Anticipated acquisition by Knauf Insulation Limited of Superglass Insulation Limited

Affected market: Insulation materials

No. ME/1634/04

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, assessment and decision.

Square brackets indicate exact figures have been removed at the parties request or text removed at request of the parties for reasons of commercial confidentiality.   

The OFT's decision on reference under section 33 given on 17 June 2004

PARTIES

Knauf Insulation Limited (Knauf), a wholly owned subsidiary of Knauf Insulation Holdings Limited, is part of a group of companies owned by Gebruder Knauf Verwaltungsgesellschaft KG.  Knauf is a producer of insulation materials for use in the construction industry and operates from four sites in the UK.  Superglass Insulation Limited (Superglass) is a separate and autonomously run business within Encon Limited (a privately owned company backed by venture capital investors).  Superglass is also engaged in the production of insulation material for use in the construction industry.  It operates from one site in Stirling.  Superglass's UK turnover for the year ending 31 August 2002 was £21.9m.

TRANSACTION

Knauf has agreed to purchase the entire issued share capital of Superglass for [ ] subject to certain adjustments.  Knauf has informed the OFT that it wishes to purchase Superglass because the investment and technology transfer it can offer the business will improve its competitiveness.  [ ].  Knauf has also committed itself to honouring a [ ] year supply agreement entered into in September 2003 between Superglass and Insta, an insulation system designer.  The administrative deadline for a decision expired on 27 May 2004.

JURISDICTION

As a result of this transaction Knauf and Superglass will cease to be distinct.  The parties overlap in the supply of mineral fibre in the UK and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met.  A relevant merger situation will be created.

ASSESSMENT

The merger brings together two major manufacturers and suppliers of mineral  fibre retro-fit cavity wall insulation material and mineral fibre loft insulation material.  Within retro-fit cavity wall insulation, the parties would represent a very significant proportion of supply of insulating materials (at around [60 per cent-75 per cent]) and this may affect both upstream competition between mineral fibre insulation material manufacturers and downstream competition between system designers.  In the absence of strong potential competition this gives ground for concern that the merger will lead to a substantial lessening of competition.  A lessening of competition could lead to higher prices and slower capacity expansion to meet growing demand.

Within loft insulation, the parties would also represent a large proportion of mineral fibre insulation material supply, again raising concerns about a substantial lessening of competition.  This is notwithstanding that alterations in building regulations are changing the quantities of materials that need to be used and over time this may change which materials act as a competitive constraint on glass fibre products.

In both of these areas the OFT has received a large number of expressions of concern by third parties at the loss of Superglass as a competitive constraint on the ability of Knauf to increase prices.    

In view of the factors set out above, the OFT is concerned that the merger may result in a substantial lessening of competition in respect of both mineral fibre retro-fit cavity wall insulation material and mineral fibre loft insulation material even before taking into account the possibility that the merger might enhance prospects of co-ordinated behaviour between the remaining firms.

The sector has some of the characteristics which favour co-ordination and there is evidence of announcements by Knauf and its competitors of similar price rises on similar dates.  The evidence also shows that Superglass has been used in the past as a bargaining tool by some customers to resist the price increases.  Accordingly, the OFT believes on the evidence before it that the merger may also substantially lessen competition by increasing the likelihood and effectiveness of coordination among competitors, tacit or otherwise. 

Knauf has claimed that a wide range of potential cost savings and customer benefits would arise from the merger.  Some of these may occur without the merger and there is a question as to what extent any cost savings will be passed on to customers.  It is far from clear that any such benefits would outweigh the potential substantial lessening of competition.

Consequently, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.  The criteria for the customer benefits exception to the duty to refer the merger to the CC are not met.

DECISION

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

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