At the request of the Secretary of State for Trade and Industry a report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 21 June 2000, to the Secretary of State for Trade and Industry under Section 76 of the Act
I have established that this transaction qualifies for investigation by satisfying the share of supply test in s.64 (1)(a) and (2) of the Fair Trading Act 1973 with regard to the manufacture and supply of ductile iron piping in the UK.
Stanton plc ('Stanton') is owned by Saint-Gobain UK Limited. It manufactures ductile iron pipes and fittings. Saint-Gobain UK Limited is a worldwide manufacturer and distributor of engineering materials and distributes pipeline products through its subsidiary, Oliver Ashworth. Stanton's ultimate parent is Compagnie de Saint-Gobain SA.
Biwater Industries (Coney Green) Limited is the holding company of Biwater Industries (Clay Cross) Limited ('Clay Cross'). Biwater plc ('Biwater') wholly owns both companies. Biwater provides engineering consultancy services to water utilities worldwide and operates water supply businesses in several countries. Clay Cross manufactures ductile iron pipes and accessories.
The parties overlap in the manufacture and supply of ductile (ie flexible or malleable) iron pipes and fittings.
Only [detail omitted] (by volume) of Stanton's sales and [detail omitted] of Biwater's sales of pipeline products are of fittings. We have been unable to establish precise market shares in fittings, However, there are a number of other UK and non-UK manufacturers who produce fittings compatible with the parties' pipes, as well as a number of UK suppliers of imported fittings. In general, pipes and fittings in one material are compatible with other manufacturers' products, whether of the same or of a different material. Accordingly, the merger does not appear to give rise to significant competition concerns in this area and this market is not considered further.
Ductile iron pipes are used to convey either sewage or water. Alternative materials can also be used to manufacture pipes for both these applications - specifically: steel; polyethylene (PE); PVC; glass reinforced plastic (GRP); concrete and clay. Sewer and water pipes can be considered to be in separate markets from a demand side perspective since the use of the pipes, the applicable regulations, customers and routes to market are distinct. Evidence of supply side substitutability between the two types of pipes is mixed, but in Weinerberger/DSCB/Steinzeug (Case No. IV/M.1644) the European Commission concluded that the markets were separate.
Sewer pipes may be made from ductile iron ([detail omitted] of the total UK sewer pipe market). However, the majority are made from concrete ([detail omitted]), while steel ([detail omitted]), PVC ([detail omitted]), GRP ([detail omitted]), PE ([detail omitted]), and clay ([detail omitted]) are also used. Third parties confirmed that these materials were demand side substitutes.
Some [detail omitted] of the total UK water pipe market is made up of ductile iron pipes. The majority of the market is made from PE ([detail omitted]), with steel ([detail omitted]), PVC ([detail omitted]) and GRP ([detail omitted]) also used. The parties argued that all these materials compete in one market and are in a chain of substitution depending on a combination of cost, strength, ease of installation and longevity. Officials considered three specific applications where ductile iron pipes were generally used due to their innate strength - clean water pressure pipes above 16 bar (ie barometric pressure) in diameters 400mm to 700mm, pipe bridges and pipes used in contaminated land. While ductile iron pipes are often used for these applications, most third parties stated that pipes manufactured from different materials were substitutable economically and technically.
The relevant product markets are, therefore, considered to be water pipes and sewage pipes manufactured from all materials.
Imports account for a small proportion of the water and sewer pipes sold in the UK and transport costs appear to be high. Accordingly, the geographical market appears to be national in scope.
The parties are the only manufacturers of ductile iron pipes in the UK. However, there are a number of suppliers of pipes of other materials for the water and sewer pipes markets. Following the merger, the parties will have a combined share of [detail omitted] (increment [detail omitted]) of the water pipes market and [detail omitted] (increment [detail omitted]) of the sewer pipe market.
There has been no entry to the ductile iron pipe market over the last five years, and over the last ten years these pipes have lost significant market share to the alternative materials, despite their real price falling by [detail omitted] in this period. The parties estimate that there is some [detail omitted] over-capacity in ductile iron pipes. It is likely that the lack of entry can be attributed to this declining market.
Pipes are bought via tenders and the parties' customers are generally large and sophisticated buyers, who appear able to exert a degree of buyer power. For example, the water companies control the specification and purchase of over 80% of water pipes in their respective geographic areas, while the main purchasers of sewer pipes (85% by volume) are merchants, who hold stock to sell on to contractors.
The parent company of Stanton plc (Saint-Gobain UK Limited) owns a merchant distributor of pipeline products in the UK, Oliver Ashworth Group (OAG). OAG is a distributor of Biwater's Clay Cross products in the UK. Neither Biwater nor its subsidiaries Coney Green and Clay Cross operate pipe distribution businesses. The proposed merger does not give rise to vertical concerns.
No unsolicited representations were received. However officials consulted both customers and competitors. Third parties had few concerns about the ductile iron sewer pipes market - concrete pipes are used more commonly and their price effectively constrains the price of ductile iron pipes. With respect to water pipes, in the three applications where ductile iron pipes were more commonly used, most third parties stated that PE and GRP could be and is used as a cost-effective alternative to ductile iron. No other issues were raised by third parties.
In the light of the preceding assessment I consider that the merger is unlikely to raise significant competition concerns.
I therefore conclude and recommend that you should not refer the proposed transaction to the Competition Commission for investigation.