Completed acquisition by Ardagh International Holdings Ltd of Rexam Glass Barnsley Ltd

Affected market: supply of glass containers for the food and beverage industry

No. ME/1739-05

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 section 22(1) given on 1 August 2005. Full text of decision published 8 August 2005.

PARTIES

Ardagh International Holdings Limited (Ardagh International) is a subsidiary of Ardagh Glass Group plc (Ardagh), which is incorporated under the laws of Ireland and is the ultimate holding company for Rockware Glass Limited (Rockware). Ardagh is active in the manufacture and sale of glass containers in the UK, Germany, Italy and Poland. Through Rockware it operates four glass manufacturing sites in the UK, with a total of nine furnaces and 23 production lines. Ardagh's worldwide turnover in 2004 was €470.3 million (approximately £322 million). Its UK turnover was €260.5 million (approximately £180 million).

Redfearn Glass Limited (Redfearn) (previously Rexam Glass Barnsley Limited)  was a wholly owned subsidiary of Rexam plc (Rexam), a leading European glass container manufacturer. Rexam's UK glass manufacturing activities were carried on by Redfearn prior to the acquisition. Redfearn's manufacturing plant is located at Barnsley, South Yorkshire, and comprises five furnaces and 13 production lines. The company's 2004 turnover was just over £101 million, around 97 per cent of which was achieved in the UK.

TRANSACTION

The parties entered into a sale and purchase agreement on 20 May 2005 and the acquisition by Ardagh International of the entire issued share capital of Rexam Glass Barnsley Limited was completed on the same day. A submission was received on 25 May 2005 and the administrative deadline is 25 July 2005.

JURISDICTION

As a result of this transaction, Ardagh International and Redfearn have ceased to be distinct. The UK turnover of Redfearn exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

The majority of customers contacted are concerned that the merger will lead to a reduction in competition, which had been expected to increase with the entry / expansion of Quinn Glass, and to prices being higher than they would otherwise have been. In contrast, all competitors are unconcerned as they believe there is over-supply in the sector, particularly given the capacity at Quinn Glass's new plant.

ASSESMENT

The parties overlap in the manufacture and supply of glass containers (excluding those used for pharmaceutical and cosmetic uses). Post transaction, Ardagh has a share of supply of 50 per cent with an increment of 17 per cent. In addition, the parties' customer profiles were similar and switching data indicates that pre-merger the parties were close competitors and were likely to have represented each others' next best alternative for customers.

Ardagh presented two main arguments as to why the merger will not result in a substantial lessening of competition. First, it pointed out the existing overcapacity in the industry and the recent opening of a plant in Cheshire by Quinn Glass as factors indicating that spare capacity is likely to increase sharply. In its view, this has resulted in falling real prices over the past few years and will ensure that post-merger Ardagh will not be able to raise prices. Second, it maintains that UK suppliers are increasingly constrained by imports.

However, the results of our investigations are that Ardagh's assertions are not adequately supported. Customers in particular are of the view that there has been no spare capacity in the market. In addition, whilst competitors were generally of the view that there is overcapacity in the industry as a whole, the OFT could identify few competitors who could state that they themselves had excess capacity. Ardagh itself estimated share figures on the basis that supply and demand for 2004 had been in balance.

In addition to this, even if the OFT were to accept Ardagh's arguments on likely capacity increases, this does not allay concerns since even when these increases are included, Ardagh will still control almost 40 per cent of UK capacity and the HHI figures still indicate that the sector would remain concentrated and the increment would be significant.

Regarding the constraint offered by imports, again the views of third parties did not support this contention. Customers maintain that supplies from overseas carry risks in terms of interruptions to supply and that transport costs are significant. A number of suppliers also noted that it was important to be located within the UK in order to supply UK customers.

Barriers to entry in this sector are high, with significant sunk costs and planning constraints among the more formidable barriers. Notwithstanding this there has been new entry and expansion, namely by Quinn Glass. However, Quinn Glass was already present in the market at the time of the merger and some customers indicated that this entry / expansion had been expected to lead to an increase in competition which had been denied by the merger. The potential constraint offered by the prospect of further new entry – which might be expected to be low - is not considered as being sufficient to allay the concerns that may be expected to arise from the loss of a substantial major competitor.

It is therefore considered that the merged firm may have the incentive and the ability to set prices at a level higher than they would have been without the merger or to reduce output and/or investment as a result of the loss of competition between Rockware and Redfearn. While it is accepted that Quinn Glass might provide some constraint, it is far from clear that this will be fully effective in the short to medium term. Even so, this does not avoid the conclusion that against the relevant counterfactual the merger reduces the number of substantial players in the UK from four to three. Moreover, a number of customers expressed substantial concerns.

Consequently, the OFT believes that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore be referred to the Competition Commission under section 22(1) of the Act. 

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