Affected market: Construction
The OFT’s decision on reference under section 22(1) given on 23 February 2007. Full text of decision published 5 March 2007.
Skanska Construction UK Ltd (Skanska) is a wholly owned subsidiary of Skanska UK plc, which in turn is a wholly owned subsidiary of Skanska AB, a Swedish incorporated company listed on the Exchanges in Stockholm. Skanska operates in the construction sector, including the telecommunications and gas segments.
McNicholas Holdings plc (McNicholas) is a construction business that operates in the utilities and infrastructure sector, including the electricity, gas, water, highways, transportation and demolition segments. McNicholas's UK turnover in 2005 was around £168 million.
The transaction was completed on 9 December 2006. Skanska purchased the entire issued share capital of McNicholas. The OFT’s statutory deadline for deciding whether to refer the merger to the Competition Commission is 7 April 2007 and the administrative deadline is 9 March 2007.
As a result of this transaction Skanska and McNicholas have ceased to be distinct. The UK turnover of McNicholas exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
FRAME OF REFERENCE
The parties submit that the only area of overlap between Skanska and McNicholas is in relation to the existing joint venture between the two companies for gas mains replacement in the North London Mains Gas Alliance (the ‘joint venture’). Further, the parties claim they provide complementary rather than competing services as McNicholas contributes gas contracting expertise and Skanska provides project management capabilities and support services. The joint venture contract expires in 2012, with an option to extend for a further five years, and is then open to tender.
The merging parties operate in the utilities and infrastructure services sector, which is a segment of the wider civil engineering and construction sector. Utilities services comprise the replacement, operation and maintenance of the network of pipes and cables providing water, gas, electricity and telecommunications. Infrastructure services cover small scale repair and maintenance work in relation to the highway and rail network.
There are elements to distinguish the utilities sector from the infrastructure sector, such as different specialist expertise and customer profile (mainly privatised utility companies for utilities and national transport bodies for infrastructure). However, the parties argue that utilities and infrastructure services should be considered as a single segment of the wider civil engineering market on the basis of supply-side substitution. They submit that both segments are similar in terms of basic construction skills required, and that a significant percentage of each utility or infrastructure service contract can – and often is – sub-contracted out to specialist service providers. Some third parties agreed with this approach, while others submitted that utilities and infrastructure services should be considered in separate frames of reference due to the lack of demand-side substitution.
In this case it is not necessary to conclude on the product scope as the outcome of the competition assessment is the same regardless of whether utilities and infrastructure services are examined together or separately. The OFT has therefore analysed this merger on the basis of the overlapping sub-sector (gas supply) as well as in the utility and infrastructure services separately.
The parties assert that for the utilities and infrastructure services the geographic scope is predominantly national, but that there may be a regional dimension to competition for smaller contracts. Third party comments generally supported this. Further, this is consistent with the OFT’s analysis in previous cases [see note 1].
The OFT considered the merger at both a national and regional level. However, it is not necessary to conclude on the geographic scope of the frame of reference as the competition assessment is the same on either measure.
The UK supply of utility and infrastructure services is highly fragmented, with many strong national players. Indeed, the largest supplier of utilities and infrastructure services in the UK has a share of supply of just 5 per cent. Third party comments confirm that there are numerous well-established service providers capable of tendering for contracts.
The parties have a combined share of supply of less than five per cent for the UK utilities and infrastructure services sector. Their only regional overlap is in Greater London, where the parties were already operating as a joint venture before the merger and where their combined share of supply in utilities and infrastructure services is less than 10 per cent.
Taking the provision of gas supply services separately, the parties only overlap in the relation to the joint venture. Their combined share of supply of construction services related to gas supply in Greater London is around 20 per cent, and in the UK as whole it is around five per cent.
The parties’ bidding data, although not fully comprehensive, indicates that they have not bid against each other in the last five years. This, coupled with the fact that the merging parties' expertise lay in different sub-sectors within the utilities and infrastructure services segment, suggests that they are not particularly close competitors.
THIRD PARTY VIEWS
No third parties raised any concerns relating to this merger.
The parties overlap in the provision of utilities and infrastructure services, and in particular the provision of gas supply replacement services in North London through one joint venture contract. Their combined share of supply is low, even under a very narrow frame of reference. There are a number of alternative suppliers, the market is highly fragmented and the parties do not have a history of bidding for the same contracts. No third parties raised any concerns relating to the merger.
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.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- For example, Office of Fair Trading anticipated acquisition of Birse Plc by Balfour Beatty plc 11 September 2006.