
       downstream market are not made worse because of the Transaction.
61
       See for example replies to questions 1, 4, 10 and 11 of the Market Test.
62
       Replies to question 8 of the Market Test.
63
       Replies to question 3 of the Market Test.
64
       Replies to question 2 of the Market Test.
65
       See for example replies to questions 1, 4, 5, 9, 11 and 20 of the Market Test.
                                                      24
 ---pagebreak--- (115) Second, the results of the market investigation are overall positive. As explained in
      Section 6.2.3 , market participants see that the Initial Commitments would ensure
      that the Initial Commitments would ensure a continued access to HABs in adequate
      volumes and at reasonable terms, including price and quality.
(116) Third, the term of the Initial Commitments and the duration of the supply obligation
      on the Notifying Party appears adequate to allow customers to develop alternative
      supply sources, for example by working with the suppliers whose quality at present
      is not adequate. This is also in line with the replies to the market test explained in
      Section 6.2.3. The Commission further considers that it is in order to incentivise
      customers to seek alternative supply sources without delay and not to unduly rely on
      the commitments for longer than necessary. This purpose appears to be adequately
      served by the fact that the supply agreements are initially concluded for five years
      instead of the whole duration of the Initial Commitments (10 years), and that
      extensions are subject to a review.
(117) Fourth, it appears that the volume thresholds set in the Initial Commitments are
      adequate to ensure that the Notifying Party is obliged to supply HABs not only in
      line with the overall market growth but to allow for market share growth by its
      downstream competitors in the supply of branded HABs to the mass retail channel.
      In particular, the Initial Commitments provide that the Notifying Party shall supply a
      given customer with at least 120% of the customer’s demand in the previous year.
      This allows for a 20-% guaranteed supply increase every year compared to the
      previous, at the request of the customer. As explained in Section 6.2.3, market
      participants generally consider the volume threshold to be adequate, and market
      participants largely expect the overall market demand to grow less than the
      guaranteed 20-% annual increase in supplies set in the Initial Commitments. The
      threshold would thus allow customers to not only grow in line with overall expected
      market expansion but to gain market share.
(118) Fifth, the interest by market participants to enter into supply relationships with the
      Notifying Party under the conditions of the Initial Commitments, as explained in
      Section 6.2.3, supports the finding that the conditions of supply laid down in the
      Initial Commitments are suitable.
(119) Sixth, while the market test revealed some shortcomings in the Initial Commitments,
      they are not of such magnitude that they would call into question the suitability and
      effectiveness of the Initial Commitments to, in principle, remove the competition
      concerns the Commission has identified. The shortcomings relate to, for example,
      indexation of the ceiling price, the types of packaging that the customers could
      acquire the HABs with and clarification on how the volume threshold is calculated.
(120) Therefore, the Initial Commitments would in principle ensure that downstream
      competitors do not face disruptions, higher prices or reduced quality in the supply of
      hearing aid batteries they offer to customers while they develop alternative sourcing
      options. The commitments would also allow other companies to enter the market
      relying on similar supply conditions from the Notifying Party.
                                             25
 ---pagebreak--- (121) Nonetheless, the Commission considers that the shortcomings referred to by market
       participants in the market test, even if limited, relate to key conditions of supply such
       as price, packaging and volumes. They must thus be addressed in order for the
       commitments to be effective from all points of view.
6.2.5. Conclusion on the Initial Commitments
(122) Based on the considerations explained in 6.2.4 and in light of the results of the
       market test and all information available to it, the Commission concludes that the
       Initial Commitments were in principle capable of removing the identified serious
       doubts, subject to implementation of the necessary improvements identified.
6.3.     Final Commitments
6.3.1. Description of the Final Commitments
(123) The Final Commitments, provide the following improvements over the Initial
       Commitments:
              The annual indexation of the ceiling price was amended based on the
               feedback from the market test;
              An amendment was added to clarify that the Notifying Party will supply
               customers with all types of packaging it uses in its own downstream
               businesses;
              A clarification was added to explain customers are allowed to see the HABs
               supply by the Notifying Party in any downstream sales channel (including to
               mass retail but to others as well), and that the volume thresholds are
               calculated on the basis of such total supplies; and
              Certain other technical amendments and clarifications were added.
6.3.2. Commission assessment and conclusion on the Final Commitments
(124) The Commission notes that the Final Commitments address all the issues identified
       in the Initial Commitments and put forward the improvements found necessary by
       the Commission.
(125) Overall, the Final Commitments ensure that downstream competitors do not face
       disruptions, higher prices or reduced quality in the supply of hearing aid batteries
       they offer to customers while they develop alternative sourcing options. The
       commitments also allow other companies to enter the market relying on similar
       supply conditions from the Notifying Party. The Final Commitments also ensure that
       customers can acquire the HABs with all types of packaging used by the Notifying
       Party itself, and that the customers are able to acquire adequate volumes of HABs
       from the Notifying Party and to sells them in any downstream channel.
(126) Therefore, the Final Commitments entered into by the Notifying Party are suitable
       and sufficient to remove the competition concerns identified by the Commission and
                                               26
 ---pagebreak---       to thus eliminate the serious doubts as to the compatibility of the Transaction with
      the internal market.
7.      CONDITIONS AND OBLIGATIONS
(127) The commitments in section B of the Annex constitute conditions attached to this
      decision, as only through full compliance therewith can the conditions of
      competition be preserved. The other commitments set out in the Annex constitute
      obligations, as they concern the implementing steps which are necessary to achieve
      the modifications sought in a manner compatible with the internal market.
8.      CONCLUSION
(128) For the above reasons, the Commission has decided not to oppose the notified
      operation as modified by the Final Commitments and to declare it compatible with
      the internal market and with the functioning of the EEA Agreement, subject to full
      compliance with the conditions in section B of the commitments annexed to the
      present decision and with the obligations contained in the other sections of the said
      commitments. This decision is adopted in application of Article 6(1)(b) in
      conjunction with Article 6(2) of the Merger Regulation and Article 57 of the EEA
      Agreement.
(129) This decision is without prejudice to the Commission's approval of VAG as a
      suitable purchaser of the Divestment Business in the case M.8988 –
      Energizer/Spectrum Brands and of the Commission's assessment of whether the
      terms of the divestiture are consistent with the Commission's decision and the
      commitments in that case.
                                                    For the Commission
                                                    (Signed)
                                                    Margrethe VESTAGER
                                                    Executive Vice-President
                                           27
 ---pagebreak---                           Dated 2 December 2019
                          Non-confidential version
                          Varta Aktiengesellschaft
CASE NO M.9449 — VAG / Varta (Consumer Battery, Chargers and Portable Power and
                             Lighting Business)
                  Commitments to the European Commission
                                     1
 ---pagebreak---             COMMITMENTS TO THE EUROPEAN COMMISSION
Pursuant to Article 6(2) of Council Regulation (EC) No 139/2004 (Merger Regulation), VARTA
Aktiengesellschaft and any of its Affiliated Undertakings (VAG or Notifying Party) hereby enters
into the following Commitments (Commitments) vis-à-vis the European Commission
(Commission) with a view to rendering the acquisition by VAG of sole control of Varta Consumer
Battery, Chargers and Portable Power and Lighting Business (Varta Business) (Concentration)
compatible with the internal market and the functioning of the EEA Agreement.
This text shall be interpreted in light of the Commission’s decision pursuant to Article 6(1)(b) of
the Merger Regulation to declare the Concentration compatible with the internal market and the
functioning of the EEA Agreement (Decision), in the general framework of European Union law,
in particular in light of the Merger Regulation, and by reference to the Commission Notice on
remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission
Regulation (EC) No 802/2004 (Remedies Notice).
Section A.        Definitions
1. For the purpose of the Commitments, the following terms shall have the following meaning:
    Affiliated Undertakings: undertakings controlled by the Notifying Party and/or by the ultimate
    parents of the Notifying Party, whereby the notion of control shall be interpreted pursuant to
    Article 3 of the Merger Regulation and in light of the Commission Consolidated Jurisdictional
    Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between
    undertakings (the "Consolidated Jurisdictional Notice").
    Confidential Information: any business secrets, know-how, commercial information, or any
    other information of a proprietary nature that is not in the public domain.
    Conflict of Interest: any conflict of interest that impairs the Monitoring Trustee's objectivity and
    independence in discharging its duties under the Commitments.
    Customer: any undertaking currently or potentially active in the wholesale supply of HAB under
    its own brand (Customer Own-Branded HAB), such brand being used for batteries of any kind
    or for hearing aid devices. Undertakings failing to satisfy annual Product purchases of at least
                                                     2
 ---pagebreak--- three million Customer Own-Branded HAB and failing to resell substantial part of them in the
EEA do not qualify as Customers.
Customisation: the process through which Customers may obtain from the Notifying Party
Product customisation, including with respect to packaging and specification on terms specified in
the Supply Agreement. For the avoidance of doubt, with respect to packaging, Customers shall be
free to demand either customised packaging options in accordance with established market
standards or any packaging option sold by the Notifying Party.
Effective Date: the date of the adoption of the Decision.
Excess Quantities: the amount of Products exceeding 120% of the Notifying Party’s volumes of
Products actually supplied further to the Supply Agreement with any given Customer during the
prior fiscal year, or in case of Existing Customers, the amount exceeding 120% of Notifying
Party’s volumes of Products actually supplied in the fiscal year preceding entering into the Supply
Agreement, with such 120% threshold set on a rolling annual basis during the Term. To the extent
the Notifying Party sells Products on its own account under a licence agreement entered into with
the Customer and the Customer intends to sell those Products under its own brand because of
termination or expiry of the license or other cause, those quantities shall not be considered Excess
Quantities. Those volumes, even if sold by the Notifying Party under license, shall be accounted
together with Products actually supplied when computing the 120% threshold for Excess
Quantities.
HAB: primary batteries for use in hearing aid devices (as opposed to other consumer batteries).
Indexation – the Supply Agreement will allow for the Notifying Party and a Customer to
negotiate in good faith for the Price to be adjusted at the end of each consecutive period of 12-
months following the conclusion of the Supply Agreement in order to reflect significant increases
or decreases in its cost base (for example, due to an increase in raw material prices, development
or labour costs or to adequately reflect Customer-specific efficiencies and changes in
Customisation). The Monitoring Trustee will, subject to consultation with the Commission,
determine whether any such adjustment is reasonable. Further, to compensate for the innovation
expenses and costs the Notifying Party had to incur to develop the New Products from which
Customer will benefit, the Price shall be reasonably increased by Notifying Party; the Monitoring
Trustee has to approve such increased Price for New Products, subject to consultation with the
Commission and taking into account whether the benefit of the innovation objectively justifies the
Price increase. In consultation with the Commission, the Monitoring Trustee shall also determine,
whether such adjustment reasonably reflects a decrease of costs that may arise due to the
introduction of a certain innovation.
                                                3
 ---pagebreak--- Monitoring Trustee: one or more natural or legal person(s) who is/are approved by the
Commission and appointed by the Notifying Party, and who has/have the duty to monitor the
Notifying Party’s compliance with the conditions and obligations attached to the Decision.
New Products: HAB similar to the Products, in relation to which quality or functionality has been
changed, provided that the change in quality or functionality is used by the Notifying Party in any
of the HAB manufactured by it.
Price: the ceiling price at which the Products are offered to be sold to the Customer, which shall
be the average per-unit price at which the Notifying Party (directly and indirectly) supplied the
Customer the Products during the period immediately preceding the conclusion of the Supply
Agreement with the Customer of either: (i) the last 12-months; or (ii) the last three years (Existing
Customers), whichever is more favourable for the Customer. For Customers who have not been
supplied by the Notifying Party for periods of at least three years immediately preceding the
conclusion of the Supply Agreement (New Customers), the Notifying Party shall submit a
proposed Price determined on bona fide and non-discriminatory commercial conditions to the
Monitoring Trustee. The Monitoring Trustee shall, subject to consultation with the Commission,
assess the issue taking into account the conditions offered to Existing Customers (including
Customisation and volumes) and make a determination of the Price. The Notifying Party shall
disclose to the Monitoring Trustee all necessary information for such determination. With respect
to Excess Quantities, the Price shall be set further to good faith discussions between the Notifying
Party and the Customer, taking into account any potential cost increase involved in supplying such
Excess Quantities.
Products: HAB manufactured by VAG as defined, specified and/or supplied further to the Supply
Agreement. New Products, should these be developed during the Term, will be included as
Products.
Supply Agreements: the agreements to be entered into between the Notifying Party and the
Customer, according to which the Notifying Party shall be obliged to supply the Products to the
Customer during the Supply Agreement Term. The Notifying Party shall agree on a form of the
Supply Agreement with the Monitoring Trustee, subject to consultation with the Commission.
Any material deviations from the Supply Agreements shall be approved by the Monitoring
Trustee, subject to consultation with the Commission.
Supply Agreement Expiry: termination or expiry of the Supply Agreement Term or the absence
of the Supply Agreement Term, upon expiry, being further extended. As part of the Initial Review
and of each Subsequent Review (if any), the Monitoring Trustee shall, subject to consultation with
                                                 4
 ---pagebreak---     the Commission, compile a report containing a recommendation as to whether Supply Agreement
    Expiry should take place, taking into account the prevailing competitive dynamics at the time.
    Supply Agreement Term: the term of any given Supply Agreement, commencing as from the
    Supply Agreement Commencement Date for an initial period of 5 years. The Supply Agreement
    Term shall be first reviewed by the Monitoring Trustee 5 years after the Supply Agreement
    Commencement Date (Initial Review). Provided that, following the Initial Review, Supply
    Agreement Expiry has not taken place, the Supply Agreement Term of the Supply Agreement in
    question shall be extended by one year. Further reviews by the Monitoring Trustee (Subsequent
    Reviews) are to be carried out starting 6 years after the Supply Agreement Commencement Date
    and at yearly intervals thereafter, the last Subsequent Review being possible 9 years after the
    Supply Agreement Commencement Date provided that, at each Subsequent Review, Supply
    Agreement Expiry may take place under the circumstances set out herein. For the avoidance of
    doubt, the duration of the Supply Agreement Term may in no circumstances extend beyond the
    Term or the duration of the Commitments, if shorter than the Term, and may be subject to
    termination or expiry as specifically provided for in the Supply Agreement. The Monitoring
    Trustee's reports shall be submitted in a timely manner, allowing the Commission a period of three
    months for its consideration.
    Supply Shortage: any situation in which the Notifying Party is unable to produce or supply
    sufficient quantities of Product to fulfil its obligations under the Supply Agreements.
    Term: the period of 10 years following the Effective Date.
    Territory: global.
Section B.       Description of Commitments
2. The Notifying Party undertakes that, during the Term, it will supply under the Supply Agreement
    in the Territory the Products to the Customer on reasonable and non-discriminatory commercial
    terms at the Price. Supply Agreements shall provide for the possibility of Indexation and
    Customisation. For the avoidance of doubt, all Customers shall have the option of safeguarding
    the terms they might have agreed with the Notifying Party prior to the Effective Date or of freely
    negotiating with the Notifying Party terms which deviate from those set out herein. To the extent
    the Notifying Party sells Products on its own account under a licence agreement entered into with
    the Customer and the Customer intends to sell those Products under its own brand because of
    termination or expiry of the licence or other cause, those quantities shall be covered by the Supply
    Agreement.
                                                       5
 ---pagebreak--- 3. In the event that a Customer requests to purchase Excess Quantities and the fulfilment of such
     request would impose unreasonable costs on the Notifying Party, the Notifying Party commits to
     discuss with the Customer in good faith, in consultation with the Monitoring Trustee a means of
     resolving such supply request. If the Notifying Party and the Customer do not reach an agreement,
     the Monitoring Trustee will, subject to consultation with the Commission, determine whether the
     supply request for Excess Quantities shall be fulfilled, in full or in part, with the Monitoring
     Trustee taking into account the reasonableness of the request of the Customer, any capacity
     constraint encountered by the Notifying Party and any additional necessary and non-
     discriminatory expenditures that may be imposed on the Customer in the fulfilment of such
     request.
4. The Notifying Party shall not do or fail to do anything that will knowingly and significantly
     degrade the quality of the Product in comparison to: (i) the quality of HAB supplied through its
     own wholesale distribution and; (ii) the quality requirements according to leading industry
     standards, in particular the internationally accepted standards set by the International
     Electrotechnical Commission under IEC 60086-2 and IEC 60086-1, as amended from time to
     time.
5. In case of a Supply Shortage, Notifying Party shall provide the Products to the Customers in
     priority to servicing the Notifying Party’s own requirements. In such case, an allocation
     methodology for the Products to each of the Customers and the Notifying Party shall be
     established by the Monitoring Trustee in consultation with the Commission.
6. The Notifying Party commits to put in place internal information barriers with a view to
     establishing a separation between its hearing aid battery related activities upstream (i.e., VAG’s
     HAB supplies to the Customers) and its hearing aid battery related activities downstream (i.e.,
     VAG’s HAB supplies to retailers, wholesalers and distributors other than the Customers)
     (Information Barrier).
7. The Notifying Party undertakes that it will not make the supply of Products subject to acceptance
     by the Customer of supplementary obligations which by their nature and according to commercial
     usage have no connection to the subject of the Supply Agreement (Non-Tying Obligation).
Section C.        Monitoring Trustee
  I.    Appointment procedure
                                                    6
 ---pagebreak--- 8. The Notifying Party shall appoint a Monitoring Trustee to carry out the functions specified in
    these Commitments for a Monitoring Trustee. The Notifying Party commits not to close the
    Concentration before the appointment of a Monitoring Trustee.
9. The Monitoring Trustee shall:
       (i) at the time of appointment, be independent of the Notifying Party;
       (ii) possess the necessary qualifications to carry out its mandate, for example have sufficient
             relevant experience as an investment banker or consultant or auditor; and
       (iii) neither have nor become exposed to a Conflict of Interest.
10. The Monitoring Trustee shall be remunerated by the Notifying Party in a way that does not impede
    the independent and effective fulfilment of its mandate.
    Proposal by the Notifying Party
11. No later than two weeks after the Effective Date, the Notifying Party shall submit a list of one or
    more persons whom the Notifying Party proposes to appoint as the Monitoring Trustee to the
    Commission for approval. The proposal shall contain sufficient information for the Commission to
    verify that the person or persons proposed as Monitoring Trustee fulfil the requirements as set out
    in paragraph 9 and shall include:
         a. the full terms of the proposed mandate, which shall include all provisions necessary to
              enable the Monitoring Trustee to fulfil its duties under these Commitments;
         b. the outline of a work plan, which shall describe how the Monitoring Trustee intends to
              carry out its duties under these Commitments.
    Approval or rejection by the Commission
12. The Commission shall have the discretion to approve or reject the proposed Monitoring Trustee(s)
    and to approve the proposed mandate subject to any modifications it deems necessary for the
    Monitoring Trustee to fulfil its obligations. If only one name is approved, the Notifying Party shall
    appoint or cause to be appointed the individual or institution concerned as Monitoring Trustee, in
    accordance with the mandate approved by the Commission. If more than one name are approved,
    the Notifying Party shall be free to appoint the Monitoring Trustee from among the names
    approved. The Monitoring Trustee shall be appointed within one week of the Commission’s
    approval, in accordance with the mandate approved by the Commission.
                                                      7
 ---pagebreak---      New proposal by the Notifying Party
13. If all the proposed Monitoring Trustees are rejected, the Notifying Party shall propose at least two
     more natural or legal persons within one week of being informed of the rejection, in accordance
     with paragraph 8 to 12 of these Commitments.
     Monitoring Trustee nominated by the Commission
14. If all further proposed Monitoring Trustees are rejected by the Commission, the Commission shall
     nominate a Monitoring Trustee, whom the Notifying Party shall appoint, or cause to be appointed,
     in accordance with a trustee mandate approved by the Commission.
 II.     Functions of the Monitoring Trustee
15.     The Monitoring Trustee shall assume its specified duties and obligations in order to ensure
        compliance with the Commitments. The Commission may, on its own initiative or at the request
        of the Monitoring Trustee or the Notifying Party, give any orders or instructions to the
        Monitoring Trustee in order to ensure compliance with the conditions and obligations attached
        to the Decision.
                  Duties and obligations of the Monitoring Trustee
16. The Monitoring Trustee shall:
    (i)       monitor the execution and implementation of the Supply Agreements and ensure that the
              rights and obligations arising under the Supply Agreements, including with respect to
              matters such as pricing, quality, quantities and other key parameters, are determined and
              carried out in fully compliance with the Commitments;
    (ii)      propose to the Notifying Party such measures as the Monitoring Trustee considers
              necessary to monitor and ensure the Notifying Party’s compliance with the conditions and
              obligations with respect to the Information Barrier and Non-Tying Obligations;
    (iii)     propose in its first report to the Commission a detailed work plan describing how it
              intends to monitor compliance with the obligations and conditions attached to the
              Decision;
    (iv)      propose to the Notifying Party such measures as the Monitoring Trustee considers
              necessary to ensure the Notifying Party’s compliance with the conditions and obligations
              attached to the Decision;
                                                     8
 ---pagebreak---     (v)      act as a contact point for any requests by third parties, in particular the potential
             Customers, in relation to the Commitments;
    (vi)     promptly report in writing to the Commission, sending the Notifying Party a non-
             confidential copy at the same time, if it concludes on reasonable grounds that the
             Notifying Party is failing to comply with these Commitments;
    (vii)    assume the other functions assigned to the Monitoring Trustee under the conditions and
             obligations attached to the Decision.
       III.       Duties and obligations of the Parties
17. The Notifying Party shall provide and shall cause its advisors to provide the Monitoring Trustee
    with all such co-operation, assistance and information as the Monitoring Trustee may reasonably
    require to perform its tasks. The Notifying Party shall make available to the Monitoring Trustee
    one or more offices on their premises and shall be available for meetings in order to provide the
    Trustee with all information necessary for the performance of its tasks.
18. The Notifying Party shall provide the Monitoring Trustee with all managerial and administrative
    support that it may reasonably request and provide the Monitoring Trustee with access to any
    documents and records that the Monitoring Trustee may require in carrying out its duties.
19. The Notifying Party shall indemnify the Monitoring Trustee and its employees and agents (each
    an “Indemnified Party”) and hold each Indemnified Party harmless against, and hereby agrees
    that an Indemnified Party shall have no liability to the Notifying Party for, any liabilities arising
    out of the performance of the Monitoring Trustee’s duties under the Commitments, except to the
    extent that such liabilities result from the wilful default, recklessness, gross negligence or bad faith
    of the Monitoring Trustee, its employees, agents or advisors.
20. At the expense of the Notifying Party, the Monitoring Trustee may appoint advisors (in particular
    for corporate finance or legal advice), subject to the Notifying Party’s approval (this approval not
    to be unreasonably withheld or delayed) if the Monitoring Trustee considers the appointment of
    such advisors necessary or appropriate for the performance of its duties and obligations under the
    mandate, provided that any fees and other expenses incurred by the Monitoring Trustee are
    reasonable. Should the Notifying Party refuse to approve the advisors proposed by the Monitoring
    Trustee the Commission may approve the appointment of such advisors instead, after having heard
    the Notifying Party. Only the Monitoring Trustee shall be entitled to issue instructions to the
    advisors. Paragraph 19 of these Commitments shall apply mutatis mutandis.
                                                      9
 ---pagebreak--- 21. The Notifying Party agrees that the Commission may share Confidential Information proprietary
      to the Notifying Party with the Monitoring Trustee. The Monitoring Trustee shall not disclose
      such information and the principles contained in Article 17 (1) and (2) of the Merger Regulation
      apply mutatis mutandis.
22. The Notifying Party agrees that the contact details of the Monitoring Trustee are published on the
      website of the Commission's Directorate-General for Competition and they shall inform interested
      third parties, in particular any potential purchasers, of the identity and the tasks of the Monitoring
      Trustee.
23. For a period of 10 years from the Effective Date, the Commission may request all information
      from the Parties that is reasonably necessary to monitor the effective implementation of these
      Commitments.
 III.    Replacement, discharge and re-appointment of the Monitoring Trustee
24.      If the Monitoring Trustee ceases to perform its functions under the Commitments or for any
         other good cause, including its exposure to a Conflict of Interest:
              a. The Commission may, after hearing the Monitoring Trustee, require the Notifying Party
                 to replace the Monitoring Trustee; or
              b. The Notifying Party, with the prior approval of the Commission, may replace the
                 Monitoring Trustee.
25. If the Monitoring Trustee is removed according to paragraph 24, the Monitoring Trustee may be
      required to continue in its function until a new Monitoring Trustee is in place to whom the
      Monitoring Trustee has affected a full hand-over of all relevant information. The new Monitoring
      Trustee shall be appointed in accordance with the procedure referred to paragraphs 8 to 14.
26. Unless removed according to paragraph 24, the Monitoring Trustee shall cease to act as
      Monitoring Trustee only after the Commission has discharged it from its duties after all the
      Commitments with which the Monitoring Trustee has been entrusted have lapsed. However, the
      Commission may at any time require the reappointment of the Monitoring Trustee if it
      subsequently appears that the Commitments might not have been fully and properly implemented.
                                                      10
 ---pagebreak--- Section D.         Arbitration
27. In the event that the Customer claims that the Notifying Party is failing to comply with the
    requirements of the Commitments described in paragraphs 2 to 7 above, the Customer may choose
    to utilise the fast track dispute resolution procedure as described in this Section.
     Fast Track Dispute Resolution
28. If the Customer wishes to avail itself of the fast track dispute resolution procedure, it shall send a
    written request to the Notifying Party (with a copy to the Monitoring Trustee) setting out in detail
    the reasons leading the Customer to believe that the Notifying Party is failing to comply with the
    requirements of these Commitments. The Customer and the Notifying Party will use their best
    efforts to resolve all differences of opinion and to settle all disputes that may arise through
    cooperation and consultation within a reasonable period of time not exceeding fifteen (15)
    working days after receipt of the request.
29. The Monitoring Trustee shall present its own proposal (Trustee Proposal) for resolving the
    dispute within seven (7) working days, specifying in writing the action, if any, to be taken by the
    Notifying Party in order to ensure compliance with the Commitments vis-à-vis the Customers, and
    be prepared, if requested, to facilitate the settlement of the dispute.
30. Should the Customer and the Notifying Party (together Parties to the Arbitration) fail to resolve
    their differences of opinion in the consultation phase, the Customer shall serve a notice (Notice),
    in the sense of a request for arbitration, to the ICC (Arbitral Institution) with a copy of such
    Notice to the Notifying Party.
31. The Notice shall set out in detail the dispute, difference or claim (Dispute) and shall contain, inter
    alia, all issues of both fact and law, including any suggestions as to the procedure, and all
    documents relied upon shall be attached, e.g. documents, agreements, expert reports, and witness
    statements. The Notice shall also contain a detailed description of the action to be undertaken by
    the Notifying Party.
32. The Notifying Party shall, within ten (10) working days from receipt of the Notice, submit its
    answer (Answer), which shall provide detailed reasons for its conduct and set out, inter alia, all
    issues of both fact and law, including any suggestions as to the procedure, and all documents
    relied upon, e.g. documents, agreements, expert reports, and witness statements. The Answer
    shall, if appropriate, contain a detailed description of the action which the Notifying Party
    proposes to undertake vis-à-vis the Customer.
                                                       11
 ---pagebreak--- Appointment of the Arbitrators
33. The Arbitral Tribunal shall consist of three (3) persons. The Customer shall nominate its arbitrator
    in the Notice; the Notifying Party shall nominate its arbitrator in the Answer. The arbitrators
    nominated by the Customer and by the Notifying Party shall, within five (5) working days of the
    nomination of the latter, nominate the chairman, making such nomination known to the Parties to
    the Arbitration and the Arbitral Institution which shall forthwith confirm the appointment of all
    three (3) arbitrators. The three-person arbitral tribunal is herein referred to as the Arbitral
    Tribunal.
34. Should the Parties to the Arbitration fail to nominate an arbitrator, or if the two (2) arbitrators fail
    to agree on the chairman the default appointment(s) shall be made by the Arbitral Institution.
Arbitration Procedure
35. The Dispute shall be finally resolved by arbitration under the rules of the Arbitral Institution, with
    such modifications or adaptations as foreseen herein or necessary under the circumstances
    (Rules). The Arbitration shall be conducted in Frankfurt, Germany, in the English language.
36. The procedure shall be a fast-track procedure. For this purpose, the Arbitral Tribunal shall shorten
    all applicable procedural time-limits under the Rules as far as admissible and appropriate in the
    circumstances. Parties to the Arbitration shall consent to the use of e-mail for the exchange of
    documents.
37. The Arbitral Tribunal shall, as soon as practical after the confirmation of the Arbitral Tribunal,
    hold an organisational conference to discuss any procedural issues with the Parties to the
    Arbitration. Terms of reference shall be drawn up and signed by the Parties to the Arbitration and
    the Arbitration Tribunal at the organisational meeting or thereafter and a procedural time-table
    shall be established by the Arbitral Tribunal. An oral hearing shall, as a rule, be established within
    two months of the confirmation of the Arbitral Tribunal.
38. In order to enable the Arbitral Tribunal to reach a decision, it shall be entitled to request any
    relevant information from the Parties to the Arbitration, to appoint experts and to examine them at
    the hearing, and to establish the facts by all appropriate means. The Arbitral Tribunal is also
    entitled to ask for assistance by the Monitoring Trustee in all stages of the procedure.
39. The Arbitral Tribunal shall not disclose Confidential Information and apply the standards
    attributable to Confidential Information under the Merger Regulation. The Arbitral Tribunal may
    take the measures necessary for protecting confidential information in particular by restricting
    access to Confidential Information to the Arbitral Tribunal, the Monitoring Trustee and outside
    counsel and experts of the opposing party.
                                                    12
 ---pagebreak--- 40. The burden of proof in any dispute under these Rules shall be borne as follows: (i) the Customer
    must produce evidence of a prima facie case and (ii) if the Customer produces evidence of a prima
    facie case, the Arbitral Tribunal must find in favour of the Customer unless the Notifying Party
    can produce evidence to the contrary.
Involvement of the Commission
41. The Commission shall be allowed and enabled to participate in all stages of the procedure by:
        i.   Receiving all written submissions (including documents and reports, etc.) made by the
             Parties to the Arbitration;
       ii.   Receiving all orders, interim and final awards and other documents exchanged by the
             Arbitral Tribunal with the Parties to the Arbitration (including Terms of reference and
             procedural timetable);
      iii.   Having the opportunity to file amicus curiae briefs; and
      iv.    Being present at the hearing(s) and being allowed to ask questions to the Parties to the
             Arbitration, witnesses and experts.
42. The Arbitral Tribunal shall forward, or shall order the Parties to the Arbitration to forward, the
    documents mentioned to the Commission without delay.
43. In the event of disagreement between the Parties to the Arbitration regarding the interpretation of
    the Commitments, the Arbitral Tribunal may seek the Commission’s interpretation of the
    Commitments before finding in favour of any Party to the Arbitration and shall be bound by the
    interpretation.
Decisions of the Arbitral Tribunal
44. The Arbitral Tribunal shall decide the dispute on the basis of the Commitments and the Decision.
    Issues not covered by these Commitments and the Decision shall be decided (in the order as
    stated) by reference to the Merger Regulation, EU law and the general principles of law common
    to the legal orders of the Member States without a requirement to apply a particular national
    system. The Arbitral Tribunal shall take all decisions by majority vote.
                                                   13
 ---pagebreak--- 45. Upon request of the Customer, the Arbitral Tribunal may make a preliminary ruling on the
    Dispute. The preliminary ruling shall be rendered within one month after the confirmation of the
    Arbitral Tribunal, shall be applicable immediately and, as a rule, remain in force until a final
    decision is rendered.
46. The Arbitral Tribunal shall, in the preliminary ruling as well as in the final award, specify the
    action, if any, to be taken by the Notifying Party in order to comply with these Commitments vis-
    à-vis the Customer (e.g. specify a contract including all relevant terms and conditions). The final
    award shall be final and binding on the Parties to the Arbitration and shall resolve the Dispute and
    determine any and all claims, motions or requests submitted to the Arbitral Tribunal. The arbitral
    award shall also determine the reimbursement of the costs of the successful Party to the
    Arbitration and the allocation of the arbitration costs. In case of granting a preliminary ruling or if
    otherwise appropriate, the Arbitral Tribunal shall specify that terms and conditions determined in
    the final award apply retroactively.
47. The final award shall, as a rule, be rendered within six (6) months after the date of the terms of
    reference. The time-frame shall, in any case, be extended by the time the Commission takes to
    submit an interpretation of these Commitments if asked by the Arbitral Tribunal.
48. The Parties to the Arbitration shall prepare a non-confidential version of the final award, without
    business secrets. The Commission may publish the non-confidential version of the award. Nothing
    in the arbitration procedure shall affect the power to the Commission to take decisions in relation
    to the Commitments in accordance with its powers under the Merger Regulation.
Section E.        The review clause
49. The Commission may extend the time periods foreseen in the Commitments in response to a
    request from the Notifying Party or, in appropriate cases, on its own initiative. Where the
    Notifying Party requests an extension of a time period, it shall submit a reasoned request to the
    Commission no later than one month before the expiry of that period, showing good cause. This
    request shall be accompanied by a report from the Monitoring Trustee, who shall, at the same time
    send a non-confidential copy of the report to the Notifying Party. Only in exceptional
    circumstances shall the Notifying Party be entitled to request an extension within the last month of
    any period.
50. The Commission may further, in response to a reasoned request from the Notifying Party showing
    good cause waive, modify or substitute, in exceptional circumstances, one or more of the
    undertakings in the Commitments. This request shall be accompanied by a report from the
    Monitoring Trustee, who shall, at the same time send a non-confidential copy of the report to the
    Notifying Party. The request shall not have the effect of suspending the application of the
                                                    14
 ---pagebreak---     undertaking and, in particular, of suspending the expiry of any time period in which the
    undertaking has to be complied with.
Section F.       Entry into force
51. The Commitments shall take effect upon the date of adoption of the Decision.
……………………………………
duly authorised for and on behalf of
VARTA Aktiengesellschaft
                                                15