Documentation

PUBLIC CT-2008- (()() l THE COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985; c. C-34, as amended; AND IN THE MATTER OF an application by the Commissioner of Competition for an interim order purs-qant to section 100 of the Competition Act;

AND IN THE MATTER OF an inquiry pursuant to paragraph lO(l)(b) of the Competition Act into the proposed acquisition by an affiliate of American Iron & Metal Company Inc. of all of the issued and outstanding shares of S N F Inc.

BETWEEN: THE COMMISSIONER OF COMPETITION

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AMERICAN IRON & METAL COMPANY INC. 6876544 CANADA INC., SN F INC., HAMETAL CANADA INC. FONDS DE SOLIDARITE DES TRAV AILLEURS DU QUEBEC (F.T.Q.)

Respondents . F , I 'L ' E 1) OTTAWA; ONTlj AFFIDAVIT OF VINCENT MILLETTE Sworn January 28, 2008 I, VINCENT MILLETTE, of the City of Gatineau, in the Province of Quebec, MAKE OATH AND SAY AS FOLLOWS:

1. I am an Acting Senior Competition Law Officer at the Competition Bureau and the lead officer in this matter. I have been a Competition Law Officer since September 2004 and have

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Applicant

PUBLIC worked in the Mergers Branch throughout that time. I have personal knowledge of the matters deposed to in this affidavit except that which has been stated to be on information and belief and where so stated, I believe that information to be true.

A. The Parties 2. American Iron and Metal Company Inc. ("AIM") is a privately held company with its head office in Montreal, Quebec. AIM and its affiliates are engaged in the business of collecting and processing ferrous and non-ferrous scrap metal from several locations across Canada. AIM also has other manufacturing operations that are not relevant to this matter.

3. 6876544 Canada Inc. is a "sister" corporation of AIM which is proposing to acquire all of the outstanding shares of S N F Inc. ("SNF").

4. SNF is a privately held company with its head office in Laval, Quebec. SNF and its affiliates l are engaged in the business of collecting and processing ferrous and non-ferrous scrap metals from locations in Quebec and Nova Scotia.

5. Hametal Canada Inc. and the Fonds de Solidarite des Travailleurs du Quebec (F.T.Q.) are the shareholders of SNF.

B. The Proposed Transaction 6. On November 27, 2007, AIM and SNF (collectively the "Parties") entered into a Purchase Agreement, under which AIM, through 6876544 Canada Inc. or an affiliate, will acquire all of the issued and outstanding share capital of SNF (the "Proposed Transaction"). A copy of the Purchase Agreement (Convention d'achat d'actions) dated November 27, 2007 is appended hereto and marked as Exhibit "1" to my affidavit.

7. On December 18, 2007, the Competition Bureau ("Bureau") received a long form filing ("Filing") pursuant to section 114 of the Competition Act ("the Act") from Mr. Larry Markowitz of McMillan Binch Mendelsohn LLP and Ms. Angela Di Padova of Fasken Martineau DuMoulin

I SNF has certain affiliates that will not be acquired through the Proposed Transaction. These affiliates are not discussed in this Affidavit.

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PUBLIC LLP, counsel for AIM and SNF Inc., respectively. A copy ofMr. Markowitz's cover letter, dated December 18, 2007 is appended hereto and marked as Exhibit "2" to my affidavit.

8. The Filing submitted on December 18, 2007 failed to supply certain of the information required under section 114 (2) of the Act. As such, on December 19, 2007, the Bureau notified counsel for the Parties that additional information was required to complete the Filing. This information was supplied on December 20,2007. As a result, the statutory waiting period of 42 days commenced on December 20, 2007 and ends on January 31, 2008.

9. On December 24, 2007, the Commissioner of Competition ("Commissioner") commenced an inquiry pursuant to section 10(1)(b) of the Act with respect to the Proposed Transaction and the inquiry remains ongoing. Appended hereto and marked as Exhibit "3" to my affidavit is a Certificate signed by the Commissioner to this effect.

C. Closing Date for the Proposed Transaction 10. In the letter dated December 18, 2007, attached at Exhibit "2" and during subsequent telephone conversations, counsel for AIM advised that the parties wished to close the proposed transaction as soon as possible due to concerns about SNF's financial condition. However, in a letter of January 3, 2008, counsel for AIM advised that the Proposed Transaction would not be closing until the earlier of April 30, 2008 or five business days after the Commissioner approved the Proposed Transaction through the issuance of an advance ruling certificate or "no action" letter. The letter of January 3, 2008 is appended hereto and marked as Exhibit "4" to my affidavit states:

The closing of the Transaction is scheduled to occur on the earlier of the following dates: (a) April 30, 2008; or (b) no later than the fifth (5th) business day following the realization of the events required to bring about the completion of the Transaction (as described more fully in the Filing).

11. The events required to bring about the completion of the proposed transaction are listed in section 2.5 of AIM's Filing, which is appended hereto and marked as Exhibit "5" to my affidavit, and include the following 3 conditions for closing:

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PUBLIC (a) Satisfaction of the conditions for closing in the Purchase Agreement relating to receipt of an advance ruling certificate pursuant to section 102 of the Act from the Commissioner or of a "no-action" letter from the Commissioner;

(b) The FTQ's debenture being repaid in full by SNF and FTQ's preferred shares in SNF being redeemed in full, together with all unpaid dividends accrued in respect thereof as at the closing of the Proposed Transaction. AIM has undertaken to ensure that SNF has the required sums for such repayment and redemption at the closing of the Proposed Transaction; and

(c) The closing of the purchase by 6876544 Canada (an affiliate of AIM) or its designated affiliate of all the shares of Kenny Auto in accordance with the terms set forth in the Option Agreement, or the execution by SNF and Kenny Auto of an exclusive supply agreement in accordance with the terms and conditions set forth in the Option Agreement.

12. Further, paragraph 8.1 of the Purchase Agreement attached as Exhibit "1" to my affidavit also states that closing of the Proposed Transaction is conditional on the Commissioner providing an advance ruling certificate or "no-action" letter.

13. Also, a strategic document prepared by AIM and dated November 6, 2007 included as part of the Filing states that "[t]he closing is expected in late February/March time frame to allow sufficient time for the competition office review". A copy of the November 6, 2007 document is appended hereto and marked as Exhibit "6" to my affidavit.

14. On January 22, 2008, I, along with other officers from the Competition Bureau and counsel for the Commissioner, met with counsel for the Parties and Mr. Herbert Black, the Chief Executive Officer and principal shareholder of AIM. At that meeting, Mr. Black stated that AIM intended to close the Proposed Transaction on February 1, 2008. Mr. Black's statement was contrary to the understanding regarding the timing of the closing that I had from the January 3, 2008 letter, AIM filings and conversations with counsel for AIM.

15. As a result of the statements made at that meeting with respect to closing there was an e­mail exchange, the next day, on January 23,2008 between Mr. Jonathan Chaplan, counsel for the

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PUBLIC Commissioner and Mr. Markowitz, counsel to AIM as to whether the closing date of February 1, 2008 had been disclosed. Appended hereto and marked as Exhibit "7" of my affidavit is a copy of the e-mail correspondence dated January 23,2008.

16. In the period between January 23 and 25,2008, counsel for the Commissioner attempted to secure an extension of the closing date in order to be able to complete the Inquiry. Additional information was requested from the Parties on a voluntary basis. In a telephone conversation held on January 25, 2007, counsel for AIM advised both me and counsel for the Commissioner that the Parties would not grant any extension of the closing date and that the Parties intended to proceed with a closing of the Proposed Transaction on February 1, 2007.

17. During the January 25,2008 telephone conversation, counsel for AIM also stated that the Parties were not willing to enter into any form of hold separate arrangement regarding the operations of SNF and AIM.

18. In a subsequent telephone held later the same day, in which I participated, counsel for the Commissioner advised counsel for the Parties that the Commissioner would be seeking an interim order under section 100 of the Act. A copy of a letter dated January 25, 2008 from counsel for the Commissioner to the Parties confirming this telephone conversation is appended hereto and marked as Exhibit "8" to my affidavit.

D. The Scrap Metal Industry Canada (a) General 19. Both AIM and SNF provide scrap metal recycling services in Quebec and the Atlantic Provinces (collectively, "Eastern Canada"). As a result of the Bureau's investigation to date, I have the following understanding of the metal recycling industry in Eastern Canada.

20. There are two main categories of scrap metal: ferrous and non-ferrous. Non-ferrous scrap metal consists mostly of elemental metals, including aluminum, copper, zinc and other precious metals. Ferrous scrap metal is scrap metal that contains iron (including steel, but with the exception of stainless steel, which is considered to be non-ferrous).

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PUBLIC 21. Non-ferrous metal is more valuable than ferrous and as a result shipping costs are less of a barrier to shipping non-ferrous metals over long distances.

(b) Purchase of Scrap Metal 22. SNF and AIM compete with respect to the purchase of scrap metal from vanous suppliers. There are several types of suppliers of scrap metal, ranging from "peddlers" who collect small amounts of scrap metal from residential and commercial operations, to small-sized scrap metal yards that lack sufficient processing equipment, and industrial manufacturers who create scrap metal as a by-product of their production.

23. Processing firms, such as the Parties, purchase scrap metal from these various vendors, sort the metal into types and grades, and apply some degree of processing to make the product suitable for resale. For example, SNF and AIM purchase demolished cars and process them into saleable products, such as shredded ferrous scrap and non-ferrous metals. As outlined in greater detail below, effective competitors appear to be companies that own shredders.

24. Some collected scrap metal, such as scrap that is a by-product of industrial manufacturing, does not require a large degree of processing; rather, such pure material can simply be bundled with metal of the same type and grade for resale directly to customers. For other materials, a variety of processing activities must be undertaken to create a finished product. If scrap arrives unsorted, then various production techniques must be employed to sort the metals into different types and grades. Further, certain types of scrap may be sheared or shredded into smaller pieces for ease of melting in downstream processes.

25. My understanding, based on discussions with other industry participants, is that to be profitable in the purchase of scrap metal, it is imperative to have an established and reliable network for the supply of scrap metal. I understand that it takes several years to establish such a network.

26. Geographic markets for the purchase of scrap metal appear to be local or regional depending upon the type of unprocessed scrap. Market contacts have confirmed that transportation costs result in more localized markets.

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PUBLIC (c) Sale of Scrap Metal 27. As indicated above, scrap metal that is purchased and then processed yields both ferrous and non-ferrous metals. These metals are separated and sold to different end users. For example, while ferrous metals are primarily sold to foundries to produce steel, non-ferrous metals are sold to a variety of end-users depending upon the type of metal.

28. As non-ferrous metals are generally lighter and of higher value than ferrous metals, transporting non-ferrous metals long distances is common as transportation costs are only a small percentage of total costs. Based on the investigation to date, including information from industry participants, the concerns regarding the Proposed Transaction relate to ferrous metals and not non-ferrous metals.

29. There are five main types of ferrous scrap metal. Each grade is differentiated by its potential yield and the amount of contaminant (i.e., inappropriate material) contained within the scrap metal. Prices for each type are generally set as a discount to "busheling," which is the highest-valued form of scrap metal.

a. Busheling (from industrial accounts - high quality); b. Plate & Structural (from demolition, including train tracks); c. Shred (processed by a shredder - often cars and "white goods" e.g., fridges); d. Heavy melt #1 (other types of ferrous scrap); e. Heavy melt #2 (other types, lower quality). 30. Customers of scrap metal processors generally purchase the processed scrap metal as an input into industrial production processes (such as steel manufacturing and foundry production). Due to the particular parameters of some customers' production processes, they have only a limited ability to substitute between types and grades of scrap metal. I understand from research and market contacts that there are a relatively small number of purchasers of processed ferrous scrap in Eastern Canada, the majority of them being foundries.

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PUBLIC 31. To be an effective competitor, a processor of scrap metal must have the equipment necessary to sort high-value scrap metal from low-value scrap metal and to process the scrap into the form required by a customer. In this regard, a number of customers noted that to fill their scrap metal needs, the processing firm must have a shredder.

32. A shredder is a piece of equipment that shreds and separates metal into ferrous and non-ferrous scrap. For example car bodies are fed into the shredder to produce saleable scrap commodities.

33. The shredder is a major piece of capital equipment and could cost twenty-five million dollars or more.

34. Shredded scrap (or "frag") represents a large share of total demand for ferrous processed scrap. Many major customers have a preference for shredded scrap metal because it has an acceptable level of contaminants and because it is easier to handle and ship.

35. There are currently eight (8) operating shredders in Eastern Canada. However, three of these shredders are owned by ArcelorMittal and used exclusively for their own processing operations. As such, the processed scrap metal from ArcelorMittal's shredders is not available for sale to third party customers.

36. Therefore, following the merger, AIM would control four of the five remammg shredders, or approximately [CONFIDENTIAL]% of the untied shredding capacity in Eastern Canada. The sole remaining competitor would be Les Industries Associees de l' Acier Ltee, located in Ste Catherine, Quebec, and would represent approximately [CONFIDENTIAL]% of the shredding capacity in Eastern Canada.

37. SNF owns the newest and most efficient shredder in Eastern Canada. This shredder is located at its Montreal (Laval) facility, and it has a capacity of approximately [CONFIDENTIAL] tons per year (approximately [CONFIDENTIAL]% of the total untied shredding capacity). SNF also owns an older shredder at its Quebec City (St-Augustin) facility with a capacity of [CONFIDENTIAL] tons, and owns a third, currently inoperative shredder at its Laval facility with a capacity of [CONFIDENTIAL] tons.

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PUBLIC 38. AIM owns two shredders with a capacity of [CONFIDENTIAL] tonnes per year each. One is located at its Montreal facility and the other one is located at its Quebec City facility.

39. While some of the processed ferrous metal, especially from the Quebec region, is sold overseas, there are virtually no imports of processed ferrous metals into Eastern Canada. As such, purchasers of processed scrap metals in Eastern Canada do not consider suppliers from outside ofthis region to be viable alternatives.

40. A number of industry participants have advised me that it is not profitable to purchase ferrous scrap from Southern Ontario and the Northeastern United States due to transportation costs. Industry participants are concerned that the Proposed Transaction will give the Parties the ability to exercise market power by raising prices and disrupting supply.

(d) Merged Entity 41. AIM and SNF are by far the largest competitors in both the purchase of scrap metal and supply of processed scrap metal in Eastern Canada.

42. In respect of the purchase of scrap metal, the merged entity would be, along with ArcelorMittal, one of the largest buyers of unprocessed scrap from peddlers, car wrecking companies, demolition companies, industrial accounts and also from small and medium scrap recycling companies.

43. As indicated above, it is imperative to have an established and reliable network for the supply of scrap metal in order to be competitively viable in this industry. It takes several years to establish such a reliable network.

44. On the basis of the Inquiry to date, I believe that the proposed transaction may result in a substantial lessening or prevention of competition in respect of the purchase of scrap metal in regions in Eastern Canada.

45. In respect of the supply of processed scrap metal, the merged entity will control four out of the five available shredders in Eastern Canada. In terms of sales of ferrous scrap the merged entity will be, by far, the largest vendor of ferrous scrap metal in Eastern Canada, representing

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PUBLIC between [CONFIDENTIAL]% to [CONFIDENTIAL]% of total supply depending on how such shares are calculated.

46. The information obtained to date gives rise to significant concerns under the Act, with respect to the purchase of scrap metal and the sale of ferrous scrap metal on the basis of, among other things, the parties' high market shares, significant barriers to entry (including existing excess capacity and the capital costs required for entry, some of which are sunk costs), and little effective remaining competition from domestic or foreign' sources (at least partly owing to high transportation costs). The parties' market shares are high with respect to some types of ferrous scrap metal, and with respect to sales of shredded scrap metal, there is only one other competitor in Eastern Canada, whose sales and capacity are significantly smaller than that of either of the parties.

E. Inquiry Not Complete 47. The Bureau began contacting industry partIcIpants with respect to this matter on December 20, 2007, the day that complete customer contact information was provided by the Parties. Since that time, I and other members of my team at the Bureau have made numerous market contacts, but still have a limited ,amount of documentation.

48. While the Bureau has previously dealt with matters involving the scrap metal industry, the majority of contacts are dated (from the late 1990s), and such investigations have either not produced much documentation or have not dealt with the Eastern Canada in any depth.

49. The Bureau did not receive a large amount of information from the Parties' Filings. Of the two filings, only 58 documents were attached in total. Further, from these 58 attached documents, 48 were financial statements of the Parties. Subsequent to the receipt of the Filings, the Bureau has received two submissions from counsel for AIM totalling 58 pages.

50. During its inquiry into the Proposed Transaction, the Bureau has made numerous market contacts with customers, competitors, suppliers and government agencies. In addition, the Bureau has received some documentation from industry participants. Although significant useful information has been gathered from market contacts, the Bureau requires more data and documentation to assist its staff in the review and analysis of the Proposed Transaction.

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PUBLIC 51. Between the date that the Parties filed their Filings (December 18, 2007) and the day that the Bureau staff met with counsel for AIM and representatives of AIM (January 22, 2008), Bureau staff also performed research and gathered information from public sources in order to obtain a better understanding of this industry. Bureau staff were required to attempt to perform their investigation over the December holiday period, and the staff faced difficulties owing to the unavailability of a number of market contacts during this period.

52. On January 23, 2008, to address the informational shortcoming discussed above, the Commissioner sent a voluntary, information request to the Parties. This request sought information regarding the Parties' operations, and included a request for data that is necessary for Bureau's analysis. As of the date of this affidavit, the Parties had yet to comply with this request.

53. The Commissioner's inquiry in respect of the Proposed Transaction is not complete and additional time is required to complete the analysis of the Proposed Transaction. Specifically, the Bureau has not yet reached a conclusion on the precise boundaries of the relevant product and geographic markets, and requires additional data to do so. Among other things, although it seems likely that the various grades of ferrous metal are not within the same relevant product market, this issue has not been finally determined. The Bureau has also not yet conclusively determined whether or to what extent competitors in Eastern Ontario may affect competition in Eastern Canada. For example, while most of the Ontario metal recycling industry is in Southwestern Ontario, there is at least one firm with facilities in Ottawa.

54. In my opi,nion, at least an additional 30 days will be required to complete the inquiry. F. Tribunal's Ability to Remedy Would be Impaired 55. Given the nature of the scrap metal operations at issue and the concerns raised to date, I believe that if a substantial lessening or prevention of competition were established, the likely remedies to be issued by the Tribunal would be the following:

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PUBLIC (c) order certain assets to be divested to permit entry by a new competitor in Eastern Canada.

56. In the case of (b) and (c) above, [CONFIDENTIAL] would impair the ability of the Tribunal to effectively remedy the substantial lessening or prevention of competition.

57. Obtaining a shredder is a significant barrier to entry in this market. Besides the cost of purchasing a shredder, environmental and other permits would need to be obtained to operate a shredder.