Proposed acquisition by Fernco Inc of Flex-Seal Couplings Limited

No. ME/1314/02

A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 21 June 2002, to the Secretary of State for Trade and Industry under section 76 of the Act.

JURISDICTION

The merger satisfies the share of supply test of the FTA with respect to the supply of flexible couplings in the UK.

THE PARTIES

Fernco Inc, a US-based multinational company, is a manufacturer and supplier of both flexible rubber and flexible PVC couplings for a wide range of applications from domestic plumbing to large scale sewers. Fernco Inc has a UK based subsidiary, Fernco International Ltd (Fernco). In the year ended 31 December 2001, Fernco reported a turnover of £1.17m. Flex-Seal Couplings Limited (Flex-Seal) is a UK supplier of flexible rubber couplings. It has a subsidiary in Germany, Flex-Seal Kupplungs GmbH. In the year ended 31 May 2001, Flex-Seal reported a turnover of £5.86m and gross world wide assets of approximately £3.9m.

ASSESSMENT

Relevant market

The parties overlap in the manufacture and supply of flexible rubber couplings. These are relatively simple products, which are used for connecting non-pressure or low pressure pipes. They incorporate a stainless steel band to provide resistance for buried pipes and couplings. (see note 1) Couplings can also be made from PVC. However, the standards required for all public sector use, set by UK water companies, mean that only flexible rubber couplings can be used. This effectively limits the use of flexible PVC couplings to the private sector. As distributors and merchants tend to prefer to carry only one type of product, flexible rubber couplings are also used for work in the private sector. Consequently, demand for flexible PVC couplings in the UK is relatively low and they are not considered further. In any event it would appear that flexible rubber and flexible PVC couplings are best considered to be in separate product markets.

The parties have identified two separate levels of the supply of flexible rubber couplings, namely supply to OEMs/distributors and supply to builders' merchants. Some OEMs/distributors purchase flexible rubber couplings from manufacturers under their own brand name and sell them on to builders' merchants. The parties therefore consider that OEMs/distributors compete against manufacturers to supply flexible rubber couplings. However, as the ultimate source for the product is UK manufacturers, no distinction need be made between the different levels of supply for the purposes of considering the relevant product market.

On the supply side, all UK manufacturers can provide a whole range of flexible rubber couplings for both private and public sectors. Therefore it appears that the flexible rubber couplings sector need not be further segmented for the purposes of competition analysis. Consequently, the relevant product market is considered to be the supply of flexible rubber couplings to both private and public sectors. However, it is not necessary to come to a firm conclusion on product market definition, as it does not significantly alter the analysis.

The relevant geographic market for flexible rubber couplings is considered to be no wider than national at present. This is largely due to the UK-specific standard for flexible rubber couplings for public sector use set by the water companies and is higher than specifications used in other European countries. There is also a second more general, Europe-wide, specification for flexible rubber couplings used outside the public sector. This would suggest that European manufacturers would be able to supply the UK private sector. However, in practice, each country carries out its own testing and certification against this standard. This means that, at present, European suppliers cannot supply the UK as they do not have the necessary certification, which can take up to one year to acquire. Moreover, some customers may require same day delivery of bespoke couplings, which necessitates having manufacturing facilities in the UK. For these reasons it seems inappropriate to widen the relevant geographic market for flexible rubber couplings on grounds of supply substitutability. European manufacturers are nonetheless potential entrants – see below. (In contrast, flexible PVC couplings supplied in the UK are imported from the US or Europe, so that the geographic market for these products would appear to be much wider than for flexible rubber couplings.)

Horizontal Issues

There are currently four manufacturers of flexible rubber couplings in the UK. As a result of the proposed transaction the number of UK-based manufacturers will be reduced to three. Post-merger, the parties will have a combined share of supply of flexible rubber couplings of 70-85 per cent (increment 5-20 per cent) (see note 2). The two other players have shares of supply of 10-20 per cent and 1-10 per cent (see note 3) each. The parties estimate that the total UK sales of flexible rubber couplings in 2001 amounted to (see note 4).

Although flexible rubber couplings must be manufactured to specific standards, the technology is readily available and is relatively simple. Entry barriers are low. The parties identified two overseas manufacturers that currently produce similar products who could apply for UK standards if they wished to enter the sector. In addition, a third party indicated that it could begin manufacturing in-house relatively quickly. Therefore, both imports and new entry by UK manufacturers appear to be feasible.

The main customers of the manufacturers – OEMs/distributors and large builders' merchants – account for a significant share of the parties' revenue and thus may be expected to have a degree of buyer power. (The parties have indicated that Flex-Seal's top five customers account for over 70-90 per cent (see note 5) of its sales.) Although the merger will lead to the loss of a supplier, there are sufficient alternatives, in the form of existing suppliers and potential new entrants, for these firms to retain some buyer power.

Vertical issues

No vertical issues arise from this merger.

Third party views

The OFT received a number of representations from customers and competitors. Third party views were mixed, but on the whole the level of concern was low.

CONCLUSION

Although the increment resulting from the transaction would be relatively small, the acquisition of Flex-Seal would give Fernco a substantial share of the supply of flexible rubber couplings made in the UK. However, these products are relatively easy to manufacture, and new entry would appear to be possible – indeed Fernco itself is a recent entrant to the UK market. Furthermore, it appears that OEMs and builders' merchants would maintain a degree of buyer power. The level of third party concern is low.

In light of the above, I conclude and recommend that you should not refer the proposed transaction to the Competition Commission for investigation.

NOTES

1. A sentence containing commercially sensitive information has been deleted at the request of the parties.

2. Market share figures have been excised and replaced by ranges, at the request of the parties.

3. As above.

4. This information has been excised at the request of the parties.

5. This information has been excised and replaced by a range at the request of the parties.

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