German FCO accepts failing company defence merger

28 July 2006

Christian Schwedler

April 2006

The German Federal Cartel Office (FCO) has cleared the acquisition of the sole control of the n-tv Nachrichtenfernsehen GmbH & Co.KG, Cologne (n-tv) by RTL Television GmbH, Cologne (RTL), although it leads to the strengthening of a dominant position. The investigations have shown that the increased concentration is not causally determined by the merger, as it would also occur if the acquisition was prohibited. However, RTL/n-tv is not a typical case of the European or German application of the failing company defence.

With the present acquisition RTL intends to purchase the remaining 50 per cent of the shares in n-tv, of which it already holds 50 per cent, from its co-partner CNN/Time Warner. This concentration affects the national TV advertising market in Germany, on which the RTL group, Luxemburg, with its TV channels RTL, VOX, Super RTL and n-tv, already holds a collective dominant position as a duopoly with ProSiebenSat.1 GruppeMedia AG, Unterföhring (Pro 7). According to the assessment of the FCO, the exclusive control of n-tv by the RTL group will strengthen the duopoly’s dominant position. However, the FCO decided to clear the merger as it complies with the requirements of the failing company defence.

According to the failing company defence a merger that leads to a strengthening of a dominant position is to be cleared if the increased concentration would also occur to the same extent if the merger was prohibited. As a matter of causation the failing company defence is usually applied rather restrictively in Germany and Europe. Usually, three requirements have to be fulfilled for the failing company defence to be accepted: (1) without the acquisition the purchased company would have to withdraw from the market, (2) there are no other potential acquirers that could purchase the company with a less detrimental impact on competition and (3) in the event the target withdraws from the market, its whole market share would fall to the purchaser anyway.

In the past, the third requirement especially was an obstacle to most attempts to succeed with the failing company defence because causation can typically only be excluded if all of the market share of the purchased company falls to the purchaser. In general, this can only be assumed if the purchaser had remained as a monopolist in the event of the withdrawal of the target company. Therefore, the failing company defence requires very specific market structures in order to be successful in Germany and Europe.

There are few exceptions to the common practice of accepting the failing company defence only on markets with monopolistic structures. One example is the European Commission’s decision in BASF/Eurodiol/Pantochim (COMP/M. 2314) in 2001. In that special case the market structures were characterised by significant capacity shortages and high market access barriers and the Commission assumed that a loss of further production capacity would have caused considerable price increases. Therefore, the Commission concluded that under these specific circumstances “the deterioration of the competitive structure resulting from the notified operation will be less significant than in the absence of the merger”.

In RTL/n-tv, the FCO accepted the failing company defence in a case with very specific market structures. As in the case BASF/Eurodiol/Pantochim, the purchaser would not remain the only competitor on the market. The relevant market is not characterised by monopolistic, but duopolistic structures. Thus, n-tv’s market potential and advertising customers would not completely fall to RTL if the merger was prohibited, but to RTL and Pro 7. Nevertheless, the FCO accepted the failing company defence with reference to the collective dominant position of RTL and Pro 7.

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