The proposed acquisition by H+H Celcon Ltd of Marley Building Materials Ltd

No. ME/1679/01

A report under section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 9 October 2002, to the Secretary of State for Trade and Industry under section 88(3)(a) of the Act.

In this submission I report under section 88(3)(a) of the Fair Trading Act 1973 (the Act) on the progress of negotiations with H+H Celcon on the undertakings that you requested the OFT to seek following publication of the above report on 26 June 2002.

The OFT is satisfied that H+H Celcon is unlikely to give full prohibition undertakings in the form sought within a reasonable time. H+H Celcon has, however, indicated its willingness to give partial prohibition undertakings, which would not prevent it from seeking to acquire one Marley Building Materials (Marley) production plant, but would prevent any such acquisition being completed without review of the merger by the OFT, and possibly the CC.

I recommend that you now request the OFT, under section 88(1) of the Act, to obtain undertakings from H+H Celcon prohibiting it from acquiring the entire Marley business, while not precluding the acquisition of part of that business, namely one unspecified production plant. Any such acquisition would, as noted, be subject to assessment by the OFT, and the CC if required.

BACKGROUND

On 13 February, in accordance with my recommendation of 4 February, you referred the proposed acquisition by H+H Celcon of Marley to the CC for investigation. On 26 June, you announced your acceptance of the CC's conclusions, supported by my advice dated 17 June, that the proposed acquisition should be prohibited, and you requested the OFT to seek undertakings from H+H Celcon to give effect to your decision.

On 10 July, H+H Celcon outlined to the OFT certain concerns it had about the prohibition undertakings. It indicated, however, that it would be prepared to sign the undertakings if they were amended to allow the potential acquisition of one of the three Marley plants, which are located at Newbury, Purfleet and Sutton Coldfield. It also indicated that it would be willing to undertake not to acquire more than a single plant, and that, as any such acquisition would (subject to the application of the European Commission Merger Regulation) be assessed as a fresh merger situation under the Act, it would not complete such an acquisition in advance of a clearance.

In the light of H+H Celcon's representations, we are satisfied that the original undertakings sought are unlikely to be given within a reasonable time. For the reasons set out in the following sections, however, I recommend the acceptance of revised undertakings in the form outlined above if they are offered by H+H Celcon.

REMEDY OF THE ADVERSE EFFECTS IDENTIFIED BY THE CC

In its report, the CC rejected a remedy broadly similar to that now proposed by H+H Celcon, as it was doubtful whether this would address the concerns it identified. However, the CC concluded that, 'Given the time available, we have not been able fully to assess this, and we cannot therefore discount the option completely.'

My advice of 17 June offered some reasons in support of the CC's doubts that partial divestment would eliminate fully the adverse effects of the proposed merger. First, any significant increase in concentration arising from the merger would represent a cause for concern. Also, an effective competitor would be replaced with a company of unknown pedigree; and a partial acquisition could lead to the acquirer gaining full information about other parts of the firm not acquired.

The OFT has considered whether these concerns apply equally to the undertakings now proposed by H+H Celcon. Such undertakings would mean that any future acquisition would give rise to a lesser increase in concentration than the acquisition considered by the CC. In the light of the arguments put to the OFT by H+H Celcon, on which the CC was not able to conclude definitively, and which the OFT has not had the benefit of testing publicly, it would be reasonable to assess whether competition concerns would arise at the time of any such partial acquisition. This approach would also secure, within a reasonable time, undertakings which would for the time being retain the status quo, without prejudice to OFT (or CC) decisions on related merger situations that may arise in the future.

CONCLUSION AND RECOMMENDATION

While the OFT retains reservations about partial prohibitions, the proposed remedy would address the CC's concerns by preserving the status quo for the time being. Also, H+H Celcon put arguments to the OFT on issues on which the CC was not able to conclude definitively, and which we have not had the benefit of testing publicly. In these circumstances, there is a sound argument for accepting H+H Celcon's offer to give undertakings, which, while less restrictive than those originally sought, could be secured within a reasonable time, and which would achieve the same practical objective.

If H+H Celcon decides in the future to propose an acquisition of one Marley plant, the OFT will consider the resulting merger in the normal way.

I therefore recommend that you now request the OFT, under section 88(1) of the Act, to obtain undertakings from H+H Celcon prohibiting it from acquiring the entire Marley business, while not precluding the acquisition of a single production plant.

See previous OFT advice on this case:
17 June 2002
5 February 2002

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