Anticipated acquisition by BOC Limited of the packaged chlorine business and assets carried on by Ineos Chlor Limited

Affected market: Distribution of packaged chlorine

No. ME/3624-08

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, assessment, undertakings in lieu of reference and decision.

The OFT's decision on reference under section 33(1) given on 29 May 2008. Full text of decision published 13 June 2008.

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

PARTIES

BOC Limited (BOC) is an indirect wholly-owned subsidiary of Linde AG, a multinational industrial gases and engineering company. BOC is a UK-based industrial gases supplier. Its business includes the manufacture, distribution and sale of industrial, medical and speciality gases, the bulk supply of liquefied gases and the distribution of packaged chlorine.

Ineos Chlor Limited (Ineos) is part of the Ineos Group. Ineos is a producer of chlorine, chlorine derivatives and PVC in Europe and it is the sole chlorine manufacturer in the UK. The transaction concerns the acquisition by BOC of the packaged chlorine business and assets (the Target Business) carried on by Ineos, which includes the packaging and distribution of packaged chlorine. The Target Business's UK turnover in the last financial year was £[ ].

TRANSACTION

The Target Business operates from Ineos's chlorine manufacturing plant at Runcorn in Cheshire. The acquisition includes a 10-year lease of the site at the plant in which the Target Business's equipment is located, plant and equipment, employees, Ineos's existing customer contracts, and a 10-year supply agreement between Ineos and the Target Business for the supply of 'bulk' chlorine.

The transaction was initially notified to the OFT as a statutory merger notice under section 96 of the Enterprise Act 2002 (the Act). However, given the substantive issues raised by the transaction, the parties subsequently withdrew the statutory merger notice. The OFT's administrative deadline for deciding whether to refer the merger to the Competition Commission is 29 May 2008.

JURISDICTION

The OFT believes that the combination of assets and rights being acquired constitute an 'enterprise' and that, as a result of this transaction, BOC and the Target Business will cease to be distinct. The parties' combined share of distribution of packaged chlorine in the UK is above 25 per cent and as a consequence the share of supply test in section 23 of the Act is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

ASSESSMENT

The transaction concerns the anticipated acquisition by BOC of the packaging and distribution parts of the packaged chlorine business carried on by Ineos (the Target Business). Pre-merger BOC is a distributor of packaged chlorine but is not active in packaging (it has a packaging contract with Albion). In contrast, Ineos is a vertically integrated manufacturer of chlorine; supplier of bulk chlorine; and packager and distributor of packaged chlorine. Chlorine is an essential input for water companies, who use it for water purification. Indeed, virtually all of BOC's sales and [ ] per cent of the Target Business's sales are made to water companies.

The OFT considers that the relevant product market is the distribution of packaged chlorine in the UK. In terms of demand-side substitution, customers have not identified other products to which they would switch in the event of a five to ten per cent increase in the price of packaged chlorine. In relation to packaged chlorine, imports into the UK of the type of chlorine that is available from the Ineos plant are minimal, and third parties have told the OFT that having an established UK distribution network is essential to compete effectively. Although supply-side substitution by UK distributors of other industrial gases or commodity chemicals could be timely and feasible (subject to being able to secure a source of packaged chlorine, which is not necessarily certain, in the case of a UK source, or cost-effective, in the case of a continental European source), the evidence before the OFT does not show that such supply-side substitution would be likely.

BOC will be by far the largest distributor of packaged chlorine in the UK, with a post-merger market share of [70-80] per cent (increment [5-15] per cent). The other market participants supplying the same type of product as the merged business are Albion (market share of [15-25] per cent) and Air Products (market share of [0-5] per cent). Post-merger, BOC and Albion will be the only packagers of bulk chlorine in the UK.

In addition to the market concentration information, bidding data provided by the parties shows that BOC is a strong competitor in the market, and had been successfully taking business away from Ineos, the largest supplier. Indeed, evidence indicates that customers perceive the merging parties as being close competitors, with BOC being the preferred alternative to the Target Business. Credible concerns about unilateral effects were expressed by the vast majority of customers and competitors. The OFT therefore believes that the merger may be expected to lead to a substantial lessening of competition resulting in unilaterally imposed higher prices and/or service level reductions.

The OFT has also found that the packaged chlorine market, post-merger, exhibits the structural conditions conducive to tacit coordination, including sufficient degrees of, variously, industry concentration, product homogeneity, stable and inelastic demand, a finite set of customers, and transparency of won bids, volumes and likely prices. The merger itself increases the likelihood of coordination being successful for a number of reasons. First, it eliminates BOC, which pre-merger had no incentive to coordinate – possibly as acted as a maverick, or disruptive force helping (among other factors) to prevent coordination between Ineos and Albion. Second, it essentially creates a duopoly between BOC and Albion at the packaging and distribution levels, which increases the likelihood and sustainability of coordinated behaviour, not least because they have similar cost structures: their major input cost is chlorine itself, which they both source from the same UK monopolist supplier, Ineos. Third, it aligns the incentives of the main market participants to coordinate in comparison with Ineos's incentives in the pre-merger scenario, where it was a vertically integrated business from chlorine manufacturing through packaging and distribution. As a result, the OFT considers that it may be the case that the merger will lead to tacit coordination.

The OFT does not consider that entry or expansion at the distribution level would be timely, likely or sufficient to prevent the likely unilateral and potential coordinated effects discussed above from arising: potential entrants would find it difficult to compete with BOC and Albion by entering only at the distribution level of the market, and that a credible constraint could only be imposed by entry in both the packaging and distribution levels of the market. In addition, the evidence before the OFT does not indicate that buyer power is sufficient to constrain BOC's ability to increase prices post-merger unilaterally or to engage in tacit coordination. Customers were generally concerned that the merger will lead to price increases, rather than suggesting they could protect themselves.

Consequently, the OFT believes that it is the case that the merger may be expected to result in a substantial lessening of competition in the market for distribution of packaged chlorine in the United Kingdom. 

UNDERTAKINGS IN LIEU OF REFERENCE

Where the duty to make a reference under section 33(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from the parties concerned such undertakings as it considers appropriate for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has resulted, or may result, from it.

The parties offered the following undertakings in lieu of a reference to the CC: [see note 1]

a) [ ] and/or

b) Merged entity to allocate sufficient capacity in its distribution business to supply packaged chlorine to such customers on terms which are fair, reasonable and non-discriminatory.

The combination of these two remedies could operate as an enabling measure, guaranteeing to Albion, Air Products, or any potential entrant access to the three key inputs/facilities necessary to operate in the packaged chlorine business: bulk chlorine, packaged chlorine, and a distribution network. This would offer a platform for entry or expansion into the packaging and/or distribution levels of the market.

While the OFT welcomes the willingness of the parties to put forward remedies, it does not consider that the remedies proposed in this case are capable of sufficiently removing the competition concerns arising from the merger. As a general point, the OFT notes that it is generally unlikely to consider that behavioural undertakings have sufficiently clear effects to address the competition concerns identified in a merger. [see note 2] In addition, undertakings in lieu of a reference are only appropriate where the remedies proposed to address them are clear cut. [see note 3]

The OFT has several concerns that the remedies fall short of this standard.

Complexity of the behavioural obligations

First, the assessment of what constitutes 'fair, reasonable, and non-discriminatory terms' in the second limb ('b' above) of the remedies offer is likely to be a complex exercise and therefore the remedies would be difficult and costly for the OFT to implement and monitor.

At the distribution level, because neither BOC nor Ineos currently distributes chlorine to other companies (as far as the OFT is aware), there is no external customer contract to use as a benchmark of the proposed 'fair, reasonable, and non-discriminatory terms'. [see note 4] At the packaging level, the terms of supply of drums by the Target Business to Albion could operate as a point of reference, [see note 5] but there would not be a similar reference for cylinders. Therefore, the OFT believes that the complexity in defining the supply terms under 'b' above is in itself indicative that the proposed remedies are not clear cut.

In addition to these practical implications of defining the terms of supply, there is a risk that, in the absence of a reliable benchmark to determine what a 'fair' price would be, BOC would be able to margin-squeeze by charging a higher price for sharing the downstream distribution business with a competitor and offsetting this internal loss by gaining higher profits in packaging. The OFT assumes that the parties' offer 'to allocate sufficient capacity in its distribution business' refers to some form of sharing of the merged party's distribution business with the new entrant.

Dependency of the new firm on BOC and the risk of coordination

Second, even considering that the packaged chlorine business is already (pre-merger) characterised by cross-supply agreements, the actual sharing of a distribution network between the merged entity and the hypothetical new entrant exploiting the proposed remedy would result in a new entrant (or expanding firm) dependent on the largest incumbent, BOC, in circumstances where BOC would know precisely that new firm's distribution costs, and would also know that the new firm would receive the [ ]. These arrangements would, if enacted, reinforce the OFT's concerns relating to tacit coordination post-merger, and in any event does little to ameliorate them. Nor does the OFT consider that firewalls or other information barriers would overcome this degree of transparency.

Overall, it is not clear how effectively a business that depends so completely on the merged entity to participate in the market would be able to compete independently and, as a consequence, whether it would be a competitive constraint on BOC (and Albion) post-merger, let alone restoring the pre-merger competitive dynamic that BOC, with its own independent distribution network, injected into the market.

Finally, a remedies offer that did not include the sharing of the merged entity's distribution network (but only [ ]) would not be sufficient to prevent the unilateral and coordinated effects identified. Although such a remedy could lower barriers to entry by securing access to the key input (bulk or packaged chlorine), as discussed in the barriers to entry section above, the evidence before the OFT does not support the contention that entry into the distribution level is necessarily profitable. Indeed, as discussed in the entry section above, access to bulk or packaged chlorine is not the only reason why the OFT does not consider entry timely, likely and sufficient to offset concerns.

For all reasons discussed above, the OFT does not believe that the remedies proposed by Ineos and BOC meet the clear-cut standard and therefore the duty to refer remains.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. The fact that the parties did actually offer remedies in this case, which the OFT has examined carefully, does not negate the OFT's prior view, discussed above, that it should not exclude application of the de minimis discretion on the ground that clear-cut undertakings in lieu were in principle available. The OFT will exclude application of the de minimis exemption only where it is objectively clear that the case is a candidate for resolution by undertakings in lieu. An objective view that the case does not fit the classical profile of the OFT's undertakings in lieu cases does not exclude the possibility that the merging parties may in fact offer remedies that merit consideration to determine whether they can in fact be described as clear-cut.
2. OFT Mergers – Substantive assessment guidance, para 8.10.
3. OFT Mergers – Substantive assessment guidance, para 8.3.
4. Even if BOC might distribute other industrial gases on behalf of third parties, it does not necessarily follow that the costs involved in distributing chlorine are the same, in particular given that it is a very hazardous chemical.
5. Although the remedies proposal does not suggest using this as the basis for setting the 'fair, reasonable, and non-discriminatory terms'.

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