90/08    30 July 2008

The OFT has used its 'de minimis' exception not to refer the anticipated acquisition of the alginates business of ISP Holdings (U.K.) Limited by FMC Corporation to the Competition Commission (CC).

This is the fourth case in which 'de minimis' has been used following the publication in November 2007 of the OFT's revised merger guidance on this point, which raised the threshold for considering this exception from £400,000 to £10 million, subject to case-by-case evaluation. Alginates are a natural product derived from seaweed, whose moisture-absorption qualities are used to promote thickening, gelling, texture stabilisation and film formation in the industrial, food and pharmaceutical sectors. The OFT's review focused on the production and supply of alginates for the pharmaceutical sector in general, and in particular for use in wound care, controlled release and anti-reflux products.

The parties account for a very high proportion (in the range 65-85 per cent) of the alginates supplied to the global pharmaceutical sector. The OFT was comfortable on the evidence it received that there were sufficient actual or potential alternative suppliers of alginates for use in wound care and controlled release applications. However, it could not rule out competition concerns in relation to the supply of alginates for anti-reflux applications, in particular given the presence of high barriers to entry, such as technical know-how, customer switching costs and regulatory barriers.

Having concluded that there was a realistic prospect of a substantial lessening of competition for anti-reflux alginates, the OFT has decided to exercise its 'de minimis' discretion not to refer the acquisition to the CC, concluding that a reference would, in the circumstances of this case, be disproportionate - in other words, that the market for the UK supply of alginates for anti-reflux applications is of insufficient importance to justify a reference.

In exercising its 'de minimis' discretion, the OFT's decision was based on the following facts:

• the overall turnover of the relevant supply market in the UK was less than the OFT's £10 million threshold, and the purchases of those customers capable of being adversely affected was particularly modest (less than £1 million) – while the largest customer accounted for the vast majority of sales of alginates, its unique position on the market meant it enjoyed substantial buyer power and was considered likely to be unaffected by the merger,
  
• while entry barriers were high for the period immediately following the merger they were unlikely to be insurmountable in the medium to long-term, and
  
• the value of the potentially affected market in the UK constituted a small proportion of the overall transaction, and there were unlikely to be substantial deterrence effects associated with the reference of this merger to the CC.

Dr. Amelia Fletcher, OFT Chief Economist, said:

'Our fourth 'de minimis' case shows that we take a pragmatic approach in exercising this discretion and are keen to avoid disproportionate references where possible. In this case, a wider deal has given rise to an overlap where the total value of affected supply in the UK is modest, and the adverse effects on competition are expected to be relatively limited. We therefore judged it appropriate to spare the public purse the costs of a Competition Commission reference.'  

NOTES

1. The 'de minimis' exception is formally known as the 'markets of insufficient importance' exception to the duty to refer under the Enterprise Act 2002. In this case, as in the three previous 'de minimis' cases involving rail franchises (see press release 180/07 and 16/08) the OFT did not believe that, as a matter of principle, clear-cut undertakings in lieu of reference were available. It reached the opposite conclusion in the Berkshire newspaper case (see press release 15/08). The OFT's approach to the factors it will take into account in exercising its 'de minimis' discretion in this case is in line with its recent decision in BOC/Ineos (although in that case the OFT ultimately concluded against exercising its discretion (see press release 68/08)).

Download more information on the guidance (pdf 122 kb).

2. The reference test - the OFT has a duty to make a reference to the CC if the OFT 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, and the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

3. Merger jurisdiction - under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises, and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.

4. The full text of the decision will appear in the mergers section.