Consolidation: Making the case for strategic M&A in EU industrials

Why is this an important issue now?

• The EU Commission is caught between political pressure to facilitate investment and loosen regulatory constraints on growth—an issue made more urgent by the impact of conflict in the Middle East on industrial inputs—and existing concerns about excessive concentration in the industrials sector.
• The latter issue is seen in an attempt by European Commission Directorate-General for Competition staff to tighten horizontal enforcement in basic industries via the draft merger guidelines, which seek to anchor competition analysis in structural capacity shares and a “pivotality” test.
• This is a material evolution for steel, chemicals, and other basic industrial companies and can change deal feasibility, remedy sizing and the sequencing of a consolidation transaction.
• Geographic markets are being drawn more narrowly (catchment area/isochrone approaches), which can underrepresent import constraints—this is especially relevant in a volatile tariff and geopolitical environment, which could result in trade diversion to Europe.
• This anxiety about potential import surges, alongside EU defense and industrial priorities favoring European production, and a relatively new and inexperienced Competition Commissioner, Teresa Ribera, create scope for novel outcomes.
• French and German CEOs have signed an open letter demanding that EU merger rules be relaxed—which is the opposite of what the draft guidelines anticipate for industrial companies. Boards may be convinced by this political story to think that previously unobtainable deals can be done. This is true to an extent, but the reality is messier.
• Wise boards and management teams should push the envelope to achieve their strategic goals while building as compelling a case as possible grounded in economics and law. 

What are the main legal and regulatory considerations involved in industrials M&A in Europe?

The critical legal input to assessing potential strategic M&A transactions involving industrials assets will be an assessment of the conduciveness of the EU regulatory environment, and how to shape the deal perimeter and evidence to pursue clearance on acceptable terms.  

What are the Commission’s core analytical pillars?

• Market power proxies in industrials: Expect the Commission to privilege capacity shares over sales or merchant sales shares, and to test whether the combined entity becomes “pivotal” (i.e., that its rivals’ spare capacity cannot cover total demand without the merged entity). Internal documents of merging parties and competitors—especially in response to rivals’ output decisions—are often decisive.
• Geographic definition: The proposed shift in the draft guidelines to radius/isochrone catchments, and “geographic differentiation” within catchments, in effect narrows frames of reference. In practice, this will mean that imports risk being discounted unless competitive pressure from imports is heavily evidenced.
• Spare capacity is not a silver bullet: There is a great deal of spare capacity in many industrial settings. But this isn’t as persuasive as it once was. The Commission now probes the ability and incentive of competitors to expand output; in many settings, the Commission says that rivals may simply raise prices and follow the merged entity rather than compete for share—especially if the product is currently protected behind trade barriers. 

How is the EU Commission thinking about potential remedies in industrial value chains?

• Default preference for structural remedies; packages must reflect vertical integration realities (i.e., for a divestment to be viable, it may need to include upstream capabilities or essential inputs). Upfront buyer requirements are common; customer acceptance of the remedy buyer (quality/R&D/ logistics/reputation) is critical.
• With that said, we are seeing nascent flexibility from competition authorities, where investment commitments and resulting output expansion have been sufficient to clear a deal. The UK’s review of Vodafone/Three is the most prominent example of this. 

What type of proof will be required to make the case for a consolidation deal?

• Capacity modeling under multiple plausible catchments; import evidence showing structural (not cyclical) diversion; and contemporaneous business documents supporting nonpivotal status, i.e., incentives to compete for share when rivals cut back. (The Commission has relied on parties’ synergy planning to show likely price effects and capacity reductions, e.g., Tata Steel/ThyssenKrupp.) 

What scenarios should be considered, and what should businesses be doing in response?

• If under plausible catchment markets the combined entity is nonpivotal on capacity (and remains so with conservative import assumptions), then proceed to pre-notification and position clearance at Phase I with a prepared evidence pack.
• If models indicate pivotality in any credible catchment, then pre-engineer a structural remedy perimeter (likely including upstream assets) and identify an upfront buyer if timetable certainty is the predominant consideration.
• If the rationale for the deal is capacity rationalization, then assume closer scrutiny and a longer deal prep and defense period. Craft a political story that supports European investment and the maintenance of productive capacity, build support from affected Member States, frame efficiencies and strength of competition from imports—especially ineffectiveness or leakage from trade protection policies (tariffs or Carbon Border Adjustment Mechanism (CBAM)).
• If deal thesis relies on import competition, then substantiate it early (trade data, contracts, logistics, internal planning models); otherwise expect imports to be discounted, especially at Phase I.
• If competitors “race to consolidate,” then first movers will benefit from the fact that there is greater spare capacity remaining outside their deal than in subsequent transactions.