Babcock International Group plc / Peterhouse Group plc
OFT closed case: Completed acquisition by Babcock International Group plc of Peterhouse Group plc.
Affected market: Facilities management services
The OFT's decision on reference under section 22 of the Enterprise Act 2002 given on 29 July 2004
Babcock International Group PLC (Babcock) is active in the refit and up-keep of warships and in military base management, estate management and related support services (including facilities management (FM) services), principally for the Ministry of Defence but also for public sector authorities, namely the Metropolitan Police, Ealing Borough Council and Magistrates' Courts.
Peterhouse Group PLC (Peterhouse) provides support services to the rail industry, in particular railway infrastructure services (track renewals and signalling renewals and projects) and railway maintenance (although this will be discontinued when Network Rail change to in-house services in the summer of 2004). It also has a business arm within its rail projects business which provides FM services for a number of railway stations. Peterhouse's UK turnover in 2003 was £479.1 million.
This merger completed on 15 June 2004. The transaction was a cash and shares offer made by Credit Suisse First Boston on behalf of Babcock to acquire the entire issued and to be issued share capital of Peterhouse. The parties submitted a satisfactory submission on 15 June. The administrative deadline expires on 10 August 2004.
As a result of this transaction Babcock and Peterhouse have ceased to be distinct. The UK turnover of Peterhouse exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. A relevant merger situation within the meaning of section 23(1) of the Act has, therefore, been created.
The parties overlap in the broad activity of providing FM services. In practice this involves the management and maintenance of a wide variety of buildings and other infrastructure (from accommodation to dockyards). The parties have described FM as a broad business concept covering the outsourcing of the management of activities by customers to service providers. It can cover estate management (including management of security, building maintenance, cleaning, catering, IT support or equipment maintenance) and extend to the operation of services on behalf of the customer. The precise scope of such services depends on the customer's requirements. FM services are often provided ancillary to other services, for example Babcock has informed the Office that where it contracts with the Ministry of Defence to provide naval related services, military equipment maintenance services or armed forces training services, it can also manage premises used in that work either directly or by arranging and managing subcontractors.
Information provided by the parties indicates that Babcock wins the majority of its FM business in activities where security is an important consideration, namely the armed services, the police and court services. Peterhouse does not serve these sectors and is active in the supply of FM services to the rail industry, in particular for railway stations and other line-side installations such as signal boxes. This fits into Peterhouse's broader activity of providing engineering services to the rail industry. The Office has not found it necessary to define the product frame of reference in this assessment because however it is defined, no competition concerns arise. If defined narrowly there is no overlap due to the parties differing areas of focus, if a wider definition is considered, the level of overlap, in terms of a combined market share, is minimal.
Information obtained by the Office during this investigation indicates that the ability to run facilities is not limited to particular local areas and, on that basis, the geographic frame of reference would be at least UK wide.
Babcock is estimated to have generated £80 million in turnover in the UK for its FM operations in 2003 whilst Peterhouse's total UK turnover for FM services was £7.5 million in the same year. The parties have informed the Office that combined this represents a small proportion of turnover across FM services within the UK. Third party comment supports this. Noting the difficulty in providing a definitive definition, the parties estimate that the total FM services sector in the UK is worth several tens of billions of pounds. One third party has estimated the sector to be worth between £16 billion to £120 billion per annum within the UK. Even on the lowest estimate this indicates that the parties represent less than 5 per cent of supply of total FM services within the UK. Other significant suppliers in this fragmented sector include WS Atkins, Serco, Interserve, Jarvis, Accord and Mouchel Parkman amongst others.
Within specific sectors the parties estimate that Peterhouse represents around 20 per cent of Network Rail's spend on mechanical and electrical and property maintenance for managed stations in 2003 with the remainder being shared between Malla, Emcor and Alfred McAlpine amongst others. Babcock has no presence in this sector. In relation to the supply of FM services to military bases the parties estimate that Babcock represents around 10-15 per cent of such FM services, while Peterhouse has informed the Office that it is not present in this sector. In relation to the supply of FM services to local authorities, local police authorities and courts, Babcock estimates it represents less than 5 per cent of the supply of such services with Peterhouse not being present.
No vertical concerns are raised by this transaction.
THIRD PARTY VIEWS
None of the third parties who responded to our enquiries expressed any competition concerns regarding this transaction.
The parties overlap in the provision of FM services but to very different sectors of industry thereby limiting the area of overlap. There are many remaining alternative suppliers in what is a fragmented sector. 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 22(1) of the Act.