Japan Tobacco Inc. & Gallaher Group Plc

Case:

Key Words:

extraterritorial merger, horizontal competition, entry barrier

Reference:

Fair Trade Commission Decision of March 29, 2007 (the 803rd Commissioners' Meeting)

Industry:

Tobacco Manufacturing (1000)

Relevant Laws:

Article 6(1)(ii) and (v) ,11(1)(ii) and 12 of the Fair Trade Law

Summary:

1. Japan Tobacco Inc. (hereinafter called "JT") planned to acquire 100% shares of Gallaher Group Plc (hereinafter called "Gallaher") through its 100% owned subsidiary, JTI (UK) Management Ltd. JT's intention fell under the merger type set forth in Article 6(1)(ii) and (v) of the Fair Trade Law. Since JT's products have one-fourth of market share in the domestic tobacco market, JT filed a merger report to the FTC in accordance with Article 11(1)(ii) of the Fair Trade Law.
2. Findings of FTC after investigation: Since both JT and Gallaher are foreign enterprises, the merger in question is subject to extraterritorial merger. However, both companies sell products through their subsidiaries or agents domestically and engage in horizontal competition with each other. Since 2002, JT has had more than one-third of market share in the domestic tobacco market taking either number one or two sales spot. As a result, the said merger would have direct, substantial, or reasonably foreseeable impact on domestic markets. The FTC therefore accepted the merger report.
3. Grounds for non-prohibited:
   1. JT's market share in the domestic tobacco market has been the top one or two. However, Gallaher's market share and sales amount are both low. Therefore, the merger of these two enterprises would cause no major changes to the current market share in the relevant markets. Moreover, after the exclusive sale of tobacco and alcohol was abolished in 2002, domestic tobacco market has had no high entry barriers. Currently, there are more than thousands of businesses in the market. Potential competitors may also join the market at any time. The merger of JT and Gallaher would cause no obvious decline in the number of competitors. Furthermore, each tobacco product is replaceable. These two enterprises of the merger in question would still have to compete with more than thousands of businesses and their products prices are also subject to government regulation. As a result, no conspicuous disadvantage to market competition was found to be caused by the merger in question. Additionally, the competent authority of tobacco products, Ministry of Finance, did not oppose to this merger as well.
   2. JT may obtain scale economy advantages, such as decrement in costs or expenses, through expanding its geographic market worldwide and increasing productivity and production upon the merger in question. On the other hand, currently Gallaher has very low sales amount and is not popularly known in the nation. Through the merger in question, Gallaher would be able to employ JT's current channels and image to increase its product sales channels and improve its visibility and popularity. Both enterprises of the merger would be able to improve their competitiveness and further provide better products or services and facilitate the positive competition in the domestic tobacco market upon this merger.
   3. In conclusion, the advantage of overall economy shall outweigh the disadvantage resulting from the competition restraints after the implementation of the merger in question. The FTC therefore approved the merger report in accordance with Article 12 of the Fair Trade Law and allowed the enterprises of the merger to commence with the merger from April 6, 2007.

Appendix:
Japan Tobacco Inc.'s Uniform Invoice Number: none
Gallaher Group Plc's Uniform Invoice Number: none

Summarized by Lin, Hsin-Wen; Supervised by Wu, Pi-Ju