WASHINGTON -- The Federal Trade Commission (FTC) has approved a complaint challenging Western Refining Inc.'s $1.4 billion acquisition of Giant Industries Inc. and has authorized a temporary restraining order and preliminary injunction in federal district court to halt the deal pending an administrative trial on the merits.
According to the FTC, Western's proposed acquisition of Giant would lead to reduced competition for the bulk supply of light petroleum products to northern New Mexico, where the two companies are direct and significant competitors. [image-nocss] Western and Giant have responded that the decision is without basis in fact or law and that the companies intend to vigorously challenge the FTC in court.
Through the proposed acquisition, Paul L. Foster, the ultimate parent entity of Western, would acquire all of the voting securities of Giant in exchange for approximately $77 per share in cash, plus $280 million in assumed debt.
Western and Giant compete in the bulk supply of light petroleum products to northern New Mexico, including gasoline and diesel, said Jeffrey Schmidt, director of the FTC's Bureau of Competition. Western's acquisition of Giant would eliminate this competition, leading to higher prices for consumers of these important energy products.
Bulk light petroleum products include motor gasoline, diesel fuels and jet fuels used in cars, airplanes and other vehicles. They are produced from crude oil at refineries throughout the United States and worldwide. Light petroleum products are transported in bulk from the refineries where they are produced to the markets where they are sold via ocean-going tankers and pipelines, as the road transport of such fuel is not cost-efficient. Tank trucks are used to transport the product from terminals to retail distribution points such as gas stations.
In northern New Mexico, Giant owns and operates two refineries and their adjacent terminals, one in Bloomfield and the other in Ciniza, from which it supplies bulk gasoline and diesel fuel to New Mexico, Arizona, Utah and Colorado. Giant also owns a petroleum products terminal in Albuquerque, from which it supplies bulk gasoline and diesel fuel to northern New Mexico. Western owns and operates a single refinery complex in El Paso, which produces primarily high-value transportation fuels, including gasoline, diesel fuel and jet fuel. From the refinery, Western supplies these products to Albuquerque, El Paso, Tucson, Phoenix and Juarez, Mexico. Western is one of two refiners supplying gasoline and diesel fuel in bulk from El Paso to Albuquerque via the Plains Pipeline, on which it has historical shipping rights.
The FTC's complaint charges that Western's acquisition of Giant, as proposed, would violate Section 5 of the FTC Act and Section 7 of the Clayton Act. It contends that if Giant is not acquired by Western, Giant will soon increase the supply of gasoline to northern New Mexico, and that the transaction as proposed would prevent this. Giant plans to bring production at its two New Mexico refineries up to full utilization, increasing the production levels of light petroleum products that it is distributing to its current marketing areas. This means more gasoline would be distributed to the Albuquerque/Santa Fe area of northern New Mexico than ever before, spurring competition within the market and leading to prices for bulk light petroleum products to decrease.
The FTC contends that the proposed acquisition would combine two of the five significant bulk suppliersthose able to increase supply in response to an output decreaseof light petroleum products to northern New Mexico; would eliminate the existing substantial competition between Western and Giant in this market; would substantially reduce competition in the market for bulk supply of light petroleum products to northern New Mexico; would combine two of the six significant bulk suppliers of gasoline to northern New Mexico, substantially increasing the concentration in an already highly concentrated market; and would eliminate existing substantial competition between Western and Giant, and would substantially reduce competition in the bulk supply of gasoline to northern New Mexico.
The commission also contends that Western has both the incentive and the means to limit any increase in the supply of gasoline to northern New Mexico after its acquisition of Giant by, among other means, diverting some of Giant's planned additional gasoline supply for Albuquerque and Santa Fe to other markets. Western also could reduce the supply to northern New Mexico by shifting some of its current bulk supply between gasoline and diesel on the pipeline. This would allow Western to reduce the amount of gasoline or diesel fuel reaching Albuquerque.
Finally, the complaint states that the reestablishment of Western and Giant as independent and viable competitors after the consummation of the deal would be difficult, that competitive harm would occur during the time it took to unravel the transaction, and that entry by other firms is not likely to offset the competitive harm caused by the acquisition.
The FTC voted 5 to 0 to authorize the staff to seek a temporary restraining order and preliminary injunction blocking the transaction pending an administrative trial. The complaint will be filed by April 13, 2007, in the U.S. District Court for the District of New Mexico against defendants Paul L. Foster; Western Refining Inc., and Giant Industries Inc. The FTC will appoint a New Mexico assistant attorney general as a special deputy to the commission to participate in the court action.
Western's president and CEO, Paul Foster, said, "This merger will result in more product being provided to the combined companies' customers and is, therefore, pro-competitive. The FTC's decision demonstrates a fundamental and troubling lack of understanding about the areas in which Western Refining and Giant operate, the competitors in those areas and the competitive nature of those areas. The FTC's position is entirely without basis, and we look forward to proving our case before an objective and knowledgeable court."
Giant's chairman and CEO, Fred Holliger, said, "We are disappointed that the FTC has chosen to oppose the merger of two small companies that together would operate less than 1.5% of the U.S. refining capacity. Over the past several years, mergers and acquisitions of refineries have created refining companies that dwarf our size and they have been allowed by the FTC. The employees of both companies have spent countless hours preparing documents in response to the FTC's information requests and we and our advisors haven't seen anything that we believe would serve as a basis for the FTC to oppose this merger. We continue to believe that the merger is in the best interest of our shareholders, our employees and our customers."
Western and Giant said that the FTC has never suggested the need for any potential divestiture or other potential remedies. The companies also noted that numerous letters and declarations of support for the merger have been sent to the FTC from state government officials, industry trade organizations and customers. In discussing the benefits that a Western-Giant combination creates for New Mexico and Texas and the consumers in those states, these state, industry and business leaders have cited, among other things, that:
Western and Giant are smaller, independent refiners that compete with the largest major oil companies in the world; The areas in which Western and Giant operate, including the Albuquerque area, are highly competitive and have multiple options for fuel supply; A Western-Giant combination would have no negative impact on competition and would instead enhance competition; Western has one of the best operating rates in the industry and its expertise will help ensure a more reliable supply of gasoline and diesel fuel by reducing the risk of unplanned refinery shutdowns and improving utilization rates; and A Western-Giant combination is good for consumers as it creates a more stable organization, will result in more product being supplied to the areas served by the companies' refineries and thereby more choice for consumers.On Nov. 13, 2006, Western and Giant announced an agreement under which Western will acquire all of the outstanding shares of Giant for $77 per share in cash. As previously announced, Giant Industries' shareholders voted to approve the transaction on Feb. 27, 2007. Consummation of the transaction remains subject to this litigation.
Western, headquartered in El Paso, Texas, is an independent crude oil refiner and marketer of refined products, operating primarily in the Southwest region of the United States, including Arizona, New Mexico and West Texas.
Giant, headquartered in Scottsdale, Ariz., is a refiner and marketer of petroleum products. It owns and operates one Virginia and two New Mexico crude oil refineries, a crude oil gathering pipeline system based in Farmington, N.M., which services the New Mexico refineries, finished products distribution terminals in Albuquerque, N.M., and Flagstaff, Ariz., a fleet of crude oil and finished product truck transports, and a chain of retail gas station/convenience stores in New Mexico, Colorado and Arizona. Giant is also the parent company of Phoenix Fuel Co. Inc., Dial Oil Co. and Empire Oil Co., all of which are wholesale petroleum products distributors.
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