Anticipated acquisition by SRCL Limited of Cliniserve Holdings Limited

Affected market: Waste management services

No. ME/3847/08

The OFT's decision on reference under section 33(1) was given on 21 November 2008. The full text of the decision was published on 8 April 2009.

PARTIES

SRCL Limited (SRCL), a subsidiary of US-based company Stericycle Inc, is a UK company providing waste management, processing and related services to the medical and other sectors throughout England and Wales. Its turnover for the financial year ended 31 December 2007 was approximately £21 million.

Cliniserve Limited (Cliniserve) provides waste management and processing services principally to the medical sector. Its focus is on the collection and treatment of healthcare and pharmaceutical waste and disposables. Cliniserve's turnover for the financial year ended 30 April 2008 was £12 million.

TRANSACTION

SRCL is proposing to acquire the entire issued and allotted share capital of Cliniserve, including Cliniserve's medical waste collection business operating across the whole of the UK, its medical waste treatment facility in Littlehampton, West Sussex and its second facility in Frome.

JURISDICTION

As a result of this transaction SRCL and Cliniserve will cease to be distinct.

The parties submitted that they overlap in and have a combined share of approximately [35-45] per cent of all available alternative technology treatment capacity in the UK and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is therefore met.

The OFT concluded in its Decision 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.

BACKGROUND

The Decision concluded that, on the evidence available, 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. Specifically, the OFT found that there is a realistic prospect of a substantial lessening of competition arising in the treatment of healthcare risk waste in south east England.

To address the OFT's competition concerns, the parties offered undertakings in lieu of reference to the Competition Commission (CC) to make completion of the acquisition of Cliniserve conditional on the divestment of Cliniserve's alternative treatment (AT) medical waste facility located at Littlehampton, West Sussex. This was to be sold to a purchaser on an up-front buyer basis; that is, to an actual named purchaser to be identified in advance of acceptance of the undertakings.

Following suspension of the OFT's duty to refer to the CC, the parties proposed Ethos Recycling Limited (Ethos) as the preferred proposed purchaser of the Littlehampton facility.

Following discussions with Ethos, the OFT considered whether it was appropriate for SRCL to provide Ethos with any form of short term supply agreement for the newly acquired Littlehampton facility. In particular, the OFT was keen to maximize the prospects of Ethos fulfilling its stated intention of expanding capacity by the addition of a second sterilization 'tube' at Littlehampton.

Following discussions with the OFT, SRCL agreed to offer Ethos a transitional agreement whereby SRCL will guarantee to supply Ethos with 3,500 tonnes of waste per annum for two years following the sale of the Littlehampton facility. This volume, which can be reduced at the request of Ethos, is equivalent to the total current capacity of the initial tube at the Littlehampton facility. In this way, the OFT considered Ethos would be guaranteed to be able to fill capacity of the first tube, thereby providing it with the financial platform to construct the second tube. In the event, Ethos decided that it did wish to accept SRCL's offer of the transitional services agreement on this basis.

Cliniserve has therefore entered into a sale agreement with Ethos relating to the Littlehampton facility conditional upon formal OFT purchaser approval and acceptance of the undertakings. The sale agreement was also necessarily conditional on the issuing by the Environment Agency of written confirmation that it would transfer the environmental permits required for the operation of the Littlehampton facility immediately after completion of the divestment. SRCL also entered into a legally binding transitional waste treatment agreement with Ethos on terms approved by the OFT.

CONSULTATION

On 5 March 2009, the OFT published the proposed undertakings, inviting interested third parties to give their views on them to the OFT by 26 March 2009 pursuant to paragraph 2(1) Schedule 10 of the Act. No submissions were received.

DECISION

The Decision concluded that the merger would be referred to the CC if the parties failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision.

The OFT considers that the undertakings in this case constitute a clear-cut remedy that - in line with the OFT's starting point for undertakings in lieu - restore competition to its pre- merger levels. In particular, the OFT considers that Ethos, as an operator of an Alternative Thermal Treatment (ATT) facility at Avonmouth, will have the necessary skills and expertise to compete effectively in the south east of England.

While the OFT is mindful of the fact that Ethos is not qualified under the LPP's existing framework agreement (and will therefore not be able to bid directly for any London NHS Trust contracts coming up prior to expiry of that agreement in late 2010), on balance, the OFT is confident that this should not prevent Ethos from being an effective competitor for the following reasons:

• Ethos has confirmed its intention, in the short term following the acquisition, to expand capacity at the Littlehampton facility through the installation of a second sterilization tube. Ethos provided business plans and financial projections to the OFT in support of this 
  
  
• the sale of the Littlehampton facility to Ethos will effectively create a new provider of healthcare risk waste treatment in the south east of England (which would not have been achieved had the proposed purchaser been an existing member of the LPP)
  
  
• although Ethos will not initially have a collection business in the south east of England, its capacity at the Littlehampton plant will potentially be available to the LPP even in the first two years, albeit indirectly, via third party members of the LPP Framework agreement, and
  
  
• to the extent that, in the short term, Ethos wins non-LPP contracts from competitors qualified for the LPP, these competitors would be expected to bid more aggressively for LPP contracts in order to replace the volume lost to Ethos.

The OFT has therefore decided to accept the proposed undertakings offered by the SRCL and Cliniserve in lieu of reference to the CC, as they are, in the circumstances of this case, clear cut and appropriate to remedy, mitigate or prevent the competition concerns identified in the Decision and any adverse effects resulting from it.

This merger will therefore not be referred to the CC and the undertakings which have been signed by SRCL and Cliniserve will come into effect from this date.

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