Affected market: Fuel
The OFT's Decision on reference under section 22 given on 6 January 2004
CPL Distribution Limited (CPL) is a national provider of a full range of solid fuels at both wholesale and retail level. In the financial year to 31 March 2003, CPL's turnover was £98.6m.
Fergusson Coal (Fergusson) is a distributor of solid fuels to both domestic and industrial customers in Scotland. In the financial year to 31 March 2002, Fergusson's turnover was £45.3m.
CPL has acquired Fergusson's coal merchant depots in Kirkcowan and Lugar in Scotland and in Otterburn in northern England. It has also acquired the goodwill and staff in Fergusson's depot in Forth, Scotland; and the goodwill in Fergusson's depot in the Lothian area in Scotland. In turn, Fergusson has acquired CPL's Scottish depots in Elgin, Dundee and Auchterarder; and parts of CPL's retail businesses in Inverness and Selkirk in Scotland.
The parties notified the transaction on Monday 10 November 2003 and the 40 working day administrative deadline expires on Wednesday 7 January 2004. The merger was completed on Friday 17 October 2003 and the statutory deadline expires on 16 February 2004.
As a result of this transaction certain businesses of CPL and Fergusson have ceased to be distinct. The parties overlap in the supply of solid fuel and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is 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 22(1)(a) of the Act.
The parties overlap in the supply of solid fuels at both wholesale and retail level. This transaction only relates to the retail sector and does not affect the parties' wholesale operations. Accordingly, the merger does not lead the OFT to believe that there is a significant prospect that the merger may be expected to result in a substantial lessening of competition in the wholesale supply of solid fuels. Therefore, the wholesale supply of solid fuels is not considered further.
Solid fuel includes house coal, anthracite and smokeless fuels. At retail level, there appear to be three different groups of coal merchants that sell solid fuel. Large merchants, such as the parties, which operate solid fuel depots and generally source their fuel from wholesalers but sometimes deal direct with coal mines; medium sized merchants which also operate their own depots and purchase their fuel from wholesalers; and small merchants, also known as drawing merchants, which do not have depot facilities but instead tend to obtain their fuel from large or medium sized merchants as and when required.
Customers of coal merchants include both domestic households, usually for heating purposes, and commercial customers, such as petrol garages, supermarkets, DIY outlets and local general stores, all of which purchase solid fuel for resale.
The parties submit that demand for solid fuel has been declining by approximately 15 per cent each year and this has resulted in consolidation between existing suppliers in the sector. Data obtained from the Department for Business, Enterprise and Regulatory Reform confirms that there has generally been a downward trend in the consumption of coal for domestic use.
The parties argue that customers do switch from solid fuels to alternative energy sources such as oil, electricity, liquefied petroleum gas and natural gas. This, they claim, constrains suppliers of solid fuels from increasing their prices and therefore the relevant product market should include all of these different fuel types.
However, the parties are unable to provide any data to substantiate their argument. The OFT's investigation appears to show that most customers consider different types of solid fuel (house coal, anthracite and smokeless fuels) to be fully substitutable and suppliers of one type of solid fuel are likely to start supplying another type of solid fuel in the event of a small but significant increase in its price. Although, there is some evidence of customers switching to alternative fuels, this principally appears to be due to convenience as opposed to a 5-10 per cent increase in the price of solid fuel.
Overall, the OFT takes a cautious view that the appropriate frame of reference in this case appears to be the supply of all types of solid fuels.
The parties submit that they typically supply customers within a (see [note 1]) mile radius of their depots in Kirkcowan, Lugar, Auchterarder, Dundee, Forth and Selkirk. In terms of the supply of solid fuel in Inverness, the parties state that fuel is delivered up to (see [note 1]) miles from the depot. The OFT's own investigation found that coal merchants on average tend to supply up to 50 miles from their depots and that the distance travelled is greater in more rural areas, such as the Inverness region. It appears that such variations are largely due to the distance that a supplier needs to travel to obtain sufficient customer density to make its business profitable.
Notwithstanding these local delivery patterns, the parties, however, argue that the geographic scope of reference should be at least as wide as northern and southern Scotland due to the potential competitive constraint exerted by neighbouring areas of supply on each other. However, the OFT's investigation did not find sufficient evidence of the possibility of customers obtaining their fuel from neighbouring areas to suggest that competition occurs over a broader geographic range.
Given the above, for the purposes of the competition assessment, a cautious view is taken that the most appropriate frame of reference appears to be the supply of solid fuel over a 50 mile radius from the parties' depots extending to an 80 mile radius in the Inverness region.
Taking the geographic scope of reference mentioned above, the share of supply data shows that the parties' shares of supply in respect of their depots in Kirkcowan, Lugar, Auchterarder, Dundee, Inverness, Forth and Selkirk vary but in no case exceed 25 per cent (see [note 2]) and the largest increment is 5.8 per cent. In each case, the parties appear to be constrained by a large number of other coal merchants operating in the relevant area (ranging from twenty to over sixty in number).
The parties' shares of supply and the large number of existing competitors present in this sector suggest that, prima facie, no competition concerns appear to arise from this transaction.
Barriers to entry and expansion
The parties have not provided any data on the costs of supplying solid fuel. However, they submit that to begin supplying solid fuel, a new entrant would require access to solid fuel. This is readily available from a wholesale supplier; direct from domestic coal mines; or via imports. They would also need a means of delivering the fuel and medium and large coal merchants would also have to acquire a depot for storage purposes. The need to achieve the critical mass of customers required to sustain costs and the numerous examples, cited by the parties, of recent consolidation between existing suppliers might suggest that new entry in this sector is unlikely. However, there do not appear to be any significant barriers to entry or expansion in this sector.
Small coal merchants which tend to purchase their solid fuel from larger coal merchants, such as the parties, may have a degree of negotiating strength due to their ability to readily switch suppliers. It appears unlikely that the transaction will materially affect this.
This merger appears to raise no vertical concerns.
THIRD PARTY VIEWS
The overwhelming majority of customers and competitors contacted by the OFT did not express any concerns about this merger. Only one customer was concerned that the merger might lead to a reduction in their choice of suppliers and a potential price increase.
Post merger, the parties will continue to face competition from a large number of other coal merchants in each of the areas of overlap. There do not appear to be any significant barriers to entry or expansion in this sector and the overwhelming majority of customers and competitors have no competition concerns as a result of this merger.
The OFT does not therefore believe that there is a significant prospect that the merger would substantially lessen competition within a market or markets in the United Kingdom for goods or services. Nor does it believe that there is a credible alternative view that the merger might substantially lessen competition within a market or markets in the United Kingdom for goods or services.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Information excised at the parties’ request.
- The parties’ share of supply only exceeds 25 per cent in the supply of solid fuel over a 50 mile radius from their Inverness depot (at 30-40 per cent) (exact figure replaced by a range at the parties’ request). As mentioned above, however, the appropriate geographic frame of reference for the supply of solid fuel in the Inverness region is considered to be up to 80 miles from the parties’ depot. Over an 80 mile radius, the parties’ share of supply in the Inverness region is only 10-20 per cent (exact figure replaced by a range at the parties’ request).