Anticipated acquisition by Travis Perkins plc of the BSS Group plc ME/4609/10 The OFT's decision on reference under section 33(1) given on 26 October 2010. Full text of the decision published on 11 November 2010. Please note that the square brackets indicate figures or text which have been deleted or replaced in ranges at the request of the parties or third parties for reasons of commercial confidentiality. PARTIES 1. Travis Perkins plc (TP) primarily distributes building materials through over 600 branches across the UK. Its businesses also include City Plumbing Supplies (CPS) a national chain of 194 outlets which specialises in the supply of plumbing and heating (P&H) products; and Wickes, a national do-it-yourself (DIY) retailer with 196 stores.1 2. The BSS Group plc (BSS) primarily retails and wholesales P&H products in the UK and the Republic of Ireland. It has three business divisions: Domestic, Industrial and Specialist. Its Domestic and Industrial divisions supply P&H products to different customer groups through different branded businesses.2 Its subsidiary, Plumbing Trade Supplies Limited (PTS), operates 325 branches retailing P&H products mainly to 'domestic' customers (mainly sole traders, plumbers and house builders) in the UK. PTS generated a turnover in 2009 in excess of £[ ] million. Other subsidiaries supplying P&H products mainly to 1 In addition, TP operates: i) other retail outlets specialising in heavy side building materials such as drainage, concrete, bricks and blocks (Keyline); a kitchen and joinery trade-only retail chain (Benchmarx); a chain of ceramics stores (Tile Giant) open to the general public; and; ii) at wholesale and retail levels, Commercial Ceiling Factors (CCF), which specialises in suspended ceilings, partitions and insulation systems. 2 Its Specialist division distributes power and hand tools, accessories, consumables, clothing and maintenance equipment to domestic and industrial retail and wholesale customers. 1 'domestic' customers include: F&P Wholesale (a wholesale supplier to general and specialist builders' merchants), Spendlove C. Jebb (a plumbers' merchant in Northern Ireland and the Republic of Ireland); and, Direct Heating Spares (a distributor of domestic heating spare parts). The Industrial division includes: BSS Industrial,3 UGS and Warren businesses. THE TRANSACTION 3. TP proposes to acquire BSS by way of a scheme of arrangement. The transaction is subject to the UK Takeover Code and is conditional on Office of Fair Trading (OFT) satisfactory non-referral. 4. TP notified this transaction to the OFT on 19 July 2010. The OFT's administrative deadline in this case is 26 October (twice extended [ ] while additional information was supplied and assessed). JURISDICTION 5. As a result of the proposed merger TP and BSS will cease to be distinct. 6. For the year ending on 31 March 2010, BSS had a UK turnover in excess of £1.3 billion. Therefore, the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is met. This transaction does not have a Community dimension for the purposes of the EC Merger Regulation, Council Regulation (EC) No 139/2004 because both parties earn more than two-thirds of their Community turnover within the UK. 3 BSS Industrial forms the industrial division of BSS with 58 branches across the UK and the Republic of Ireland. It supplies specialist brands for specific technical product ranges such as pumps, plastics and controls. It also markets and distributes heating and plumbing, process, pipeline and mechanical services equipment primarily for industrial applications. It stocks some products which can be used in domestic installations. Since the material overlap resulting from this merger relates to domestic products, this assessment has focused on BSS Domestic Division which in the UK consists of PTS at the retail level and F&P at the wholesale level. 2 7. Consequently, the OFT considers that arrangements are in progress or contemplation which, if carried into effect, will result in the creation of a relevant merger situation. BACKGROUND 8. The parties are both active in the supply of building materials. In particular, they overlap in the supply of P&H products for 'domestic' use. 9. TP submits that P&H products include: baths and sanitary ware, accessories, brassware, rainwater and soil goods, showers and fittings, tubes and fittings, water mains and waste pipes, boilers, electrics storage heating, room heaters, fires, radiators, fireplaces, water heaters, air conditioning units and heating controls and pumps. 10. Building materials (including plumbing and heating products) are supplied to a greater or lesser extent through different types of retailers. The product portfolio, stock depth and levels vary substantially depending on the type of retailer (or distribution channel). 11. The parties submit that the following diagram illustrates the various channels of supply of building materials in the UK. 3 Figure 1 – Building materials supply chain : Source: the parties. 12. The non-P&H specialist merchants/distributors in the above diagram include: national DIY/Retail (B&Q, Focus, Wickes and Homebase), national builders' merchants (Travis Perkins, Jewson, Build Center, Buildbase and Jacksons), sub-national DIY and builders' merchants retailers, specialist merchant distributors (including P&H and other retailers: such as bathroom, tile and kitchen specialists) which can operate at national, regional or local level. General builders' merchants typically supply the full range of building materials while specialist distributors/retailers focus on either heavyside or lightside products or a single segment. DIY chains have an increasing tendency to provide products (albeit with a relatively narrow range) which were traditionally supplied to the builders' trade, but will also naturally focus on their core retail customer base. 13. The customer base for these products is varied: from very large national building or service companies to small traders (such as plumbers and heating system installers) or individuals performing home repairs. Their 'shopping missions' also vary from procurement for new constructions/large projects ('new build') to repair, maintenance and improvement (RMI). 14. Although it is possible to buy P&H products through various channels, the vast majority of P&H sales are in fact made through P&H specialists. Third parties' responses have led the OFT to consider that 4 the following diagram represents the supply chain for P&H products through P&H specialists. Figure 2 – Supply chain for P&H products Manufacturers s nt de ply' depen NP&atHio wnahl ogleesnaelrearls Nspaetcioifnica l wprhoodleuscat-lers p n Direct su o large i ((SFe&eP p a&ra gBrCapGh) 15) (Fsruocnhtl ianse )P (JSHe eo r ' T paragraph 15) National P&H specialists Independent P&H specialists (Wolseley, BSS, TP, Grafton, and Saint Gobain) Customers (predominately trade) Source: OFT based on third parties' representations. 15. BSS controls F&P Wholesale (F&P) and Wolseley owns BCG. Independent P&H specialist retailers and product manufacturers named F&P and BCG as the two largest national wholesalers of P&H products. Other general P&H wholesalers (such as AMS Plumbing Supplies) operate at regional level. There are also national wholesalers which specialise in specific product ranges (such as bathroom suites or kitchens).4 Independent retailers and suppliers told the OFT that wholesalers facilitate the distribution to individual stores which are unable to have their own depots or logistical facilities to stock large quantities. The product manufacturers benefit from a limited number of delivery points and easier credit control risk management of a large number of independent retailers. 4 For example, PJH Group or Frontline –which is part of the Grafton Group. 5 16. Other national P&H specialist retailers are controlled by large international conglomerate groups: Wolseley plc owns Plumb Center, Saint Gobain SA controls Graham and Grafton Group plc, a large retailer and specialist wholesaler with operations in the Republic of Ireland and the UK, controls Plumbase. Their retail networks also supply some P&H products through other distribution channels/types of retailer such as builders' merchants or specialist outlets, which often sell particular product lines, including spare parts, under different brands. 17. Kingfisher, B&Q's parent company, owns 150 Screwfix stores across the country and has been rolling out specialist P&H Plumbfix outlets, to adjoin each of these Screwfix stores. Plumbfix started trading in 2008 with a catalogue offering [confidential to third party]. MARKET DEFINITION 18. As stated in the Merger Assessment Guidelines, 'market definition is a useful tool, but not an end in itself, and identifying the relevant market involves an element of judgment. The boundaries of the market do not determine the outcome of the Authorities' analysis of the competitive effects of the merger in any mechanistic way. In assessing whether a merger may give rise to a substantial lessening of competition the Authorities may take into account constraints outside the relevant market, segmentation within the relevant market, or other ways in which some constraints are more important that others.'5 Product market 19. The parties supply building materials and primarily overlap in the retail supply of P&H products through their national P&H specialist chains (CPS and PTS). As stated above,6 BSS also owns a national supplier at the wholesale level. The transaction does not create any overlaps at the wholesale level and hence, supply at such level is only considered when assessing non-horizontal issues, below. 5 OFT / CC Merger Assessment Guidelines, paragraph 5.2.2 (OFT1254). 6 See paragraph 15 above. 6 20. The OFT has not previously reviewed a merger between specialist P&H suppliers of this magnitude. In Wolseley/William Wilson Holdings Limited 7 which concerned the acquisition of a regional plumber's merchant and raised no substantive competition concerns, the OFT's investigation suggested that the relevant product frame of reference could be 'the distribution of plumbing and heating products by builders' merchants, specialists distributors and DIY stores'. The OFT notes, however, that the decision stressed that different types of suppliers pose different degrees of constraint on each other. 21. The European Commission has also looked at the supply of building materials. In 2003, it cleared a concentration between a builders' and a specialist merchants, Wolseley/Pinnault, Boix & Matériaux,8 which created a network of over 600 outlets in France. The European Commission did not conclude on the relevant market definition but acknowledged that P&H products could represent a separate market given that these goods are often bought by the same customers (for example plumbers), sold in the same areas of the outlets or in similar specialist stores. 22. In this case, the OFT has considered whether the appropriate product scope is that of building materials as a whole or whether P&H products should be considered as a distinct segment of building materials. All building materials or P&H products only 23. TP submits that TP and BSS operate in the building materials market, which includes the marketing and distribution of P&H products for both RMI and for 'new build'. Consequently, TP submits that a frame of reference incorporating all building materials is appropriate but that given the nature of BSS' businesses, the weight of the overlap resides in the supply of P&H products. 24. It is clear that there is unlikely to be significant substitutability on the demand side between P&H products and wider building materials, 7 OFT decision of 12 January 2006 on the completed acquisition by Wolseley plc of William Wilson, paragraphs 14, 15 and 17. 8 Case No COMP/M.3184, decision of 3 July 2003, paragraph 16. 7 given their very different uses. However, where products are typically supplied together by a particular type of retailer, reflecting customer preferences to buy them in one place, then it may be appropriate to define a retail market more widely than might be implied by the demand-side substitutability of the specific products being supplied. 25. In this case, though, and consistent with the OFT's previous investigations in this area, the evidence available suggests that the supply of P&H products forms a separate market to the supply of building materials in general. In particular: • most national P&H specialists, builders' merchants and DIY retailers, told the OFT that P&H professionals expect to source from expert P&H retailers rather than general builders' merchants • Wolseley, TP, Grafton, Saint Gobain and Kingfisher all have chains of specialist branded P&H outlets, even though they also operate general builders' merchants outlets • the range of P&H products offered by large specialist P&H retailers is fairly similar - and typically wider than that offered by general builders' merchants. This indicates that specialist P&H retailers are targeting trade customers who specialise in this area. 26. The OFT therefore considers that the appropriate product market should comprise 'the supply of P&H products' and should not be extended to building materials. The OFT considers below whether the market should be further segmented by product, customer type or distribution channel. Further segmentation by product, customer type or distribution channel is not appropriate 27. As stated in the Merger Assessment Guidelines,9 the relevant market may not be the narrowest market that meets the hypothetical monopolist test. In this case, given the variety of products on offer, 9 OFT/CC Merger Assessment Guidelines, paragraph 5.2.3. 8 customer types and route to market (that is, distribution channels), the OFT considered whether segmentation of the market by product, customer or distribution channel is appropriate. 28. On possible narrowing by individual P&H product type, the OFT notes that: • although third party responses suggested that, on the demand side, customers cannot generally switch between P&H product types (which the parties also confirmed), third parties explained how customers often seek a 'bundle' of related products (such as boilers, radiators, flues, cylinders, thermostats to build an entire heating system) in a single transaction • on the supply-side, TP submitted and competitors confirmed that supply side substitution is easy, with the only constraint being the size of the premises as some core products which must always be available • the product range and depth supplied by the national and some large regional P&H specialists are similar and incorporate a wide range of P&H productsm, and • the majority of third parties agreed that the appropriate frame of reference for the OFT to examine the merger was all P&H products, although some urged the OFT to examine the supply of boilers separately (which is discussed further below). 29. The OFT therefore considered that it was not appropriate to narrow the market by individual P&H product type. 30. On possible narrowing by customer type, the OFT notes that: • although the OFT's third party enquiries did suggest that—on the demand side—there could be separate markets by customer type (for example, 'jobbing' plumbers, P&H installers, national P&H contractors), the parties provided evidence (from the CPS customer survey10) that customer divisions are becoming 10 City Plumbing Supplies – 2007 Customer satisfaction survey, presented in February 2008 (CPS customer survey). See further paragraph 56 below. 9 increasingly blurred and that multi-sourcing by customers among P&H specialists and other suppliers is common,11 and • similarly, in the detailed information supplied by the parties on individual (largely volume related) discounts given on price,12 there was no consistent evidence that some defined customer groups got better terms for the same requirements than others with negotiations taking place on a case by case basis. There was therefore no evidence that the effects of the merger on competition to supply a targeted group of customers would differ from its effects on other customers so as to require a separate analysis.13 31. In light of the above, the OFT therefore considered that it was not appropriate to narrow the market by customer type. 32. Regarding possible narrowing by distribution channel, the OFT notes that: • the evidence was mixed on the degree of constraint faced by the parties from the various distribution channels • for example, a DIY store selling a few P&H product stock- keeping units (SKU) was unlikely to impose a significant constraint on a national P&H specialist chain, especially for a trade customer who valued range, service and expertise. However, there is some evidence (discussed below in the unilateral effects section) that even a DIY store can provide a weak constraint, especially in respect of small unbundled purchases of P&H products (for example, tools and accessories) • similarly, an independent specialist P&H supplier may not provide a significant constraint due to their differential scale and range. However, there is also evidence that independents, 11 Notwithstanding this, the parties submitted that differences in the customer bases served by CPS and PTS indicated that they were not close competitors. This is discussed in the unilateral effects section below. 12 See further paragraph 61 below. 13 OFT / CC Merger Assessment Guidelines, paragraph 5.2.28. 10