Notification No. CA/2/94 ‑ Barlo Group plc/ Kingspan Group plc.

Decision No. 302

Introduction

1.	Arrangements for the acquisition by Barlo Group plc, (Barlo), of the assets and property, including the goodwill, of Kingspan Veha Limited, (Veha), from Kingspan Group plc, (Kingspan), were notified to the Competition Authority on 8 February 1994.  The notification requested a certificate.  Notice of intention to issue a certificate was published in the Irish Times on 18 March 1994.

The Facts

(a)	The Subject of the Notifications

2.	The notification relates to an agreement, dated 7 February 1994, between Barlo, Mellstock Limited, Veha and Kingspan for the sale by Veha of the assets and property, including goodwill, of its business located in Wicklow to Mellstock.  Mellstock is a wholly owned subsidiary of Barlo and the arrangements effectively involve the acquisition by Barlo of Veha's radiator manufacture and design business.  Veha is a wholly owned subsidiary of Mildenhall which is an associate company of Kingspan.  The business being acquired is defined in the agreement as that heretofore carried on by Veha `comprising the design, manufacture, distribution and sale of radiators and other heating equipment.'  The assets being acquired are `the Agency Agreements, the Computing Assets, the Consumable Stores, the Contingent Rights, the Contracts, the Goodwill, the Intellectual Property, the Investments, the Leased Assets, the Motor Vehicles, the Plant, the Prepayments, the Property, the Records, the Shares and the Stocks.'  The arrangements include certain non‑compete provisions.  The acquisition does not appear to come within the scope of the Mergers Acts although Barlo has disputed this point.

(b)	The Parties

3.	Mellstock is a wholly owned subsidiary of Barlo.  Barlo is a manufacturing based company which is engaged inter alia in radiator production and processing of plastic products for both domestic and export markets.  It owns radiator manufacturing plants in Clonmel, Belgium and the UK.  It had a turnover of £49.7m in the year to March 1993.

4.	Veha is a private limited company which manufactures domestic radiators at premises situated in Wicklow Town.  The plant was originally established by Veha B.V., a Dutch company, in the mid 1950s.  In 1962 both the Dutch parent and the Irish subsidiary went into liquidation.  It was acquired from the liquidator by a management buy out in 1964.  An industrial dispute which began in 1984 resulted in the closure of the plant.  In 1988 the business was again put into liquidation.  It was sold by the liquidator to Brackenglen, which subsequently changed its name to Kingspan Veha.  At the time Brackenglen was wholly owned by Kingspan.  BES investors acquired a 50.1% stake in Mildenhall, Veha's holding company in 1989, but Kingspan has an option to purchase those shares and may be required to purchase them.  According to Veha's accounts it recorded losses of £155,000 in the year ending 31 December 1992.  At that stage it had accumulated losses of £426,000.  Kingspan is a public company engaged in the building products sector.  In the year ending 31 December 1992 it had a turnover of £53.1m.

(c)	The Product and the Market

5.	Veha is engaged in the business of manufacturing and designing panel radiators, i.e. radiators for use in conjunction with central heating systems mainly in private households and commercial premises.  Most household central heating systems use boilers to heat water which is pumped to radiators located in individual rooms within the house.  The boilers in such systems are fuelled by either oil, solid fuel, natural gas or LPG.  The same type of radiators can be used for any of these fuels.  Electrical central heating systems and certain warm air systems do not use radiators.

6.	The relevant market is that for radiators for use in central heating systems in households and commercial premises.  There are two main sources of demand for installation of household central heating systems and hence for radiators, namely, new houses and existing houses.  By and large radiators tend to have a fairly long life and so there is only a very limited demand for replacement or upgrading of radiators once installed.

7.	Trends in house building have changed considerably over the past 20 years or so, with the result that most new houses now have central heating installed when they are being built, in contrast to the situation which prevailed prior to 1970.  Essentially most new houses are built by private speculative builders and they effectively make the decision as to which type of heating to install.  They also decide on the type or brand of radiators to use.  The actual central heating systems may be installed by sub‑contractors employed by the main builder, in which case they may make the decision as to which brand of radiator to install.  Both groups purchase these radiators from builders' suppliers who in turn are supplied by manufacturers and/or importers.  The individual house buyer is effectively not involved in the decision as to which brand of radiator will be installed.

8.	The number of new house completions has been rising steadily over the past 5 years although the 1992 total was lower than that recorded during the early 1980s.  Over 22,000 houses were completed in 1992 and, as stated earlier, the vast majority would have had central heating installed.  According to the 1991 Census of Population there were a total of 1,029,000 private households in the State.

	

	Table 1:  Number of New House Completions.

			Private		Local Authority		Total

	1988		14204			1450			15654
	1989		17300			768			18068
	1990		18536			1003			19539
	1991		18472			1180			19652
	1992		20982			1482			22464

	Note:  1992 figures are provisional.

	Source:  Department of the Environment; Annual Housing Statistics Bulletin 1992.

9.	A significant proportion of the total housing stock is more than 25 years old and, as pointed out, such houses were generally not built with central heating systems.  Over the past number of years, however, many such households have had central heating systems installed.  In spite of this a significant proportion of the existing housing stock still does not have central heating systems.  It is to be expected, however, that a continuing number of existing households will install central heating over time.  Obviously as the number of houses without heating systems declines, the number of existing houses in which central heating systems are being installed will also decline.  In the case of existing houses central heating systems are typically installed by specialist firms engaged in this business.  In this instance the actual householder may have a greater input into the decision as to the brand of radiator used, although, in the vast majority of cases, this decision is likely to be taken by the firm or individual carrying out the installation work.  Again they purchase the radiators from builders' suppliers.

10.	Of course the decision as to whether or not radiators will be installed depends to some extent on the type of heating system chosen.  Thus in a sense non radiator heating systems are substitutes for radiator based systems.  It would appear that the radiator based systems are far more common than other types of system.  Electrical central heating is used in only a relatively small number of households while warm air heating systems are also relatively unpopular.  The parties have indicated, however, that electrical heating systems are popular in older houses.  In practice the relative costs of fuels and the particular features of the system, e.g. cleanliness, storage requirements etc. are far more likely to be the decisive factors in the decision as to the type of system chosen.  The cost of radiators is unlikely to result in a preference for one type of system over another.  Once a decision has been made to install a water based system then one must use radiators.  Consequently the relevant market is that for radiators for use in household  and commercial heating systems.

11.	According to the parties Barlo and Veha are the two main suppliers of radiators to the domestic market.  Both firms were stated to have a market share of more than 30%.  No other supplier holds more than 10% of the market.  A large proportion of radiators produced in Ireland is exported while imports have a sizeable share of the home market.

	Table 2:  Market Shares in Panel Radiators

				Veha			38
				Barlo			35
				Myson			10
				Rettig			 5
				Others			12

	Source:  Notifying Parties' Estimates.

(d)	The Arrangements

12.	The agreement relates to the sale by Veha of its business of designing and manufacturing radiators to Barlo.  It is located at Wicklow town.  Under the terms of the sale Barlo are purchasing the property, business assets and goodwill of the business together with the benefit of certain contracts but not the actual company or its liabilities.  The business assets essentially consist of the plant and equipment of the business.

13.	Clause 2 of the agreement provides that it is conditional on a number of conditions being fulfilled prior to 21 February 1994 or such later date as the parties may agree.  Among the conditions to be fulfilled is the receipt of a certificate from the Competition Authority.  In this instance the Authority notes that the parties only notified the agreement on 8 February 1994 having set 21 February as the original deadline for obtaining a certificate from the Authority.  Notification of agreements under the Competition Act is not compulsory, although obviously the parties to an agreement notify it requesting a certificate or licence because they perceive a benefit in so doing.  The Authority is required to give a detailed consideration to any agreement notified to it before reaching a decision and it follows certain procedures in the interests of fairness and justice to the notifying parties and others.  While the Authority recognises the need for prompt decisions particularly when a sale of business is involved, it believes that it must follow fair procedures, and cannot accept the setting of deadlines for a decision by the parties involved.

14.	Clause 9 contains a number of restrictive provisions.  Specifically Kingspan and the vendor agree that they will not for two years in any capacity either be engaged in the relevant business, solicit former customers on their own or anyone else's account or solicit or obtain the services of any employees of the business.  In addition they agree not to use or disclose any confidential information relating to the business at any time.

(e)	Submissions of the Parties

15.	Barlo argued that the radiator market was an intensely competitive one.  They claimed that the acquisition would not confer any market power on Barlo but would enable it to compete with larger European firms.  They pointed out that the product was by its nature a standard one built to common specifications, and that the product could move freely throughout the EU.  They argued that the acquisition of additional manufacturing facilities was necessary for Barlo to achieve the economies of scale necessary to compete in the European market.  They indicated that their aim would be to use the Wicklow plant to export to the UK and that Barlo planned to increase production at the plant by 40‑50% thereby increasing efficiency at the plant and enhancing employment prospects at the plant.  The parties pointed out that the products moved freely into and out of Ireland so that the Irish market would remain competitive after the acquisition.  They pointed out that major European producers were active in this market and that Rettig, one of the leaders in the European market had a plant located in Ireland which exported approximately 90% of its output to Germany.

(f)	Views of Third Parties.

16.	The Minister for Enterprise and Employment wrote to the Authority following the announcement of the receipt of the notification.  He indicated that his main concern was safeguarding employment but that he was also concerned to see the growth and strengthening of Irish companies which would permit them to compete successfully in Europe and world markets.  He believed that the acquisition would enable Barlo to achieve the necessary economies of scale to compete against larger European manufacturers, considering such economies of scale to be a crucial success factor in this industry.  He also pointed out that Veha had been in a loss making situation for some years and that if the takeover did not proceed there would be a serious danger that jobs would be in jeopardy.  He believed that Barlo was committed to investing the necessary resources in the plant to develop it into a profitable operation.

Assessment

(a)	Section 4(1)

17.	Section 4(1) of the Competition Act states that `all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.'

(b)	The Undertakings and the Agreement

18.	Section 3(1) of the Competition Act defines an undertaking as `a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.'  The parties to the present agreement are Barlo, Mellstock, Veha and Kingspan.  Barlo, Veha and Kingspan are corporate bodies engaged in the provision of goods and services for gain and are therefore undertakings within the meaning of the Act.  As Mellstock is acquiring the business of Veha it is also an undertaking.  The notified arrangements therefore constitute an agreement between undertakings.

(c)	Applicability of Section 4(1)

The Acquisition.

19.	The Authority has given its views on mergers in a number of previous decisions.  In Woodchester it stated that:

	`before a merger can be found to offend against Section 4(1) of the Competition Act, it must be shown that it would, or would be likely to, result in an actual diminution of competition in the market concerned.  A reduction in the number of competitors or the fact that a merger will result in the merged entity having a larger share of the market than that previously held by either of the merged undertakings individually, are not, of themselves, sufficient to establish that such a diminution of competition has occurred or would be likely to occur.'

20.	The Authority clarified its position further in Scully Tyrrell where it stated that:

	`The Authority believes that it would generally be accepted that a market where the four firm concentration ratio fell below 40 percent is effectively competitive...the Authority believes that in a highly concentrated market a merger which results in even a relatively small increase in the market share of one of the larger firms merits closer examination.'

The Authority also indicated that it might use an alternative measure of market concentration, namely the Herfindahl Hirschman Index (HHI) which is used by the US Department of Justice to evaluate mergers.

21.	In Scully Tyrrell the Authority found that the data on both the four firm concentration ratio and the HHI suggested that the arrangements merited further examination.  Having concluded in that instance that the merger in question did not prevent, restrict or distort competition the Authority stated that:

	`The present decision seeks to clarify the Authority's views in this area.  In general the Authority believes that a merger per se between competitors would not prevent, restrict or distort competition and thereby offend against Section 4(1) unless the market is, or will as a result of the merger become, highly concentrated.

	If the market were highly concentrated following the merger the Authority believes that it would be unlikely to prevent, restrict or distort competition where
	‑ there were no significant impediments preventing new competitors from entering the market, and/or
	‑ there was effective competition from overseas suppliers.'

22.	The figures given in Table 2 indicate that the relevant market in this instance is highly concentrated.  Both Barlo and Veha account for more than 30% of the market and their combined market share exceeds 70%.  No other supplier accounts for more than 10% of the market.  Given the Authority's views in Scully Tyrrell, such an arrangement requires a detailed examination.  A similar conclusion would emerge on the basis of the HHI estimates.

23.	In the Authority's opinion there are no particular barriers to entry in this market.  Radiators which conform to legal standards set down in other EU countries can be freely imported.  It accepts the parties' claim that the product is by its nature a standard one built to common specifications.  Nor does the Authority believe that, in this instance, transport costs would be such as to create a barrier to entry for imported products.  It is relevant that Veha and Barlo export a significant proportion of their output to other EU countries and that a significant proportion of sales in Ireland is attributable to imports.  In addition the Authority notes that there is another radiator manufacturer located in Ireland with only a small share of the domestic market which exports the vast bulk of its output to other EU countries.  The Authority believes therefore that the presence of other producers located within Ireland and in other EU countries would be sufficient to maintain competition in spite of the fact that, following the acquisition, Barlo would have a preponderant share of the market.  Should Barlo abuse a dominant position contrary to Section 5 of the Competition Act, action can be taken to prevent this. In addition it believes that the customers in this market are capable of obtaining supplies from abroad.  The Authority does not believe that the acquisition will have the effect of preventing, restricting or distorting competition within the State.

24.	The Authority also notes that Veha is in financial difficulties and that Kingspan is disposing of the business because it does not wish to incur further losses.  In the absence of the sale of the business to Barlo, the closure of the plant is a likely prospect.  Were Veha to close then the degree of market concentration would increase anyway although perhaps not to the same degree as is likely as a result of the acquisition.

25.	Mergers which have an adverse effect on competition have been permitted under US law under the `failing firm defence doctrine' since the 1930s.  The US Department of Justice Merger Guidelines 1984 outline the main features of the `failing firm' defence.
	`The "failing firm defense" is a long‑established, but ambiguous, doctrine under which an anti‑competitive merger may be allowed because one of the merging firms is "failing".  Because the defense can immunize significantly anticompetitive mergers, the Department will construe its elements strictly.
	The Department is unlikely to challenge an anticompetitive merger in which one of the merging firms is allegedly failing when: (1) The allegedly failing firm probably would be unable to meet its financial obligations in the near future; (2) it would probably not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made unsuccessful good faith efforts to elicit reasonable alternative offers of acquisition of the failing firm that would both keep it in the market and pose a less severe danger to competition than does the proposed merger.'
The guidelines state that the fact that an offer is less than the proposed transaction does not make it unreasonable.  Indeed any offer to purchase the assets of the failing firm for a price above the liquidation value of those assets will be regarded as a reasonable alternative offer.  It is also necessary to show that, in the absence of the acquisition, the assets of the failing firm would leave the relevant market.

26.	In the present circumstances of continuing losses, were Veha not to be acquired by Barlo then it is likely to face imminent closure.  The plant has had a chequered history, with a number of owners having failed to operate it profitably.  In these circumstances the Authority believes that there is little prospect of the plant being acquired by someone other than Barlo or of it continuing in operation under its present ownership.  In addition the Authority believes that the acquisition of Veha by Barlo would result in the assets of the business being retained in the radiator industry.  The Authority also believes that Barlo's existing Irish operations will continue in production.  Consequently the Authority does not believe that the acquisition has as its object the prevention, restriction or distortion of competition within the State and so does not offend against section 4(1).

The Non‑Compete Provisions.

27.	Clause 9 of the agreement imposes a number of restrictions on the vendor and Kingspan.  They are both prevented for two years from being engaged in any capacity in the relevant business, from soliciting former customers on their own or anyone else's account or from soliciting or obtaining the services of any employees of the business.  In addition they agree not to use or disclose any confidential information relating to the business at any time.

28.	The Authority has considered similar restrictions in a number of previous decisions and they can be dealt with briefly here.  The Authority has stated previously that a restriction on a vendor competing with the purchaser of a business may be necessary to protect the goodwill of the business being sold and where such a restriction does not exceed what is necessary for the protection of that goodwill in terms of its duration, geographic coverage and subject matter, it does not offend against Section 4(1).  It has stated that it would normally regard a period of two years as adequate for such purposes.  It has also stated that restrictions on soliciting customers and former employees for a like period do not offend against Section 4(1).

29.	The Authority has also stated in previous decisions that a restriction on the vendor using or revealing to anyone any confidential information relating to the business being sold are acceptable provided that they are not used to prevent the vendor from re‑entering the relevant market once a legitimate non‑competition clause has expired.  Were it to be used in such a way the Authority would regard it as offending against section 4(1).

The Decision

30.	In the Authority's opinion, Barlo, Mellstock, Kingspan and Veha are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the acquisition by Barlo of the business of Veha constitutes an agreement between undertakings.  In the Authority's opinion, the agreement does not have, as its object or effect, the prevention, restriction or distortion of competition and does not offend against Section 4(1) of the Competition Act, 1991.

The Certificate

31.	The Competition Authority has issued the following certificate:

The Competition Authority certifies that in its opinion, on the basis of the facts in its possession, the agreement of 7 February 1994 between Barlo Group plc, Mellstock, Kingspan Group plc and Kingspan Veha Ltd. for the acquisition by Barlo Group plc of the radiator manufacturing and design business of Kingspan Veha Ltd. in Wicklow town, (notification no. CA/2/94), notified on 8 February 1994 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member

25 March 1994.