Alcatel Cable SA and STC Limited: A report on the proposed acquisition by Alcatel Cable SA of STC Limited

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On 27 October 1993 we were asked to investigate and report on the proposed acquisition of STC Limited (STC) by Alcatel Cable SA (Alcatel Cable) (see Appendix 1.1). Both companies supply submarine cable systems. STC is ultimately owned by Northern Telecom Limited (NT), a large multinational company registered in Canada. The ultimate parent of Alcatel Cable is Alcatel Alsthom SA (Alcatel), another large multinational company registered in France.

Reflecting the bulk of the evidence we received, we conclude that submarine cable and satellite systems are separate markets. Although both Alcatel and STC took the view that the balance of advantage between cable and satellite might change, as it had in the past, it is doubtful whether competition from satellites is now effectively constraining the prices charged by suppliers of submarine cable systems.

The systems may be divided into long-haul (repeatered) and short-haul (unrepeatered). The suppliers generally operate on a global basis, particularly for repeatered systems. Supply should therefore be considered on a global basis although indigenous suppliers may be favoured within a country or region.

Long-haul submarine cable systems require the installation of repeaters underwater at regular intervals in order to maintain the quality of transmission. This increases substantially the cost of an underwater system because of the high degree of reliability necessary for a planned life of 20 to 25 years without underwater maintenance. There are few significant suppliers in this sector of the market. STC and Alcatel both had a 19 per cent share over the period 1990 to 1993, giving the combined entity a share of 38 per cent of a sector worth about US$6,788 million over that period. AT&T had 36 per cent and Japanese firms 24 per cent between them. Pirelli accounted for the remaining 2 per cent, but did not itself manufacture the repeaters for the contracts concerned.

The short-haul sector is at present only about one-tenth of the size of the total market for submarine cable systems, but its share is expected to increase to around one-fifth over the next four years. The suppliers of repeatered systems also supply over 60 per cent of the unrepeatered systems but there are five other suppliers. STC and Alcatel both had 22 per cent of the short-haul sector of the market over the period 1990 to 1993, giving the combined entity a share of some 44 per cent of a sector worth $779 million over that period. American Telephone and Telegraph Company (AT&T) had 12 per cent, Japanese firms 7 per cent, Pirelli Cavi SpA (Pirelli) 16 per cent and NKT Elektronik (NKT) 7 per cent. Other suppliers shared the remaining 14 per cent.

The Office of Telecommunications (OFTEL) believes that price control arrangements affecting British Telecommunications plc (BT) until at least 1997 are sufficient to ensure that telephone users are protected from any abuse in the form of higher prices that might result from the acquisition.

We noted some concern that STC's future as an important UK business might be jeopardized by the proposed merger if, for example, some of STC's research and development (R&D) and manufacturing were transferred to Alcatel establishments in France, with effects on employment and on STC's UK suppliers. Alcatel pointed to its policy of developing its foreign acquisitions, and we have no reason to believe that it would not implement this policy following the acquisition of STC. Alcatel told us that it had no plans to make any redundancies in either its own or STC's business, and we found that this is consistent with its plans for STC. We received no representations from trade unions representing STC's workforce.

NT said that STC did not fit within its core strategy. It had discussed the possible sale of the business with prospective purchasers but only Alcatel had made a firm offer. If the proposed sale did not go forward, STC would face strong competition for funding, and might not be able to secure funds at an appropriate level, given the heavy demands of NT's core business. STC's senior management told us that they had given some consideration to a management buyout but had decided that it would be impracticable.

The proposed merger will increase an already high level of concentration amongst suppliers in the long-haul sector of the market. This may, however, be inevitable, as BT and Cable & Wireless plc (C&W) suggested, given the increasing sophistication of the product and the consequent increasing demands for R&D and capital investment. Barriers to entry are high in an industry subject to rapid technological change. The short-haul sector is also highly concentrated, and is taking an increasing share of the total market. But the technological demands are not so great, making the sector attractive to the smaller competitors; there is a larger number of suppliers; and in any event market entry is relatively easy.

STC has clearly been a lively independent competitor, and we recognize the dangers inherent in the further concentration of supply in the long-haul sector of the market. However, we are satisfied that STC will need the long-term wholehearted support of a strong parent company if it is to continue to thrive. We accept that Alcatel intends to provide that support and to continue both to manufacture submarine cable systems and to carry out concomitant R&D in the UK. The proposed merger is therefore likely to be a means of preserving STC's presence in the UK as a significant exporter and employer at the leading edge of telecommunications technology. We believe that any tendency which the merged group might have to abuse its market position will be kept in check by competition between suppliers and the strong countervailing power of the purchasers of submarine cable systems. We therefore conclude that the creation of the merger situation that we have identified may not be expected to operate against the public interest.

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