Anticipated Acquisition by Essilor International (Compagnie Générale D'optique) SA of Shamir Optical Industry Limited
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Anticipated acquisition by Essilor International (Compagnie Générale D'Optique) SA of Shamir Optical Industry Limited ME/4732/10 The OFT's decision on reference under section 33(1) given on 20 December 2010. Full text of decision published 18 February 2011. Please note that the square brackets indicate figures or text which have been deleted or replaced in ranges at the request of the parties or third parties for reasons of commercial confidentiality. PARTIES 1. Essilor International (Compagnie Générale D'Optique) S.A. ('Essilor') is a French company listed on Euronext. It is the parent and holding company for the Essilor Group of companies, whose main activities are the manufacture and supply of finished glass and plastic ophthalmic lenses to opticians worldwide. Essilor is also a wholesaler of ophthalmic substrate1 to independent laboratories and to integrated optician chains which have their own labs. Essilor's UK turnover was £[ ] million in 2009. 2. The main Essilor companies active in the supply of ophthalmic lenses in the UK are Essilor Limited, BBGR Limited and Signet Armorlite Europe Limited,2 which are integrated manufacturers of ophthalmic lenses; Wholesale Lens Corporation Limited ('WLC'),3 which is a wholesale supplier of ophthalmic 1 Ophthalmic substrate is a semi-finished plastic ophthalmic lens. Substrate requires further laboratory processing before the lens can be sold to the end customer. 2 ME/3992/09 'Anticipated acquisition by Essilor International (Compagnie Générale D'Optique) S.A. of Signet Armorlite Inc' 11 March 2009 3 ME/4154/09 'Anticipated acquisition by Essilor International (Compagnie Générale D'Optique) S.A. of Wholesale Lens Corporation Ltd' 27 July 2009 1 lenses; and Horizon Optical Company Limited ('Horizon'),4 Sinclair Optical Services Co. Ltd ('Sinclair'), United Optical Laboratories Ltd ('United') and Leicester Optical Limited, which are prescription laboratories. 3. Essilor also has a 50/50 joint venture in Japan with Nikon Corporation, called Nikon Essilor Co. Ltd. The joint venture is active in the UK through its wholly-owned subsidiary, Nikon Optical UK Limited ('Nikon UK'), and supplies Nikon branded ophthalmic lenses to customers in the UK. Certain Essilor subsidiaries also provide glazing and mounting services and supply spectacle frames to customers in the UK. 4. Shamir Optical Industry Ltd ('Shamir') is an Israeli company with a joint listing on the Tel Aviv Stock Exchange and the NASDAQ Global Market, although the majority of its shares are privately owned. The main activity of Shamir is the manufacture and supply of finished glass and plastic ophthalmic lenses to opticians worldwide. Shamir also manufactures ophthalmic substrate. The activities of Shamir's UK subsidiaries are limited to glazing and distribution of finished lenses. Shamir's UK turnover was £[ ] million in 2009. TRANSACTION 5. As part of the transaction, Essilor has agreed to purchase a 50 per cent indirect interest in Shamir through an acquisition of 50 per cent of shares in Shamir Optica Holding A.C.S (Shamir Holdings) which after the transaction will own 100 per cent of shares in Shamir. Essilor's acquisition of shares in Shamir Holdings is for a consideration of approximately US$130 million. 6. Although after the transaction, Essilor and Kibbutz Shamir A.C.S., an Israeli agricultural cooperative society ('Kibbutz Shamir'), will each own 50 per cent of shares in Shamir Holdings (each indirectly own 50 per cent of shares in Shamir), Essilor will have sole control of Shamir. However, under the terms of the sale agreement, Shamir will retain its operational independence, maintain autonomy over its R&D capabilities, and preserve its existing culture. 4 ME/4258/09 'Anticipated acquisition by Essilor International (Compagnie Générale D'Optique) S.A. of Horizon Optical Company Ltd' 5 November 2009 2 7. The transaction has been notified in Portugal, Spain and the UK. The transaction was announced on 15 October 2010 and the administrative deadline for a decision is 20 December 2010. JURISDICTION 8. As a result of this transaction Essilor and Shamir will cease to be distinct. The parties overlap in the supply of ophthalmic substrate, finished glass ophthalmic lenses and finished plastic ophthalmic lenses in the UK. The parties have an estimated share of supply of [30-40] per cent in the supply of ophthalmic substrate in the UK. As a result, the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. RATIONALE FOR THE MERGER 9. The parties submit that as a result of the merger Shamir's operations will benefit from Essilor's international network, enabling it to access, and expand in, new markets worldwide. The merger is also expected to create cost efficiencies with Shamir benefitting from Essilor's better procurement processes resulting in lower purchase prices for its inputs, such as liquid monomer. The parties also anticipate co-operation on R&D projects such as developing new lens designs which, absent the merger, would not occur. MARKET DEFINITION BACKGROUND Ophthalmic lens supply chain and types of lenses 10. The diagram below shows the supply chain from the supply of chemicals for the substrate to the consumer purchase. The parties compete at stages two and three of the supply chain. 3 using Design Service technology 11. Stage 1. Raw material manufacture: glass is produced for glass lenses and liquid monomer is produced for plastic lenses. 12. Stage 2. Lens manufacture: liquid monomer or glass is processed to produce ophthalmic substrate (semi-finished lenses). Ophthalmic substrate is created by two types of firms: independent manufacturers that do not complete further lens processing and integrated manufacturers with labs (such as the merging parties), which also complete additional processing (including coating or tinting and shaping).5 13. Stage 3. Lens shaping and additional processing: prescription labs shape/develop semi-finished lenses into finished single vision, bi-trifocal and progressive lenses and apply anti-reflective, scratch-resistant or easy cleaning coatings according to the preferences of the end-user. This process can be completed by integrated manufacturers, independent 5 Independent manufacturers sell substrate to independent laboratories (such as Norville, Galaxy Optical and Dunelm) and to large optical retail chains which have laboratories (such as Specsavers and Vision Express). Integrated manufacturers sell substrate to these two types of customers as well, but they also complete an additional stage of processing on behalf of opticians: the final stage of processing creates lenses which are ready to be sold to patients. Integrated manufacturers therefore compete downstream with independent laboratories, their upstream customers. 4 laboratories, and large optical retail chains which have laboratories in- house.6 14. Finished lenses can be designed to target alternative vision defects: • Single vision: these have the same optical correction over the surface of the lens and require minimal additional processing of ophthalmic substrate, except when a patient requests further processing, such as coating or tinting. • Bi/tri-focal: these provide two or three different vision corrections across the surface of the lens. So, for example, bi-focals may correct near vision in the lower part of the lens and distance vision in the upper part of the lens. • Progressive: also known as varifocals, these lenses provide more than one vision correction in the same way as bi-trifocal lenses. The important difference between bi-trifocals and varifocals is that there is no visible line on the plane of the lens where the lens changes from correction of near vision to the correction of distance vision. The key benefit to patients is that they do not need to make significant head movements to look through a different corrective part of the lens. Because of the complexity of the technology and the manufacturing process, progressive lenses are typically more expensive than single vision and bi-trifocal. 15. Stage 4. Lens glazing and mounting: finished lenses are shaped to fit spectacle frames, mounted onto spectacle frames, and made ready for sale to patients. Due to varying degrees of vertical integration these services may be carried out by the laboratories or by their customers. 6 Integrated manufacturers and independent laboratories also sell finished prescription lenses to independent opticians and non-integrated optician chains. Importantly, branded substrate processed by independent laboratories retains the original manufacturer's brand when sold to opticians, even though the original manufacturer did not complete the final stage of processing. 5 Product scope 16. The parties submitted that the appropriate market definition should be (i) the supply of ophthalmic substrate and (ii) the supply of ophthalmic lenses. This broadly follows the European Commission's (EC) decision in the Zeiss/EQT/Sola JV in 2005,7 which considered the manufacture of ophthalmic substrate and finished plastic ophthalmic lenses. While for the purposes of that decision the precise definition of the product market was left open, the EC's market investigation broadly supported a market definition that segmented the manufacture of ophthalmic lenses by material (either plastic or glass) and by the type of corrective design (single vision, bi/tri-focal, progressive). However, the EC also noted that there was some evidence of supply-side substitutability between glass and plastic lenses, and between suppliers of all types of corrective designs. Ophthalmic Substrate 17. Essilor defines ophthalmic substrate as 'semi-finished lenses and finished single-vision lenses that require additional shaping, according to the desired correction type, and/or processing.' In Essilor International/Signet Amorlite, the OFT agreed with this definition and considered whether the market should be subdivided into generic and branded substrate but did not conclude on this point as competition concerns did not arise on either approach.