Competition concerns have put the brakes on the proposed Anglo American and Lafarge merger. Robert Camp looks at the issues
The decision by the UK's
With austerity measures across Europe starting to bite and public spending in the doldrums, there is plenty of incentive for the industry to seek further economies of scale.
But with integration comes the potential for market dominance, and the authorities are having to decide whether there is likely to be a significant reduction in competition in the markets where the parties to a merger operate.
In the case of Anglo American and Lafarge the authorities clearly think there is potential for market distortion. The proposed merger would see a 50:50 joint venture to which both companies would contribute the bulk of their construction materials business in the UK.
The OFT said it felt that the merger would represent a significant structural change in the sector and raised serious competition issues in several markets, hence the referral to the UK's regulatory body, the Competition Commission, to investigate further.
The OFT is concerned about overlaps in the supply of aggregates, asphalt, and ready-mix concrete and the impact that overlaps in the supply of bulk grey cement could have on independent suppliers of ready-mix concrete.
It said these suppliers could find it hard to source materials at competitive prices and be driven out of business, and there were separate concerns about the increased prospect of co-ordination in the supply of bulk grey cement. The OFT has already raised what it sees as a lack of competition in the sector. In August it published a study into aggregates, cement and ready-mix concrete saying that the five biggest companies control more than 90% of the cement market in the UK, and that it was minded to refer the whole sector to the Competition Commission.
I believe these tensions between regulatory bodies and the industry will only be exacerbated as further consolidation occurs.
For operators this means they will have to weigh very carefully how a merger might impact on markets at local, regional and national level, and whether concessions they may be forced to make in order for a merger to proceed actually undermine the rationale for the merger in the first place.
In the case of Anglo American and Lafarge, the two companies have offered to divest themselves of certain assets in order to overcome competition issues. But the OFT said this would not remove its concerns in all areas. This would suggest that both parties could be asked to go further.
The companies appear to be taking it all in their stride. A spokesman for Anglo American said at the time of the OFT's announcement that the review of the deal by the Competition Commission "marked the next stage in the regulatory process" and that it would work with regulators to find a way forward.
From a legal perspective, the Competition Commission has been asked by the OFT, under the UK's Enterprise Act 2002, to decide whether the joint venture may be expected to result in a substantial lessening of competition in any market or markets for goods or services in the UK.
In order to refer the merger to the Competition Commission, the OFT must have satisfied itself that the merger in question constitutes a 'relevant merger situation'. This is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25% share of supply in the UK (or a substantial part thereof) is created or enhanced.
If the Competition Commission concludes that there will be a substantial impact, then it must propose remedies, in consultation with the main parties involved, to counter the adverse affects. These remedies can be negotiated undertakings which are agreed with the parties, or they can be imposed. Thereafter the OFT would have the responsibility of monitoring undertakings and orders.
If the parties to the merger disagree with the Competition Commission's findings then they may appeal for a judicial review. The Competition Commission is due to report by 16 February, 2012.
The challenge for regulatory bodies across Europe, and not just in the UK, is to strike a balance between the commercial imperatives of an industry suffering amid a sustained economic downturn, and the desire to clip the wings of the big players before they become too dominant.
