On September 30, the FTC (with only 2 Commissioners sitting) announced that it reached a settlement that would allow Procter & Gamble Co.’s (“P&G”) proposed $57 billion acquisition of a rival consumer products manufacturer, Gillette Co., to proceed. By a 2-0-2 vote, the Commission approved the merger so long as the companies divest assets ranging from toothbrushes to antiperspirants/deodorants. The divestitures are required to satisfy the FTC that competition will not be harmed following the transaction.

As is typical in merger reviews, the FTC staff focused on specific product overlaps to determine what assets needed to be divested to resolve the antitrust concerns. The specific assets to be divested include: Gillette’s Rembrandt at-home teeth whitening business to a Commission approved buyer; P&G’s Crest SpinBrush battery-powered and rechargeable toothbrush business to Church and Dwight; and Gillette’s Right Guard men’s deodorant business to a Commission approved buyer. In addition, P&G would be required to amend its joint venture agreement with Philips Oral Health Care, Inc. (“Philips”) regarding the Crest Sonicare IntelliClean System rechargeable toothbrush.

Up-Front Buyer

Interestingly, the FTC did not require up-front buyers for Gillette’s Rembrandt at-home teeth whitening business or Gillette’s Right Guard men’s deodorant business. In the recent past, the FTC has used up-front buyers as a vital tool in assuring that a buyer will successfully enter and restore competition fully. Up-front buyers are typically required when the FTC is concerned about whether the proposed asset package is adequate to maintain or restore competition or whether the asset package is sufficient to attract an acceptable buyer or buyers. For some time, however, it seemed as though the FTC was always requiring up-front buyers even in routine cases. Undoubtedly, the FTC will continue to require up-front buyers in many situations, but this decision demonstrates the FTC’s willingness to approve mergers without requiring up-front buyers when they are not deemed necessary by the FTC. In those situations in which the FTC is concerned about the adequacy of the asset package or the possible lack of an acceptable buyer, the FTC will require an up-front buyer to minimize the risk that the divestiture remedy will be ineffective. When the merging parties can show that a good buyer will likely emerge, that the assets to be divested have been operated as a stand-alone business so that the buyer can maintain and restore competition after acquiring it, and that interim competition and the viability of the assets will be preserved pending divestiture, the FTC may not require an up-front buyer.

Category Captain

The other noteworthy issue regarding the FTC’s evaluation of P&G’s acquisition of Gillette is that the FTC analyzed portfolio effects and category management roles for the potential to increase the anticompetitive effects of the combination at the retail level. The retail practices of category management have come under increased antitrust scrutiny over the past several years in the context of monopolization cases. While the FTC has analyzed these issues in the past through workshops and investigations, this is the first time that the FTC has publicly acknowledged that category management practices are a potential concern in a merger review.

The FTC’s press release and the Commission’s Analysis to Aid Public Comment indicate that the FTC staff investigated whether the combined entity would have an increased ability to take advantage of its position as a “category manager” or “category captain” for retailers. A category manager is chosen by a retailer to assist in providing a plan for shelf space positioning of a certain category of products. Typically, a retailer chooses a number manufacturers to help manage a given retail product category by providing information about shelf space position and in-store marketing. Moreover, the category manager assists in the stocking, selection, and display of a certain category of products.

In this merger review, the FTC staff investigated whether P&G through its acquisition of Gillette would have an increased ability to exploit its position as a category manager in order to obtain premium retailer shelf space and potentially exclude or disadvantage competitors in various broad categories, like oral care or deodorants. The FTC staff concluded that most retailers do not look at broad categories, like oral care and deodorants when they decide which products to stock and sell. Retailers make decisions on individual products and the FTC staff found that retailers choose different suppliers for different products. The FTC staff also discovered that most retailers employ different category captains to assist them on a product by product basis within broad categories and that retailers normally do not choose one supplier to be a category captain of a broad category of products.

Observations

The merger investigation of P&G’s acquisition of Gillette indicates that the FTC staff is willing to work with merging parties and does not always require an up-front buyer. Although it appears as if the FTC always requires up-front buyers in merger review of certain industries, the decision to require an up-front buyer is dependent upon the circumstances of each individual case so merging parties have the opportunity to make their case of why an up-front buyer should not be required. The investigation also indicates that the FTC staff will listen to complainants regarding anticompetitive theories relating to portfolio effects and category management issues in future merger reviews. However, the conclusions from the investigation indicate that complainants continue to face an uphill battle when making these arguments. That being said, every merger review is fact specific and now the FTC has indicated a willingness to evaluate whether a merger could increase a category manager’s power to exploit its position. This means that merging parties and third parties potentially harmed by mergers that arguably increase the power of a category captain must evaluate these issues as part of the overall competition assessment.

Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com