Duralay International Holdings Ltd and Gates Consumer & Industrial (part of the Tomkins PLC group): A report on the proposed merger

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Summary

On 28 June 2001 the Secretary of State for Trade and Industry referred to us the proposed acquisition by Duralay International Holdings Ltd (Duralay) of Gates Consumer & Industrial (Gates), part of the Tomkins PLC group. We were asked to report by 18 October 2001. Our terms of reference are set out in Appendix 1.1.

Duralay and Gates (the main parties) supply secondary products used in the installation of carpet. Duralay manufactures sponge rubber (sponge), crumb rubber (crumb) and latex foam (foam) underlay, while Gates produces sponge and polyurethane (PU) underlay. Both companies also manufacture gripper, which is used to secure carpet to the floor, and other carpet-laying accessories including metal edgings, which are used to join carpet, for example between rooms.

Sales of underlay and gripper are wholly dependent on the demand for carpet, but carpet can be, and often is, laid without underlay, particularly cheaper carpet. New carpet is sometimes laid over existing underlay and gripper is also sometimes re-used. Carpet sales have declined over recent years and smooth floor coverings such as wood laminates have been gaining share at their expense.

When buying carpet, consumers are primarily interested in the choice and quality of carpet on offer, and its price. They are generally unaware of the material, specification and price of the many underlays available, and if underlay is used, generally purchase it on the recommendation of the retailer. There is little promotion of underlay at the retail level and much underlay is sold as the own label brand of the wholesaler or retailer.

Competition at the retail level appears to take place predominantly on price. Many consumers compare quotes for the total installation costs of carpet and accessories, including underlay and gripper, before making a decision. Others purchase carpet and underlay separately. Broadly speaking, the higher the quality of the carpet, the more expensive will be the underlay on which it is laid, but the lower the proportion of the underlay to the carpet price.

There have been practically no imports of underlay for some years and only a small volume of gripper is imported. We found that sponge, crumb, PU, foam and felt formed differentiated segments within a UK underlay market. We found that gripper formed a separate market from other types of product for fixing carpet to the floor and that the geographic scope of the market was the UK. So far as metal edging is concerned, the merged company would be only the third largest supplier in the UK. We therefore found it unnecessary to go any further either in defining the market for metal edging or considering this product in the context of the public interest.

Following the acquisition of Gates by Duralay, the merged company would have about [$] per cent by value of the UK supply of underlay, worth around £[$] million and [$] per cent by value of the UK supply of gripper, a market worth around £[$] million. Given its high market share of underlay and gripper supply, we think that the merged company would, unless constrained, seek to exploit its position either by attempting to gain share at the expense of its competitors or by raising prices. We considered whether any constraints might operate to prevent it from exploiting its enhanced position in these markets.

In our view, a combination of the following constraints would represent a powerful curb on the merged company, sufficient to prevent it from attempting significant price increases. We expect large wholesale and retail customers of the merged company to use their counter-vailing purchasing power to pre-empt price increases for underlay above the competitive level, either by switching or threatening to switch their custom to other suppliers (either UK suppliers or imports), or by fostering the entry of new suppliers or the expansion of existing ones. Some customers would be prepared to move from sponge to PU or crumb, and competitors of the merged company have sufficient spare capacity to meet significant additional demand for these products. We do not consider that there are high barriers to entry to the underlay market. We believe that the threat of imports of underlay would be a factor inhibiting the merged company from pursuing an aggressive pricing policy. We see the most likely constraint on attempted price increases in gripper by the merged company as low entry barriers and the threat of increased imports. At the retail level, we would not expect increases in underlay prices to be passed on to consumers, because retailers, under pressure to keep the total price of carpet and underlay competitive, would find ways to offer underlay of similar quality, if differing specification, to consumers without increasing prices.

We expect that any strategy by the merged company to lower its prices selectively to some customers in order to drive competitors out of the market would be both too risky and too pro-longed to be attempted. We expect that attempts by the merged company to tie in the supply of one of its products with that of another product could not be sustained because of the threat of new entry or imports.

We have identified no wider public interest benefits from the merger that need to be considered alongside our analysis of its impact on competition in the relevant markets. Taking into account all the matters set out above, we conclude that the proposed merger may be expected not to operate against the public interest.

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