Anticipated acquisition by Anglo American plc of Johnston Group plc

Affected market: Quarrying of aggregates and the supply of asphalt

No. ME/1264/04

8 November 2004 - This reference was cancelled by the Competition Commission.

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, assessment, undertakings in lieu and decision.

Please note square brackets indicate exact figures replaced by ranges at parties' request.

The OFT's decision on reference under section 33 given on 29 September 2004.

PARTIES

Anglo American plc (AA) is one of the world's largest mining and natural resource groups. Its wholly owned subsidiary, Tarmac Limited (Tarmac), is a buildings materials/construction group producing aggregates, asphalt, ready mixed concrete, mortars and screeds, cement and lime, concrete products and industrial products. 

Johnston Group plc (Johnston) is a publicly quoted engineering and construction materials group.  Johnston owns the freehold of Leaton Quarry in Shropshire.  This quarry is operated by Berwyn Granite Quarries Ltd, a 51/49 joint venture between Johnston and an AA subsidiary, Tarmac Roadstone Holdings Limited.  Johnston also holds a 100 per cent leasehold interest in and operates Leinthall Quarry in Herefordshire.  The construction materials division also includes Johnston Pipes Ltd, a single site in Telford, manufacturing concrete drainage products.  Johnston achieved European turnover of (see note 1) million for the year ended 31 December 2003 and has indicated that its UK turnover for the last financial year was over £70 million.

TRANSACTION

Tarmac holds 24.9 per cent of the issued share capital of Johnston.  It had originally intended acquiring a further 0.5 per cent of Johnston's shares.  However, following the announcement of the intended bid for Johnston by Ennstone on 29 July 2004, AA announced its intention to make a bid for the remaining share capital of Johnston on 24 August 2004. Should the offer be successful, Ennstone may exercise a call option to acquire the Leinthall operations for £11.25 million.  AA has informed the OFT that it will in due course seek the on-sale of Johnston's engineering division assets.

Tarmac's stated rationale for acquiring Johnston's construction division comprises synergies and environmental benefits via improved logistics which would occur as a result of full takeover.  The acquisition of Leaton is regarded by Tarmac as essential to its long-term strategy to replace an existing quarry in Shropshire which has limited reserves.

JURISDICTION

As a result of this transaction AA and Johnston will cease to be distinct.  The UK turnover of Johnston Group exceeds £70 million, so the turnover test in section 23(1) (b) of the Enterprise Act 2002 (the Act) is satisfied.  The parties overlap in the supply of aggregates and asphalt, and the share of supply test in section 23 of the Act is also met.  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.

ASSESSMENT

The parties overlap in the supply of aggregates and asphalt to customers around Johnston's Leinthall and Leaton quarries (the latter already being a 51/49 JV with Tarmac).  While a 30-mile radius from site of production has been used as the initial geographic context to analyse the merger's competitive effects, wider radii, including the parties' proposed 2-hour drive time isochrone, have also been considered.

The share and concentration data raise potential competition concerns, more in asphalt than aggregates, and more in the Leinthall than in the Leaton area.  Customers are almost all concerned that prices will rise post-merger.  The countervailing evidence on spare capacity, bidding, entry and buyer power, taken together, is insufficient to allay these concerns.

Setting aside the undertaking in lieu offer, discussed below, the OFT believes it is or may be the case that the merger may substantially lessen competition in the supply of asphalt and aggregates in the Leinthall area, and in the supply of asphalt in the Leaton area. 

UNDERTAKINGS IN LIEU
 
Ennstone has a call option to buy Leinthall from Tarmac if the transaction is completed.  Tarmac has asked that this option be considered as an undertaking in lieu of reference to resolve any competition issues raised in this area.
 
In the past, undertakings in lieu of reference have been accepted and quarries/sites have been divested, consistent with the 'safe harbour' rule of thumb, such that the share of supply is no higher than 33 per cent within a 30-mile radius of the relevant aggregates or asphalt site.  While this rule has been kept in mind as a benchmark, it should not be read as determinative of whether or not there are competition concerns warranting a CC reference.  Rather, the OFT has taken a variety of factors into account in analysing the effect of the undertaking in relation to both Leinthall and Leaton.

The proposed undertaking has several elements in its favour.  First, it entails divestment, thereby avoiding the regulatory issues that sometimes are associated with non-structural remedies.
 
Second, Ennstone does not appear fully to own any quarries within the Leinthall or Leaton areas; it has no asphalt plants in England, but has aggregate quarries located at Breedon (near Derby), Ling Hall (West of Birmingham), Burford (near Oxford) and De Lank (near Bodmin).

Third, the parties argue that Ennstone is an attractive entrant from a competition perspective because (i) the Leinthall and Leaton plants would have no common ownership and thus the plants would be independent competitors, and (ii) Ennstone is likely to be an aggressive competitor. 

Nonetheless, the undertaking also raises several difficulties, having regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the competition concerns identified. 

First, Ennstone will be a smaller independent supplier with Leinthall than Johnston was with Leinthall plus a 51 per cent stake in Leaton.  Leinthall and Leaton are in each others' 30-mile radius.  The parties have emphasised that control of more than one plant in an area provides the supplier with flexibility to meet demand from either plant (which is important given the transport costs and delivery time issues described at paragraph 11 of the full text): Tarmac explained how it bid for asphalt contracts as a company and then assigned the job to the most appropriate plant; this method of supplying contracts was also open to Johnston.  It would not be open to Ennstone.  Doubts therefore remain whether Ennstone would be as an effective competitor as was Johnston pre-merger.  

Second, even with divestment of Leinthall, high concentration levels would increase as a result of the merger because of the transfer of control of Leaton to Tarmac, whose share in the Leinthall 30-mile radius rises from [45-55] per cent to [55-65] per cent for asphalt (and [30-40] per cent to [35-45] per cent for aggregates).  Tables three and four in the Annexe of the full text show the impact this will have on shares of supply and HHIs, the issues being more acute in relation to asphalt. (Note that the question of whether any of MQP's shares of supply should be attributed to Tarmac is not relevant to the Leinthall analysis since MQP is not present in the 30-mile radius around Leinthall. See paragraphs 17-23 of the full text.) 

Third, the merger with the divestment to Ennstone will still result in a substantial post-merger share – [40-50] per cent, with an increment of [0-15] per cent — for Tarmac in respect of asphalt within the Leaton 30-mile radius (exceeding the 'safe harbour' rule of thumb of previous cases).

The OFT's published guidance indicates that in order to accept undertakings in lieu, the OFT

'… must be confident that the competition concerns can be resolved by means of undertakings without the need for further investigation.  Undertakings … are therefore appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut...' (see note 2).

Further investigation may well reveal that the proposed undertaking does resolve all competition concerns.  At this stage of the inquiry, however, the undertaking leaves open a number of concerns and fails to meet the above standard.  

Accordingly, the remedy offered as an undertaking in lieu of a reference does not relieve the OFT of its duty to refer the merger to the CC given the belief that it is or may be the case that the merger may be expected to result in a substantial lessening of competition.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. Details excised at the request of the parties for reasons of commercial confidentiality.

2. 'Mergers - Substantive assessment guidance' - May 2003 (OFT 516).

Back to top