Anticipated acquisition by Chemring Group plc of Comet GmbH

Affected market: Marine pyrotechnics

No. ME/1897/05

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 and rationale, jurisdiction, assessment and decision.

The OFT's decision on reference under section 33(1) given on 13 October 2005. Full text of decision published 20 October 2005.

Please note that square brackets indicate information excised, or exact figures replaced by a range, at the parties' request.

PARTIES

Chemring Group plc (Chemring) is a UK company listed on the London Stock Exchange. It operates in three principal sectors: countermeasures, military pyrotechnics and marine safety. Chemring's wholly-owned subsidiary McMurdo Ltd (McMurdo) manufactures a number of leading brands in the marine electronics and safety products sector, such as Pains Wessex, ICS NAVTEX and McMurdo.

Comet GmbH (Comet) is currently owned by Diehl Group, a German corporation. It is active in the supply of marine pyrotechnics, life saving appliances and military products. Comet's UK turnover in 2004 was £84,000.

TRANSACTION AND RATIONALE

Chemring has agreed to acquire the entire issued share capital of Comet from Diehl for a consideration of £6.7 million. The transaction does not involve the acquisition of any UK assets.

Chemring submitted that the Comet business is currently not very profitable. It considers that combining its production facilities with Comet's will save costs by eliminating duplicated operational overheads and using Comet's lower cost facilities in Germany. It also submitted that its main interest in the acquisition is related to Comet's military products division.

JURISDICTION

As a result of this transaction Chemring and Comet will cease to be distinct. The parties overlap in the supply of marine pyrotechnics and the share of supply test in section 23 of the Enterprise Act 2002 is met since the combined share of supply to the UK market is [60-70 per cent]. The Office of Fair Trading therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

ASSESSMENT

The parties overlap in the manufacture and supply of military and marine pyrotechnic products. The merger does not raise any concerns in the military sector, where there will remain a number of competitors in the UK and worldwide able to supply the products in question. In addition, Comet does not appear to be a significant constraint on Chemring when it comes to UK customers, and there were no customer concerns.

In the marine sector, Chemring will have a UK share of supply of [60-70 per cent] ([0-10 per cent] increment) following the transaction. We consider below whether Comet's small UK share of supply understates the competitive constraint it is able to exert on its UK competitors in view of its competitive position in the EEA, as well as of its reputation for offering a full range of quality products. The OFT was not able to identify potential entrants to the UK market based elsewhere in Europe offering a full range of products of the same quality / reputation as Comet's. Furthermore, barriers to entry in this sector seem to be high in view of the need to set up a distribution network and to establish the reputation of a product as being of good quality.

Nevertheless, there are a number of factors that lead the OFT to believe that the merger will not have a significant adverse impact on competition in the UK. First, Comet has been active in the UK market since 1980 and has only achieved a [0-10 per cent] share of supply; there is no evidence that it would grow in the UK market in the near future and Chemring denies that Comet had any plans to target the UK market. Second, Comet has only one customer in the UK and therefore it currently faces high barriers to expansion as it would have to establish a distribution network if it were to attempt to gain a broader customer base and so market share. In sum, there is no evidence that Comet has been or would become an effective competitive constraint to the other UK players and therefore the merger does not significantly change the competitive situation of the UK market for marine pyrotechnics.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

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