Competition Bureau statement regarding Le Groupe Harnois inc.’s proposed acquisition of Distributions pétrolières Therrien Inc.’s gasoline supply arrangements
OTTAWA, June 23 , 2016 — On June 21, 2016, the Competition Bureau announced that, following a review of Le Groupe Harnois inc.’s (Harnois) proposed acquisition of Distributions pétrolières Therrien Inc.'s (DPT) gasoline supply arrangements, it has reached an agreement with Harnois that preserves competition for the retail sale of gasoline in Coaticook and Lac‑Mégantic in Quebec.
This statement summarizes the approach taken by the Competition Bureau in its review of the proposed transaction.
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Pursuant to an asset purchase agreement dated November 9, 2015, Harnois is proposing to acquire substantially all the assets used in the operation of DPT, which mainly consist of 50 distribution contracts with Esso‑branded dealers, with stations located in Quebec. Harnois sells wholesale and retail sale of petroleum products in Quebec, Labrador, New Brunswick and Ontario. It owns 58 stations and supplies gasoline to an additional 253 Harnois, Petro‑T or Esso‑branded retail gas stations.
The parties’ distribution contracts allow DPT and Harnois to change the wholesale prices charged to the dealer‑owned stations they supply, thereby providing Harnois and DPT with the ability to use their vertical relationships with dealers to influence retail gasoline prices set by those dealers.Footnote 1 Hence, the Bureau’s review focused on whether the proposed transaction would be likely to substantially lessen competition in local geographic markets where a DPT distribution contract overlaps with either one or more corporate stations operated by Harnois and/or a dealer station supplied through a distribution contract with Harnois.
In the course of its review, the Bureau conducted interviews with many market participants including competing gas station retailers and wholesale customers; reviewed documents and information provided by the parties and third parties; and analyzed transaction level data.
The Bureau conducted an analysis consistent with the framework established in its review of Parkland’s acquisition of Pioneer.Footnote 2 As in that case, the relevant product market was deemed to be the retail sale of gasoline, as vehicle operating specifications constrain consumers in their ability to switch to other fuels. The relevant geographic market considered was local, given transport and opportunity costs associated with purchasing at more distant stations.
The Bureau conducted a detailed analysis of a large number of local markets across Quebec in order to determine which stations should be included in a given local market, and closely evaluate each station’s effectiveness as a competitor. In this regard, the Bureau relied on interviews with local market participants, strategic and pricing documents provided by the parties, and data analysis. The factors examined by the Bureau in its local analyses included, among other considerations, the strengths and weaknesses of stations in a given area (based on location quality, convenience and marketing effectiveness), population information, evidence on prevailing pricing strategies, and consumer traffic patterns.
The Bureau found that Harnois and DPT compete for the sale of gasoline in local markets where Harnois operates one or more corporate stations and DPT supplies at least one dealer station, and where both of the parties supply gasoline to third party dealers. The Bureau’s analysis ultimately led it to conclude that the proposed transaction is likely to result in a substantial lessening of competition in two local areas, namely Coaticook, Québec, and Lac‑Mégantic, Québec, as listed below.
|Market||Harnois Stations||DPT Stations|
In both Lac‑Mégantic and Coaticook, the Bureau determined that only one additional competitor would remain post‑merger and that the parties can materially influence the retail pricing of the majority of the stations, either through direct retail price control at Harnois’ corporate stations in Lac‑Mégantic or through the vertical relationships that Harnois and DPT have with the dealers that they supply. In both Lac‑Mégantic and Coaticook, Harnois and DPT account for a significant proportion of local sales of gasoline. Furthermore, in these overlap markets, Harnois would have the ability following the proposed transaction to raise:
- retail prices at its corporate stations, and
- its wholesale prices (thereby influencing the retail price) at dealer stations it supplies, and could have an increased economic incentive to do so.Footnote 3
This increased incentive results from the fact that, in the case of a price increase following the merger, Harnois will recapture a portion of sales at the wholesale or retail levels which would have been lost to competitors absent the proposed transaction. The Bureau also conducted an analysis of transaction‑level data received from the parties, in order to estimate the likely effect of the merger on prices in the local markets at issue, and determine the likely deadweight loss to the economy as a result of the transaction
Barriers to entry
The Bureau determined that significant barriers to entry and expansion exist in the relevant markets, including, but not limited to, high fixed costs, and the need for environmental and regulatory approvals. Previous analysesFootnote 4 have found that constructing a new retail gas station can cost from $2 to $4 million, and the process may take 18‑32 months, including financing, regulatory approvals, and construction.
Conclusion and remedy
Based on the existing rivalry between the parties, the limited number of remaining competitors, and significant barriers to entry, among other factors, the Bureau concluded that the merger was likely to substantially lessen competition through the loss of rivalry between the parties, as well as increase the level of concentration in the retail supply of gasoline such that the extent, likelihood, frequency and duration of tacit coordination may be increased.
The Bureau and Harnois have entered into a Consent Agreement which requires Harnois to divest a corporate station or dealer supply agreement in Lac‑Mégantic, Québec, and prevents Harnois from increasing any margin it earns on the sale of gasoline to dealers in Coaticook, Québec.
In Lac‑Mégantic where Harnois owns retail gas stations, the Bureau found that a divestiture was an effective and viable remedy because it eliminates Harnois’ ability to increase prices and any incentive it could have had to do so. In Coaticook where the parties are in a vertical supply relationship with dealer stations, the Bureau was satisfied that by preventing Harnois from having a material influence on the retail price of gasoline charged by dealer stations, the merger is not likely to lessen competition substantially.
This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.
However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.
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