Anticipated acquisition by G4S plc of Global Solutions Limited

Affected market: Supply of security services

No. ME/3493/08

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 33(1) given on 2 May 2008. Full text of decision published 28 May 2008.

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

PARTIES

G4S plc (G4S) operates worldwide in two sectors, namely the provision of security services (including manned security, security systems and care and justice services) and the provision of cash services (that is, secure transport and storage of cash and valuables between premises and the processing of cash within the secure premises of the company).

Global Solutions Limited (GSL) is divided along three business divisions: GSL Care and Justice Services; GSL Integrated Services; and GSL Data and Managed Services. The only division which is relevant to this assessment is GSL Care and Justice Services, which consists of four specialist units offering services in the UK (as well as operations in South Africa and Australia): offender management (management of prisons and rehabilitation) and immigration services (management of immigration detention centres); prisoner escort and court custody services; police services (including custody support services); and children's services (including secure training centres). In 2006, GSL generated a worldwide turnover of around £402.4 million (of which approximately £[ ] was generated in the UK).

TRANSACTION

G4S proposes to acquire the entire issued share capital of DeFacto 1119 Limited, the holding company for GSL.

An informal submission was deemed received from G4S on 10 March 2008. The 40 day administrative deadline expires on 7 May 2008. The 45 day statutory deadline expires on 20 May 2008. [see note 1]

JURISDICTION

The aggregate Community-wide turnover of each of the parties exceeds €250 million and the parties combined aggregate worldwide turnover exceeds €5,000 million. Although GSL achieves more than two thirds of its Community turnover within the UK, G4S does not. Therefore, the undertakings concerned do not each achieve more than two thirds of their aggregate Community-wide turnover within one and the same Member State, as envisaged by Article 1(2) of the EC Merger Regulation (ECMR) [see note 2]. The concentration therefore meets the requirements of a Community dimension pursuant to Article 1(2) ECMR.

On 8 February 2008, the parties submitted a Form RS to the European Commission, requesting the referral of this transaction to the UK pursuant to Article 4(4) ECMR. On 7 March 2007, the European Commission agreed to the Article 4(4) request from which date the OFT assumed jurisdiction.

As a result of the transaction, the parties have ceased to be distinct.

The UK turnover of GSL was approximately £[ ] in 2006. The turnover test pursuant to Section 23(1)(b) of the Enterprise Act 2002 (the Act) is therefore satisfied. The OFT believes, therefore, 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 relation to the operation and construction of adult custodial facilities, the operation and construction of youth justice facilities, the provision of support services to police forces and the secure transportation of offenders, immigrants and asylum seekers. Both parties have also bid for the provision of electronic tagging and monitoring services, although only G4S has been successful in winning a contract. Contracts for the provision of these services can be awarded either on a PFI basis for construction and operation or on a management only (MO) basis. The parties submit that the market should be looked at as one for the provision of care and justice services in general.

On the basis of the evidence on demand-side and supply-side substitutability between the various care and justice services and between services provided under PFI and MO contracts, the OFT has decided to consider the transaction under the following frames of reference:

i.  operation of adult custodial facilities (prisons) under MO contracts
ii. operation and construction of adult custodial facilities (prisons) under PFI contracts
iii. operation of young offender institutes (YOIs) under MO contracts
iv. operation and construction of YOIs under PFI contracts
v. operation and construction of secure training centres (STCs) under PFI contracts
vi. operation of immigration removal centres (IRCs) under MO contracts
vii. operation and construction of IRCs under PFI contracts
viii. operation of police custody suites under MO contracts
ix. operation and construction of police custody suites under PFI contracts
x. secure transportation of offenders, immigrants and asylum seekers
xi. provision of electronic tagging and monitoring services.

Given the lack of competition concerns arising in relation to any of the narrow frames of reference identified, the OFT does not need to come to a conclusion on the precise relevant product market in this case.

The parties submit that the geographic market for the provision of these care and justice services is at least the whole of Great Britain and may be wider because providers of care and justice services operating elsewhere in the world can and do bid for contracts in Great Britain. The OFT accepts that the geographic market is at least the whole of Great Britain. It acknowledges the parties' arguments in relation to a wider market. However, given the lack of competition concerns on even the narrowest basis, the OFT does not consider it necessary to conclude on the precise geographic scope of the market.

Six companies have reached the pre-qualification stage of PFI tenders for the construction and operation of a prison in Great Britain. To-date, PFI prison contracts have been awarded to four of these bidders (Kalyx, Serco, G4S and GSL). The parties submit that the other two pre-qualifying bidders (The Geo Group and Reliance) are credible bidders which impose a competitive constraint on the four current contract holders. This view is supported by third parties. The OFT does not accept that HMPS is a current competitor in this segment, although it cannot entirely exclude that it exerts some competitive constraint or may do so in the future. The OFT's conclusion on the basis of the evidence available is that the existence of five credible bidders for future PFI contracts for the construction and operation of prisons is sufficient to ensure that competition is maintained in this case. The OFT considers that the significant anticipated expansion in the number of prison places will make this segment even more attractive.

The competitive position in relation to MO contracts for the operation of prisons in Great Britain is comparable to that in relation to PFI contracts discussed in the previous paragraph as the OFT considers that PFI providers could relatively easily bid for and perform an MO contract. The OFT also received evidence that HMPS can and does bid in relation to these contracts and is the provider of last resort for NOMS. As such, HMPS is a significant competitive constraint on private sector bidders for MO contracts for the operation of prisons. Therefore, the OFT concludes that the transaction does not give rise to any competition concerns in relation to MO contracts for prison services.

No MO contracts for YOIs have been awarded to-date. The only two PFI contracts for YOIs were awarded as part of a prison facility. The OFT has analysed YOIs in the context of its assessment of prisons and does not consider that any additional issues or concerns arise.

The merged entity will hold three of the four PFI contracts for operation and construction of STCs. The fourth contract was awarded to Serco. The OFT understands that none of the current contracts will come up for renewal for almost five years and no new construction of STCs is planned within this period. The terms of PFI contracts are set at the time the contract is awarded. As such, the OFT does not consider that this transaction will have any effect on competition within this segment for almost the next five years. In relation to future contracts put out to tender after that date, the OFT understands that Reliance and the Castle Care Group have bid for contracts in the past and accepts that there are other potential credible bidders in the form of bidders for prison contracts (Kalyx and The Geo Group). As such, the OFT does not consider that the transaction raises competition concerns in this area.

Of six MO contracts for the operation of IRCs put out to tender to the private sector, the merged entity will hold four. The other two contracts are held by The Geo Group and Serco. The parties submit that Kalyx, which has won a PFI contract for the operation and construction of an IRC, is also a credible bidder, as is Reliance, which has bid for these contracts in the past. The OFT analysed bidding data from UKBA which indicated that there has been a strong degree of rivalry amongst all six bidders in past tenders and that the parties are not each other's closest competitors. On this basis, the OFT is able to exclude any competition concerns in relation to this segment.

Two contracts for the operation of IRCs were put out to tender to the private sector on a PFI basis. The parties did not win these contracts and so do not overlap in relation to this segment. Given the lack of concerns in relation to MO contracts for the operation of IRCs, the OFT concludes that the transaction also raises no competition concerns in relation to this area. In relation to future tenders, the OFT accepts that, other than the existing providers, The Geo Group and Reliance both constitute credible bidders in addition to the merged entity.

The merged entity will hold five out of the eight contracts for the operation of police custody suites put out to tender on an MO basis. The other three contracts are held by Reliance. The parties submit that Serco and The Geo Group have submitted bids in previous tenders and that Kalyx and a number of other operators are credible bidders and represent a competitive constraint. Only 12 out of a potential total of 51 police authorities have currently outsourced the operation of police custody services to the private sector. This is an area of the care and justice sector which is likely to expand in the coming years and, as such, may be attractive to other bidders. The OFT concludes that, in addition to the merged entity, the two current providers as well as a number of additional credible bidders will ensure that future tenders are competitive. Therefore, the transaction does not raise any concerns in relation to the operation of police custody suites under MO contracts.

In relation to PFI contracts for the operation of police custody suites, one of these was awarded to GSL and the other four to Reliance. Given the lack of overlap between the parties in this area, the fact that Reliance is by far the most significant operator and the number of other credible bidders for future tenders, the OFT does not consider that the transaction raises any competition concerns in relation to this segment.

The merged entity will hold six out of the 12 contracts for secure transportation of offenders, immigrants and asylum seekers. Four other companies hold the other contracts: Reliance (three), Serco (one), The Geo Group (one) and ITA (one). The OFT understands that the significant increase in the number of prison places will have a knock-on effect in terms of expanding demand for these services. Given that post-transaction there will still be four companies which have submitted credible bids in past tenders, the OFT is able to conclude that the transaction will not lead to competition concerns in relation to the provision of secure transportation of offenders, immigrants and asylum seekers.

G4S holds three contracts for the provision of electronic tagging and monitoring services. The other three are held by Serco. GSL bid for these contracts in the latest round of tenders, as did a number of other operators. The OFT understands that this is an expanding market which is likely to attract a significant number of bidders when the contracts come up for renewal. As such, the OFT does not consider that the transaction raises any competition concerns in relation to this area.

In relation to future tenders for STCs, to the extent that there is any doubt about the competitive constraint on the merged entity imposed by the existing providers and past credible bidders, the OFT considers that potential credible bidders for STC PFI contracts in the form of credible bidders for prison contracts will ensure that an adequate level of competition is maintained. In relation to the other individual segments for the provision of care and justice services identified, the OFT does not consider that it is necessary to come to a conclusion on the ease and likelihood of new entry or expansion, or on the issue of buyer power given that the transaction does not raise significant competition concerns.

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.

NOTES

1. Calculated according to section 34A of the Enterprise Act 2002.
2. 139/2004/EC, OJ L24, 29.1.2004

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