Affected market: Crop protection
The OFT's decision on reference under section 22 given on 16 February 2004
Masstock Arable UK Ltd (Masstock) provides agronomy advice to UK arable farmers, together with the sale and distribution of crop protection products, including herbicides, insecticides, fungicides, nutrients and growth regulators. In the year ended June 2002, Masstock's turnover was £59 million. Dalgety Arable Limited (DAL) is a significant supplier of agrochemical advice and products across the UK. DAL's turnover for the year ended June 2003 was £321 million.
Masstock has acquired the UK arable business of DAL on 3 December 2003. The statutory deadline expires on 2 April 2004. The administrative timetable will expire on 16 February 2004.
As a result of this transaction Masstock and DAL have ceased to be distinct. The UK turnover of DAL exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The parties overlap in the supply of crop protection products and advice and the share of supply test in section 23 of the Act is met. A relevant merger situation has therefore been created.
The parties' main area of overlap is in the distribution of crop protection products and the provision of agronomy advice. There is also a small overlap in the distribution of fertiliser and seeds.
There are three main groups of crop protection products: herbicides; insecticides; and fungicides. Crop protection products are manufactured by firms such as Bayer, BASF and Syngenta and are sold to end-users - arable farmers ([see note 1]) - through distributors such as Masstock and DAL. Masstock also acts as a wholesaler and supplies smaller retailers who, in turn, also supply arable farmers. DAL only supplies farmers directly. No single manufacturer produces the full range of products required by customers, and the use of non-exclusive distributors, who stock a range of products from all manufacturers, is the most efficient route to market. In addition to the sale of crop protection products, distributors also provide agronomy advice on the suitability of these products, and the quantities in which and how they should be used.
Crop protection products
On the demand-side it would appear that each group of crop protection products has specific uses and is not interchangeable from the customers' point of view. On the supply-side, it seems unlikely that suppliers of crop protection products to non-arable customers could quickly switch to supplying arable customers. Suppliers tend to focus on a particular sector and products are supplied in different quantities according to their use. Moreover, amenity and forestry distributors tend to be much smaller firms because their customers are smaller and use smaller quantities of the products distributed. They may find it difficult to provide products in suitable volumes, which could prevent them from supplying arable customers.
All distributors of crop protection products also provide agronomy advice, a service that normally adds about 10 per cent to the price of an order for crop protection products. According to a Farmstat survey ([see note 2]), 95 per cent of farmers took advice before purchasing crop production products, and 60 per cent of farmers purchased advice and products together, suggesting that, while the majority of farmers do purchase advice and products from a single supplier, there is a significant minority that do not.
As no competition concerns are raised whether the products and advice are considered separately or as bundled items, the product frame of reference can be left open.
This transaction is concerned with the distribution, rather than the manufacture, of crop protection products. The key issue, therefore, in determining the relevant geographic scope is whether customers are able to purchase from distributors in other regions, and would do so if prices were to increase by 5-10 per cent. There may be regional aspects to competition - the majority of Masstock's customers are located within an hour's drive of its depots although its competitors may deliver further afield - but the trend is towards fewer, larger depots to reduce costs.
No competition concerns are raised on either a national or regional basis within the UK so the geographic frame of reference can be left open.
The parties estimate that their combined national share of supply of crop protection products and advice would amount to 10-15 per cent, with an increment of 5-8 per cent. The combined entity will continue to face competition from four other national distributors as well as a number of smaller distributors. The pre-merger HHI amounts to 623 (increment 84) which suggests that the merger raises no competition concerns. On a regional level the merger will reduce from seven to six the number of major distributors in three regions and from six to five in two regions. In North Yorkshire/ Humberside where the parties' combined share of supply is highest, the parties will supply 25-30 per cent, being an increment of 8-12 per cent.
The parties were unable to supply separate figures for crop protection and advice. However, based on the value of crop protection products sales, the parties' combined share of supply for crop protection products will only be about 8-12 per cent (increment 1 per cent). No regional estimates were available.
Barriers to entry and expansion
An ordinary warehouse can be used to store crop protection products as long as a low, chemically sealed wall is constructed to contain possible spillages. It is estimated that a distributor would need to make an investment of £5 million to achieve a 10 per cent share of supply of crop protection products and agronomy advice. For crop protection products only, entry costs are not high relative to the size of the sector.
While customers value the reputation and experience of distributors, this does not prevent them from switching to a new distributor if they were unsatisfied with prices. Customers, therefore, do not appear to face any barriers to switching supplier. Indeed, third parties indicated that, where they were dissatisfied with service and/or prices, they would willingly switch.
The parties contend that large farms and co-operatives are able to exercise negotiating strength. While larger farms and co-operatives may have a degree of negotiating strength, it appears unlikely that smaller customers possess any countervailing buyer power.
The transaction does not raise any vertical issues.
THIRD PARTY VIEWS
Suppliers, competitors and customers were contacted to assess whether the merger raised any competition issues. Two competitors raised concerns that the merger would result in high market shares nationally and in certain regions. Further investigation of this issue did not support this concern as sufficiently founded. One competitor considered that the merger would allow the parties to cross subsidise their sales of crop protection products, seeds and fertilisers. This view presumes one-stop shopping and does not appear to be well-founded since customer switching and customers buying from multiple suppliers would prevent this strategy.
The transaction qualifies on the turnover test and the share of supply test of the Act. Nationally, the parties' combined share of supply for all crop protection products and advice will be 10-15 per cent, increment 5-8 per cent. Regionally, the transaction has the largest impact in North Yorkshire/Humberside where the combined share of supply is 25-30 per cent, increment 8-12 per cent. Post-merger, there will be at least five other larger suppliers as well as a number of smaller suppliers who together account for a significant share of supply. In the provision of crop protection products only, the parties' combined share of supply nationally will be 8-12 per cent, increment 1 per cent.
Entry costs do not appear to be high relative to the size of the sector, as all that is required to become a distributor is suitable warehousing, distribution facilities and staff, including agronomists and customers appear to be willing to switch distributor. Buying groups and co-operatives may possess a degree of negotiating strength but this does not appear to be very significant.
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.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Arable farmers produce cereals (principally wheat and barley), oilseed rape, linseed, pulses, sugar beet and potatoes.
- Commissioned by the parties.