WASHINGTON (CN) - Ecolab said it will sell some assets to overcome Uncle Sam's antitrust complaint blocking its $2.2 billion offer for its chief competitor, Permian Mud Service; the two companies dominate chemical treatments for deepwater oil wells in the Gulf of Mexico.
The Department of Justice sued the two companies under Section 7 of the Clayton Act. The defendants made their $2.16 billion in December 2012.
The government claims the merger will give Ecolab and Permian 70 percent of the market for production and chemical management services market in the Gulf of Mexico.
"Ecolab's acquisition of Permian would combine the two leading providers of production chemical management services for deepwater oil and gas wells ('deepwater PCMS') in the U.S. Gulf of Mexico ('Gulf'). Deepwater PCMS providers design, produce, and apply specially formulated chemical solutions to oil or gas wells to facilitate hydrocarbon production and protect well infrastructure," the complaint states.
"Permian's wholly owned subsidiary, Champion Technologies, Inc. ('Champion'), and Ecolab's wholly owned subsidiary, Nalco Company ('Nalco'), are the two largest suppliers of deepwater PCMS in the Gulf and vigorously compete head-to-head to win the business of oil and gas exploration and production companies ('E&P companies'). If the transaction is allowed to proceed, this competition will be lost and the merged firm will control approximately 70 percent of the market, leading to higher prices, reduced service quality, and diminished innovation."
Ecolab, based in St. Paul, Minn., earned $1.87 billion in the oil and gas industry in 2011 through Nalco. Houston-based Permian made $1.25 billion that year through Champion, the complaint states.
Ecolab offered to sell some of Champion's Gulf assets to allow the merger to proceed. The company told Bloomberg News that the deal could close in a few days if the Department of Justice accepts the offer.
Exploration and production companies hire PCMS firms to keep their oil and gas deepwater wells operating efficiently and safely. PCMS firms provide many crucial services, including treating deepwater wells with chemical solutions, delivering chemicals to the wells via complex systems, and devising treatment programs for each well that account for their pressure, temperature and chemical characteristics.
The services are rendered by experts, including "scientists, engineers and other lab technicians who customize the chemical blends and application methodology for specific well formations," according to the Department of Justice.
Exploration and production (E&P) companies choose deepwater PCMS providers through a bid process, requiring treatment plans, prices, safety records, and employee resumes.
"Although deepwater PCMS represents a fraction of an E&P company's overall cost of production, the costs associated with delay or failure are high. If the deepwater PCMS provider selects the wrong chemicals or fails to adequately monitor or service the well, it can cost the customer millions in lost production or compromise the well's infrastructure," the complaint states.
"Because of the value of deepwater wells and the risks of improper treatment, some customers will only accept a bid for a particular project from a supplier whom it has thoroughly vetted and pre-qualified. As a result, deepwater PCMS providers sometimes compete to be designated as preferred or pre-qualified suppliers. Preferred suppliers may then bid against each other for specific projects.
"There are often only two or three bidders for each deepwater PCMS contract in the Gulf, and the bidders typically know whom they are competing against for a particular project. Nalco and Champion are the two largest deepwater PCMS providers in the Gulf and compete head-to-head on a substantial number of deepwater PCMS opportunities."
In the Gulf of Mexico, exploration and production companies choose only providers that have already established infrastructure in the Gulf, and have experience "with the particular production challenges that frequently affect deepwater wells in the Gulf," the government says in the complaint.
Although "a handful" of other firms also compete for deepwater PCMS services in the Gulf, Nalco and Champion's "robust track record" of experience and expertise working there mean they get most of the jobs, according to the complaint.
"The relevant market is highly concentrated and would become more concentrated as a result of the proposed transaction. Based on 2012 revenues, Champion's share of the deepwater PCSM market in the Gulf was 34 percent while Nalco's was 33 percent," the complaint states.
"Market concentration is often one useful indicator of the likely competitive effects of a merger. The more concentrated a market, and the more a transaction would increase concentration in a market, the more likely it is that a transaction would result in a meaningful reduction in competition that would result in harm."
Since Ecolab and Permian's merger would increase concentration in the already highly concentrated Gulf market, "the transaction [is] presumptively anticompetitive."
The government claims: "The response of the remaining deepwater PCMS firm[s] would not be sufficient to constrain an exercise of market power by Nalco after the acquisition. Having removed its closest substitute for many customers, Nalco would be aware that many customers now have a stronger preference for it as a supplier, allowing Nalco to raise prices above pre-acquisition levels, relax its service standards, and scale back its efforts to innovate. ...
"Defendants cannot demonstrate cognizable and merger-specific efficiencies that would be sufficient to offset the transaction's anticompetitive effects."
The government seeks declaratory judgment and a permanent injunction preventing the defendants from "entering into or carrying out any contract, agreement, plan, or understanding ... to combine Ecolab and Permian."
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