Balfour Beatty plc / Mansell plc
OFT closed case: Completed acquisition by Balfour Beatty plc of Mansell plc.
Affected market: Building construction
No. ME/1511/03
The OFT's decision on reference under section 22 given on 29 January 2003.
PARTIES
Balfour Beatty plc (Balfour Beatty) is involved in four main industry sectors: building; civil engineering; rail engineering; and investment and developments in the construction sector and states that it serves the international markets for rail, road and power systems, buildings and complex structures. It also operates a plant hire business which serves mostly internal customers. Balfour Beatty's activities are based primarily in Europe and North America.
Mansell plc (Mansell) is a building contractor. Mansell undertakes a broad range of construction work, with the main focus on smaller value contracts. Mansell also operate a small plant hire business. Mansell's UK turnover in the year ended 31 December 2002 was £511 million.
TRANSACTION
Balfour Beatty acquired the entire issued share capital of Mansell on 29 December 2003.
The transaction was notified on 4 December 2003. The administrative deadline is 2 February 2004 and the statutory deadline is 28 April 2004.
JURISDICTION
As a result of this transaction Balfour Beatty and Mansell have ceased to be distinct. The UK turnover of Mansell exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 is satisfied. A relevant merger situation has been created.
RELEVANT MARKET
Balfour Beatty and Mansell are active in the UK construction industry. According to the parties construction can be broken down into four main categories:
- Private housing, the building of new homes
- Public housing, often referred to as social housing
- Building, the construction of commercial buildings which can be sub-divided into New Building and Repair, Maintenance and Improvement, and
- Infrastructure, civil engineering related work.
Product market
The parties overlap in the provision of 'New Building' and in the plant hire sectors. Mansell is also active in the supply of private and public housing and RMI and Balfour Beatty is active in infrastructure, however as there is no overlap in these sectors they are not considered further.
There appear to be limited demand-side substitutes in the sector of New Building, as the service offered is specific to the project undertaken.
On the supply-side it would appear that it is possible to switch between the various sectors of the construction industry. Third party responses indicate that firms who are active in one segment can and do switch to the provision of other construction services. All they need is to hire sufficiently experienced staff with the expertise and subcontractor contacts to construct a bid.
However, reputation appears to be important especially regarding those projects which are large and complex. Thus for these contracts it would appear to be difficult for a firm active in a different sector to switch, without a proven track record in that sector.
Comments received by the parties and third parties indicate that the frame of reference could be sub-divided into contract size, however there does not appear to be any clear cut off in terms of contract value. Small firms can and do bid for larger contracts and large firms can and do bid for smaller contracts.
Regarding plant hire, third parties have indicated that it is possible for construction companies to switch into the provision of plant hire as they are regularly engaged in plant hire and have a good knowledge of this sector. There are a number of construction companies which do provide plant hire.
For the purpose of this analysis, the appropriate frames of reference are considered to be plant hire and the provision of New Building, although they may in fact be wider due to the impact of supply-side substitutability.
Geographic market
The parties and third parties submit that there is a need for companies, especially multinationals, to have an established UK presence and track record in UK projects in order to be able to make credible bids.
It also appears that there are regional aspects to competition in Building services and most national firms have regional offices. However there do not appear to be any clear geographic breaks, suggesting at the very least that a chain of substitution exists.
Thus for the purposes of this assessment the geographic scope is considered to be the UK.
HORIZONTAL ISSUES
Market shares
The construction industry is highly fragmented with firms ranging from 'one-man bands' to large multinationals. As such the parties' shares of supply are very low. With regard to the segment in which they overlap, New Building, the parties combined share of supply post-merger is 1.9 per cent.
The parties also do not appear to be each other's closest competitor. Balfour Beatty has a presence in large contract values and Mansell in smaller ones. Customers commented that is was rare for the parties to submit a bid for the same project, thus direct competition between the parties is limited.
The parties both have a plant hire business. Balfour Beatty's business has a turnover of £84m, whilst Mansell's operation has a turnover of just £8.4m. The majority of the parties' plant hire business is for internal use and the parties estimate that their combined share of external supply is less than 1 per cent.
Barriers to entry and expansion
Barriers to entry vary depending on the size and scope of the contract being bid for. For small projects third parties have indicated that entry is relatively easy. The main cost is that of recruiting experienced staff and gaining a reputation with customers. Much of the construction work is normally subcontracted so a new entrant would need a network of proficient subcontractors, however experienced staff may well already have these contacts. The parties also maintain that capital outlay is not a barrier as the amount required is low, because most plant is hired, large portions of work sub contracted and contracts often contain advanced payments.
For the more complex projects the costs involved are similar, but of a larger degree. Third party comments indicate that it is unlikely that a new entrant would be entrusted with large or complex a project.
Barriers to entry in plant hire are also modest. The main cost is the capital outlay required to purchase machinery. It is common for construction firms, particularly the larger ones to self supply.
Buyer power
There are some large customers who repeatedly tender for business and are well informed and experienced buyers. However none of these customers are large enough to constitute a significant part of the procurement of building services. As such there is little prospect of them being able to exercise any buyer power.
VERTICAL ISSUES
There are no vertical issues.
THIRD PARTY VIEWS
The majority of third parties were unconcerned by the merger. One competitor did raise a concern that the merged entity may engage in predatory pricing in the RMI and Social Housing sectors which may push out competitors. However, given the very low market shares, the fact that the parties do not overlap in these sectors, and the sustainability needed to push out competitors, this appears to be very unlikely.
ASSESSMENT
The merger qualifies on the turnover test of the Act. The construction industry is characterised by a high degree of fragmentation, such that the parties combined shares of supply in New Building is only 1.9 per cent ([note1]). There are a large number of players in the industry ([note 2]). Barriers to entry in New Building do not appear to be significant. No competition concerns are raised in respect of the overlap in the plant hire sector.
The OFT does not therefore believe that there is a significant prospect that the merger would substantially lessen competition within a market of 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.
DECISION
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
NOTES
- This figure has been estimated by the parties.
- Details excised at the parties request.