Proposed acquisition by Grundfos Holding AG of certain assets of Baxi Partnership Limited, namely its pumps manufacturing business (Myson Pumps)

No. 00087/P

Report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 25 September 2000, to the Secretary of State for Trade and Industry under Section 76 of the Act

Assessment

Jurisdiction

I have established that this transaction qualifies for investigation by satisfying the share of supply test in s.64 (1)(a) and (2) of the Fair Trading Act 1973 with regard to the manufacture and supply of water circulator pumps for use in domestic and commercial heating and ventilation systems in the UK.

Relevant markets

The parties overlap in the manufacture and supply of water circulator pumps for use in domestic and commercial heating and ventilation systems and aquatic circulator pumps. The main overlap is in domestic water circulator pumps for heating and ventilation systems. I consider this to be a distinct product market, given the different demand side characteristics, the bespoke nature of commercial production contrasted with the high volume, automated nature of domestic pump production and the lack of evidence of switching. Pumps for such systems are supplied to both original equipment manufacturers (OEMs) and to wholesalers. The geographical market for supply to OEMs appears to be wider than the UK. However, supply to wholesalers may be national in scope because a large proportion of sales are for replacement pumps with wholesalers carrying a limited range and customers generally seeking the same brand for replacement, which make it difficult for new importers to gain a foothold.

Horizontal issues

There are currently three main firms active in the domestic heating and ventilation pumps market in the UK. Grundfos with around [detail omitted] per cent of sales, Myson with around [detail omitted] per cent and Wilo, the only significant competitor, having around [detail omitted] per cent. The merger would thus reduce the number of significant players in the market to two, concentrating [detail omitted] per cent of the market in the hands of a single player. Furthermore, Myson's prices appear to have been consistently lower than those of its competitors (but see Note 1 below) and [detail omitted] it seems likely that it has exerted competitive pressure on the other producers, constraining prices in the UK significantly more than in the rest of Europe, where Myson is not generally present. There is evidence that UK prices may be 20-25 per cent lower than elsewhere in Europe (but see Note 2 below) - something which must be considered very seriously.

It has been suggested that barriers to entry are low - particularly for those producing commercial pumps. In practice, however, there appears to have been no significant entry into either the UK or the EU in recent years. Moreover, features such as reputation and wholesale stocking policies may make new entry difficult. I am not persuaded that barriers to entry are low enough to offset the potential detriment to competition. OEMs appear to be able to exercise some buyer power, even after the merger. However, the wholesale channel is comparatively fragmented and it seems unlikely that wholesalers would be able to constrain the exercise of increased market power resulting from this merger.

Vertical issues

The transaction also involves a supply agreement with Baxi to supply pumps for installation in its boilers. This is to ensure continuity of supply. The supply agreement with Baxi would only account for a small percentage of Grundfos' sales to OEMs and I do not consider it likely to raise additional concerns.

Third party views

I received a number of unsolicited representations and consulted both customers and competitors. Third parties raised a number of concerns about the effect of the merger on prices, consumer choice and the prospects for new entry. I have also received a number of representations about the potential effect of the merger on employment.

Conclusion

In the light of the preceding assessment I consider that the merger is likely to result in significantly less competition and, hence, to higher prices and a reduction in choice in the market for the sale of domestic pumps in the wholesale sector, justifying reference to the Competition Commission. I do not think that this case lends itself to undertakings in lieu of a reference. The proposed acquisition is of only one plant, which does not make a structural remedy feasible and the parties did not offer behavioural remedies. I am therefore unable to recommend undertakings in lieu of a reference as an appropriate alternative.

Recommendation

I therefore conclude and recommend that you should refer the proposed transaction to the Competition Commission for investigation.

Notes

1. Baxi considers this statement is incorrect and does not agree with it.
2. Grundfos and Baxi both consider that this statement is incorrect and do not agree with it.

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