Completed acquisition by DS Smith plc of LINPAC Containers Limited

Affected market: Corrugated cardboard packaging

No. ME/1647/04

Please note that the full text of the decision can be downloaded using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, udertakings in lieu, assessment and decision.

The OFT's decision on reference under section 22 given on 20 May 2004

PARTIES

DS Smith plc (DS Smith) is an international firm involved in the paper and corrugated packaging, plastic packaging, office products wholesaling, and office products manufacturing sectors. In the year ended April 30th 2003, DS Smith had a worldwide turnover of £1,479 million, of which £873 million was achieved in the UK. The paper and corrugated packaging business accounted for £747 million of sales.

LINPAC Containers Limited (LINPAC Containers) is a division of the LINPAC Group involved primarily in the supply of corrugated paper packaging. In 2002 its turnover was approximately £163 million, with all turnover generated in the UK.

TRANSACTION

Under the acquisition agreement, DS Smith agreed to purchase all of the shares in LINPAC Containers for a consideration of £170 million. The acquisition agreement was conditional on shareholder approval at an EGM held on 22 March 2004, but not on regulatory clearance. The EGM voted in favour of the resolution to approve the proposed acquisition of LINPAC Containers Limited and the acquisition was completed on 22 March 2004. The enterprises ceased to be distinct on 22 March 2004 and the statutory deadline for a reference therefore expires on the 21 July 2004.

The OFT received a satisfactory submission on 3 March 2004, which created an administrative deadline for a decision of 30 April 2004, however, the deadline has not been met in this case.

JURISDICTION

As a result of this transaction, DS Smith and LINPAC Containers have ceased to be distinct. The UK turnover of LINPAC exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. A relevant merger situation has been created.

ASSESSMENT

The analysis above considers whether the merger may lead to or strengthen co-ordinated effects within the corrugated cardboard sheet sector, specifically in merchant supply. In the light of this analysis OFT's main concerns are: the suggested headline price increase letters sent out by DS Smith and its major competitors, which may have the effect of closing down the freedom of customers to push back the increase, and the perception of customers for sheet that LINPAC Containers performed the role of a maverick in the market, whose removal has affected their ability to negotiate competitive prices.

DS Smith has produced counter arguments to the effect that since all sheet manufacturers will feel the effect of a CCM price increase at a similar time it is not wholly unexpected to see proposals for price increases being sent to customers for a similar amount at a similar time, that a lot of the spare capacity on the market relates to slack periods of the week and the need to maintain available capacity for short notice orders so that it is in fact not 'spare', and that internal evidence suggests that LINPAC Containers did not regard itself as a maverick.

While there may be some force in the counter arguments put forward by DS Smith, the OFT makes the following observations. This merger would lead to a significant increase in DS Smith's share of supply of sheet to the merchant sector. DS Smith and other suppliers recently sought across the board price increases (which appear unrelated to this merger) which, given the size and number of market players, may indicate the ability of firms to align their behaviour in the market; and some third parties have expressed significant concerns. The degree of market transparency appears to allow firms to quickly identify price-cutting behaviour by rivals, and excess capacity in the market may indicate that there is scope for retaliation against deviation from co-ordinated behaviour, so that there may be incentives to maintain co-ordinated behaviour. Finally, customer perceptions of LINPAC Containers as an important maverick able to influence the market may be inaccurate, but that perception, itself may have been sufficient to encourage previous and effective price negotiation. Absent LINPAC Containers, co-ordinated behaviour may be sustainable.

In the light of these factors the OFT believes that it may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

UNDERTAKINGS IN LIEU

Notwithstanding its view that a substantial lessening of competition has not or will not result from the merger, DS Smith has made an offer of undertakings in lieu. To remove any competition concerns the OFT may have, DS Smith is prepared to offer the following undertakings to address possible competition concerns: [ ] (see note 1)

[ ] (see note 2). The second remedy would not appear to be sufficient on its own to remedy the perceived loss of a maverick as a result of the merger.

The OFT's published guidance (see note 3) indicates that undertakings in lieu will only be accepted if they represent a clear cut remedy to a clearly identified competition concern. It is not clear that either of the remedies offered met these criteria and the remedies offered are therefore rejected.

DECISION
This merger will therefore be referred to the Competition Commission under section 22(1) of the Act.

NOTES  

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

2. Details excised at the request of the parties for reason of commercial confidentiality.

3. Mergers — Substantive assessment guidance — May 2003 (OFT 516)

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