Anticipated acquisition by Drager Medical AG & CO. KGAA of the Air-Shields' infant warming therapy care business from Hillenbrand Industries Inc

Affected market: Incubators

No. ME/1441/03

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, assessment, undertakings in lieu of reference and decision.

The OFT’s decision on reference under section 33 given on 18 December 2003

PARTIES

Drager Medical AG (Drager) develops, manufactures and sells products, services and integrated solutions for acute patient care, including neo-natal warming therapy products and home care throughout the world.  Drager's manufacturing plants are located in Germany, the Netherlands, USA and China.  In 2002, Drager's UK turnover for neo-natal warming therapy products, which are those relevant to this merger, was approx [ ] (see note 1).  Drager became a joint venture between Dragerwerk AG (65 per cent) and Siemens (35 per cent) in July 2003: the European Commission having cleared this transaction in April 2003.

Air-Shields is a business within Hill-Rom Inc, which is a wholly owned subsidiary of Hillenbrand Industries Inc.  Air-Shields' main business comprises the manufacturing of warming therapy devices for infant care.  Air-Shields' manufacturing plant is located in the US (Hatboro, Pennsylvania).  In 2002, Air-Shields' worldwide turnover was [ ] (see note 1), of which approx. [ ] (see note 1) was attributed to the UK.

TRANSACTION

Drager proposes to acquire certain assets of the Air-Shields business of Hillenbrand's subsidiary, Hill-Rom Inc, relating to the manufacture (in the USA) and worldwide supply of neo-natal warming therapy products.  Drager explained that the rationale for the merger was to increase its presence in the important US market, where Air-Shields makes over 50 per cent of its sales. There are a number of restrictions to the purchase agreement which may or may not be ancillary to the merger.

The transaction was notified by Drager on 22 October 2003.  The administrative deadline expires on 24 December.  The transaction has been notified or details submitted voluntarily in a number of other European countries.

JURISDICTION

As a result of this transaction Drager and Air-Shields will cease to be distinct.  The parties overlap in the supply of neo-natal warming therapy products and the share of supply test in section 23 of the Enterprise Act 2002 ('the Act') is met.  A relevant merger situation is likely to be created.

ASSESSMENT

The parties are the two major suppliers of neo-natal warming therapy products to hospitals in the UK.  The merged entity would have shares of supply that range from [55-65] per cent  (see note 2) in closed care incubators to [in excess of 90] per cent (see note 2) in transport incubators.  For all neo-natal warming therapy products its share would be [75-85] per cent (see note 2).  The HHI figures and increments are also very high. In short the market is already highly concentrated and would become more so.

The merger would reduce the number of major suppliers of closed care incubators in the UK from four to three and the number of major suppliers of other types of neo-natal warming therapy product from three to two.  This limits the choice that customers would have when putting an order out to tender.  Although customers may still possess some buyer power in negotiating discounts, this is likely to be weakened by the loss of a strong competitor and alternative supplier.  The parties say that Datex-Ohmeda, now part of GE Medical Systems, can be expected to become a much more effective competitor in the UK.  Be that as it may, the merger appears likely to lead to a reduction from three to two in the number of major players providing the full range of neo-natal warming therapy products to the UK.

Although technical barriers to entry may be low, the experience of other potential competitors trying to enter the UK market for neo-natal warming therapy products suggests that barriers to effective distribution do exist.  Customer comments have also implied that branding and reputation are vitally important to them and that this could impede potential entry.  With regard to barriers to expansion, smaller competitors currently active in the supply of types of neo-natal warming therapy product indicated that the cost of expansion was too high to be profitable for them, partly because of the cost involved in providing aftercare services.

In sum, the merger would substantially increase concentration and reduce customer choice in a market that is already highly concentrated.  Buyer power and potential entry cannot confidently be relied upon to avert a lessening of competition.  The OFT therefore believes that there is a significant prospect that the merger would substantially lessen competition.  That is a sufficient condition for the OFT to refer the merger to the Competition Commission.  To reach a reference decision in this case, therefore, it has not been necessary to assess the merger further in relation to the interpretation of the test for reference given in the recent judgment of the Competition Appeal Tribunal (CAT) in IBA Health v OFT [2003] CAT 27.

UNDERTAKINGS IN LIEU OF REFERENCE

Where the duty to make a reference under section 33(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept undertakings for the purposes of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which may be expected to result from it.  Having reached a reference conclusion, the OFT has considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above.  The OFT's guidelines on undertakings in lieu of reference state that, 'undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut' (see note 3).  The OFT has also considered the recent judgment of the CAT in IBA Health Ltd v OFT.

In this case there does not appear to be a clear cut remedy to the competition concerns that the OFT would be capable of implementing readily. (see note 4) [ ].  Given that the concerns arise from a significant change in the structure of the UK market, the OFT does not believe that the (see note 4) [ ] undertakings offered by Drager  (see note 4) [ ] would adequately remedy the competition concerns arising from the merger. (see note 4) [ ].

Accordingly, the OFT has decided not to exercise its discretion to seek undertakings in lieu of reference. 

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. Details excised at the request of the parties for reason of commercial confidentiality.

2. Actual figures replaced by a range at the parties' request for reasons of commercial confidentiality.

3. Mergers, 'Substantive assessment guidance' May 2003.

4. Details excised at the request of the parties for reasons of commercial confidentiality.

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