Affected market: Rail fastenings
The OFT’s decision on reference under section 33 given on 23 September
Delachaux S.A. (Delachaux) is a French company active in:
electrification systems; magnetisms; special steels; metals; injection
systems; and rail and urban transport. In the rail segment Delachaux
designs, manufactures and supplies a range of rail fastenings and rail
Pandrol Holdings Ltd (Pandrol) is a UK company active in the design,
manufacture and distribution of rail fastenings and rail fastening
systems for use in railway and urban transport sectors. In the year
ended 31 December 2002 Pandrol’s UK turnover was £16.4 million.
Delachaux proposes to acquire Pandrol. The merger has also been notified
in France and cleared in Spain. The administrative deadline is 23
As a result of this transaction, Delachaux and Pandrol will cease to be
distinct. The parties overlap in the manufacture and supply of rail
fastenings and rail fastening systems and the share of supply test in
section 23 of the Enterprise Act 2002 (the Act) is met. It is therefore
probable that a relevant merger situation will be created.
The parties overlap in the manufacture and supply of rail fastenings and
rail fastening systems. In the UK, Delachaux is only active in the
supply of rail fastenings, while Pandrol is active in the supply of both
fastening and fastening systems.
Rail fastenings are designed to hold the rail in place on the sleeper.
They are procured for maintenance and repair work, often called legacy
work, where the sleeper is not changed. Rail fastenings come in a
variety of formats: round-bar, flat-bar, threaded, non-threaded,
resilient (with greater elasticity) and non-resilient. All these
fastenings perform the same function, however historically different
rail networks have favoured a particular type of fastening.
Rail fastening systems are more complex and consist of a number of
components including the rail fastening. The principal pre-assembled
fastening systems are protected by patents. Fastening systems are used
in renewal and upgrade work and when replacing track (known as project
work). In project work, the sleeper is either changed or new track is
Demand side substitutes
The parties consider that rail fastenings and rail fastening systems are
part of the same product market. In this regard, it may be possible to
switch between purchasing and assembling individual components of the
system and the entire pre-assembled system. However, as mentioned above,
fastenings and systems are generally used in different situations.
It may be appropriate to delineate between types of rail fastening and
system: the parties and their main competitors do not produce homogenous
fastenings and systems. In legacy work, the type of fastening used must
be the same as the one being replaced, thus there is no possibility for
users to substitute between the types of rail fastenings. However in
project work switching may be more prevalent as there is no need to use
the same fastening system.
Supply side substitutes
On the supply side, substitution between fastenings and fastening
systems is asymmetric. Since fastenings are a component of the system,
it is expected that systems manufacturers are able to move into the
supply of fastenings with relative ease. Conversely, manufacturers of
fastenings are less able to move into the production of systems, due to
the research and development resources that would be required to develop
an entire system that does not infringe existing patents.
Regarding the different types of fastenings, the parties argue that they
can switch production to another type with relative ease and have
expanded their range in line with demand. Indeed, all of the principal
suppliers in the market provide a range of different types of rail
On the basis of the discussion above no firm conclusion has been reached
as to whether fastenings and systems should be considered as part of the
same product market. The impact of the merger on each of these segments
is considered under the horizontal issues section of this paper.
There are a large number of manufacturers of rail fastenings and systems
based outside of the EEA. As far as the Office is aware, of those
located outside Europe only one is currently accredited to supply rail
networks within the EEA. Safety is a key concern of customers and they
confirmed they are reluctant to source fastenings and systems from
companies whose products do not have a proven safety track record.
Although, currently they do not compete directly, those manufacturers
located outside the EEA may place some constraint on those inside and
their presence may increase in the future following rigorous testing.
The relevant geographic focus is narrower than global although no firm
conclusion has been reached on whether the relevant frame of reference
in this case is the EEA or UK. The impact of the merger on the relevant
geographic areas is considered under the horizontal issues section of
It is estimated that the parties post-merger will supply [45-55] per
cent [see note 1] of all fastenings and systems in the EEA
and [70-80] per cent [see note 1] in the UK. The
post-merger HHIs and increments for the EEA (HHI above 4000 [see note
1] – increment above 1000 [see note 1] and UK
(HHI above 5000 [see note 1] – increment above 1500 [see
note 1] are significant.
However, Delachaux, as discussed above, is not active in and is not an
accredited supplier of fastening systems in the UK. As such the
structure of supply in this segment will not change post merger and
further analysis will focus on the fastenings segment.
The parties have had difficulties providing shares of supply for the
fastenings segment and have only been able to provide broad estimates.
Contracts for supplying rail fastenings are awarded through competitive
tender. From information supplied to the Office on recent bids in the UK
that the parties have made, it appears that they were often the only
bidders. All but one customer asked only sought bids from either or both
of the merging parties.
The Office recognises that in bidding markets, market shares are often
lumpy and not a good indicator of market power. Between 1998-2002 there
have been fluctuations in the parties’ and competitors’ sales volumes
in the UK for rail fastenings and systems. In this period Pandrol was
clearly the leading supplier, but volumes fluctuated year on year. In
order to tender for contracts firms must qualify as a supplier and
achieve accreditation for their product. The Office has learnt that
there are other accredited suppliers in the UK, however these suppliers
are presently smaller than the parties although they are seeking to
expand. The Office is also aware that one significant potential
competitor is actively seeking accreditation at the present time.
Further entry into the supply of fastenings in the UK could come from
generic and non-EEA manufacturers. In the EEA there are some companies
which manufacture generic alternatives and who are not accredited in the
UK to supply. Outside the EEA there are a substantial number of generic
manufacturers in the US, Brazil, India, China and Mexico.
The parties submit, using Delachaux as an example, that achieving
accreditation is not difficult. It takes between 6 to 12 months and
costs approximately £50,000 for each product accredited. This includes
preparing the technical documentation, laboratory testing and testing on
track. Third parties have stated that the process is costly in terms of
time and money and that safety is the prime concern of network
providers. As such reputation and experience of suppliers is important,
which may make entry more difficult for those manufacturers from outside
the EEA, however entry into the UK by a non-EEA manufacture has
Successful entry appears to be dependent on the support of network
operators who have the ability to expand their range of suppliers by
sponsoring manufacturers in the accreditation process. In effect network
providers have the ability to expand their range of suppliers by seeking
out, testing and accrediting other manufacturers. Therefore customers
are able to manage their supply base effectively by sponsoring entry
when they believe there is insufficient competition. However, this
ability may be constrained to some extent by the number of suitably
reputable and experienced suppliers and by the cost of sponsoring.
Some customers have confirmed that due to the scale of their purchases
they are able to obtain discounts. The parties submit that customers are
cost-sensitive buyers. For example, Network Rail announced its intention
in July to reduce its spending on track replacement and signal repairs
from £6 billion in 2003 to £4 billion in 2008 [see [note 2].
Third parties have confirmed that they would seek to switch if prices
rose 5-10 per cent, however their ability to switch may be reduced, at
least in the short term, as the merger will remove an alternative
THIRD PARTY VIEWS
Of those customers and competitors contacted, the majority were either
unconcerned or did not wish to express a view. Third parties did
identify that the merger was between the two largest players in rail
fastenings, but considered that the entry of alternative suppliers and
the ability of customers to assist entry would place some constraint on
the parties post merger.
The merger qualifies on the share of supply test for rail fastenings and
systems. In the UK the parties overlap in the supply of rail fastenings.
The parties’ estimate of their shares of supply, seem to be lower than
evidence collated by the Office. However, rail fastenings are supplied
through a bidding process and it is recognised that in bidding markets,
market shares are not always a good indicator of market power. In
addition to the parties there are other accredited suppliers of rail
fastenings in the UK, although these are much smaller suppliers looking
to expand. Evidence received from the parties and third parties also
suggests that a new entrant may soon enter the market for rail
fastenings in the UK. As this new entrant appears to have capacity to
meet increased demand, it is expected that it will place a constraint on
the parties post merger.
Further entry from generic and non-EEA manufacturers may also occur and
network operators are in a position to sponsor new entry in the face of
insufficient competition. As such the merger does not appear to result
in a substantial lessening of 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 33(1) of the Act.
- Actual figures replaced by a range at the request of the parties
- Factual correction - This announcement in July was made by the rail
regulator not Network Rail. However on 23 September, Network Rail issued
a press release announcing that it had published its Cost Submission to
the rail regulator and that it was spending £24.5 billion over the next
five years, a reduction of £5 billion compared to the previous forecast
published in June.