RHI AG; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 991 0281]

RHI AG; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before January 31, 2000.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pennsylvania Ave., NW, Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT: Richard Parker or Morris Bloom, FTC/H-

374, 600 Pennsylvania Ave., NW, Washington, D.C. 20580. (202) 326-2574

or 326-2707.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the

Commission's Rules of Practice (16 CFR 2.34), notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of thirty (30) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for December 30, 1999), on the World Wide Web, at ``http://

www.ftc.gov/os/actions97.htm.'' A paper copy can be obtained from the

FTC Public Reference Room, Room H-130, 600 Pennsylvania Avenue, NW,

Washington, D.C. 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Comments should be directed to: FTC/

Office of the Secretary, Room 159, 600 Pennsylvania Ave., NW,

Washington, D.C. 20580. Two paper copies of each comment should be

filed, and should be accompanied, if possible, by a 3\1/2\ inch

diskette containing an electronic copy of the comment. Such comments or

views will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

Section 4.9(b)(6)(ii) of the Commission's Rules of Practice (16 CFR

4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission (``Commission'') has accepted, subject

to final approval, an Agreement Containing Consent Order

(``Agreement'') from RHI AG (``RHI'' or ``respondent'') to resolve

competitive concerns relating to the refractories industry arising out

of RHI's proposed acquisition of Global Industrial Technologies, Inc.

(``Global''). Under the Agreement, RHI would divest two refractories

manufacturing plants located in North America and certain assets

relating to refractory products currently produced at a third North

American manufacturing plant. The proposed Order requires that the

assets be divested to another refractories producer, Resco Products,

Inc. (``Resco''), a company that produces refractories but does not

compete in the affected markets at the present time, or to another

buyer approved by the Commission.

The proposed Order has been placed on the public record for thirty

(30) days for reception of comments by interested persons. Comments

received during this period will become part of the public record.

After thirty (30) days, the Commission will review the Agreement and

comments received and decide whether to withdraw its acceptance of the

Agreement or make final the Agreement's proposed Order.

Refractories are brick- and cement-like products made from certain

natural minerals and materials that are used to line and protect

furnaces in many industries--including the steel, aluminum, cement and

glass industries--that involve the heating or containment of solids,

liquids, or gases at high temperatures. Refractories are consumable

products, and wear down as a result of being subjected to intense

temperatures as well as chemical and mechanical pressures.

The proposed complaint alleges that the acquisition, if

consummated, would violate Section 7 of the Clayton Act, 15 U.S.C. 18,

as amended, and Section 5 of the Federal Trade Commission Act (``FTC

Act''), 15 U.S.C. 45, as amended, in the following markets: (1) The

North American market for magnesia-carbon bricks for basic oxygen

furnaces (``BOFs''); (2) the North American market for magnesia-carbon

bricks for electric arc furnaces (``EAFs''); (3) the North American

market for magnesia-carbon bricks for steel ladles used with BOFs; (4)

the North American market for magnesia-chrome bricks for steel

degassers; (5) the North American market for high-alumina bricks for

steel

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ladles used with BOFs; and (6) the North American market for high-

alumina bricks for torpedo cars used in steel making.

The proposed complaint alleges that each of the relevant markets is

highly concentrated. Specifically, the proposed complaint alleges that

RHI and Global control approximately 95 percent of the $30 million

North American market for magnesia-carbon refractory bricks for BOFs.

The proposed acquisition thus represents a virtual merger to monopoly

in magnesia-carbon bricks for BOFs. The proposed complaint also alleges

that RHI and Global control approximately 65 percent of the $58 million

North American market for magnesia-carbon refractory bricks for EAFs;

approximately 40 percent of the $100 million North American market for

magnesia-carbon bricks for steel ladles used with BOFs; approximately

46 percent of the $5 million North American market for magnesia-chrome

bricks for steel degassers; approximately 70 percent of the $50 million

North American market for high-alumina bricks for steel ladles used

with BOFs; and approximately 52 percent of the $23.5 million North

American market for high-alumina bricks for torpedo cars.

The proposed complaint further alleges that the effect of the

acquisition may be to substantially lessen competition and to tend to

create a monopoly by, among other things, eliminating actual, direct

and substantial competition between RHI and Global in each of the

relevant markets identified above. The proposed complaint further

alleges that the effect of the acquisition may be to substantially

lessen competition and to tend to create a monopoly by increasing the

level of concentration in each of these relevant markets and by

increasing the likelihood that the firm created by the merger of RHI

and Global will unilaterally exercise market power in each of these

relevant markets, that purchasers of these products will be forced to

pay higher prices, that technical and sales service will decline, and

that innovation in the development of these products will decline.

The proposed complaint further alleges that entry into the relevant

markets requires significant sunk costs and would not be timely, likely

and sufficient to deter or offset reductions in competition resulting

from the proposed acquisition. Development of the specialized

refractories described above, including determination of the proper

chemical composition and manufacturing techniques, is time consuming

and requires an extremely high level of expertise. In addition,

customers in the steel industry increasingly require that their

suppliers of refractories be able to supply the full line of

refractories for particular applications, such as BOFs, EAFs and steel

ladles. Thus, a new entrant would have to be able to assume the costs

and expertise necessary to develop and supply both magnesia-carbon and

high-alumina bricks.

Furthermore, because the refractory bricks at issue are used to

control processes and substances at extremely high temperatures, the

failure of the products can be catastrophic, sometimes causing the loss

of human life. Consequently, customers are extremely resistant to

change, and any new entrant would have to undergo months of laboratory

testing, followed by extended periods (sometimes taking several years)

of field testing, prior to acceptance of product for use in BOF and EAF

steel making applications.

The proposed Order is designed to remedy the anticompetitive

effects of the acquisition in the relevant markets, as alleged in the

complaint, by requiring the divestiture to Resco of: (a) Global's

Hammond, Indiana refractories plant, which produces magnesia-carbon

bricks for BOFs, EAFs and steel ladles, and related equipment,

machinery and intellectual property (including formulas, mixes, presses

and molds) and customer lists and contracts; (b) Global's Marelan,

Quebec plant, which produces magnesia-chrome bricks for steel

degassers, and related equipment, machinery and intellectual property

(including formulas, mixes, presses and molds) and customer lists and

contracts; and (c) all rights, title and interest in and to specific

assets relating to the production of high-alumina bricks for BOF steel

ladles and torpedo cars, which are currently produced by RHI at its

Farber, Missouri plant, including intellectual property, customer lists

and contracts, formulas, mixes and molds. The proposed Order requires

the divestiture to take place no later than forty-five (45) days after

the date the Commission accepts the Agreement for public comment.

The proposed Order also provides for a magnesite supply contract

between Resco and respondent. Currently, Global is one of only two U.S.

producers of high purity magnesite, a necessary ingredient of magnesia-

carbon and magnesia-chrome bricks, and currently supplies other

refractory producers with the material for the production of

refractories. In order to ensure that Resco has a continuing supply of

high purity magnesite with which it can make the relevant products, and

to prevent the possibility that customers might require re-

qualification in the event that the acquirer is forced to obtain an

alternate source of supply of this raw material, the proposed Order

provides that respondent enter into a one year high purity magnesite

supply contract, renewable for two additional one year terms at Resco's

option, with most favored nation pricing. The arrangement is intended

to be of sufficient duration to give Resco time to assimilate the

relevant products into its own line of refractory products, to perfect

the production processes, and to test other sources of high purity

magnesite without jeopardizing customer contracts in the meantime.

Thus, the proposed Order is designed to promote the viability and

competitiveness of the divested businesses by placing the businesses in

the hands of a company with extensive expertise in the refractories

industry, expertise in related refractories applications, and

additional economies resulting from shared research and development,

overhead and production. The proposed Order is structured to help

assure the success of Resco in operating the divested businesses by

providing Resco with the assets required for it to successfully compete

in the relevant markets: magnesia-carbon, magnesia-chrome and high-

alumina formulas that are well-known, well-respected and already proven

in the marketplace; supply contracts with customers; technical

assistance and training; production assets; and raw materials supply

contracts to ensure the continued and consistent ability to produce the

products.

If the Commission determines that Resco is not an acceptable buyer,

or that the agreement between Resco and respondent is not an acceptable

form of divestiture, the proposed Order provides that respondent shall

rescind the Resco agreement and any divestiture to Resco, and divest

the identified assets, including RHI's Farber, Missouri plant and

fixtures, at the purchaser's option, to an acquirer that receives the

prior approval of the Commission. In such an event, the proposed Order

also contains provisions designed to ensure that such an acquirer has

the benefit, at its option, of all of the raw materials, contracts and

technical assistance relating to the businesses to be divested.

The proposed Order also provides that if respondent fails to divest

the assets to be divested as required by the proposed Order, the

Commission may appoint a Divestiture Trustee to divest the business

along with any assets related to the business that are necessary to

effect the purposes of the proposed Order.

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The proposed Order also provides for the appointment of an Interim

Trustee to ensure that respondent expeditiously performs its

responsibilities under the proposed Order. The Interim Trustee will

oversee the divestiture to ensure the adequacy of the transfer, to

ensure that disputes between the parties will be identified and

resolved quickly, clearly, and impartially, and to identify possible

violations of the proposed Order.

The Agreement requires respondent to provide the Commission, within

thirty (30) days of the date of the agreement was signed, with an

initial report setting forth in detail the manner in which respondent

will comply with the provisions relating to the divestiture of assets.

The purpose of this analysis is to facilitate public comment on the

proposed Order. This analysis is not intended to constitute an official

interpretation of the agreement or the proposed Order or in any way to

modify the terms of the Agreement or the proposed Order.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 00-365 Filed 1-6-00; 8:45 am]

BILLING CODE 6750-01-M