Anticipated acquisition by Brulines (Holdings) plc of Nucleus Data Holdings Limited

Affected market: Dispense monitoring equipment and services

No. ME/3365/07

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 33(1) given on 20 November 2007. Full text of decision published 30 November 2007.

Please note that square brackets indicate figures or text which have been deleted or replaced with a range for reasons of commercial confidentiality.

PARTIES

Brulines (Holdings) plc (Brulines) supplies data capture services, data management, market intelligence and beer quality monitoring services to the UK licensed on-trade, including the supply and service  and maintenance of volume and revenue protection equipment for draught alcoholic drinks (or 'dispense monitoring equipment'). Brulines' group turnover for the year ended 31 March 2007 was £16.8 million, all of which was earned in the UK.

Nucleus Data Holdings Ltd (Nucleus) also supplies data capture services, communication platforms, data management, market intelligence, and dispense monitoring equipment to the UK licensed on-trade. The UK turnover of Nucleus in the financial year ending 31 December 2006 was £3.1 million.

TRANSACTION

On 4 September 2007 a share purchase agreement was entered into under which Brulines will pay a fixed consideration of £3.8 million for the entire issued share capital of Nucleus. A further consideration of up to £700,000 is payable, depending on sales of certain products in the period up to 31 March 2009.

The parties notified the transaction on 3 September 2007. The administrative timetable on this case expired on 30 October 2007.

JURISDICTION

As a result of this transaction Brulines and Nucleus will cease to be distinct. The parties overlap in the supply of dispensing monitoring services to the tenanted licensed on-trade and the merger will give rise to a combined share of supply (assuming a base of all tenanted pubs) of approximately 64 per cent in the UK (increment seven per cent).[see note 1]  As a result, the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is 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.

THIRD PARTY VIEWS

All of the competitors who responded expressed concerns regarding the merger, which they considered would increase their current difficulties in winning new business. One competitor did acknowledge that there could be some benefits to the merger as some customers prefer to split their buying between two suppliers and, given that Nucleus has historically been the second supplier, post-merger this 'space' might be available for a different supplier.

Of the 19 customers who responded, the majority (14) were unconcerned, with several noting that they would be either willing to sponsor entry or take services in-house. Where these customers had experience of other suppliers in the sector through trials, they generally considered that these new entrants products were credible alternatives to the parties' products. Of the five customers who expressed concerns, most were primarily worried about a lack of alternative suppliers if problems were to arise during their current contract. Others considered that the merger would only present a short-term problem (as they felt future entry was likely) and/or they felt other strategies were available to mitigate any reduction in negotiating power.

The concerns raised have been discussed and addressed in detail above.

ASSESSMENT

The parties overlap in the supply of a number of services: communication platforms for remote data capture; data management and analysis; dispense monitoring equipment provision; service and maintenance of dispense monitoring equipment; beer quality measurement; and market intelligence services. No competition concerns were considered to arise in relation to the supply of beer quality measurement and/or market intelligence services given that there are a number of other competitors present in these sectors who will continue to constrain the parties' behaviour post-merger.

For the remaining four areas of overlap – communication platforms for remote data capture; data management  and analysis; dispense monitoring equipment provision; and service  and maintenance of dispense monitoring equipment – the OFT found that the vast majority of customers had a preference for purchasing these services as a bundle. It would appear possible for customers to achieve supply of each of these services separately; however, this may involve additional costs and/or compatibility issues. A cautious approach is therefore warranted and the appropriate product frame of reference is the supply of all four 'dispense monitoring services'. It was recognised that some suppliers of beer quality measurement, that is, those with suitable 'technology based' offers, were capable of supply side substitution into the provision of dispense monitoring services. However, it was considered more appropriate to examine the constraints imposed by these technology based suppliers individually, rather than including all beer quality measurement providers within the relevant frame of reference. The appropriate geographic frame of reference was considered to be UK-wide.

Together the parties account for over 90 per cent of customers currently purchasing dispense monitoring services in the UK. In addition, third parties confirmed that the parties were the two main suppliers of dispense monitoring services and customers considered them to be each other's closest competitors. Concerns therefore arose that post-merger the constraint imposed by competition between the parties would be lost.

Based on the evidence available, the OFT considers that the costs of entry and expansion are relatively low, and there are sufficient opportunities for new and existing competitors to achieve expansion either through new installations, or following customer contract renewals. The only potential barrier to entry identified related to issues surrounding reputation and customer relationships. Countervailing buyer power is also expected to provide a significant constraint on the parties post-merger. In particular, several customers indicated that they would be willing to sponsor entry or expansion by an existing competitor, or take services in-house. This willingness to sponsor entry/expansion would also be expected to assist in overcoming any reputational / customer relationship barriers to entry. On this basis, the combined constraint imposed by the threat of new entry, expansion by existing competitors and countervailing buyer power is considered to be significant.

Consequently, the OFT does not believe that 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.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTE

1. It should be noted that the group of goods or services used to determine jurisdiction may be different to the relevant economic market used for the purposes of the OFT's competition assessment. Generally, the OFT will have regard to the narrowest reasonable description of good and services to determine whether the share of supply test is met. See paragraph 2.24 of 'Mergers – substantive assessment guidance'.

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