R&D activities presenting a hurdle in agri-business mergers

Recent competition reviews of mergers in agri-markets demonstrate the significance of effects on R&D and their flow-on effects downstream in the supply of agricultural products in Australia.

Recent technological advancements have given rise to the importance on R&D activities by agri-businesses. These businesses are often global companies based in a foreign country. However, it is not just the supply of R&D services that may be of interest to competition authorities. The products that are developed from the R&D activities are often supplied in Australia and consideration should be given to the potential effects in the supply of these products in some very narrow markets.

In February 2019, the ACCC cleared DLF Seeds A/S' (a Danish based company) (DLF) proposed acquisition of PGG Wrightson Seeds Holding Limited (PGG), a subsidiary of PGG Wrightson, which is based in New Zealand.

The ACCC closely considered each company's R&D activities in the development of novel endophytes in forage seed varieties, which protect crops from disease. In particular, the ACCC considered the impacts of the merger the supply of ryegrasses with novel endophytes, used primarily in high intensity farming areas, such as dairy farming applications. In Australia, the prevalence of high intensity farming is generally concentrated in small pockets in south east Australia (typically, New South Wales and Victoria). Furthermore, many farmers often used ryegrass without endophytes or other forage grasses in competition with ryegrasses with endophytes. The ACCC was therefore concerned with the effect that a potential concentration in R&D activity would have in the supply of products to a very small product and geographic market in Australia.

The ACCC cleared the transaction, in part, on the basis that DLF's R&D activities (in Denmark) were at a more nascent stage of development and that there would continue to be alternative R&D activities undertaken by other companies to provide a competitive restraint on the merged entity.

In Bayer AG's proposed acquisition of Monsanto the ACCC was concerned with R&D in relation to traits and herbicides. Bayer and Monsanto competed in the supply of herbicides (including Monsanto's "Roundup") as well as R&D activities, such as trait technology (breeding of disease resistant traits in crops).  The ACCC originally held concerns that the proposed merger would substantially lessen competition in the supply of weed management systems for use on canola crops and reduce competitive tension in R&D of new crop protection products.

The transaction was being considered by a number of competition authorities globally, and following the US Department of Justices' and European Commission's clearance of the transaction subject to a number of divestments by Bayer, the ACCC cleared the transaction in Australia. It was the largest ever divestiture by the Department of Justice and included many overlapping products with Monsanto.

A similar scenario was encountered in late 2016 following the ACCC's consideration (and eventual clearance) of The Dow Chemical Company (Dow) and E.I. Du Point de Nemours and Company (DuPont) transaction in late 2016. There the ACCC stated that the proposed merger may [have] "reduced the competitive tension in the research and development of new crop protection products" and that it could "therefore reduce the rate at which new products come onto the market". Both Dow and DuPont were active in the R&D of new canola seed varieties which were adapted to Australian conditions. The ACCC's (and other global competition regulators') concerns were allayed by a number of divestments made by DuPont.

The above transactions however, make it clear that the ACCC will take into consideration the R&D activities and the downstream supply of future products by the merged entity, and whether there will be any concentration in those markets that would substantially lessen competition. Even if some of the R&D activities performed by agri-business does not take place in Australia, those companies should consider the effect that products arising from the R&D activities will have in markets in Australia.

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