Completed acquisition by Balfour Beatty plc of Edgar Allen Limited

Affected market: Rail turnouts and their components

No. ME/2366/06

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, third party comments, assessment and decision.

The OFT's decision on reference under section 22(1) given on 6 July 2006. Full text of decision published 27 July 2006.

Please note that the square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties or a third party for reasons of commercial confidentiality.

PARTIES

Balfour Beatty Plc (Balfour Beatty) is an international engineering, construction and services group. It is a specialist in the design, manufacture and supply of track products through its subsidiary, Balfour Beatty Rail Track Systems. In particular, Balfour Beatty supplies turnouts and certain individual components of a turnout to customers in the UK and abroad.

Edgar Allen Limited (Edgar Allen) was originally part of the Mowlem Group, which was recently acquired by Carillion plc (see note 1).  Edgar Allen supplies turnouts and certain individual components of a turnout to customers in the UK and abroad. In particular, it manufactures cast manganese crossings (CMX) which are used in turnouts on high speed, heavily trafficked rail networks. Edgar Allen's UK turnover was £[ ] million in the 2005 calendar year.

TRANSACTION

Balfour Beatty (via its subsidiary Balfour Beatty Group Limited) acquired the entire issued share capital of Edgar Allen on 30 March 2006. The total net cash consideration for the deal was £9.5 million. The statutory deadline is 28 July 2006.

JURISDICTION

As a result of this transaction Balfour Beatty and Edgar Allen have ceased to be distinct. The parties overlap in the supply of turnouts as well as the supply of certain individual components which form part of a turnout. In relation to the supply of turnouts in the UK, the parties estimate that this market is worth approximately £39 million. On this basis the parties have a combined share of supply of approximately [65 per cent to 75 per cent] (with an increment of [30 per cent to 35 per cent]). Therefore the share of supply test in section 23(2) of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

Customers, including Network Rail, were generally unconcerned about this transaction. One major competitor as well as some smaller competitors raised general concerns about the unilateral effects of this merger. These concerns have been addressed above.

ASSESSMENT

The parties overlap in the manufacture and supply of complete turnouts and rail fabricated components and in the supply of CMX. Post-merger the parties are the biggest single supplier of each of these products in the UK. The parties' combined share of supply is approximately [65 per cent to 75 per cent] for complete turnouts, [45 per cent to 55 per cent] for rail fabricated components and [90 per cent to 100 per cent] for CMX. However, the evidence before the OFT indicates that shares of supply in this industry can change significantly year on year.

In addition, the OFT has considered a number of possible constraints on the parties' behaviour post-merger, including the ability of customers to switch to alternative sources of supply. The evidence before the OFT indicates that customers could switch to alternative suppliers for at least a significant proportion of their requirements for each of the product overlaps. This ability of customers to switch to alternative suppliers is expected to operate as a competitive constraint on the parties' post-merger behaviour.

The OFT also considered barriers to entry and expansion in relation to each product overlap. The evidence before the OFT indicates that barriers to de novo entry in relation to the manufacture and supply of turnouts are high.  However, the evidence before the OFT indicates that the possibility of further expansion by existing UK competitors is sufficient in terms of likelihood, scope and timeliness to act as a competitive constraint on the parties' post-merger behaviour. The evidence before the OFT also indicated that entry by European based suppliers in relation to rail fabricated components is feasible, although one third party submitted that customers would be more likely to switch to other UK competitors with excess capacity than to source from European suppliers. Finally, in relation to the supply of CMX, third party comments suggest that barriers to de novo entry are high. However, the evidence before the OFT indicates that if the merging parties were to increase the price of CMX, it is expected that an existing CMX foundry would work in collaboration with a UK turnout supplier to start supplying UK customers. Therefore the scope for further entry or expansion as outlined above is also expected to operate as a constraint on the parties' post-merger behaviour.

In addition to the factors discussed above, the evidence obtained by the OFT suggested that Network Rail possesses a considerable amount of countervailing buyer power which is further expected to constrain the parties' post-merger behaviour. This arises as a result of: (i) its ability to switch a considerable amount of its business to competitors; (ii) its ability to take its requirements in-house (although this is not expected to occur in the case of CMX); (iii) its ability to retaliate in other markets where Balfour Beatty is a supplier to Network Rail; and (iv) its ability to encourage entry and expansion. A further indication of Network Rail's ability to exercise countervailing buyer power is the existence of its framework contracts (where list prices are bid infrequently and the value of the contract is very large) (see note 2) which gives Network Rail control over the price setting process over a prolonged period.

Overall, despite the high shares of supply for the parties post-merger in each of the products for which they overlap, the OFT has therefore found that no horizontal concerns arise from this merger in light of the factors discussed above.

The OFT also considered a number of vertical issues. In particular, the OFT considered whether the combined entity would be able to foreclose companies that supply complete turnouts by virtue of its increased share of supply of components. The evidence before the OFT indicated that the parties' ability and incentive to foreclose such supplies has not changed as a result of the merger. In addition, the OFT considered whether the merger would result in the foreclosure of suppliers of individual components but received no evidence to suggest this was the case. Consequently the OFT does not consider that this merger raises any vertical concerns.

As regards third party views, customers including Network Rail were generally unconcerned about this transaction. A small number of competitors raised general concerns about the unilateral effects of the merger which have been addressed in the OFT's assessment of potential horizontal concerns.

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

DECISION

This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.

NOTES

1. This transaction was cleared by the OFT on 24/1/06.
2. Network Rail notes that its framework contracts are not binding on its suppliers.

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