Titanium dioxide producers received a rare bit of bad news today -- with a little bit of drama sprinkled in.
Tronox (NYSE:TROX) appeared set to proceed with its proposed acquisition of the titanium dioxide business of Cristal, a privately held global mining and chemical company based in Saudi Arabia, as recently as the first of December. That's when the comment period expired under the Hart-Scott-Rodino Act, a major antitrust law that grants the U.S. Federal Trade Commission and U.S. Department of Justice powers to intervene in large business mergers.
But investors' celebration may have been a little premature. Today the FTC decided to block the proposed merger citing concerns about competitiveness in the global titanium dioxide market. Tronox has vowed to appeal the decision, which it thinks is based on erroneous information about the market's structure, but the stock dropped as much as 27.1% today. That's because Wall Street thinks the proposed Cristal acquisition is critical to the company's valuation and future growth.
Nearly every major titanium dioxide producer was affected by the news today. Shares of Valhi (NYSE:VHI) dropped as much as 27.9%, while shares of Kronos Worldwide (NYSE:KRO) fell up to 13%. Even the more diversified producer Chemours (NYSE:CC) saw its shares down 5.8% at 12:16 p.m. ET.
The surprise move from the FTC is catching the titanium dioxide industry off guard for good reason. While the decision to block the proposed merger was handed down days after the Hart-Scott-Rodino Act waiting period ended, the real kicker is the argument the commission is using to justify its stance. The three main points the FTC argues:
- The proposed merger will limit competition in the market by concentrating too much production capacity currently spread between two top producers.
- The titanium dioxide market operates as an oligopoly, in which a small number of companies run the entire market, and that the merged companies will coordinate production to drive up prices.
- The commission believes the companies will cut production to drive up prices.
The first point may be the most subjective, but the other two arguments are making the industry's top producers shake. Simply put, if the FTC recognizes the titanium dioxide market as an oligopoly, then it opens the door to further action and certainly makes any future potential expansion among top producers that much more difficult.
Is the titanium dioxide market an oligopoly? Well, there's certainly a very small number of companies that exert control over the global industry. Chemours, Venator Materials (NYSE:VNTR), and Kronos Worldwide own roughly 45% of global production capacity. They have all benefited tremendously -- almost unbelievably -- in the past year thanks to rising selling prices. Whether or not they're coordinating production to help their collective case is unknown, although the FTC seems to be wary of allowing power to concentrate further.
There's not much investors can do besides wait. If the FTC makes its case that the global titanium dioxide market is already too concentrated, then that will complicate future expansion -- even if Tronox wins an appeal on the technicality that the decision was handed down days after the appropriate window expired. For now, it's still early in the process, but investors may have been warned.