P&G Terminates the Billie Deal In the Face of the FTC Lawsuit: A New Antitrust Concern in Fashion M&A

*** The writing does not, and is not intended to, constitute legal advice by any means***

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Source: The official website of Billie

Let's get back to our business as usual. Last month, I reported that Proctor & Gamble ("P&G") moved to acquire Billie, a subscription-based service for women's razor. The Federal Trade Commission ("FTC") subsequently filed an administrative complaint to block the proposed merger on the ground that it would effectively nip in the bud the competition in the market, thereby reducing consumer welfare. Following the pending lawsuit, P&G and Billie issued a joint statement in which they expressed that "we were disappointed by the FTC's decision and maintain there was exciting potential in combining Billie with P&G to better serve more consumers around the world. However, after due consideration, we have mutually agreed that it is in both companies' best interests not to engage in a prolonged legal challenge, but instead to terminate our agreement and refocus our resources on other business priorities." The deal was canceled as of January 6th.

Before we analyze its aftermath, let's take a moment to take a detailed look at the FTC complaint. Last time, I couldn't go over the complaint because it had not been made public. To gauge the level of competition, I noted in the earlier post that the FTC will take into account 1) relevant product market and 2) relevant geographic market, which it precisely did. As for the relevant product market, the complaint states that "it is no broader than the production and sale of wet shave razors." You can already see that the FTC is defining the product market narrowly, effectively excluding other body care products the both companies are currently selling in the market. The complaint predicts that there is a high possibility that the merged company would be in a position to "profitably impose a SSNIP". SSNIP stands for small but significant and non-transitory increase in price. So what does it do? It's a test for determining whether a pending merger would confer a monopolistic market power to the resulting company. There is a heated academic discourse on whether SNNIP is a valid metric, but it suffices here to say that the FTC uses it frequently. If a hypothetical monopolist can impose a price increase of 5% for 12 months and turn a profit, then it is assumed to be a monopolist in the eyes of the FTC. See Horizontal Merger Guidelines. When it comes to the relevant geographic market, the complaint defines it as all territories within the United States. 

As if SSNIP alone were not sufficient, the complaint further advances an argument that the proposed merger is "presumptively illegal". The FTC employs the Herfindahl-Hirschman Index ("HHI"), which measures the degree of market concentration. (Read the Department of Justice post to learn how to calculate HHI.) An increase in HHI of more than 200 points "renders an acquisition presumptively unlawful" according to the guideline. See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010). The bar is lower for highly concentrated markets. An increase of 100 points is enough to trigger a FTC intervention. The complaint concludes by noting that there is no countervailing factors that can compellingly justify the proposed merger's anticompetitive effects.

A score of critics who took issue with this type of FTC lawsuit voiced a concern that the FTC moved too quickly. According to the attorneys at Baker & Hostetler LLP, there now is a worrying prospect that "market disruptors, especially those challenging large incumbent competitors through marketing and advertising, may be viewed by regulators as strong potential competitors likely to restrain competitor market power", referring to Billie as exemplifying a nascent but strong competitor. If the FTC continues to adopt the approach it exhibited in the botched Billie deal, there would be cases where "disruptive brands that successfully challenge the competition through advertising and more competitive pricing may inadvertently weaken their ability to be acquired." Would this be an isolated instance or an entrenching trend? It remains to be seen, but it definitely is something worth keeping in mind for rapidly growing fashion companies.