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
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.