UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ALABAMA
|UNITED STATES OF AMERICA,||)|
| v.||)|| Civil Action No.:|
ALUMINUM COMPANY OF AMERICA
|REYNOLDS METALS COMPANY,||)|
The United States of America, plaintiff, acting under the direction of the
Attorney General, brings this civil action to enjoin Aluminum Company
of America ("Alcoa"), the largest producer of aluminum for
beverage cans in the United States, from acquiring the competing production
facility of Reynolds Metals Company ("Reynolds"), the third
largest producer. If the acquisition is permitted to proceed, it would
cause the immediate shutdown of the Reynolds facility in Muscle Shoals,
Alabama, and would substantially lessen competition in the production
of aluminum can stock in the United States in violation of Section 7
of the Clayton Act, 15 U.S.C. § 18. As a result, American consumers
would pay more for their beverages in cans.
- Alcoa and Reynolds are competing
producers of a rolled aluminum sheet product known as beverage
can stock ("can stock"). There are two types of
beverage can stock -- body stock, which is used to make the body
of a beverage can, and end/tab stock, which is used to make the
lid and pull tab of a beverage can. In 1996, U.S. sales of body
stock were $3.2 billion; U.S. sales of end/tab stock were $1.4
- The beverage can stock business is
highly concentrated, with the four largest producers accounting
for over 90 percent of U.S. sales. Alcoa and Reynolds are the
number one and two producers of end/tab stock, and together
account for 67 percent of the market's production capacity.
Alcoa and Reynolds are also the second and fourth largest
producers of body stock.
- The Reynolds facility in Muscle Shoals
will be closed as a result of the transaction. Under its
agreement with Alcoa, Reynolds must close down the facility (and
pay the associated costs) before transferring ownership to
Alcoa. Alcoa has no need for additional can stock production
capacity, nor any present intention to use the facility to
produce can stock. The transaction will thus result in a
significant reduction in capacity to produce can stock.
- The loss of Reynolds as an independent
competitor in the production and sale of can stock will make it
easier for the few remaining aluminum can stock producers to
increase the price of body stock and end/tab stock in the United
States. Ultimately, beverage consumers throughout the United
States will pay those price increases.
JURISDICTION AND VENUE
- This action is filed under Section 15 of
the Clayton Act (15 U.S.C. § 25), to prevent and restrain
the violation by the defendants, as hereinafter alleged, of
Section 7 of the Clayton Act (15 U.S.C. § 18).
- Alcoa and Reynolds sell and ship
substantial quantities of can stock and other products from
locations in one state to locations in other states throughout
the United States.
- Alcoa and Reynolds are engaged in
interstate commerce and in activities that substantially affect
interstate commerce. The Court has jurisdiction over this action
and over the defendants pursuant to 28 U.S.C. §§ 1331
and 1337. Venue is proper in this district under 15 U.S.C.
§ 22, and 28 U.S.C. § 1391(b) and (c).
- Alcoa is a corporation organized and
existing under the laws of the State of Pennsylvania, with its
principal offices in Pittsburgh, Pennsylvania. Alcoa is the
second largest producer of aluminum products in the United
States and the world's largest integrated aluminum company.
Alcoa is engaged in all phases of the aluminum business -- from
mining and processing of bauxite to the production of primary
aluminum and fabrication of products. In 1996, Alcoa had
revenues in excess of $13 billion, more than three-fourths of
which came from the sale of aluminum products.
- Reynolds is a corporation organized and
existing under the laws of the State of Virginia, with its
principal offices in Richmond, Virginia. Reynolds is the largest
producer of aluminum products in the United States and is the
third largest producer of aluminum products in the world.
Reynolds is also engaged in all phases of the aluminum business.
Reynolds is the only major can stock producer that also
manufactures aluminum beverage cans. Reynolds' 1996 revenues
were almost $7 billion, more than 80 percent of which came from
the sale of aluminum products.
- Alcoa operates two rolling mills in the
United States that are dedicated to the production of can stock
-- Alcoa, Tennessee (body stock) and Warrick, Indiana (end/tab
stock). Reynolds produces can stock (both body and end/tab) at
one rolling mill -- the Listerhill facility located in Muscle
- Pursuant to a letter of intent dated
April 14, 1997, Alcoa agreed to pay at least $250 million for
Reynolds' can stock production assets: the Listerhill rolling
mill, two aluminum can reclamation plants, and an aluminum coil
coating facility. Reynolds must close down these assets prior to
transferring ownership to Alcoa. Alcoa plans to re-open only the
coil coating facility. Alcoa and Reynolds will also enter a
supply contract under which Alcoa will supply Reynolds' can
making division, which manufactures aluminum beverage cans, with
most of its can stock needs for seven years. Alcoa can fulfill
the supply agreement with its existing capacity.
TRADE AND COMMERCE
- Aluminum can stock is manufactured in a
rolling mill. A typical rolling mill contains a hot mill, which
performs the initial reduction of the thickness of the ingot,
one or more cold mills, which finish the metal to the desired
thickness and width, and a variety of ancillary equipment.
Rolling mills fabricate a wide range of products, including
plate used for trailer trucks and the aerospace industry, siding
for houses, sheet for making cooking utensils, household foil,
and can stock for food and beverage cans. The types of products
a particular rolling mill can produce depend on the
configuration of equipment in the plant, including the
horsepower of the hot mill, the number and type of cold mills,
and the type of ancillary equipment.
- Four companies dominate the can stock
business in the United States: Alcoa, Alcan Aluminum
Corporation, Reynolds, and Atlantic Richfield Corporation. These
four companies accounted for 90% of the can stock sales in the
United States in 1996. Most of the other firms that produce can
stock do not produce end/tab stock.
- Can stock producers sell virtually all
their body and end/tab stock to can makers who, in turn, produce
beverage cans. From the 4.2 billion pounds of can stock produced
in 1996, can makers produced approximately 100 billion can
bodies and lids in the United States.
- Can stock is sold in large coils that
can be over five feet wide and weigh up to 40,000 lb. The coils
are fed into can body-making machines, which stamp out a
circular piece of aluminum and form a small cup. A machine then
"draws" the cup to the desired height of the can and
"irons" the surface to make it smooth and of even
thickness. Coils of can end/tab stock are fed into lid-making
machines that stamp out rings that are attached to scored
circles to form the lid.
- Aluminum can end/tab stock differs from
body stock. Aluminum can end/tab stock is made of harder alloys
than is body stock, and requires more powerful mills and more
mill time to produce than body stock. End/tab stock is therefore
more expensive per pound than body stock. Body stock cannot be
used to make lids and end/tab stock cannot be used to make
bodies. Used aluminum cans can be remelted to make body stock,
but not end/tab stock.
- Can makers sell the bodies and lids to
beverage companies who fill them with beer or soft drinks and
then seal the cans. In addition to cans, the beverage companies
purchase other containers for their products. Brewers also
purchase 12-ounce glass bottles; soft drink bottlers also
purchase plastic bottles larger than 12-ounce. For both
beverages, the familiar 12-ounce aluminum can is the
overwhelming favorite and is the single-serve container
consumers purchase in by far the largest quantities. The
aluminum can is also the least costly 12-ounce container to
manufacture, fill and distribute. Finally, the shelf life of
soft drinks in aluminum cans is much longer than in single-serve
plastic bottles, nine or ten months for cans versus four months
or less for plastic bottles.
RELEVANT PRODUCT MARKETS
- Aluminum can stock differs from all
other beverage container materials, including steel, glass, and
plastic, in its physical characteristics, means of production,
and pricing. Aluminum can stock prices are not linked to the
prices of the other container materials.
- Can makers cannot use their existing
plants and equipment to produce beverage cans from other
materials such as steel, plastic resin or glass. As a result,
can makers do not switch between aluminum and other container
materials in response to changes in the relative prices of
steel, glass or plastic containers.
- The proportion of a beverage company's
product that it sells in aluminum cans is determined by a number
of factors, including the shelf life of a beverage in the
container, consumer preference for the container, unit cost of
the container, filling and sealing costs of the container, and
distribution costs of handling the container. The unit cost of
the container is but one factor, and this cost would have to
change significantly to outweigh all of the other factors and
cause a beverage company to alter the proportion of its product
that it distributes in aluminum cans.
- The ultimate consumer's choice of
beverage container is unlikely to be significantly affected by
the increase in the retail price of a can of beer or soda that a
five or ten percent increase in the price of can stock may
cause. (A ten percent increase in the price of can stock, for
example, would cause the cost of a 24-pack of canned beverages
to increase by less than ten cents. Because consumers' container
preferences will not change in response to small changes in
relative container prices, beverage manufacturers will not
substitute other containers for aluminum cans in response to
those price changes.
- Because of the differences between
end/tab stock and body stock, can makers cannot and do not shift
their purchases between body stock and end/tab stock in response
to relative price changes between body stock and end/tab stock.
- The manufacture and sale of end/tab
stock constitutes a relevant product market and a separate line
- The manufacture and sale of body stock
constitutes a relevant product market and separate line of
RELEVANT GEOGRAPHIC MARKET
- Can stock is sold throughout the United
States, and manufacturers of can stock compete for sales to
customers located throughout the United States. Imports account
for less than 5 percent of U.S. sales. Both Alcoa and Reynolds
sell can stock nationwide. The United States constitutes a
geographic market for the production and sale of can stock.
CONCENTRATION AND ENTRY
- In 1996, Alcoa accounted for 50 percent
of end/tab sales and 34 percent of body stock sales in the
United States. Reynolds accounted for 19 percent of end/tab
stock sales and 14 percent of body stock sales in the United
States. Based on 1996 production capacity, Alcoa's shares were
51 percent and 26 percent respectively, and Reynolds' shares
were 16 percent and 11 percent. Together, they represented 67
percent of end/tab capacity in the United States and 37 percent
of body stock capacity in the United States.
- The markets for end/tab stock and body
stock are highly concentrated. The top four end/tab stock
producers account for approximately 90 percent of 1996 sales and
90 percent of production capacity. The top four body stock
producers account for approximately 90 percent of 1996 sales and
78 percent of production capacity.
- Using a measure of market concentration called the Herfindahl-Hirschman Index ("HHI"),
defined and explained at
Appendix A, a combination of Alcoa and
Reynolds would substantially increase the concentration in the
already highly concentrated U.S. body stock and end/tab stock
- The approximate post-merger HHI for can
end/tab stock, based on 1996 capacity of firms with rolling
mills located in the United States, would be about 5000, with an
increase in the HHI resulting from the merger of over 1600
- The approximate post-merger HHI for can
body stock, based on 1996 capacity of firms with rolling mills
located in the United States, would be about 2800, with an
increase in the HHI resulting from the merger of over 600
- Successful entry into the production and
sale of can stock is difficult, time consuming and costly. To
build an efficient, high volume can stock rolling mill would
cost at least $1 billion, and would require as many as four
years from the time of site selection. The equipment needed to
produce can stock is custom-engineered and would take at least
two years to design, manufacture and install.
- The production of can stock is a
sophisticated and technologically-demanding process compared to
the production of most other rolled aluminum products. The
acceptable margin for error in meeting customer specifications
for can stock is very small. Rolling mills must be specifically
designed or modified to produce can stock. The modification of
an existing mill or construction of a new facility is costly and
would take a year or more.
- A new entrant into can stock
manufacturing must "qualify" its product with each
can-making plant before it will be accepted as a supplier at
that plant. A new entrant must establish a reputation for good
quality product and for reliability in fulfilling customer
- There are no other domestic or foreign
firms whose entry or expansion would be likely, timely and
sufficient to thwart an anticompetitive price increase.
- The proposed acquisition will remove one
of only a few significant suppliers from an already concentrated
market. It will also remove from the market the rolling capacity
that Reynolds has operated. The increase in concentration will
make a price increase through anticompetitive coordination by
the few remaining firms easier and more likely.
- On April 14, 1997, Alcoa and Reynolds
entered into an agreement whereby Alcoa would acquire Reynolds'
rolling mill and related assets located in Muscle Shoals,
- The effects of the acquisition, if
consummated, may be to lessen competition substantially and
tend to create a monopoly in interstate trade and commerce
in violation of Section 7 of the Clayton Act in the
following ways, among others:
- Competition between Alcoa and
Reynolds in the production and sale of can body stock and
end/tab stock will be eliminated;
- Competition generally in the
production and sale of can body stock and can end/tab stock
may be substantially lessened;
- Coordinated pricing activity among
the producers and sellers of can body stock and can end/tab
stock likely will be facilitated; and
- Prices for can body stock and can end/tab stock in the United States are likely to
WHEREFORE, Plaintiff prays:
- That a permanent injunction be issued
preventing and restraining the defendants and all persons acting
on their behalf from consummating the agreement alleged in
paragraph 37, or any other plan or agreement to sell part or all
of Reynolds' Listerhill facility to Alcoa, except on such terms
and conditions as may be agreed to by plaintiff and the Court.
- That the proposed acquisition be
adjudged a violation of Section 7 of the Clayton Act.
- That the plaintiff have such other and
further relief as the nature of this case may require and as
this Court may deem just and proper.
- That the plaintiff recover the costs of this action.
Dated: December 29, 1997
Joel I. Klein
Assistant Attorney General
A. Douglas Melamed
Constance K. Robinson
Attorneys for the Plaintiff
United States Department of Justice
G. Douglas Jones
United States Attorney
Northern District of Alabama
James G. Gann
Assistant United States Attorney
Roger W. Fones
Donna N. Kooperstein
Nina B. Hale
Angela L. Hughes
John R. Read
Dorothy B. Fountain
Attorneys for the Plaintiff
United States Department of Justice
325 7th Street, N.W. Suite 500
Washington, D.C. 20530
DEFINITION OF "HHI"
The term "HHI" means the Herfindahl-Hirschman Index, a commonly accepted measure of
market concentration. The HHI is calculated by squaring the market share of each firm
competing in the market and then summing the resulting numbers. For example, for a market
consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600
(302 + 302 + 202 + 202 = 2,600). The HHI
takes into account the relative size and distribution of the firms in a market. It approaches zero
when a market is occupied by a large number of firms of relatively equal size and reaches its
maximum of 10,000 when a market is controlled by a single firm. The HHI increases both as the
number of firms in the market decreases and as the disparity in size between those firms
Markets in which the HHI is between 1000 and 1800 are considered to be moderately
concentrated, and markets in which the HHI is in excess of 1800 points are considered to be
highly concentrated. Transactions that increase the HHI by more than 100 points in highly
concentrated markets presumptively raise significant antitrust concerns under the Department of
Justice and Federal Trade Commission 1992