Completed acquisition by Aggregate Industries Limited of Atlantic Aggregates Limited and Stone Haul Limited

Affected market: Supply of loose aggregates

No. ME/3978/08

Please note that the full text of the decision can be downloaded by using the link at the bottom of this page. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 22(1) given on 2 March 2009. Full text of the decision published on 16 March 2009.

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

PARTIES

Aggregate Industries UK Limited (AI) is a wholly-owned subsidiary of the Holcim Group and a subsidiary of Aggregate Industries Limited. AI produces and supplies aggregates (both primary and secondary), asphalt (and asphalt surfacing services), ready-mixed concrete and other concrete products.

In Devon and Cornwall AI has a number of quarries producing aggregates. It also sources china clay waste material from a third party, Imerys Minerals Limited (Imerys), from which it can extract secondary aggregates. [see note 1] In addition, AI has a number of concrete and asphalt facilities in the regions.

Atlantic Aggregates Limited (Atlantic) is a regional heavy building materials company which supplies secondary aggregates. It does not produce aggregates but, like AI, it sources china clay waste material from Imerys in order to obtain secondary aggregates. Imerys supplies Atlantic from its sites at Gunheath and Lee Moor. Atlantic's turnover for the year ending 31 December 2007 was £[ ] million.

Stone Haul Limited (SHL) is a haulage company which distributes bagged aggregates, predominately to builders' merchants in Cornwall. SHL was owned by two shareholders, one of whom also owned Atlantic.

TRANSACTION

AI acquired the entire issued share capital of Atlantic on 31 July 2008. On the same day it also acquired SHL.

JURISDICTION

On 31 July 2008 the enterprises AI and Atlantic ceased to be distinct. The parties are both active in the supply of aggregates in Cornwall and Devon and will after the merger have a share of supply of greater than 25 per cent. Therefore, the share of supply test in section 23 of the Act is met with respect to the acquisition of Atlantic.

With respect to the acquisition of SHL, the OFT notes that AI submitted that it is not clear whether the acquisition of SHL is a part of the same relevant merger situation (within the meaning of the Act) as the acquisition of Atlantic, and submitted arguments both for and against the proposition. Against the proposition, AI submitted:

• the two companies are separate legal entities, were operated as businesses independent of each other and were acquired by AI under separate sale and purchase agreements, and
  
• there is some but not full shareholder commonality between the two companies: SHL was owned by two shareholders, one of whom owned Atlantic.

However, AI submitted that the arguments in favour of treating SHL as being the same relevant merger situation as the acquisition of Atlantic were:

• there is some (albeit not full) shareholder commonality
  
• the two companies were offered for sale together and, with implied inter-conditionality of sale, they were purchased together as a part of the same transaction, and
  
• the two companies share some common staff and functions (for example, in the areas of administration, accounting and IT functions).

In substantive terms the OFT considers that, on balance, the acquisition of SHL should be regarded as forming part of the same relevant merger situation as the acquisition of Atlantic. In particular, the OFT notes that the two companies were offered for sale together and that they share some staff and resources.

The OFT therefore believes that it is or may be the case that a relevant merger situation has been created in the acquisition of Atlantic and SHL.

THIRD PARTY VIEWS

All third party customers who responded to the OFT's questions (in both the Gunheath and Lee Moor areas) were concerned about this merger. Their concerns are that their choice of secondary aggregates supplier has been reduced, competition has been lessened and prices will go up as a result. Customers sourcing secondary aggregates from Gunheath, in particular, said that for the quality and type of aggregates that they require (for example, sand or crushed rock), there will be little remaining choice in the vicinity apart from the merger parties and Goonvean. Some customers compete with AI in downstream activities, such as ready-mixed concrete, and were concerned that the merger would result in them having to acquire a key input from a competitor. All customers who responded to the OFT's questions informed the OFT that they consider the parties to be close competitors.

Most competitors told the OFT that they are unconcerned about the merger.

ASSESSMENT

The parties overlap in the supply of secondary aggregates in Cornwall and Devon.

Given the price differential between primary and secondary aggregates, and the fact that customers told the OFT that if the price of secondary aggregates were to increase by around 10 per cent they would still not switch to primary aggregates, on a cautious basis the OFT has examined this merger on the basis of secondary aggregates only.

Third party comments to the OFT indicated that the typical delivery distance ranges between suppliers from 30 to 50 miles. Transport costs are a significant cost component for secondary aggregates. Therefore, on a cautious basis, the OFT has examined the merger on the basis of a 30 mile radius around Gunheath and Lee Moor, although the OFT has also had regard to the parties' preferred geographic market of a [40-50] mile radius around Gunheath and a [40-50] mile radius around Lee Moor.

Gunheath

In Gunheath the parties' combined share of production is [55-75] per cent (depending on the geographic area) with an increment of [20-30] per cent. Goonvean, located nearby to Gunheath, is the parties' closest competitor. Bidding data submitted to the OFT was incomplete (reflecting the nature of how the market works) and so the OFT has down-graded its evidentiary weight accordingly. However, these data do provide some indication that Atlantic has been AI's closest competitor in the Gunheath area.

The parties submitted that there is considerable excess capacity (in the form of china clay waste material) in the area. However, the parties did not supply examples of recent entry or increases in capacity utilisation. The OFT, through questioning third parties in the 30 mile radius area, could only identify a small amount [ ] of spare capacity in the hands of competitors which could easily be utilised in a timely manner in response to any price increase after the merger. Indeed, the quantities of spare capacity that one might normally consider would be sufficient to offset any post merger price increase could only be identified by the OFT outside of the 30 mile radius around Gunheath where transport costs may be so expensive as to force customers to switch to nearer primary aggregates.

Stockpiled china clay waste that would be required for a new entrant is only available in significant volumes from either Goonvean or Imerys. Existing contractual arrangements between Imerys and the parties, and the incentives facing Goonvean (where it itself is a supplier of secondary aggregates but not of china clay waste) lead the OFT to conclude that difficulties accessing waste means it cannot consider entry to be timely, likely and sufficient to offset a post merger price increase. Although the parties argued that there is a considerable amount of dormant china clay waste material in the area which could be processed by entrants, the OFT was not confident that this possibility was economically viable such that entry would be timely, likely and sufficient.

Therefore, on the balance of the evidence before it, the OFT considers that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition in the supply of secondary aggregates in the Gunheath area. This finding is not altered when primary aggregates are considered in the analysis.

Lee Moor

In Lee Moor the parties' combined share is around [40-60] per cent (depending on the geographic area) with an increment of [20-30] per cent. The parties' main competitor in the area is Tarmac.

The OFT does not have bidding data for the supply of secondary aggregates in the area.

Information submitted by third parties shows that there is considerable spare capacity in the nearby area which can be used to supply secondary aggregates in a timely and sufficient manner in the event of a post merger price increase. Moreover, the availability of large volumes of feed material to the existing players suggests that capacity could readily expand by more than the identified spare capacity suggests. 

The OFT has found this evidence persuasive and although the share of supply figures raise prima facie concerns, on a substantive examination the OFT has concluded the merger will not result in a substantial lessening of competition in the supply of secondary aggregates in the Lee Moor area. Given the OFT has not found competition concerns on the narrowest possible basis, it did not find it necessary to include primary aggregates in its analysis as a sense check.

Coordinated effects

The OFT investigated whether the merger raises competition concerns with regard to coordinated effects. In doing so, the OFT found that that the merger itself will not create or strengthen incentives for coordination. The merger has not removed a maverick or otherwise destabilising force on coordination. Moreover, given the increased asymmetry between the merged entity and its key competitors, the merger is if anything likely to reduce any incentive for coordination.

Therefore, the OFT does not believe that coordinated effects concerns arise as a result of this merger.

Vertical issues

During the course of its investigation, the OFT examined vertical issues resulting from the merger. However, no vertical concerns arise separately from the unilateral effects identified by the OFT (that is, the merger strengthens AI's position in the supply of secondary aggregates in the Gunheath area). Given the harmful effects of the merger have been examined in terms of the unilateral effects, the OFT has not considered it necessary to conclude on the likelihood of foreclosure as a result of the merger.

DECISION

The OFT has therefore decided to refer the completed acquisition by AI of Atlantic and SHL to the Competition Commission pursuant to section 22 of the Act. However the OFT's duty to refer is suspended because the OFT is considering whether to accept undertakings in lieu of reference from AI pursuant to section 73 of the Act.

NOTES

1. Imerys has a number of sites in Devon and Cornwall including at Gunheath (Cornwall) (where AI has a nearby quarry), Blackpool (Cornwall) and Lee Moor (Devon). Imerys has stopped quarrying at Blackpool and Lee Moor but stockpiles of china clay waste remain at these sites which can be processed for the extraction of secondary aggregates.

Completed acquisition by Aggregate Industries UK Limited of Atlantic Aggregates Limited and of Stone Haul Limited (pdf 439 kb)

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