Completed acquisitions by Celsa Steel Service (UK) Limited of the manufacturing and reinforcement divisions of BRC Limited, Express Reinforcements Limited and The ROM Group

Affected market: Manufacture and distribution of steel reinforcement products

No. ME/3964/08

This decision also refers to case nos. ME/3982/08 and ME/3963/08.

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 decisions on reference under section 22(1) given on 29 January 2009. Full text of decision published on 20 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

Celsa Steel Service (UK) Limited (Celsa), is a wholly-owned subsidiary of Celsa (UK) Holdings Limited. The ultimate parent company of Celsa (UK) Holdings Limited is Catalunya Steel SL, a Spanish company, which is one of a number of companies managed under the 'Grupo Celsa' brand. Celsa is mainly active in the manufacture of reinforcing bars (rebars), reinforcing bars in coil shape or 'reinforcing coils' (coils); and mesh wire rod (MWR). These are specialized reinforcement steel products that are used (typically after further processing) in construction applications to reinforce concrete.

The manufacturing and reinforcement divisions of BRC Limited (BRC), Express Reinforcements Limited (Express) and The ROM Group (ROM) (the target companies) are each involved in the processing and distribution of reinforcement steel products. They purchase reinforcing steel in the form of rebars and coils from steel manufacturers (such as Celsa) and process it into reinforcement steel products for concrete which is then sold to construction companies and builders' merchants. BRC and ROM also manufacture steel mesh from MWR, which they acquire from companies such as Celsa.
 
In 2007, BRC had a turnover in the UK of approximately £130 million, Express had a turnover in the UK of approximately £68 million and ROM had a UK turnover of approximately £113 million.

TRANSACTION

On 1 September 2008, Celsa acquired BRC from Acertec plc. The statutory deadline, as extended, for the OFT's consideration of this case expired on 29 January 2009.

On 18 November 2008, Celsa, Compania Espanola de Laminacion SL and Global Steel Wire SA (all companies within the Grupo Celsa Group) acquired the entire issued share capital of Express from Ash & Lacy Services Limited, a subsidiary of Hill & Smith Holdings plc.

On 9 January 2009, Celsa, Compania Espanola de Laminacion SL and Global Steel Wire SA completed its acquisition of ROM.

Celsa notified the OFT by way of informal merger submission of all three acquisitions on 12 December 2008.

JURISDICTION

As a result of these transactions Celsa has ceased to be distinct from each of BRC, Express and ROM. The UK turnover of each of BRC and ROM exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied in relation to these acquisitions.  In relation to Express, the combined share of supply of Celsa post-mergers exceeds 25 per cent of all processed reinforcing steel products supplied in the UK, so the share of supply test in section 23(3) of the Act is satisfied in relation to this acquisition.  The OFT therefore believes that it is or may be the case that a relevant merger situation has been created in each case.

THIRD PARTY VIEWS

The OFT received a significant number of concerns relating to the mergers. At the downstream level, a number of end customers raised concerns that the merger of the three largest fabricator/distributors would reduce customer choice and buyer power. Concerns were also raised regarding the ability of the remaining competitors in the market to offer services of a sufficient scale and scope to constrain the merged entity.
 
Further, a number of fabricators raised concerns regarding their ability to source steel from upstream suppliers post-mergers. Many argued that Celsa has a very large upstream market share and would seek to favour its downstream operations at the expense of rival fabricators. Concerns were also raised about the ability of imports to compete with Celsa.

Finally, a small number of market participants raised concerns that the merger would result in the number of contestable fabricator customers decreasing to a point where it will not be viable to continue supplying them. 

ASSESSMENT

The OFT considered whether competition issues would arise from Celsa's acquisition of approximately [45 to 55] per cent of the downstream fabrication/distribution market. It further considered whether concerns would arise from the combination of this downstream market share with its substantial upstream market share. A concern regarding the ability of the remaining competitors in the market to service large contracts was also considered.

Unilateral effects

At the downstream level, the OFT considered whether the acquisitions would lead to increased prices through either Celsa witholding fabrication supply from the market and/or acting as a price leader.

In terms of witholding supply, the evidence before the OFT suggested that there is a substantial amount of spare capacity in the fabrication market spread among many competitors, including a number of relatively large and well-resourced ones. Further, market enquiries suggested that there are no material costs associated with fabricators increasing output, leading the OFT to conclude that any supply withdrawn from the market could be easily replaced by a competitor. Celsa would therefore have to forego a high volume of sales before it would become the marginal supplier, which, based on the evidence before it, the OFT considered would be unlikely to be profitable. The OFT also considered that the existence of spare capacity would undermine Celsa's ability to credibly commit to any strategy of price leadership.

The OFT also considered whether competition issues could arise with respect to large construction contracts, but ultimately dismissed such concerns. Post-mergers, Celsa will be constrained by a number of well resourced companies that can (and do) tender for large contracts. While market enquiries did reveal some concerns that the merger would decrease choice for customers, many market participants commented that their needs could be serviced by companies other than the target companies. Further, the OFT noted that contracts can be (and indeed are currently) split between a number of fabricators, or into multiple lots as the contract progresses, such that smaller companies are able to tender for parts of larger contracts. Very large contracts allow for the possibility of backwards integration into fabrication by the end customer.

Vertical effects

In terms of input foreclosure, the OFT was not persuaded that the mergers would give Celsa the ability to engage in either partial or total input foreclosure.

Given that the OFT views vertical mergers as presumptively benign, in order for an input foreclosure strategy to be anticompetitive, Celsa would need to have substantial market power upstream. While there was some tension between the information provided by Celsa (based on independent evidence) and some market participants as to the competitive constraint provided by Thames Steel, on balance the OFT believes that the existence of Thames Steel will have a constraining effect on Celsa. Further, a number of market participants advised that they either actively import materials from overseas or could do so in the event that Celsa attempted fully or partially to foreclose them. The OFT was also made aware of specific examples of fabricators ordering volumes ahead of demand to overcome the longer lead times involved with imports. As such the OFT did not believe that Celsa would have the ability to forelose downstream rivals.

Given this lack of availability, it was not necessary for the OFT to conclude on incentive for input foreclosure. Nevertheless, there appear to be a number of factors that may work against there being such incentives on this occasion, in particular the existence of alternative sources of inputs, the relative lack of incentives created by high upstream margins, and the difficulty in forcing rivals to exit the market given the ability to utilise mothballed machinery virtually costlessly.

In terms of customer foreclosure, given the OFT has found that the mergers are unlikely to give Celsa substantial market power at either the intermediate or downstream levels of production, the OFT considered that any strategy of this nature was unlikely to raise competition concerns. In particular, the ability of rival fabricators to both expand production and switch to rival upstream sources of supply (both in the UK and overseas) meant that the OFT was comfortable that Celsa internalising the total demand of the target companies would not create a realistic prospect of a substantial lessening of competition.

CONCLUSION

Consequently, the OFT does not believe that it is or may be the case that any of these three mergers has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

None of these three mergers will therefore be referred to the Competition Commission under section 22(1) of the Act.

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