Anticipated acquisition by Convatec Limited of Acordis Speciality Fibres Limited

Affected market: Alginate fibre

No. ME/1564/04

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,markets,conclusion, and decision.

The OFT's decision on reference under section 33 of the Enterprise Act 2002 given on 12 February 2004.

PARTIES

Convatec Limited (CTL) is a division of a wholly owned subsidiary of the Bristol-Myers Squibb Company.  CTL manufactures ostomy care and modern (advanced) wound and skin care products.  Acordis Speciality Fibres Limited (ASF), a subsidiary of Acordis International Holdings BV, develops and manufactures small volume, high value fibre products primarily used in the healthcare sector, in particular in the advanced wound care treatment sector.  These include alginate fibre.  ASF's UK turnover in 2002 was (see note 1).  In 1992, ASF collaborated with CTL to develop an advanced gel forming fibre called Hydrocel.  The patent covering Hydrocel technology expires in (see note 1).  The fibres and fabrics are produced exclusively for CTL, which converts them into a wound care dressing called Aquacel.  This manufacturing agreement expires at the same time as the patent.  In 2002, ASF's UK sales of Hydrocel to CTL were approximately (see note 1).

TRANSACTION

CTL has contracted to buy the entire issued share capital of ASF for a consideration of US$ (see note 1) at closing (see note 1).

The transaction was notified to the OFT on 15 December 2003 and the administrative deadline expires on 12 February 2004.

JURISDICTION

As a result of this transaction, CTL and ASF will cease to be distinct.  The parties overlap in the UK in the supply of alginate fibre and the share of supply test in section 23 of the Enterprise Act 2002 is met.  The OFT believes, therefore, that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, may be expected to result in the creation of a relevant merger situation.

RELEVANT MARKETS

Alginate is extracted from certain types of seaweed and converted into powder form.  The majority of alginate powder is used as a thickening and stabilising agent in the food and brewing industries.  Neither CTL nor ASF produces alginate powder.  Only a small percentage of alginate powder is sold to alginate fibre manufacturers, which then process the powder into a fibrous material (alginate fibre).  Both CTL and ASF are active in this conversion process.  Alginate fibre is then converted into alginate wound care dressings (alginate dressings).

CONCLUSION

CTL and ASF are the two leading producers and suppliers of alginate fibre in the UK.  CTL is also a leading producer and supplier of alginate dressings.  ASF sells all of its alginate fibre production to third parties.  We have therefore considered both horizontal and vertical competition issues.

The transaction would result in a relatively high combined global share of supply of alginate fibre of up to (60-80) per cent (increment (20-40) per cent)(see note 2).  Although ASF sells all of its alginate fibre production to third parties and CTL uses all of its alginate fibre production internally, the merger would appear to eliminate the possibility that CTL would supply third parties in the event of a price stimulus from the merchant sector.  On balance, there is reason to believe that CTL currently constrains to some degree prices in the merchant sector, especially given its substantial over-capacity.  Absent a constraint from CTL, it is not clear that sufficient alternative supply choices exist for non-vertically integrated third parties to discipline prices charged by ASF and other suppliers.  The evidence does not suggest that there is a significant number of alternative fibre suppliers to which customers could turn.  Nor does new entry into or expansion of alginate fibre production seem likely to arise as a disciplining factor.  Furthermore, buyer power appears limited and will be further reduced by this transaction.

As to the vertical competition issues, following the transaction, the merged entity will control the supply of alginate fibre to a number of competing suppliers of alginate dressings downstream.  In such a position, the merged entity could pursue a number of strategies that would be detrimental to competition.  There are plausible arguments that such strategies would be profitable for CTL, although evidence as to CTL's incentives is mixed.  It is also unclear to what extent factors such as substitution by end-users to alternative advanced wound care dressings; end-user buyer power; substitution by manufacturers of alginate dressings to alternative advanced wound care dressings; and the possible entry of alternative alginate fibre suppliers would constrain the merged entity.

In light of the above, the OFT believes that there is a significant prospect that the merger would substantially lessen competition within a market or markets in the United Kingdom for goods or services.  That is a sufficient condition for the OFT to refer the merger to the Competition Commission.  To reach a reference decision in this case, therefore, it has not been necessary to assess the merger further in relation to the interpretation of the test for reference given in the recent judgment of the  Competition Appeal Tribunal in IBA Health Limited v OFT [2003] CAT 27.

DECISION

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

NOTES

1. Details excised at the request of the parties for reasons of commercial confidentiality.

2. Exact figures replaced by ranges at parties request.

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