BREEDON AGGREGATES/AGGREGATE INDUSTRIES UK MERGER INQUIRY Provisional findings report Notified: 6 February 2014 The Competition Commission has excluded from this published version of the provisional findings report information which the inquiry group considers should be excluded having regard to the three considerations set out in section 244 of the Enterprise Act 2002 (specified information: considerations relevant to disclosure). The omissions are indicated by []. Some numbers have been replaced by a range. These are shown in square brackets. Non-sensitive wording is also indicated in square brackets. Contents Page Summary .............................................................................................................................. 3 Provisional findings ............................................................................................................. 11 1. The reference ................................................................................................................ 11 2. The companies and the industry in which they operate ................................................. 11 Breedon ........................................................................................................................ 11 Aggregate Industries and its operations in north Scotland ............................................. 15 The supply of heavy building materials in north Scotland .............................................. 17 The relevant products and services .......................................................................... 19 Primary aggregates .................................................................................................. 20 Recycled and secondary aggregates ........................................................................ 23 Drivers of demand .................................................................................................... 29 Customers ................................................................................................................ 31 Competitors .............................................................................................................. 33 3. The merger and the relevant merger situation ............................................................... 42 Outline of merger situation ............................................................................................ 42 The rationale for the merger .......................................................................................... 44 Jurisdiction .................................................................................................................... 44 Enterprises ceasing to be distinct ............................................................................. 45 Turnover test/share of supply test ............................................................................. 46 Timing of the reference ............................................................................................. 49 Provisional conclusions on relevant merger situation ................................................ 49 4. Market definition ............................................................................................................ 49 Analytical framework ..................................................................................................... 49 Product market .............................................................................................................. 50 Aggregates ............................................................................................................... 51 RMX ......................................................................................................................... 57 Asphalt ..................................................................................................................... 59 Contract surfacing services....................................................................................... 61 Provisional conclusions on product market definition ................................................ 62 Geographic market and catchment area analysis .......................................................... 63 Approach .................................................................................................................. 63 Aggregates ............................................................................................................... 65 RMX ......................................................................................................................... 67 Asphalt ..................................................................................................................... 70 Decorative aggregates .............................................................................................. 73 Contract surfacing services....................................................................................... 73 Provisional conclusions on geographic market definition ............................................... 74 5. Counterfactual ............................................................................................................... 75 The circumstances prior to the merger .......................................................................... 76 Our assessment of the counterfactual ........................................................................... 77 Scenario 1: Closure of the acquired operations ........................................................ 77 Scenario 2: acquisition by one or several alternative purchasers .............................. 78 Scenario 3: continued ownership of the acquired operations by Aggregate Industries ................................................................................................................. 80 Provisional conclusion on the counterfactual ................................................................. 81 6. Assessment of the competitive effects of the merger ..................................................... 82 Introduction ................................................................................................................... 82 Pre-merger competition ................................................................................................. 83 Purchasing processes .............................................................................................. 83 Criteria used to select suppliers ................................................................................ 87 Pricing ...................................................................................................................... 89 Closeness of competition between Breedon and Aggregate Industries in north- east Scotland........................................................................................................... 91 1 Analysis of local effects for aggregates, RMX and asphalt ............................................ 96 Approach .................................................................................................................. 96 Step 1: Filtering out of sites based on overlap and concentration analysis .............. 102 Step 2: Detailed analysis of the competitive effects of the transaction in the relevant product markets and local areas .............................................................. 108 Step 3: Countervailing factors: Likelihood of entry and expansion in the relevant product markets of the problem sites and buyer power .......................................... 151 Conclusions on the competitive effects of the merger in the markets for aggregates, RMX and asphalt in the relevant local areas ...................................... 163 Analysis of competitive effects for contract surfacing services and decorative aggregates ................................................................................................................. 163 Contract surfacing services..................................................................................... 163 Decorative aggregates ............................................................................................ 168 Provisional conclusions on the SLC test ...................................................................... 170 Appendices A Terms of reference and conduct of the inquiry B Parties’ financial information C Supporting analysis for product market definition D Catchment area analysis E Tender and win and loss analysis F Analysis of overlaps and local concentration G Analysis for competitive assessment H Pricing analysis I Survey evidence at site level J Barriers to entry and expansion Glossary 2 Summary 1. On 24 September 2013, the Office of Fair Trading (OFT) referred the completed acquisition by Breedon Aggregates Limited (Breedon) of certain Scottish assets of Aggregate Industries UK Limited (Aggregate Industries) (the transaction) to the Competition Commission (CC) for investigation and report. We are required to publish our report by 5 May 2014.1 2. Breedon is a producer of heavy building materials, which serves primarily the North, West and East of Scotland (through Breedon Aggregates Scotland Limited, hereafter referred to as Breedon Scotland), together with the East and West Midlands, East Anglia, North Wales, Greater Manchester and South Yorkshire. In Scotland, it operates 29 sites and produces aggregates, asphalt, ready-mix concrete (RMX) and concrete blocks. It also provides contract surfacing services (ie services associated