DUG Appalachia: Antitrust Policies Could Chill M&A

The Biden administration’s aggressive scrutiny of mergers may not be discouraging transactions—at least, not yet—but the policies are complicating the M&A process, an antitrust expert said Nov. 30 at Hart Energy’s DUG Appalachia conference in Pittsburgh.

As the oil and gas industry moves through a wave of consolidation, leadership at the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division, which are tasked with enforcing antitrust laws, believe that the last 40 years of enforcement has been too lax, said Ian John, partner in antitrust and competition at the Kirkland & Ellis law firm.

“Essentially, we should be throwing out the last 40 years and going back to the 1960s for enforcement,” John said. The agencies are focusing on the competitive process, but so far have experienced limited success in testing their theories in court.

In July, FTC Chair Lina Khan said that, in the commission’s proposed merger guidelines, “we will consider not just competition between players offering similar services, but also competition from firms whose offerings could replace or disintermediate an existing platform.”

But while consolidation can lessen competition, it can also enhance efficiencies. In the case of the energy industry, that can aid in the quest for cleaner fuels.

Earlier in the day, Toby Rice, CEO of gas producer EQT Corp., said his company’s acquisition and absorption of Tug Hill and XcL Midstream brought more than just cost savings and increased inventory.

“We’re going to make the energy they produce cleaner by incorporating them into our ‘Net Zero by 2025 Scope 1 and 2 plans,” Rice told conference attendees.

Averse to remedies

The agencies, which put the $5.2 billion Tug Hill deal under the antitrust microscope before approving the acquisition in August, took a narrow approach departing from processes undertaken in previous administrations.

“The agencies, especially at the Department of Justice, have said they’re not in the merger clearance business, they’re not in the merger shaping business, they’re in the law enforcement business,” John said. “They have been less willing to engage in the types of discussions that lead to merger remedies.”

In the Tug Hill case, there was no allegation that the deal lessened competition. Instead, the FTC objected to Quantum Capital Group, which purchased shares of EQT, gaining the right to appoint members of EQT’s board of directors. The issue centered around Quantum’s ownership of other assets in the Appalachian Basin and being a provider of financing to other entities in the basin.

Quantum agreed to give up its right to appoint a seat on EQT’s board and sell down its ownership of EQT stock. Following that agreement, the deal was approved.

But the feds have not always pursued remedies, and that approach has not always gone over well with federal judges. In one case, John said, a judge admonished Justice Department lawyers for filing a complaint and trying to scuttle a merger in court without making any attempt to reach a settlement. The lawyers went back to the table and were able to settle the case without litigation, allowing the deal to go through.

Pressure on private equity

John also took issue with the agencies’ approach to private equity.

“Both agencies have given a couple of speeches where they have painted private equity as a business model of: acquire, strip down the acquired assets and then resell,” he said. “I do a lot of work with private equity clients. That’s not the experience that I’ve had. As a matter of fact, I think it’s almost the opposite—acquire, grow and then sell.”

The FTC’s biggest private equity target has been U.S. Anesthesia Partners and the private equity firm Welsh, Carson, Anderson & Stowe. In a September lawsuit filed in Houston, Texas, the government said the private equity firm was rolling up all of the major anesthesiology practices in Texas.

“This is a pretty common roll-up strategy, and some of the big private equity companies must be wondering if more FTC complaints are coming,” Loren Adler, associate director of the Brookings Schaeffer Initiative on Health Policy, told Fortune. “If the FTC is successful in court, it will have a chilling effect.”

While the targeted private equity firm operates in health care, energy attorneys like John are keeping an eye on the proceedings.

“They claim that the pattern of acquisitions was itself illegal,” he said of the Welsh, Carson suit. “It’s the first and only time that a claim has been brought on that theory. We’ll watch and see what happens.”

John does not expect the FTC’s new merger guidelines to take effect before fourth quarter 2024, and not without changes to the current text. He does, however, expect challenges when it does go into effect.

“The new rule will certainly be more challenging to prepare filings than it has been in the past,” he said. “Particularly for smaller transactions … those kinds of burdens might be a little much for particularly smaller players, and that might chill some deal activity just because of the process alone.”