A report under s125(4) of the Fair Trading Act 1973 on the advice of the Director General of Fair Trading given on 21 November 2002, to the Secretary of State for Trade and Industry under section 76 of the Act
The merger falls for consideration under the EC Merger Regulation (ECMR) and was notified to the European Commission on 30 September 2002. Although the Commission has sole jurisdiction to investigate the competition aspects of the merger under the ECMR, Member States may exercise a residual power under Article 21(3) of the ECMR to take 'appropriate measures to protect legitimate interests other than those taken into consideration by this Regulation'. Article 21(3) says that public (or national) security shall be regarded as a legitimate interest. The merger satisfies both the assets test and the share of supply test (in respect of the market for solid rocket motors for tactical military purposes) of the FTA. You may therefore make a reference to the CC under section 64(1) of the FTA to address public security concerns arising from the merger.
MBDA SAS (MBDA) was created on 18 December 2001 through the merger of Matra BAe Dynamics (see note 1), EADS Aérospatiale Missiles (see note 2) and Alénia Marconi Systems (see note 3). It is primarily active in the manufacture and sale of guided weapons and guided weapons systems. The parties have not submitted turnover figures for MBDA.
SNPE SA (SNPE) is owned by the French State and is primarily active in energetic materials (industrial explosives, propellants and launchers for strategic missiles, pyrotechnics etc) and in fine chemicals (including pharmaceuticals, intermediates and agrochemicals). In the year ending December 2001, SNPE's worldwide turnover was £539 m and its Community-wide turnover was £385 m.
SNPE and EADS have a joint venture, Celerg, which specialises in the manufacture of rocket motors for tactical weapons. BAES has a wholly owned subsidiary, Royal Ordnance, which is also active in the manufacture of rocket motors through its 'RORM' division.
On 25 July 2002, BAES, EADS, Finmeccanica, MBDA, Royal Ordnance and SNPE entered into a Formation Agreement by which they decided to combine the rocket motor businesses of Celerg and RORM into a joint venture between MBDA and SNPE.
ASSESSMENT OF NATIONAL SECURITY ISSUES
The MoD has made representations that the merger might adversely affect the public interest on national security grounds. The MoD has identified two main areas of concern arising from this merger: the maintenance of strategic UK capabilities and the protection of classified information.
Undertakings in lieu
The test in the FTA relates to the effect of the merger on the public interest. (As you know, national security is a specified public interest consideration under the Enterprise Act.) The MoD has identified national security concerns arising from the transaction which relate to the maintenance of a strategic capability and the protection of classified information.
The attached draft FTA undertakings are intended to remedy or prevent the particular effects adverse to the public interest identified by the MoD. Specifically, the undertakings seek to address the two areas of concern identified above. They include provision for a compliance regime consisting of the appointment by MBDA and SNPE of a 'Compliance Officer' for the purposes of facilitating, overseeing and reporting to the MoD on the security undertakings.
MBDA and SNPE have confirmed that they are willing to sign the FTA undertakings in the form attached.
Conclusions on national security considerations
The OFT is not expert in national security matters and must therefore rely heavily on the representations made by the MoD. The MoD is a body having a substantial interest in the above transaction within the meaning of section 76 of the FTA.
I have no reason to doubt the representations made by the MoD on the appropriateness of the security undertakings in order to remedy or prevent the specific effects adverse to the public interest identified by it and which are briefly described above. I have therefore concluded that the transaction should be referred to the CC for further investigation unless the parties provide FTA undertakings in lieu of reference.
It appears that this transaction raises national security concerns. FTA undertakings (in lieu of reference) have been prepared to deal with the security concerns of the MoD. It remains open to you to make a reference to the CC on such public interest grounds, or to accept undertakings in lieu of such a reference. The MoD believes that FTA undertakings in lieu of a reference to the CC are the most effective means of remedying its national security concerns.
Following discussions with OFT officials, the parties have confirmed that they are prepared to sign the attached draft FTA undertakings. However, this will in no way bind your decision whether to accept the proposed undertakings in their current form, or in a modified version, if found appropriate following public consultation.
I therefore recommend that you accept the attached draft undertakings in lieu of a reference, but that before doing so, you publish them for consultation.