Otis Ltd / Excelsior Lifts Ltd

OFT closed case: Completed acquisition by Otis Ltd of Excelsior Lifts Ltd.

Affected market: Lifts / Elevators

No. ME/1585/05

The OFT’s decision on reference under section 22 given on 7 June 2005. Full text of decision published 29 June 2005.

Please note square brackets indicate information excised or replaced by a range at the request of the parties for reasons of commercial confidentiality.

PARTIES

Otis Limited (Otis) is active in the manufacture (see [note 1]), installation, upgrading, repair and maintenance of passenger and goods lifts and escalators. It is ultimately owned by .U.S.-based United Technologies Corporation.

Excelsior Lifts Ltd (Excelsior) installs new lifts and provides lift refurbishment and maintenance services. It does not manufacture equipment itself but supplies new equipment assembled from components bought from third parties. Excelsior is based in Peterborough and provides regional coverage in the Midlands. Its customers are mostly in the government (eg local authority housing) and residential business sectors (eg care homes and hotels). In the year ending 31 May 2003 its UK sales were £4.5 million.

TRANSACTION

Excelsior was acquired on 28 February 2005 for a consideration of £ [ ]. The statutory deadline expires on 27 June 2005 and the OFT’s 40 day administrative deadline is 7 June 2005.

Over the past two years, the OFT has considered and cleared the acquisitions by Otis of Oakland Elevators Limited, Key Elevators Limited and Estec Limited. Both Oakland and Key specialized in lifts work whereas Estec was an escalator service and repair company. The OFT has drawn on these previous cases in carrying out its assessment of the current case. As with the Oakland and Key mergers, the main rationale for this acquisition is to enable Otis to expand its provision of lift maintenance and service contracts to a wider range of customers.

JURISDICTION

As a result of this transaction Otis and Excelsior have ceased to be distinct. The parties overlap in the supply and refurbishment of new lifts in the UK and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met, with an estimated combined share of supply of [25 per cent - 35 per cent] in the lift refurbishment sector. A relevant merger situation has been created.

RELEVANT MARKET

Product market

In the previous merger cases considered in this sector, a cautious view was taken with three separate frames of reference being considered:

  • the supply (i.e. installation) of new lifts;
  • the provision of refurbishment services; and
  • the provision of maintenance, including repair, services.

In the current case, the OFT has also considered whether it would be appropriate to focus on certain customer groups due to Excelsior's focus on particular types of customers.  Such a distinction is backed by comments from third parties which suggest that certain residential business, government and retail (see [note 2]) sector customers do tend to be attracted to smaller suppliers who they believe offers them a more competitive and flexible service (see [note 3]).  However, no firm conclusion is necessary on these issues because even by focusing narrowly on supply to specific customers no competition concerns arise.

Geographic market

For the installation of new lifts and the refurbishment of old lifts local presence by the lift company is unlikely to be necessary, as response time by suppliers is less of a concern than in the case of maintenance services. Thus, for these services the OFT considers that the appropriate frame of reference is UK-wide.

Conversely, it is necessary for a lift company (or its representative) to be situated locally to the customer in order for them to attend promptly to certain maintenance requests (eg a breakdown). In this particular case, government and residential business customers in particular will depend on the local supply of these services and are unlikely to require national coverage. It could therefore be suggested that customers served by Excelsior (whose activities are almost entirely limited to the Midlands) would not turn to suppliers outside the region in response to price increases.

It is not necessary to conclude on the geographic scope of the competitive constraints in relation to maintenance and repair services, since no competition concerns arise under any reasonable definition.

HORIZONTAL ISSUES

Installation and refurbishment of lifts

Limited share of supply data is available in the lift sector. On a UK basis the parties estimate their share of the refurbishment sector to be around [25 per cent - 35 per cent] and for installation to be around [20 per cent - 30 per cent] with the acquisition of Excelsior increasing these figures by well under 1 per cent.

In these sectors Otis competes on a UK basis against full service global lift companies such as Kone, Schindler and Thyssen, as well as against medium-sized and smaller local UK companies, such as Pickering, Jacksons, Stannah and Excelsior. Given the low increment to the share of supply on a UK basis and the existence of numerous other competitors the OFT does not consider that competition concerns will arise in the installation and refurbishment sectors.

Lift maintenance and repair services

For the supply of maintenance and repair services to all customers in the UK, Otis has a [15 per cent - 25 per cent] share of supply with Excelsior again having a share of well under 1 percent. Although regional share of supply figures are not available, Excelsior's customer list and third party responses suggest that Excelsior's share of supply of maintenance services to retail, residential business and government sector customers in the Midlands are significantly higher than its share of supply of these services to all customer groups in the UK.

Our assessment of the sector shows that smaller lift companies in general have a strong presence in the supply of maintenance services to government, retail and residential business customers due to the perception that smaller operators are often more able to meet specific customers requirements at the lowest cost. The parties themselves distinguish their offerings between ‘top of the range service packages’ and ‘lower level service packages’ (see [note 4]). While large lift companies offer mainly top of the range packages, smaller companies offer the lower level service packages. The parties further submit that local government, housing authorities, private owners and volume retailers are among the customers who are likely to opt for a lower level service package as they are likely to place less emphasis on image and reliability but face pressure to minimize up front costs. It is this lower level sector which Otis seeks to expand in by its purchase of companies such as Excelsior.

The OFT has sought to assess whether the removal of a relatively strong local competitor, which Excelsior is considered to be, by a larger national competitor could substantially reduce competition in the supply of maintenance services to customers in the Midlands region. Customers of Excelsior who responded to our questionnaires mention a number of other lift companies as potential suppliers of lift maintenance services. These included the large lift companies Thyssen, Kone, Schindler and Otis but also a number of smaller competitors, namely, Lifts and Engineering Services, Concept Elevators, Pickerings Europe, Jackson, Moris Vermaport, Appollo, Rubax Lifts and Stannah. These customer comments suggest a significant number of competitors of a similar size and competitive strength as Excelsior operating in the region. Of these, the parties submit that Lifts and Engineering Services and Concept Elevators are particularly strong competitors to Excelsior in the Midlands.

Barriers to entry and expansion

The assessment in this case indicates that, as found in the previous decisions in this sector, barriers to entry in the provision of lifts and associated services are low. There are a number of examples of recent entrants into the provision of repair and maintenance, for which there are very few requirements to meet in order to be able to begin offering services.

VERTICAL ISSUES

No vertical competition issues arise as a result of this transaction.

THIRD PARTY VIEWS

A number of Excelsior customers, competitors and industry representatives were contacted to supplement the extensive third party representations undertaken in the previous cases. While concerns were raised by some customers about the loss of a supplier the above analysis shows that sufficient competition remains even on a regional basis.

ASSESSMENT

In installation and refurbishment of lifts, the merger raises no competition concerns due to the number of competitors remaining and the low increment to share of supply on a UK basis. For the supply of maintenance and repair services, it is also clear that post-merger sufficient competitors remain who are able to meet customer requirements in Excelsior's principal supply area, the Midlands. Barriers to entry, particularly to the provision of maintenance, are low.

Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.

NOTES

1.Otis Ltd notes that it does not manufacture lifts and other equipment itself which are bought in from other members of the Otis group or from third parties. 2. Excelsior serves retail customers to a lesser extent than government and residential business customers. 3. The parties submit that because smaller companies tend to have shorter management chains, with perhaps a direct link between the engineer and the owner, they may sometimes be perceived to be faster than larger companies in evaluating the engineering viability of a non-standard request and that customers may, therefore, on occasion feel they get more responsive service from smaller companies. The view that smaller companies are more customer focused and can better adapt to specific customer needs is supported by most customers who responded, who also stress that smaller companies are able to offer less costly solutions. 4. Top of the range refers to a comprehensive maintenance package which guarantees continuity of service and where the supplier fixes a price up front, assuming the risk of unexpected or unusual repairs, parts or servicing needs. Lower level service packages entails fewer up front benefits and require the customer to take the risk of having to pay as they go for additional spare parts, breakdowns, repairs, etc.

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