More to it Than Market Share, What the FTC’s Quest to Block Billie-P&G Merger Means for DTC Buy-Outs

Image: Billie

More to it Than Market Share, What the FTC’s Quest to Block Billie-P&G Merger Means for DTC Buy-Outs

In one of the other actions initiated this week by the Federal Trade Commission (“FTC”), its antitrust case against Facebook takes the headline-grabbing cake on all fronts, the government agency has filed an administrative complaint – and authorized a suit in federal ...

December 11, 2020 - By TFL

More to it Than Market Share, What the FTC’s Quest to Block Billie-P&G Merger Means for DTC Buy-Outs

Image : Billie

Case Documentation

More to it Than Market Share, What the FTC’s Quest to Block Billie-P&G Merger Means for DTC Buy-Outs

In one of the other actions initiated this week by the Federal Trade Commission (“FTC”), its antitrust case against Facebook takes the headline-grabbing cake on all fronts, the government agency has filed an administrative complaint – and authorized a suit in federal court – against Proctor & Gamble in order to stop the multinational consumer goods giant’s acquisition of shaving startup, Billie. According to a release from the FTC on Tuesday, the proposed acquisition of the 3-year old shaving company would allow P&G “to eliminate growing competition that benefits consumers,” and thus, should be prohibited on anticompetitive grounds.

On the heels of P&G and Billie announcing the acquisition in January 2020, the FTC – which is tasked with “enforcing antitrust laws” and “challenging anticompetitive mergers and business practices that could harm consumers by resulting in higher prices, lower quality, fewer choices, or reduced rates of innovation,” among other things – has swooped in to call foul. The basis for its action? Put simply: The acquisition would “eliminate substantial and growing head-to-head competition” between Cincinnati, Ohio-based P&G – “the market-leading supplier of both women’s and men’s wet shave razors” – and “nascent competitor Billie” in U.S. wet shave razor markets.

The FTC says that it will file a complaint in the U.S. District Court for the District of Columbia seeking a Temporary Restraining Order and Preliminary Injunction to stop the deal pending an administrative trial. 

Nascent Competition

The FTC’s newly-initiated action to halt the Billie acquisition is not the first of its kind this year. In fact, the government agency filed an administrative complaint in February, asserting that it has “reason to believe that Edgewell Personal Care Company and Harry’s, Inc. have executed a merger agreement in violation of [various sections] of the FTC Act,” as well as the Clayton Antitrust Act. As it turns out, Edgewell, the shaving company that owns a stable of household names from Playtex and Skintimate to shaving brands Schick Edge and Wilkinson Sword, had made Harry’s a $1.37 billion dollar offer, and the burgeoning direct-to-consumer (“DTC”) shaving company took it. 

Edgewell and Harry’s boasted that the merger would “create a complementary portfolio of global brands built for the modern consumer and powered by world-class omni-channel capabilities,” and analysts looked favorably upon the combination of “the brand affinity of Harry’s” and the sheer “scale” of Edgewell’s operations. The FTC did not quite see the beauty of the deal, though, with Daniel Francis, the Deputy Director of the FTC’s Bureau of Competition, stating in conjunction with the February 2020 administrative filing that “Harry’s and [its female focused] Flamingo brand represent a significant and growing competitive threat to the two firms that have dominated the wet shaving market for decades,” Edgewell and P&G. 

As such, “Edgewell’s effort to short-circuit competition by buying up its newer rival promises serious harm to consumers,” Francis argued. 

Both Edgewell and Harry’s continued to extoll the values of the proposed merger in statements following the start of the FTC’s action in February, but ultimately, Edgewell called it quits, citing “uncertainty about the potential outcome” of – and the time/resources required for – a legal fight with the FTC, and the parties went their separate ways. (Harry’s allegedly threatened legal action against Edgewell for pulling the plug on the deal, but never filed suit). 

Many were struck by the FTC intervention in light of the fact that Harry’s reported market share was only about 2.5 percent at the time and presumably, given the lack of regulatory intervention in Unilever’s 2016 acquisition of Dollar Shave Club for $1 billion. However, “The business community should not have been quite so surprised by the outcome in the Edgewell-Harry’s deal,” according to Baker & Hosteler attorneys Marc Schildkraut and Alyse Stach, and they should not be surprised now. 

Such regulatory blockades should not necessarily be striking, since “for several years, the federal antitrust agencies, particularly the FTC, have been developing a concept known as ‘nascent competition,’” Schildkraut and Stach assert. In other words, the agency has been opposing instances in which the acquisition target is a small, but rapidly growing entity – or “disruptive” competitor of a larger, dominant company. 

This budding new development is noteworthy, as antitrust agencies, such as the FTC, “traditionally consider current competition between merging parties and look to their existing market shares as indicators of competitive strength,” Shearman & Sterling’s David Higbee, Jessica Delbaum, Ben Gris, and John Skinner previously stated. The larger the market shares at play, the more likely there will be FTC pushback on the basis of competition, and thus, small share gains – such as 2.5 percent – have traditionally fallen outside of the realm of FTC action. 

However, instances like the failed Harry’s-Edgewell merger and the more recent Billie-P&G case, among others in which the acquisition target has maintained a relatively small stake in the relevant market, “show an emphasis on preventing an established incumbent from acquiring a smaller, disruptive competitor that threatens to shake up the status quo – even when there is only a small incremental increase in market share.”

Against that background, “a key component” of the FTC’s complaint in its case to block Edgewell and Harry’s nearly $1.4 billion dollar deal was Harry’s role as “‘a uniquely disruptive competitor that interrupted the P&G/Edgewell duopoly’ in a wet shave razor market, which was ‘ripe for disruption,’” Higbee, Delbaum, Gris, and Skinner note. While the FTC did not assert that Harry’s success had hindered Edgewell – or fellow shaving giant P&G – from continuing to raise their own prices on an annual basis, it did place significant weight on the fact that Harry’s expanded from its online-only existence into brick-and-mortar retail in August 2016 when it partnered with Target. 

The FTC argued that “Harry’s took shelf space at Target away from Edgewell’s Schick brands, among others, and quickly took share from both Edgewell and P&G due to aggressive pricing,” thereby, giving rise to competitive significance. 

The same logic appears to be at play in the Billie-P&G case. “As its sales grew,” Billie – which operates in a purely DTC capacity, selling razors and shaving supplies to consumers via its e-commerce site (and without retailer and wholesaler middlemen) in line with the enduring trend initiated by the likes of Warby Parker, Dollar Shave Club, Harry’s and co. about a decade ago – “was likely to expand into brick-and-mortar stores, posing a serious threat to P&G,” Ian Conner, director of the FTC’S Bureau of Competition, said in a statement this week. 

As a matter of fact, the FTC asserted in its statement, “The proposed acquisition also halted Billie’s anticipated expansion into brick-and-mortar retail stores, which would have benefitted consumers through intensified competition between Billie and P&G at retail locations.” 

“If P&G can snuff out Billie’s rapid competitive growth, consumers will likely face higher prices,” Conner argued. 

As for Billie’s status as an industry upstart, and a “nascent” competitor capable of “disrupting” the market, one need not look further than the media attention it has received. A 2018 Time article, for instance, details how “Billie Razors is Disrupting the Shaving Industry.” In other words, the very thing that has made the brand successful – its “disruptive qualities,” or more specifically, its quest to cut out the “pink tax” on women’s shaving goods, its special soap-infused razor blades, its competitive pricing, etc. – is now proving to stand in its way of a buy-out. 

The Impact for DTC

This growing trend of FTC blockades raises questions about the future for the sizable number of buzzy DTC companies that have flooded well-established market categories in recent years, offering up everything from suitcases and sneakers to beauty products and supplements to digitally-grounded millennial and Gen-Z consumers, and thriving based on their “disruptive” qualities – whether that be competitive prices, new tech., compelling brand messaging, or otherwise-missing elements of community, and so on. Higbee, Delbaum, Gris, and Skinner claim that taken together, these challenges, among others, “show that considering the target’s level of sales or market share, alone, can ignore other indicia that a transaction will raise antitrust concerns.” And this is particularly true in instances when the transaction involves a relatively new market recent entrant with “new technology, aggressive pricing, or other innovative qualities.”  

Reflecting on the status quo of most regulatory actions to date, they contend that “incremental share gains as low as 2 percent resulting from a transaction typically suggest a low risk of an agency challenge.” That is clearly changing, though, where a target company “represents a unique competitive threat that has the potential to disrupt incumbents,” in which a simple reliance on market share, alone, “can understate the significance of the transaction’s likely effect on competition.” 

Ultimately, the “nascent competition” label is helpful in gauging potential FTC attention when the party on the other side of the equation is a dominant firm,” Schildkraut and Stach argue. However, just as an over-reliance on market share in a vacuum is ineffective, “we have to be careful not to make too much of the label.”

“The real test will come if and when one of the antitrust agencies challenges the acquisition of a nascent competitor that has not yet entered the market.” Until then, the most useful analysis involves determining whether that nascent competitor at issue is “unique in some way despite a small share of the market,” and if so, considering the following questions: “Does it have a one-of-a-kind technology? Has it grown rapidly? Does it have a credible plan showing likely speedy growth? Has it already had a pro-competitive effect on market prices? Is it otherwise a disruptive competitor?” 

The more “yes” answers, they say, “the more likely it is that the merging parties will be spending some quality time at the FTC or DOJ.” 

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