Anticipated acquisition of Lochard Ltd by Spectris plc

Affected market: Environmental noise management

No. ME/3911/08

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, third party views, assessment and decision.

The OFT's decision on reference under 33(2)(a) give on 29 January 2009. Full text decision published 17 February 2009.

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

Spectris plc (Spectris) is a leading supplier of precision instrumentation and controls for use in, for example, performance management and quality assurance. Brüel & Kjær Sound & Vibration (B&K) is a subsidiary of Spectris. Globally, B&K supplies systems for environmental noise management at airports, cities, railways, construction sites, traffic areas, entertainment parks, racing tracks, and mines; and for noise surveys. In the UK, B&K offers environmental noise management systems (ENMS) and handheld noise measurement devices.

Lochard Limited (Lochard) specialises in the manufacture, supply, service and operation of ENMS, mainly to airports. Lochard also manufactures environmental noise management tools with broader applications, namely combined systems integrating the monitoring of air quality and carbon emissions with noise monitoring. Lochard's total turnover in the UK for its financial year ending 30 June 2008 was less than £5 million.

TRANSACTION

On 11 November 2008 Spectris announced its proposed acquisition of Lochard by a Share Sale and Purchase Deed concluded between Spectris and Lochard on 11 October 2008. The OFT received a satisfactory submission by the parties on 10 November 2008 and the administrative deadline is 6 February 2009.

JURISDICTION

As a result of this transaction Spectris and Lochard will cease to be distinct. The parties overlap in the supply of ENMS to airports in the UK and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met as the parties' combined share in the supply of ENMS to airports in the UK exceeds 25 per cent. 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.

THIRD PARTY VIEWS

Customers contacted by the OFT were not generally concerned about the proposed merger as they (a) viewed Topsonic as a major competitor to the parties and (b) thought that the merger could potentially result in an improved service offering. Customers did voice some concern in respect of the reduced choice they would be facing in the future and potential reduced quality of service but did not raise strong objections to the merger.

Competitors raised some concerns about the impact of the merger on their own position in the market as they thought that the merged entity would potentially be able to offer a product of much higher quality due to the complementary strengths of Lochard in software and B&K in hardware. Other competitors pointed out the high market shares of the parties and the difficulty in entering the market, especially with the merging parties' market shares. Some competitors also indicated that the merger could even be beneficial for them in that it would reduce the competitors during the tendering process. 

One competitor was concerned about the future supply of hardware units and hardware maintenance and the incentives of the parties post merger to increase prices to those they supply with hardware.

ASSESSMENT

The merger combines the two largest providers of ANMS in the UK and globally.

For the purposes of its assessment, the OFT analysed the merger on the basis of ANMS forming a distinct product market to urban environmental noise management.

In the UK, the merger will effectively result in a reduction of competitors from three to two with the parties having a combined market share of at least 60 per cent. The parties appear to be close competitors (both from their internal documents and from customer submissions) and the data seen by the OFT indicates that they both bid for all tenders in the UK since 2003. While B&K has not been winning tenders recently, the OFT considers that it has nevertheless continued to impose an important competitive constraint on Lochard.

The OFT is not convinced that potential entry either from competitors active outside the UK, such as ERA (that has not been bidding in Europe after 2006), 01db or Softech, or from companies active in the urban environmental noise management sector will be timely, likely or sufficient to alleviate its unilateral effects concerns.

The OFT concluded, on the basis of the evidence before it, that the merger would not create or strengthen coordinated effects as two of the three necessary conditions for coordination (reaching and monitoring the terms of coordination; and internal sustainability) are not realistically met on an individual basis.

The OFT also had concerns in relation to the non-horizontal aspects of this merger, in that B&K currently provides hardware to ERA, which is potentially re-entering into the UK ANMS segment. On the basis of the evidence before it, the OFT considers that the merged firm may have the ability and incentive to foreclose ANMS competitors. However, this is unlikely to affect any current players in the market, but only the potential for re-entry by ERA, and as such has already been factored into the conclusion that the prospects for entry are not sufficient to alleviate the unilateral effects concerns.

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.

EXCEPTIONS TO THE DUTY TO REFER 

The OFT's duty to refer under section 33(1) is subject to the application of certain discretionary exceptions, including the markets of insufficient importance, or ‘de minimis’, exception under section 33(2)(a). 

The factors that the OFT considers in determining whether it should apply its discretion in respect of the ‘de minimis’ exception have been set out in detail in a number of recent cases (see example BOC/Ineos, Capita/IBS). The relevant factors are:

• market size
• strength of the OFT's concern (that is, its judgment as to the probability of the substantial lessening of competition occurring)
• magnitude of competition lost by the merger
• durability of the merger's impact, and
• transaction rationale and the value of deterrence.

Overall, the OFT considers that in this case the evidence points towards the impact of the merger being relatively limited in time. In particular, the current size of the market at less than £1 million is well below the £10 million threshold (and would still be small even if extended to include current and potential future hosting and operation services), and the scale of anti-competitive effects is likely to be limited due to entry by ANMS providers currently operating outside the UK or entry from related sectors such as urban environmental noise management. 

 Accordingly, the OFT has decided to exercise its discretion not to refer this transaction to the Competition Commission because the market concerned is of insufficient importance to justify the making of a reference.

DECISION

This merger will therefore not be referred to the Competition Commission pursuant to section 33(2)(a) of the Act.

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