Completed acquisition by CAIK Holding AF 13.06.2000 A/S (now Icopal Holding A/S) of Icopal A/S

No. 00136/C

Report under section 125(4) of the Fair Trading Act 1973 of the Director General's advice, given on 13 November 2000, to the Secretary of State for Trade and Industry under section 76 of the Act

Jurisdiction

The merger satisfies the assets test of the FTA. It also satisfies the share of supply test in respect of the supply of traditional and high performance bituminous flat roof coverings, pitched roof underlinings, and high performance damp proof courses. The European Commission has confirmed that the ECMR does not apply.

The parties

CAIK Holding AF 13.06.2000 A/S (CAIK) is a Danish joint venture company, one of whose shareholders is IKO (Sales) Ltd (IKO). IKO owns, through a subsidiary, Ruberoid plc (Ruberoid) and, through Ruberoid, Briggs Roofing & Cladding Ltd, a roofing contractor. Icopal A/S (Icopal) is also a Danish company, which indirectly owns Callenders Ltd and Vulcanite Ltd - both of which, together with Ruberoid, are active in the UK markets for roofing and other building materials (see Note 1) . CAIK completed the acquisition of Icopal on 28 July 2000. Following the acquisition, CAIK was renamed Icopal Holding A/S.

Assessment

Relevant markets

The parties overlap in the manufacture and supply of bituminous flat roof coverings, pitched roof underlinings, and high performance DPCs.

Bituminous flat roof coverings can be subdivided into traditional BUR felts and high performance felts. I consider traditional BUR felts to be a distinct product market, which can be distinguished from high performance felts and other flat roof materials such as metal by virtue of both demand and supply side characteristics. Traditional felts are predominantly used in the refurbishment and home extension market, while high performance felts and other materials are largely used in industrial and commercial applications where higher quality and durability are required. It appears that significant increases in the price of traditional felts would be needed before substantial switching would occur. On the supply side, while UK manufacturers of bituminous products produce both traditional and high performance felts, it appears that the manufacturing processes differ (see Note 2) and there are substantial differences in manufacturing costs. The manufacturing processes for other flat roof materials are even more disparate and these are unlikely to be supply-side substitutes.

The geographic market for traditional BUR felts is national. Imports are insignificant due to the low ratio of value to transport costs for the product and the fact that it is not widely used or manufactured elsewhere in Europe; imports do not appear to act as a constraint on prices in the UK. By contrast, the market for high performance felts is likely to be European. They are widely produced in continental Europe and used almost exclusively in domestic buildings there. They are of higher value than traditional felts, thus making importing more viable; imports account for between 29% and 39% of the UK market, and are, therefore, likely to constrain UK prices.

Available estimates of the size of the UK market for bituminous flat roof coverings vary between [over £75 million] and [over £85 million] (see Note 3), of which approximately one-third by value (although over half by volume) is accounted for by traditional BUR felts.

Pitched roof underlinings may be manufactured from bitumen or plastic. While bituminous underlinings predominate in the UK, plastic underlinings are widely produced and used in continental Europe and imports account for a considerable and increasing proportion of UK consumption. The two materials appear to be demand-side substitutes and it seems likely, therefore, that the overall market is European and that imports constrain UK prices. The total UK market for pitched roof underlinings is estimated at [around £25 million, approximately three-quarters of which is accounted for by bituminous underlinings] (see Note 3).

The market for high performance DPCs is likely to be a national one, because they are specific to the UK market and UK cavity wall construction methods. The size of the UK market is estimated at [between £10 million and £15 million] (see Note 3).

Horizontal issues

It has not been possible to obtain definitive information on market shares. While the parties have estimated that their combined share of the market for traditional BUR felts is in the range 45-50%, some third parties consulted by the Office have suggested a much higher figure. It is, however, not in dispute that their combined market share is substantially larger than that of their next largest competitor. Moreover, the merger involves a substantial increment of market share.

While the direct costs of entry do not seem high, the market for bitumen-based products is declining, and there appears to have been no market entry in the last five years. Furthermore, it seems likely that there is significant excess capacity in the UK.

The products are sold to a range of customer types (roofing distributors, retailers including large chains, builders' merchants and roofing contractors), and evidence on buyer power is correspondingly mixed. It is likely, however, that a substantial proportion of customers, notably small ones who are major purchasers of traditional rather than high performance felts, do not enjoy significant buyer power.

Taking into account the evidence on barriers to entry and buyer power, the parties' combined share of the market for traditional BUR felts is sufficiently large to lead to concern about the market power that the merged entity would hold, and the potential for anti-competitive conduct, increased prices and a reduction in choice.

In each of the other areas of overlap between the parties - high performance felts, pitched roof underlinings, and high performance DPCs - the existence of competition from imports or (in the case of DPCs) other significant UK suppliers may reduce the grounds for concern about the consequences of the merger. Nevertheless, in all these areas the combined UK market shares are in excess of 40%.

Vertical issues

No significant vertical issues appear to arise from the merger. While one of the parties owns a roofing contractor, its share of the UK market is small and I do not think it likely that the merger would raise issues of market foreclosure at this level.

Other issues

Unlike the other three shareholders, IKO is represented on the board of CAIK not by a representative director but by a 'nominee', thus limiting its influence over the affairs of CAIK and its subsidiaries, including those involved in the UK markets affected by the merger. The nominee is described by the parties as an independent lawyer, who has signed a confidentiality agreement. He is entitled to all the rights of a full director in only limited circumstances, essentially where important decisions affecting IKO's investments are to be taken. The parties contend that this 'Chinese wall' will ensure that competition between Ruberoid and Icopal's UK subsidiaries will remain effective following the merger. I take the view, however, that the efficacy of Chinese walls as a means of maintaining competition cannot be taken for granted. Furthermore, formal undertakings in lieu of reference and rigorous monitoring would be necessary to ensure that such arrangements were effective.

I recognise, also, that IKO has only a 25% shareholding in CAIK. In my view, however, this is sufficient to influence CAIK and, hence, to have a potential adverse effect on competition between Ruberoid and Icopal's UK subsidiaries.

Undertakings in lieu

The parties have not offered any structural remedy, and divestment might in any case be difficult to achieve as the declining nature of the market makes entry or expansion by potential purchasers unattractive. It would, in my view, be difficult to devise behavioural remedies - for example, reinforcement of the 'Chinese wall' - which would both adequately address the competition concerns which I have identified and be practicable to monitor.

Third party views

I have received a number of representations from competitors and customers, which to a large extent reinforce the concerns I have set out above.

Conclusion

In the light of the above assessment, I conclude that there are substantial grounds for concern that the merger may be detrimental to competition, particularly in the market for traditional BUR felts, and that it may therefore lead to higher prices and a reduction in choice. I also believe that it would not be prudent, at least not without further investigation, to rely on the 'Chinese wall' between IKO and the other shareholders in the CAIK joint venture, or on the limited shareholding of IKO in CAIK (either individually or in combination), to ensure that effective competition in the UK market is maintained.

As discussed above, I do not believe that this case lends itself to undertakings in lieu of reference.

I therefore conclude and recommend that you should refer this merger to the Competition Commission.

Notes

1. The parties have pointed out that a third Icopal subsidiary, D Anderson & Son Ltd (which acquired Callenders and Vulcanite in 1999) is also active in this market.
2. The parties disagree with this statement, pointing out that the same production facilities are used for the manufacture of both products.
3. More detailed estimates have been omitted at the request of the parties.

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