In its successful, steadfast rejection of a Martin Marietta Materials-proposed merger six years ago, Vulcan Materials stressed the likely sale of strategic sand & gravel and crushed stone assets that federal antitrust regulators would stipulate as a condition of approval.
That foresight was manifested on the final business day of 2017 as Vulcan closed on Aggregates USA. The $900 million transaction commenced after the U.S. Department of Justice Antitrust Division issued a complaint challenging the acquisition in U.S. District Court, along with a proposed settlement calling for the sale of one Virginia and 13 Tennessee quarries, plus two aggregate yards in the latter state, to investor Blue Water Industries. The properties fetched $290 million and span markets of significant overlap with Vulcan operations in Knoxville and the Tri-Cities, Tenn., plus southwest Virginia. The remainder of the Aggregates USA portfolio—three Georgia granite quarries plus distribution facilities serving Georgia, Florida and South Carolina—fits Vulcan’s Southeast business.
Justice alleged violation of the Clayton Act, which spells “relevant market” criteria for merger and acquisition review. Agency officials defined state department of transportation-qualified coarse aggregate as a relevant product market, where the product has narrowly defined properties and few, if any, substitutes in many concrete and asphalt applications. Regulators then painted the three areas the former Aggregates USA operations serve as relevant geographic markets, gauging competition in transportation terms: How many prospective aggregates producers can compete from areas outside Abingdon, Va., Knoxville and the Tri-Cities, where Vulcan and Aggregates USA have dominant positions?
“For many customers, a combined Vulcan and Aggregates USA will have the ability to increase prices for DOT-qualified coarse aggregate,” the Justice complaint contends. “The combined firm could also decrease service for these same customers by limiting availability or delivery options. DOT-qualified coarse aggregate producers know the distance from their own quarries or yards and their competitors’ quarries to a customer’s job site. Generally, because of transportation costs, the farther a supplier’s closest competitor is from a job site, the higher the price and margin that supplier can expect.”
“In instances where Vulcan and Aggregates USA quarries or yards are the closest locations to a customer’s project, the combined firm, using the knowledge of its competitors’ locations, will be able to charge such customers higher prices or decrease the level of customer service,” Justice posits. “The proposed acquisition will substantially lessen competition in the market for the production and sale of DOT-qualified coarse aggregate in the relevant areas.”
Beyond validating concerns Vulcan raised in Martin Marietta’s 2011-12 overture, the settlement speaks to a pattern of federal government actions that the Cato Institute, a free-market Washington, D.C. think tank, weighs in its call to Congress to repeal the Clayton Act (1914) and the Sherman Act (1890). Antitrust law, “Cato Handbook for Policymakers” authors argue: “debases the idea of private property,” whereby the government transforms a company’s assets into something that effectively belongs to the public; and “is based on a static view of the market,” while ignoring the potential for markets to evolve and their tendency to move faster than antitrust laws.
Vulcan took DOJ’s Aggregates USA deal terms in stride. Management appears content with a significant Southeast portfolio boost and not inclined to school regulators in federal court on the limited value of a monopoly in a business where up to half the volume rests on the zero-sum nature of state and local agency budgets; and, day-to-day functions like hauling and truck routing, or long-term measures like site permitting, turn on the good graces of city, county and state officials mindful of price gougers.