Affected market: Sack and kraft paper
The OFT's Decision on reference under section 33 given on 18 February
Please note text in square brackets indicates range inserted at
request of parties.
Billerud AB (Billerud) is listed on the Stockholm Stock Exchange. It is
active in the supply of sack and kraft paper, containerboard and paper
pulp. In the financial year to 31 December 2002, Billerud's worldwide
turnover was approximately £528.2 million.
Henry Cooke Limited (Henry Cooke) is active in the supply of technical
kraft paper. In the financial year to 30 September 2002, Henry Cooke's
worldwide turnover was £28.5 million of which approximately £ 9.9
million was made in the UK.
Billerud proposes to acquire the share capital of Henry Cooke for (see
[note 1]). The parties notified the transaction on Monday 22
December 2003 and the 40 working day administrative deadline expires on
Monday 23 February 2004.
As a result of this transaction Billerud and Henry Cooke will cease to
be distinct. The parties overlap in the supply of technical kraft paper
and the share of supply test in section 23 of the Enterprise Act 2002
appears to be met. The OFT believes that it is or may be the case that
a relevant merger situation has been created for the purposes of section
33(1)(a) of the Act.
The parties overlap in the supply of a variety of sack and kraft paper
products. Sack and kraft paper is made from wood pulp produced by a
modified sulphate pulping process. It is principally used by converters
to produce industrial sacks, consumer bags, wrapping paper and flexible
The range of sack and kraft paper products supplied by the parties
includes a particular type of technical kraft paper for medical
packaging and wraps (Medical Packaging Paper).
Medical Packaging Paper differs from other types of sack and kraft paper
in that it allows the contents of the packaging to be sterilised and
keeps the contents sterile until use. The immediate customers of
Medical Packaging Paper are converters which use it to produce medical
packages in which end users, such as medical device manufacturers and
hospitals, package items such as syringes and other surgical
Our investigation considered whether converters and end-users could use
alternative materials to Medical Packaging Paper for sterilisation
purposes. The parties estimate that only 45 per cent of medical
packaging is made from paper and information provided by them suggests
that alternative materials, such as flexible film and non-woven
materials, could be used.
However, our own investigation does not wholly support the parties'
view. Some converters state that they can only use paper to produce
packaging as their machinery is not suitable for flexible film or other
materials. Other converters that do use flexible film indicate that
some products require both paper and film resulting in a package that is
one side film and one side paper. The use of paper is essential if the
end user requires steam sterilisation as its porous properties allows
steam to enter and exit whilst still providing a barrier to bacteria and
The parties, however, argue that steam sterilisation accounts for only
around 8 per cent of medical products and steam is only one of four
possible sterilisation forms, the others being ethylene oxide, gamma
radiation and gas plasma sterilisation. Nonetheless, our investigation
shows that for a number of end-users, who rely on the steam
sterilisation process, there appear to be no suitable alternatives for
Medical Packaging Paper.
Our investigation also assessed the ease with which sack and kraft paper
suppliers presently not active in the supply of Medical Packaging Paper
could switch to producing it within one year. Some sack and kraft paper
suppliers were relatively confident that they might be able to switch.
However, due to quality testing requirements of converters and
customers, it was estimated that it might take six months to two years
Overall in this case, it has not been necessary to conclude definitively
on product market definition. Therefore, the appropriate frames of
reference are considered to be the supply of sack and kraft paper and
the supply of Medical Packaging Paper.
The principal suppliers of Medical Packaging Paper in the UK are French
based Arjo Wiggins SA; Billerud situated in Sweden; and Henry Cooke
based in the UK. A significant proportion of paper, including Medical
Packaging Paper is supplied across borders. The OFT's own
investigation shows that there appear to be no significant barriers to
cross border trading. In this case, therefore, the appropriate
geographic frame of reference is considered to be at least Europe wide.
By their own admission, the parties have been unable to provide reliable
share of supply data in this case. However, in the supply of sack and
kraft paper in the EU, the parties estimate that post merger they will
have a combined share of [10-20 per cent] by volume with an increment
of [less than 10 per cent].
There seems to be little prospect of any competition concerns arising in
this sector as there appear to be a large number of alternative
suppliers (over thirty in number) operating within Europe as well as
suppliers in the Far-East and in South America which appear to be able
to supply UK and other European customers.
In the supply of Medical Packaging Paper, neither the parties nor third
parties contacted by the OFT were certain as to how many suppliers are
active in this sector. Nevertheless, the parties together with Arjo
Wiggins are recognised as the major players. The parties estimate their
combined share of supply in the UK at [35-45 per cent] by volume, with
an increment of less than [5 per cent], and in the EU at [35-45 per
cent] [increment 15-25 per cent] by volume and [20-30 per cent]
[increment 10-20 per cent] by value. Arjo Wiggins estimates its share
of supply in the UK at 30-40 per cent (see [note 2]). The
parties submit that there are a number of other suppliers, including US
based Kimberley Clarke. However, we were unable to confirm this during
It appears, therefore, that the merger may lead to a reduction from
three to two major players in the supply of Medical Packaging Paper in
Europe. Prima facie, this gives rise to the potential for the merger to
lessen competition in this sector. However, the ability of producers of
sack and kraft paper to switch to supplying Medical Packaging Paper (see
paragraph 11 above) and the limited barriers to entry and expansion into
this sector discussed below are likely to act as competitive constraints
on the parties post merger.
Barriers to entry and expansion
Our investigation shows that de novo entry into the supply of Medical
Packaging Paper would be costly and time consuming requiring around
£100m investment and taking two years to begin production.
In contrast, entry by firms currently active in the supply of other
paper types, in particular sack and kraft paper, appears to be much
easier. Most of their plant and machinery can be easily adapted to
produce Medical Packaging Paper and in some cases firms believe that
they already have the technical capability. Third parties suggest that
clean room facilities and a calendar machine are required to control
porosity. The cost of switching is estimated at around £3.5m depending
on existing plant and setup.
The main obstacle for existing sack and kraft paper suppliers appears to
be customers' quality control requirements to ensure absolute
cleanliness and the attainment of UK and EU certification. These can be
lengthy processes and take six months to two years to complete.
In addition, barriers to expansion in the Medical Packaging Paper
segment also appear to be low. In particular, information provided by
the parties and the OFT's own investigation indicate that existing sack
and kraft paper producers have sufficient capacity to facilitate both
their entry and expansion.
Our investigation revealed no evidence to suggest that converters or
end-users have any buyer power.
This transaction appears to raise no vertical concerns.
THIRD PARTY VIEWS
No competitors expressed concerns about the merger. Most customers were
also unconcerned. However, a few expressed concerns about the
possibility that the merger may give the parties considerable market
power and lead to poorer service levels. One customer was concerned
about the time and cost implications of having to switch suppliers.
The parties overlap in the supply of various types of sack and kraft
paper products. The only potential area of concern appears to be the
supply of sack and kraft paper for medical packaging purposes (Medical
Packaging Paper) where the merged entity will have a [35-45 per cent]
share of supply in Europe. The number of recognised active players in
this sector will reduce from three to two.
However, a large number of end-users of Medical Packaging Paper do not
rely on steam sterilized paper. In the event of a small but significant
increase in the price of Medical Packaging Paper, they could use
alternative materials such as flexible film.
Our investigation shows that those end-users, which are reliant wholly
on steam sterilized paper, can expect the merged entity to be
constrained by the ability of sack and kraft paper suppliers to quickly
begin supplying paper for medical packaging purposes on a large scale.
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 UK.
This merger will therefore not be referred to the Competition Commission
under section 33(1) of the Act.
- Information excised at the parties’ request.
- Exact figure replaced by a range at third party request.