Affected market: Environmental risk reports
DMG Information Ltd (DMG) is the parent company of EDR Landmark Ltd (Landmark) which acts as a holding company for Landmark Information Group Ltd and Prodat Systems Plc. Landmark provide a range of services to the UK property industry including environmental risk reports; distribution of large scale mapping from Ordnance Survey; and bespoke mapping and data capture services. In the year to 30 September 2002, Landmark's turnover was [see note 1] of which [see note 1] related to environmental risk reports.
Sitescope Ltd (Sitescope) is an English registered company which is controlled by its senior management. Its primary activity is the provision of property and environmental information services to conveyancers and solicitors in the UK for both commercial and residential property transactions. In the financial year to 31 March 2003, Sitescope's turnover was [see note 1].
DMG proposes to acquire the entire issued share capital of Sitescope for approximately [see note 1]. The parties exchanged contracts on 16 July 2003. Completion is conditional upon confirmation from the OFT that the transaction will not be referred to the Competition Commission.
The transaction was notified by DMG on 17 July 2003. The 40 working day administrative deadline expires on 12 September 2003.
As a result of this transaction, DMG and Sitescope will cease to be distinct. The parties overlap in the supply of environmental risk reports for both residential and commercial property to legal and property professionals, local and central government and environmental consultancies. 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.
For many years, end users have collated environmental data from original sources, such as HM Land Registry, Local Authorities, the Coal Authority and the Environment Agency, and drawn their own conclusions, taking expert advice as necessary, as to the potential existence of any environmental risks.
More recently, users have been able to purchase environmental risk reports, such as those produced by the parties. Providers of the reports collect the relevant data and add value to it by clarifying the data and setting it out in a single report. The report often concludes with the opinion of an environmental consultant on the environmental risks disclosed by the data. One advantage of these reports is that they are a one stop shop so that customers do not have to obtain separate reports from a variety of data providers.
Suppliers of environmental risk reports for either commercial or residential property can easily switch to producing the other because they provide a similar service in their respective sectors and the information needed to supply all types of environmental risk reports comes from the same data sources. For this reason, environmental risk reports for residential property and for commercial property are considered to be supply side substitutes.
There is a possible further category of environmental risk report. Environmental consultants also supply environmental risk reports for commercial property. They use data from one or other of the parties' reports for incorporation into their own reports. However, these reports are more detailed and considerably more expensive than the parties' products. End users have stated that they do not view them as an alternative to the parties' reports and environmental consultants have indicated that they would not switch to supplying the kind of reports provided by the parties in the event of a 5-10 per cent increase in the price of reports of the sort that the parties produce.
In this case, the most suitable frame of reference would therefore appear to be the supply of environmental risk reports for commercial and residential property excluding detailed reports for commercial property supplied by environmental consultants.
It appears that residential and commercial environmental risk reports can be supplied from anywhere in the UK. Therefore, the most suitable frame of reference would appear to be the UK.
The sector's annual turnover is considered to be around [See note 1] across the UK. It has not been possible to obtain reliable share of supply data in this case. However, post merger, the parties will be the largest supplier of environmental risk reports in the UK and it is estimated that they will have a combined share of sales of around 58 per cent with a 22 per cent increment. Their two remaining competitors will be Groundsure, which entered in 2001, and the Environment Agency. The Environment Agency is an original source of data on environmental risk. It has been providing hard copy environmental search data for many years. Earlier this year, the Agency introduced a new environmental risk report which will shortly be available on line. This report is expected to compete with the parties' reports.
As noted above, environmental risk reports are a relatively new product. Landmark was the first supplier of these reports in 1996 with Sitescope entering two years later. The parties state that demand for environmental data has increased significantly in the past few years leading to 45 per cent growth in the sector since 2001. This is largely due to increasing awareness of environmental risks associated with purchasing contaminated land. In the future, the Law Society may introduce a new conveyancing search form under which environmental information relating to a specific property can be requested. In addition, the Office of the Deputy Prime Minister is considering introducing a Home Information Pack which vendors must produce when selling their property. This pack may contain an environmental risk report. These factors suggest that demand for environmental risk information is expected to grow further in the future.
Barriers to entry and expansion
To start supplying environmental risk reports, a new entrant would need access to environmental data. This can be obtained direct from the relevant public body for a fee and also under licence from the parties' historical mapping and landfill databases. The parties' databases have been created by digitally scanning maps.
Some third parties have suggested that to compete in the market it is necessary to have access to historical mapping and landfill data. Both Landmark and Sitescope own such databases; therefore, the merger would reduce the choice of where to obtain historical mapping and landfill data from databases (rather than from the primary sources of data).
Even if the parties were the only owners of historical databases, there are no intellectual property rights attached to the data and the maps required for digital scanning to create a database can be obtained from the various sources including libraries and Ordnance Survey. It is estimated that it would cost less than £1m and take between one and two years to create a database from scratch. The parties both created their databases from scratch and other businesses are known to be developing their own databases. Sitescope has cited one example of a company which currently licenses historical mapping data from it in order to create its own database.
A new entrant would also need a means of reaching customers in the market. Environmental risk reports are available through a number of routes to market. The National Land and Information Service (NLIS) is a new electronic service set up by the Government as a means of distributing environmental data from Government entities and other data providers to the market. Currently, the three NLIS channels all offer the Environment Agency's new report; two of them offer Landmark's report and one offers Sitescope's report. Reports are also sold direct to end users as well as indirectly through exclusive and non-exclusive arrangements with resellers and agents. Overall, although some exclusive arrangements exist, effective distribution channels would be available to a new entrant.
Some third party resellers and agents believe that they have significant negotiating power to obtain lower prices because of the threat of switching and the fact that they buy in large volumes. A few of them were concerned that this would diminish if the parties merge.
No vertical competition issues arise.
THIRD PARTY VIEWS
Many third parties were unconcerned. In particular, agents and resellers welcomed the opportunity to sell both parties' reports as currently many of them are under exclusive arrangements. Nevertheless, some concerns were raised such as Landmark's strong position in historical mapping data; the parties' ability to align prices and to stop licensing their databases post merger; the lack of actual competitors of scale in the market; the fact that the parties would be the largest supplier; and concerns that they would no longer have the incentive to engage in product development.
The transaction qualifies in respect of the share of supply test of the Act. The parties overlap in the supply of environmental risk reports for both residential and commercial property to legal and property professionals, local and central government and environmental consultancies.
Until recently, all end users seeking to obtain environmental information would source the data themselves direct from the original data provider. Now, however, it is possible to obtain all the necessary information in one single report from environmental risk report providers who therefore provide a value added service.
Although there are few existing competitors to the parties in this young sector, the Environment Agency has recently developed a product which is expected to compete with the parties' reports. In addition, environmental data is publicly available and there appear to be no barriers to a new entrant setting up its own database of historical information and distributing its product either directly or indirectly to end users. Having regard to Government and Law Society respective proposals on the Home Information Pack and the new search form, future demand for environmental data may well increase substantially. This might lead to set up costs diminishing relative to the value of the market. Besides prospective competition from the Environment Agency, market growth might stimulate further new entry. On balance, therefore, the merger does not appear to result in a significant prospect of 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.
1. Figure excised at parties' request