Completed acquisition by Babcock International Group plc of the Strachan & Henshaw division of Weir Group plc

Affected market: Engineering for the defence and nuclear industries

No. ME/3650/08

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 and decision.

The OFT's decision on reference under section 22(1) given on 2 July 2008. Full text of decision published 3 September 2008.

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

PARTIES

Babcock International Group Plc (Babcock) is an asset management business, which manages fixed infrastructure in the rail, power networks, defence and nuclear sectors, and defence assets such as military aircraft, warships and nuclear submarines.

The operations of the Strachan & Henshaw Division of Weir Group plc (S&H) are focused on the defence and nuclear sectors. In the defence sector, S&H's activities relate to weapons handling and launch systems for submarines. In the nuclear sector, S&H provides support services for nuclear power generation and the nuclear decommissioning sector. The UK turnover for S&H in the year ended 31 December 2006 was £43.2 million.

TRANSACTION

The transaction involves the acquisition by Babcock of the entire issued share capital of Strachan & Henshaw Limited (which has small subsidiaries in Canada and the US), and Strachan & Henshaw Australia Pty Ltd, which together comprise S&H from the Weir Group PLC.

Following a competitive bidding process, the parties signed a sale and purchase agreement and completed the transaction on 21 April 2008 therefore the statutory deadline for a decision is 20 August 2008. The transaction was notified to the OFT on 12 May 2008 and the administrative deadline for a decision is 8 July 2008.

JURISDICTION

As a result of this transaction Babcock and S&H have ceased to be distinct. The parties overlap in the supply of fuel route support services for the UK nuclear industry, together providing fuel route support services to all of the UK's seven Advanced Gas-cooled Reactors (AGRs). Therefore 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.

ASSESSMENT

The parties are active in the defence and civil nuclear industries, and primarily overlap in the supply of fuel route support services to the UK's AGR power plants.

While the parties have a 100 per cent share of fuel route support services for AGRs in the UK, Babcock argued that the merger would not lead to a substantial lessening of competition as each party only provides support services for those fuel routes for which they were the OEM. The parties have submitted that as each AGR is unique in terms of its specifications and design this means that fuel route support services need to be tailor-made and require an understanding of the original design and access to the design's intellectual property rights. Anyone other than the OEM would be required to reverse-engineer the support services to enable them to be carried out correctly, and given that AGR technology is being phased out, albeit over a number of years, and replaced by either PWR or BWR powered plants such steps were not commercially viable. [ ].

Given this, the OFT believes that the provision of fuel route services to individual AGRs should be considered as separate relevant product markets. Further, the OFT does not consider it plausible, absent the merger, that Babcock and S&H would have entered each other's market by bidding for fuel route support services on AGRs for which they were not the OEMs, and, for the same reasons, entry by other companies such as Areva, GE-Hitachi and Westinghouse is equally unlikely.

Any new generation of nuclear reactors are most likely to be based on a water reactor, PWR or BWR, rather than the AGRs that the parties provide support services for. Water reactors are the norm outside of the UK, and the parties will face competition for future contracts from a number of worldwide competitors.

In the light of the above evidence, the OFT does not believe that the merger will lead to a substantial lessening of competition in the provision of fuel route support services for AGRs.

Consequently, the OFT does not believe 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 not be referred to the Competition Commission under section 22(1) of the Act.

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