H+H Celcon Limited and Marley Building Materials Limited: A report on the proposed merger

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Summary

Introduction

On 13 February 2002, the Secretary of State for Trade and Industry referred to the Competition Commission (CC) the proposed acquisition of Marley Building Materials Limited (MBM), part of the Etex Group SA, by H+H Celcon Limited (H+H Celcon), a subsidiary of H+H International A/S (H+H International). We were asked to report by 27 May 2002. Our terms of reference are set out in Appendix 1.1.

The terms of the bid for MBM have been agreed between the parties subject, chiefly, to regulatory clearance. H+H Celcon and MBM (the main parties) both manufacture and supply aerated concrete blocks for use in the construction industry, especially in residential construction. Each firm has three plants at locations mainly in the southern half of Great Britain and the Midlands. Aerated concrete blocks are known as aircrete blocks and are referred to as such throughout this report. The other types of concrete block used in construction are aggregate concrete blocks, either dense or lightweight. The manufacturing equipment and processes for aircrete blocks are very different from those involved in aggregate block production. Of the 9 million m3 sales of concrete blocks in 2001, aircrete blocks accounted for one-third (2.9 million m3), dense aggregate blocks for 41 per cent (3.7 million m3), and lightweight aggregate blocks for 26 per cent (2.3 million m3).

The main parties each produce about one-third of the volume of aircrete blocks sold in Great Britain, so that the resulting merged entity would control 66 per cent of current supply. Virtually all the remaining third is currently supplied by Tarmac Limited. The key question at the outset of our inquiry, therefore, was what should be taken as the relevant economic market, aircrete alone or-as the main parties maintained-all concrete blocks.

H+H Celcon and MBM argued that the market was at least as wide as all concrete blocks on four main grounds: that aggregate blocks were a functional substitute for aircrete blocks in all instances where the latter are used; that the overall cost of walls (in which aircrete blocks are chiefly used) was virtually the same, whichever material was used; that prices of the two types of block showed very similar trends over the 15-year period to 2002; and that there was evidence of customers switching between aircrete and aggregate blocks.

Taking all the evidence into account, however, we have concluded that the relevant market is aircrete alone. There was little willingness on the part of housebuilders giving evidence to us to switch between aircrete and aggregate blocks in response to a small but significant rise in aircrete prices-the standard test for defining a market. There was almost no readiness on their part to switch in response to a hypothetical 5 per cent rise in aircrete prices. Some housebuilders indicated that they might consider switching or would switch if prices were raised by 10 per cent. However, this evidence is not clear cut. In addition, there are grounds for considering that current aircrete price levels are above competitive levels, which suggests that these respondents to some extent overestimate the degree of substitutability relevant to market definition.

Evidence available to us indicates that there are three main reasons underpinning the reluctance to switch in response to a price increase:

(a) housebuilders showed clear preferences for using aircrete blocks in their main use-the inner leaf of exterior walls-because they are much lighter than aggregate blocks, have greater thermal insulation properties, and are easier to handle and to work with than aggregate blocks;

(b) there can be significant perceived and actual costs associated with switching from aircrete to aggregate blocks; and

(c) the impact of a 5 to 10 per cent price rise has only a marginal effect on the total costs of walls as the price of concrete blocks is a very small element of the cost of materials and labour involved.

In addition:

(d) despite some limitations on the data available, the information gathered points to substantial variations in the price differential between aircrete and aggregate blocks both through time and across regions in England, which is not consistent with the contention that aircrete and aggregate blocks are close substitutes for each other.

The merger would give the new company control of two-thirds of the total volume requirement for the product, with only one other significant competitor-in short, the situation post-merger in Great Britain would in effect be a concentrated duopoly. We therefore went on to consider whether the constraints that might operate on the merged firm would be sufficient to prevent it from exploiting its enhanced position in the aircrete market in Great Britain. We considered three possible constraints:

(a) competition between suppliers;

(b) entry into the market; and

(c) countervailing buyer power.

We noted that other suppliers of aircrete blocks had only limited spare capacity for H+H Celcon's and MBM's customers to turn to; and that little new capacity was likely to become available in the industry apart from that already being introduced by H+H Celcon itself. We have therefore concluded that other manufacturers would not be in a position to act as a competitive constraint on the new firm. We also noted, having taken account of all the evidence, that there was little to mitigate the probability that the concentrated duopoly resulting from the merger would have the opportunity and incentive to raise and maintain prices above levels that would otherwise be expected.

As to the prospect of new entry, we looked at the currently planned entry by one firm and concluded that this was not likely to be of a scale that would provide a significant competitive constraint on the activities of the merged firm.

We also looked at possible imports and have concluded that, despite a small presence of supplies from a Northern Ireland manufacturer into the market in Great Britain, such prospects as there are of imports on a significant scale are either relatively remote or do not involve sufficiently large volumes to act as a check on the behaviour of the merged firm.

Finally, we have concluded that there would be insufficient buyer power to offset the market power of the merged company, and that such buyer power as did exist would be likely to be reduced as a result of the merger.

H+H International said that benefits of the merger included a reduction in operating costs, and greater research and development activity which would lead to greater innovation. This would result in greater competitiveness in a global environment. We noted these claims, but we saw little prospect that such benefits from the merger would, to any great extent, be passed on to the new firm's customers.

. We therefore concluded that the merger may be expected to operate against the public interest because prices for aircrete blocks would be higher than otherwise and because competition in the aircrete block market would be impaired.

We considered whether a form of price control would be a satisfactory remedy, but concluded that it would not. Nor were we able to identify any structural remedy by way of divestment of plants that would offset the reduction in competitive pressures that would otherwise occur and ensure a continuance of the competitive pressures that currently obtain in the industry. We therefore recommend that the merger be prohibited.

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