Affected market: Industrial surface / equipment testing microbiological products
The OFT’s decision on reference under section 33(1) given on 27 November 2006. Full text of decision published 20 December 2006.
Please note that square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.
3M Company (3M) the ultimate parent company of 3M UK Holdings Plc, is a diversified technology company with a worldwide presence in the following product and service sectors: consumer and office; display and graphics; electro and communications; health care; industrial and transportation; and safety, security and protection. In the UK, it is principally active through its subsidiary, 3M United Kingdom plc.
Biotrace International plc (Biotrace), a public company listed on the London Stock Exchange, is a manufacturer and supplier of industrial microbiology products, specialising in the development and manufacture and supply of rapid tests and laboratory consumables for environmental monitoring and quality control in a wide range of industrial and defence applications. For the financial year ending 31 December 2005, Biotrace’s UK turnover was £[ ]million.
3M UK Holdings plc is proposing to acquire the entire issued and to be issued share capital of Biotrace by way of a recommended public cash offer. The parties notified the transaction to the Office of Fair Trading (OFT) by merger notice on 16 October 2006. The OFT’s extended statutory deadline is 27 November 2006.
As a result of this transaction 3M and Biotrace will cease to be distinct. The parties overlap in the supply of industrial surface and equipment testing products for the food and beverage sector (combined shares more than [ ] per cent) and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The OFT therefore 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.
FRAMES OF REFERENCE
Product frame of reference
Both parties are manufacturers and suppliers (to end users and to distributors) of industrial microbiological testing products.
Industrial microbiological testing products are used to monitor and detect unwanted bacteria in manufacturing processes. They are primarily used in three broad sectors: (i) food and beverage processing, (ii) pharmaceutical, personal care and cosmetics, and (iii) defence and life sciences.
3M is only active in the food and beverage processing sector. Within this sector, there are three product segments:
- indicator testing, which provides an overview of the microbiological ‘quality’ of food products by analysing the presence and amount of bacteria, contaminants, yeasts and moulds
- pathogen testing, which tests for three specific pathogens: salmonella, listeria and e-coli O157
- surface/equipment testing, which detects the presence of cellular debris and other non-specific bacterial residue on equipment and on food preparation surfaces after cleaning.
Products tend to be specifically tailored to the relevant segments. Despite a technical possibility of substitution in some cases, customers’ have submitted that testing products specifically tailored for the three different sectors are not substitutable on the demand side and that the different segments within each have unique end-uses and (in some cases) product-specific regulatory approvals. As such they are considered complements rather than substitutes by both manufacturers and purchasers.
In relation to supply side substitution, due to different underlying technologies there does not appear to be much scope for supply side substitution between the different types of testing segments within the food and beverage processing sector. According to a competitor, switching production from one type of testing segment to another would take at least one year due to the development of new production methods and protocols, regulatory validation of the new product, and persuading customers to accept the product. No examples of actual supply-side substitution were provided by third parties
Geographic frame of reference
The parties submit that the relevant geographic frame of reference is at least EEA-wide, possibly world-wide. This view is supported by third parties. The parties and their competitors have an international customer base, manufacturing and shipping worldwide. Customers have a definite preference for suppliers with a national presence, so that service support is readily available and delivery problems are minimised. However, this can be provided via a distributor, with manufacturing outside the UK. National branding is not important as customers are able to objectively test products by obtaining trial samples from new suppliers to test and compare effectiveness with existing supplier’s products.
From the supply-side, there are no significant trade barriers or regulatory barriers specific to non-UK firms, transport costs are low relative to the value of the products, and entry or expansion in the UK by a non-UK firm only requires a local sales agent or distributor (in addition to the parties, two competitors confirmed the use of an established UK distributor is one way of gaining access to UK customers by a non-UK supplier). There are a number of non-UK firms supplying microbiological testing products to UK customers.
The relevant markets appear to be those for surface and equipment testing products, pathogen testing products and indicator testing products for the food and beverage sectors on a global basis. There is, however, no need to conclude on the geographic scope, since the competition assessment does not change whether the frame of reference is EEA or world-wide.
The parties overlap in all three segments of the supply of industrial microbiological testing products for the food and beverage processing sector. On a worldwide basis, the parties’ combined market share for surface /equipment testing products is about 20 - 30 per cent and about 30 - 40 per cent on an EEA-wide basis (with increments less than five per cent). There is no overlap within the EEA for the other two segments and the increment is less than one per cent on a global basis.
Customers were not concerned, suggesting switching suppliers is easy and identifying a number of alternatives on a worldwide basis. This indicates that the competitive constraints facing the merged entity will continue to remain strong post-merger.
This transaction does not raise any vertical issues.
THIRD PARTY COMMENTS
Third parties who were contacted by the Office raised no concerns or complaints about the proposed transaction.
The parties to this transaction overlap in the supply of industrial microbiological testing products for the food and beverage processing sector. The merger would only cause a significant [Note 1] degree of overlap in the surface/equipment testing products segment with joint shares at around 30 - 40 per cent at an EEA-wide level. However, the increment to the parties’ combined share of supply is low (less than five percent). Third parties raised no concerns and a number of competitors will remain post-merger to whom they feel they can easily switch.
Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- Given the small increment to the parties' combined share of supply in the surface/equipment testing products segment, 3M considers that the description of the overlap as 'significant' is inaccurate.