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OFT refers chlorine distribution merger between BOC and Ineos to the Competition Commission

68/08    29 May 2008

The OFT has referred the proposed acquisition by BOC of Ineos' chlorine packaging and distribution business to the Competition Commission (CC).

The OFT believes this merger will substantially lessen competition in the supply of packaged chlorine to the UK water industry, which relies on chlorine as an essential input for water purification. Since BOC's entry in the market in 2000, it has grown into a substantial competitor, principally at the expense of Ineos, the leading player, with well over 60 per cent of the market. UK water companies have benefited from BOC's rivalry with Ineos, and almost all were concerned that the merger would leave them worse off as a result.

The OFT is referring the merger based on two theories of harm. First, the OFT believes it likely that BOC could unilaterally raise prices profitably after the merger, irrespective of any remaining competition.

Second, the OFT also considers it plausible that the merger may facilitate tacit coordination between BOC and Albion - for example, to reach a tacit bargain not to poach each other's customers. There are two key reasons for this. First, BOC and Albion will form a quasi-duopoly, each with a potentially similar cost structure, making it easier for them to coordinate and monitor each other's behaviour. Second, the merger arguably eliminates a potentially important constraint on coordination because, post-merger, BOC will become a large incumbent and will lose its status as a smaller aggressive player, or 'maverick' force.

As this merger is in a market worth less than £10 million per year, the OFT also considered the issue of 'de minimis' - that is, whether the market was of sufficient importance to justify a reference to the CC. The OFT has concluded that a CC inquiry is proportionate to the potential detriment created by the merger.

Simon Pritchard, OFT Senior Director of Mergers, said:

'The merger is likely to raise chlorine prices to water companies because it removes rivalry between BOC and Ineos - the most important competitive dynamic in the market in recent years. We also want the CC to study the risk of tacit coordination between the duopoly of BOC and Albion, partly because the merger eliminates BOC's 'maverick' incentives to compete aggressively. Given the strength of our concerns, which are shared by customers, and combined with the size of the market and the value of deterrence, we have judged that the benefits of a CC inquiry outweigh the costs. As such, we are instructing the CC to examine the merger further.'

NOTES

1. The OFT has not received any evidence that explicit or tacit coordination occurred in the packaged chlorine market pre-merger.

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. 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 CC may extend the 24 week period within which it is required to publish its report by no more than eight weeks if it considers that there are special reasons why the report cannot be published within that period.

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

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