Completed acquisition by various subsidiaries of Greif Inc of the steel drum and closures business of Blagden Packaging Group

Affected market: Steel drums

No. ME/2754/06

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, undertakings in lieu, assessment and decision.

The OFT's decision on reference under section 22(1) given on 20 February 2007. Full text of decision published 8 March 2007.

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

PARTIES

Greif Inc (Greif) is the US parent company of a multinational industrial packaging group which has production facilities in the UK at Ellesmere Port, Hull and Burton-on-Trent. Greif's UK subsidiary, Greif UK Ltd, reported turnover of £60.4 million for the year ended 31 October 2005.

Blagden Packaging Group (Blagden PG) is also a multinational industrial packaging manufacturer consisting of various subsidiaries of Blagden Group NV, (^ note 1) headquartered in Belgium. Blagden PG has a UK production site in Manchester. Its annual turnover in the UK amounts to approximately £[less than 70 million].

TRANSACTION

The transaction was effected by means of a management buy-out (MBO) of Blagden PG, followed by immediate sale of its steel drum and closures manufacturing business (Blagden) to various subsidiaries of Greif.  The MBO has retained ownership of Blagden's steel drum collection, reconditioning and recycling business.

Greif completed its acquisition of the share capital of Blagden on 30 November 2006. On 3 January 2007, the OFT accepted initial 'hold separate' undertakings given by the parties under s. 71 of the Enterprise Act 2002 (the Act). The statutory deadline for the OFT's decision is 29 March 2007 and the administrative target date is 20 February 2007.

JURISDICTION

As a result of this transaction Greif and Blagden have ceased to be distinct. The parties overlap in the manufacture and supply of new large steel drums and – by virtue of the parties' combined shares of [80 – 90] per cent – 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 a relevant merger situation has been created.

THIRD PARTY VIEWS

We received unsolicited complaints from third parties after the merger was announced in October 2006, and a further expression of concern from a customer in response to our ITC. A substantial majority of customers who responded to our questionnaire, or who were otherwise contacted, were also concerned about the effects of the merger on competition.

UNDERTAKINGS IN LIEU 

Where the duty to make a reference under section 22(1) of the Act applies, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it, accept from such of the parties concerned undertakings as it considers appropriate.

The OFT's Mergers Substantive Assessment Guidance states that, undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are capable of ready implementation.

Greif offered behavioural undertakings not to increase ex works prices for new steel drums to existing customers of Greif UK and Blagden UK – subject to fluctuations in the costs of raw materials and the rate of UK inflation. These undertakings were to be in place for a period of three years from the date of acquisition.

The OFT's guidance states a clear preference for structural remedies. In this case, the proposed behavioural remedy raises serious questions as to whether such pricing behaviour would be capable of restoring the previous competitive dynamic. In addition, given that it is subject to increases and decreases in the costs of raw materials and the rate of inflation over a three year period,  both the capacity to monitor and the transparency of such a remedy would in the OFT's view not be sufficiently clear.

The OFT therefore does not believe the undertakings offered are sufficiently clear cut to address the competition concerns outlined above.

ASSESSMENT

The parties overlap in the manufacture and supply of new large steel drums and drum closures.

Evidence before the OFT indicates that the supply of closures is global in geographic scope and that a number of competitive sources of supply remain post-merger. No credible theory of harm in the supply of closures is attributable to the merger at either a horizontal or a vertical level.

Some customers who have used steel drums in the past now use industrial containers made from other materials such as plastic and fibre. However, for some customers, only steel drums are suitable for either all or for certain ranges of their total requirements. Reconditioned drums do not appear to be substitutable in all cases. The cautious frame of reference for this competition analysis is therefore the supply of new large steel drums.

Available evidence pertaining particularly to transport issues makes the UK the appropriate geographic frame of reference for assessing the impact of the merger on the supply of new large steel drums.

The parties' combined shares of the supply of new large steel drums in the UK amount to over [80-90] per cent. Supply of this product in the UK is very highly concentrated.

Third party comment submitted that the remaining significantly smaller competitors had insufficient capacity to meet substantial order requirements and that they did not manufacture or supply a sufficiently complete range of regulation-compliant products to match the full ranges offered by Greif and Blagden. Customers have raised concerns that the merger will remove their ability (having previously been able to actively negotiate and apportion demand between the two principal suppliers) to discipline pricing behaviour.

In addition to this loss of competition which the OFT attributes to the merger, demand in the UK for new large steel drums has been in continuing decline over a number of years and third parties have pointed to an ongoing process of suppliers exiting the industry. Additionally, the available evidence indicates that there is significant overcapacity in steel drum manufacture in the UK. Entry by new competitors would therefore be insufficient in time, scope and likelihood to address any competition concerns that arise from the merger.

The OFT considers that any countervailing buyer power previously held by major customers would be eliminated by the structural consequences of the merger.

Consequently, the OFT believes that it is 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.

NOTE

1. The vending companies in the transaction are: Blagden Packaging Nederland BV, Blagden Packaging Rumbeke NV, Blagden Packaging Wichelen NV, Blagden Packaging Zwolle BV, and Van Loon Consulting Services BV. The companies being sold are: Blagden France Holdings SAS, Blagden Packaging NV, Blagden Packaging Tournai NV, Blagden Packaging Femba Ibérica SL, Blagden Packaging Singapore Pte. Ltd, Bipol Co Ltd, Bipol Sib Co Ltd and certain assets of Blagden Packaging Nederland BV.

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