Day International (UK) Holdings / Duco Holdings Ltd
OFT closed case: Anticipated acquisition by Day International (UK) Holdings of Duco Holdings Limited.
Affected market: Flat offset printing blankets
The OFT’s decision on reference under section 33(1) given on 5 October 2006. Full text of decision published on 11 October 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.
Day International (UK) Holdings (Day) is a UK investment company which owns Day International (UK) Limited and Varn Products Company Limited. Day’s parent company is Day International Inc, which is a US manufacturer of products for the printing industry including printing blankets and more.
Duco Holdings Limited (Duco) is a UK company that manufactures and supplies printing blankets in over 65 countries worldwide. Duco's global sales of flat offset printing blankets in 2005 were [£10-£20] million, of which [less than £5] million represents UK turnover.
Day agreed to purchase the entire issued share capital of Duco on 31 August 2006.
The parties notified the OFT of the transaction by merger notice on 7 September 2006. The OFT’s (unextended) statutory deadline is 5 October 2006.
As a result of this transaction Day and Duco will cease to be distinct. The parties overlap in the supply of standard flat offset printing blankets and they submit that their share of supply of such products exceeds 25 per cent in the UK. Accordingly, 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.
RELEVANT FRAME OF REFERENCE
The parties overlap in the manufacture and supply of standard flat offset printing blankets.
Types of offset printing blankets
Offset printing blankets are laminated sheets of fabric, rubber or metal used to transfer an image from a printing plate onto paper or other material in the offset printing process. There are four types of offset printing blankets: 1) standard flat offset printing blankets; 2) metal-backed flat offset printing blankets; 3) cylindrical offset printing blankets; and 4) digital offset printing blankets.
The type of offset printing blanket customers use is determined by the type of printing press in which they are used. A flat printing press can only use standard flat offset printing blankets, a metal-backed press can only use metal-backed flat offset printing blanket and so on. Firms manufacture more than one type of offset printing blanket but the processes and machinery required to manufacture each are different. Each type of offset printing blanket therefore constitutes a separate frame of reference. (see [Note 1])
Methods of offset printing
There are different methods of offset printing that are employed using standard flat offset printing blankets, including, web fed offset printing, sheet fed printing and metal decoration. Offset printing blankets are manufactured to a specific method of printing. However, the parties submitted that modifications required to make offset printing blankets suitable for a different printing method are minor. We received no information from third parties to contradict this.
Speed of printing press
Offset printing blankets can also differ according to the speed of the printing press in which they are expected to perform. However, the machinery is the same, regardless of the end application or the printing speed. The manufacture of each roll of offset printing blanket is independent of the previous roll and manufacturers can easily switch to produce different types of offset printing blankets within the same day.
Conclusion on product scope
In Continental/ Xtra (see [Note 2]), the European Commission found that most suppliers manufactured offset printing blankets in all printing method segments and printing speeds. In this case, the parties and third parties submitted that the modifications necessary (to method and speed) to make a range of standard flat offset printing blankets are minor. The OFT has therefore analysed this case on the basis of all standard flat offset printing blankets.
The parties submitted that the geographic scope for the supply of standard flat offset printing blankets is at least EEA-wide. The parties told the OFT that over half of the standard flat offset printing blankets used in the UK are imported, predominately from Italy, France, Germany and Japan. In addition, a large proportion of the standard flat offset printing blankets produced by the parties in the UK are exported, mostly within the EEA. A competitor told the OFT that it sells printing blankets across Europe from manufacturing plants in Japan and the US. The OFT was told by one customer that it purchased its entire printing blanket requirements from within the UK. However, other UK customers told the OFT that prices for standard flat offset printing blankets are similar across Europe and that they either already purchase from suppliers in other European countries or would consider doing so.
In Continental/ Xtra, the European Commission found that the majority of customers purchased printing blankets from both EU and non-EU based suppliers. (see [Note 3]) Although not concluding on the geographic scope, the Commission examined that merger on both a worldwide and EU-wide basis.
The evidence in this case - the large proportion of the parties' UK production being exported and the fact that over 50 per cent of UK supply is met by imports - tends to support the Commission's findings. Nevertheless, in the horizontal assessment the OFT has considered the impact of the merger on UK consumers and whether they will have sufficient choice available to them post merger.
The parties estimated that they have a combined share of supply of standard flat offset printing blankets in the UK of [35-40] per cent by volume (increment of [15-20] per cent) and [40-45] per cent by value (increment [15-20] per cent). However, there are four competitors which the parties submitted have estimated shares of supply in the UK ranging from around 5 to 15 per cent of sales.
On an EEA-wide basis the parties’ estimated shares of supply are [20-25] per cent by volume (increment [5-10] per cent) and [20-25] per cent by value (increment [5-10] per cent). However, there are four competitors which the parties submitted have estimated shares of supply ranging from around 13 to 23 per cent of sales.
Barriers to entry and expansion
The parties submitted that there are no significant barriers to entry and expansion to the supply of standard flat offset printing blankets in the UK. They contended that: switching between brands is reasonably easy: there are no technical or intellectual property barriers; and access to market via distributors is not difficult (distributors tend not to have exclusive supply arrangements with manufacturers). In addition, customers submitted they are not dependent on any particular brand, therefore switching to another supplier is reasonably straightforward.
One competitor submitted that it holds a considerable intellectual property for printing blankets but did not indicate whether this formed a significant barrier to entry. It considered, however, that the initial costs of setting up a manufacturing plant, together with environmental issues, did form a significant entry barrier. However, the parties and some third parties told the OFT that entry to the UK/ EEA from cheaper manufacturers located in China and Brazil has taken market share from suppliers operating in Europe. The OFT therefore believes that barriers to entry and expansion are not high.
The main customers do not consider that they possess enough countervailing buyer power to be able to constrain prices themselves. In contrast, the parties submitted that the majority of their customers are multinational printing groups who enjoy considerable buyer power. However, given our conclusion in the competitive assessment below, it is not necessary for the OFT to conclude on buyer power in this case.
THIRD PARTY VIEWS
No third party customers who responded were concerned about the merger. They commented that they will have adequate choice of supplier of standard flat offset printing blankets post merger. One competitor expressed concern that Day will become the largest standard flat offset printing blanket manufacturer in the world post merger but also mentioned increased competition from Eastern Europe, China and Brazil.
The parties overlap in the manufacture and supply of standard flat offset printing blankets. The evidence provided to the OFT - particularly that a large proportion of the parties’ UK production of such blankets is exported and over 50 per cent of supply in the UK is accounted for by imports - tends to support the contention that the market is wider than the UK and is probably at least EEA wide.
While the merged entity will be the largest supplier of standard flat offset printing blankets in the UK, there are at least four competitors with shares of supply between 5 and 15 per cent and third parties say that entry from outside the UK has increased. On an EEA wide basis, the merged entity will have a share of supply ([20-25 per cent]) similar to that of another competitor with two other suppliers having shares between 13 to 15 per cent and a number of smaller competitors. Given these competitive constraints, it seems unlikely that the merged entity would possess sufficient market power to unilaterally raise prices or lower quality. In addition no UK customers who responded to the OFT are concerned about the proposed merger. Two customers consider switching easy as the major suppliers produce a large range of offset printing blankets, either individually or between them. UK customers are aware of prices paid elsewhere and consider that they can easily source flat offset printing blankets from outside of the UK if they do not already do so.
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.
- This is similar to European Commission's approach in Continental/ Xtra Print Case No COMP/M.3804, 4 July 2005 where the EC considered three types of printing blankets (excluding digital) as comprising separate product segments.
- Continental/ Xtra Print Case No COMP/M.3804, 4 July 2005.
- Continental/ Xtra Print Case No COMP/M.3804, 4 July 2005, paragraph 16.