# m8341.docx

EUROPEAN COMMISSION Brussels, 29.3.2017 C(2017) 2186 final PUBLIC VERSION To the notifying party Subject : Case M. 8341 – LONE STAR FUND / XELLA INTERNATIONAL Commission decision pursuant to Article 6(1 )( b) of Council Regulation No 139 /2004 1 and Article 57 of the Agreement on the European Economic Area 2 Dear Sir or Madam, (1) On 22.02.2017 , the European Commission received notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which the undertaking LSF10 XL Bidco SCA (Luxembourg), an affiliate of Lone Star Fund X (U.S.), L.P. and Lone Star Fund X (Bermuda), L.P. (both of which are private equity funds organised by Lone Star) acquire s within the meaning of Article 3(1)(b) of the Merger Regulation sole control of the whole of the undertaking Xella International S.A. (Luxembourg), parent company of the Xella Group. (Lone Star is designated hereinafter as "the Notifying Party", while Lone Star and Xella together as "the Parties ") . 3 1. The P arties (2) Lone Star is a private equity firm that invests globally in real estate, equity (including the equity of operating companies), credit and other financial assets. Lone Star has organized 17 private equity funds. The Lone Star Funds are structured as closed-end, private-equity limited partnerships, the limited partners of which include corporate and public pension funds, sovereign wealth funds, university endowments, foundations, funds of funds and high net worth individuals. (3) Forterra is a UK building materials company producing bricks, blocks, walling & cladding systems (made of, or resembling, bricks), chimneys, roofing and flue systems, floors and precast products, and paving and suds systems predominantely for the UK market. (4) Xella is a diversified building materials group. Headquarted in Duisburg, Germany, Xella operates 96 production plants in 20 countries. 2. The operation and the concentration (5) Xella's sellers and Lone Star 4 entered into a sale and purchase agreement (the "SPA") on 1 December 2016. According to the SPA, Lone Star will acquire ( i ) the entire share capital in, as well as (ii) all preferred equity certificates issued by Xella . Upon closing of the Transaction Lone Star will thus have sole control over Xella . (6) The Transaction therefore constitutes a concentration within the meaning of Article 3(1 )( b) of the Merger Regulation. 3. EU D IMENSION (7) The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 000 million 5 ( Lone Star: EUR [...] million; Xella : EUR 1 272 million ) . Each of them has a n EU- wide turnover in excess of EUR 250 million ( Lone Star: EUR [...] million; Xella : EUR [...] million ) , but they do not achieve more than two-thirds of their aggregate EU- wide turnover within one and the same Member State. (8) The notified operation therefore has an EU dimension within the meaning of Article 1(2) of the Merger Regulation .
4. A ssessment 4.1. Activities of the Parties (9) Xella is organized around three business units: ( i ) Building Materials, which include, inter alia, wall-building products, aerated concrete wall units and insulation materials; (ii) Dry Lining, which includes the manufacture and supply of, mainly, gypsum fibreboards and, to a more limited extent, cement bonded boards; and (iii) Lime, which includes the production of burnt lime and limestone. (10) The Lone Star Funds have investments in a broad portfolio of companies and assets but their only European presence in the building materials sector is through Forterra . Forterra produces bricks, blocks, walling & cladding systems, chimneys, roofing and flue systems, floors and precast products, and paving and subs systems. (11) The only overlap between the Parties' activities is in so-called aerated concrete products in the UK. (12) Aerated concrete blocks are a lightweight, precast, foam concrete building material, being produced using no aggregate larger than sand. (13) Xella has no production facilities for aerated concrete products in the UK, but supplies aerated concrete products (autoclaved aerated concrete or "AAC" blocks under its Ytong brand) to the UK from Germany, Belgium and Netherlands using a dedicated sales team in the UK. Figure 1: Ytong brand Source:
https://www.xella.com/en/ytong.php (14) Forterra produces and markets aerated concrete or " aircrete " blocks in the UK under its Thermalite ® brand. Forterra has production facilities in Hams Hall and Newbury (UK) . Figure 2: Thermalite brand Source: Forterra prospectus – Annex 13 4.2. Relevant product market (15) Aerated concrete ( aircrete ) blocks form part of building materials. In its practice, the Commission considered the following segmentations of building materials. (16) The Commission has previously considered the possibility of a market for all materials that can be used to build walls by the 'brick on brick' method (masonry), including clay bricks, sand-lime bricks, aerated concrete blocks and pumice blocks. Its investigations suggested that, at least at the building planning stage, these products were interchangeable. 6 However, the Commission did not take a definitive position on the relevant product market definition. (17) I n subsequent decisions, the Commission has drawn a distinction between a market for building materials for load-bearing walls and a market for building materials for non-load-bearing walls. 7 (18) I n a past decision , t he Commission has also considered that there is a separate sub-market for concrete building blocks. 8 (19) Under a narrower definition , the relevant product market could be confined to aerated concrete blocks. This market segmentation was used by the UK's Competition Commission ("CC") in a report considering the proposed acquisition of Marley Building Materials Limited by H+H Celcon Limited. The CC took into account evidence that from the demand-side, a majority of house builders would not switch to aggregate blocks in response to a 5% increase in the prices for aerated concrete blocks, and also that there was no practical ability for supply-side substitution as the manufacturing process, capital requirements and associated know-how of the two types of blocks differ. The same segmentation has been used by the German Federal Cartel Office in the decision concerning the acquisition of H+H by Xella . 9
4.2.1. The Notifying Part y ' s views (20) The Notifying Party submits that a market definition covering all masonry building materials is consistent with its commercial perception of the markets it operate s in. (21) However, as regards a possible distinction between a market in building materials for load-bearing walls and a market in building materials for non-load-bearing walls, the Notifying Party submits that it is no longer appropriate, particularly in light of more recent technical and market evolutions in the construction industry. In particular, the Notifying Party argues that it make s no such distinction when it market s and sell s its products and that in any case aerated concrete blocks can be used in both load-bearing and non-load-bearing walls . Further, the Notifying Party indicates that recent evolutions in markets and consumer choices blur the distinction and that other features of building materials not limited to their load-bearing capacity such as thermal conductivity are affecting demand-side substitutability. (22) The Notifying Party submits further that there may be a degree of demand-side substitutability between aerated concrete blocks and aggregate blocks (a market in which only Forterra is active in the UK) and thus they could be seen as belonging to one market . According to the Notifying Party, aerated blocks are lighter than aggregate blocks and can be used for relatively low buildings, whereas aggregate blocks are stronger but have less insulating capacity. Both aerated and aggregate blocks are widely used in residential construction and there are indications that they are used interchangeably in Great Britain, especially at the planning stage of building construction. (23) Moreover, t he Notifying Party indicates that in some cases other building materials such as bricks, sand-lime bricks and calcium silicate units can be used as substitutes for aerated and aggregate concrete blocks. (24) According to t he Notifying Party , the narrowest plausible definition of the product market is the market for aerated concrete blocks. (25) Finally, the Notifying Party takes the view that there is no basis for a narrower market definition, i.e. one that would distinguish between different types of aerated concrete blocks. Such a distinction could be made between aerated concrete blocks made of pulverised fuel ash " PFA " (such as Forterra's aerated concrete blocks) and aerated concrete blocks made of sand (such as Xella's AAC blocks). However, the Notifying Party argues that the technical differences between these two types of aerated concrete blocks remain relatively insignificant and thus insufficient to justify a product market segmentation. 4.2.2. Commission's assessment (26) Regarding a possible distinction between building materials for load-bearing walls and building materials for non-load-bearing walls , competitors who replied to the market investigation indicated that this distinction might not be appropriate for aerated concrete blocks, as they can be used for the construction of both types of walls. 10 (27) Regarding a product ma rket definition including both aerated and aggregate concrete blocks , a majority of respondents to the market investigation indicated that the two types of concrete blocks are substitutable . 11 However, it was mentioned that aerated and aggregate concrete blocks differ in terms of thermal efficiency and thus require a change in the insulation process. 12 T imber frame was also considered by participants to the market investigation as a substitute to aerated concrete blocks . 13 (28) Finally, as regards a possible segmentation by different types of aerated concrete blocks , i.e. aerated concrete blocks made of PFA and those made of sand, a majority of respondents to the market investigation confirmed that the two different types of aerated concrete blocks are substitut able. 14 A competitor noted that " both types of aircrete blocks are sold in direct competition with each other and they constitute one overall market of aircrete blocks ". 15 Similarly , for a customer, aerated concrete blocks made of PFA and sand are " 100% substitutable ". 16 (29) The precise scope of the relevant product market can be ultimately left open in the current case, since no competition issues arise under any plausible market definition. 4.3. Relevant geographic market (30) The Commission has considered the geographic markets for building materials as national in scope, by virtue of the high transportation costs and in some cases different national rules on building and industrial safety regulations. 17 In past decision s , the Commission also considered that the potential geographic market for different concrete products and concrete building blocks was national in scope, leaving open the possibility of a narrower definition (i.e., local). 18 The CC in the report mentioned above concluded that the relevant geographic market was Great Britain, i.e. the UK without Northern Ireland, given the transportation cost and the absence of aerated supplies by the three main British-based manufacturers from Britain to Northern Ireland. (31) The Notifying Party contends that the relevant geographic market for any plausible product market is at most national in scope and potentially limited to Great Britain. (32) Competitors based in Great Britain who responded to the market investigation indicated that the geographic market for aerated concrete blocks is national in scope. 19 Further, they mentioned that they do not supply customers in Northern Ireland . 20 A majority of customers who participated to the market investigation indicated the main geographic scope of their supplies was at most national. 21 (33) The precise scope of the relevant geographic market can be ultimately left open , since no competition issues arise under any p lausib le market definition. 4.4. Competitive assessment (34) The Transaction gives rise to a horizontally affected market under the narrow product market definition of aerated concrete blocks in Great Britain . 22 (35) Under any other broader product market definition , either no affected markets would arise or the Parties' combined market share would be diluted with further competitors added. Moreover, should the market be split between PFA and sand-based aerated concrete blocks, no overlap would occur between the Parties' activities, as Forterra produces PFA aerated concrete blocks while Xella's products are made from sand.
4.4.1. The Notifying Part y ' s views (36) The Notifying Party claims that Xella cannot be considered as an important competitive constraint on the main aerated concrete block producers in the UK because of its small market share and the high transportation costs it faces for its imports into the UK . (37) The Notifying Party contends that the Transaction will not eliminate Xella as an independe nt competitor , because they will be held by different funds of the Lone Star group and operate on an arms-length basis . Moreover, even if that would be the case, Forterra would still face at least two strong competitors (H+H and Tarmac). (38) Lastly, the Notifying Party adds that it is easy for customers in the affected markets to switch supplier as the associated switching costs are limited and there are no exclusive agreements. The Notifying Party submits that even if, post-transaction, Forterra and Xella were to be considered a " merged entity " , they would have none of the means to hinder expansion by their competitors within the meaning of paragraph 36 of the Horizontal Guidelines . 23 4.4.2. Commission's assessment (39) In Great Britain, there are three main aerated concrete blocks manufacturers, namely H+H ( [40-50 ] % market share ), Forterra ( [20-30] % market share ) and Tarmac ( [20-30] % market share ). 24 Other smaller manufacturers have together a market share of around 10%. Xella's market share is around [5-10 ] % . Post-transaction, Xella will therefore face competition from at least two strong players (H+H and Tarmac). (40) Most of the customers who responded to the market investigation indicated that they have several suppliers of aerated concrete blocks. 25 (41) In addition, the market investigation confirmed the existence of imports of aerated concrete blocks in Great Britain from manufacturers based in other Member States, either through direct sales or distributors . 26 (42) No substantiated concerns have been raised by respondents to the market investigation . A majority of customers who responded to the market investigation indicated that the Transaction w ould have no impact or a positive impact on the market for aerated concrete blocks in the UK . In particular they underlined that there are in total 6 suppliers in the UK and Xella's market share is relatively small . 27 (43) In view of the above, it can be concluded that the Transaction does not raise serious doubts as to its compatibility with the internal market with respect to any of the plausible markets relating to aerated concrete blocks. 5. Conclusion (44) For the above reasons, the European Commission has decided not to oppose the notified operation and to declare it compatible with the internal market and with the EEA Agreement. This decision is adopted in application of Article 6(1 )( b) of the Merger Regulation and Article 57 of the EEA Agreement . For the Commission
(S igned)
Margrethe VESTAGER
Member of the Commission
(1) OJ L 24, 29.1.2004, p. 1 (the ' Merger Regulation ' ). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ( ' TFEU ' ) has introduced certain changes, such as the replacement of ' Community ' by ' Union ' and ' common market ' by ' internal market ' . The terminology of the TFEU will be used throughout this decision.
(2) OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').
(3) Publication in the Official Journal of the European Union No C 69, 4.3.2017 , p. 13.
(4) Through its affiliate LSF10 XL Bidco SCA.
(5) Turnover calculated in accordance with Article 5 of the Merger Regulation .
(6) Case No COMP/M.1866 – Preussag / Hebel , paragraph 7.
(7) Case No COMP/M.2495 – Haniel / Fels , paragraph 53; Case No COMP/M.2568 – Haniel / Ytong , paragraph 63; Case No COMP/M.2650 – Haniel / Cementbouw /JV , paragraph 81.
(8) Ca se No COMP/M.1779 – Anglo American/Tarmac , pa ragraph 19.
(9) Decision of 12 March 2012, B1-30/11, Xella /H+H .
(10) Agreed non-confidential minutes of a call with a competitor of 7 February 2017; agreed non-confidential minutes of a call with a competitor of 14 February 2017; agreed non-confidential minutes of a call with a competitor of 17 February 2017 .
(11) Replies to question B.4 of Q1 – Questionnaire to customers; Agreed non-confidential minutes of a call with a competitor of 7 February 2017; agreed non-confidential minutes of a call with a competitor of 14 February 2017; agreed non-confidential minutes of a call with a competitor of 17 February 2017 .
(12) Agreed non-confidential minutes of a call with a customer of 6 February 2017; a greed non-confidential minutes of a call with a customer of 10 February 2017 ; agreed non-confidential minutes of a call with a competit or of 17 February 2017.
(13) Replies to question B.4 of Q1 – Questionnaire to customers ; agreed non-confidential minutes of a call with a competitor of 17 February 2017.
(14) Replies to question B.4 of Q1 – Questionnaire to customers; Agreed non-confidential minutes of a call with a competitor of 7 February 2017; agreed non-confidential minutes of a call with a competitor of 14 February 2017; agreed non-confidential minutes of a call with a competitor of 17 February 2017.
(15) Agreed non-confidential minutes of a call with a competitor of 17 February 2017.
(16) Replies to question B.4 of Q1 – Questionnaire to customers.
(17) Case No COMP/M.7703 – PontMeyer /D BS , paragraphs 21-22; Case No COMP/M.7457 – CVC/ Paroc , paragraphs 27-28.
(18) Case No COMP/M.7552 – Holcim /Lafarge , paragraph 4 67; Ca se No COMP/M. 1779 – Anglo American/Tarmac, paragraphs 19 and 24.
(19) Agreed non-confidential minutes of a call with a competitor of 7 February 2017; agreed non-confidential minutes of a call with a competitor of 14 February 2017; agreed non-confidential minutes of a call with a competitor of 17 February 2017.
(20) Ibid .
(21) Replies to question C.1 of Q1 – Questionnaire to customers.
(22) The assessment would not substantially differ if the whole of the UK were to be considered as the relevant geographic market. According to the Notifying Party, the volume of the Northern Irish market is very small in comparison to the whole of the UK. Northern Ireland has a population of 1.9 million as compared to the UK of 65 million.
(23) OJ C 31, 5.2.2004, p. 5-18 ('Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings').
(24) Source: Parties.
(25) Replies to question C.1 of Q1 – Questionnaire to customers.
(26) Replies to question C.1 of Q1 – Questionnaire to customers; email from a manufacturer to the case team, dated 13 March 2017 .
(27) Replies to question s D.1, D.2 and E.2 of Q1 – Questionnaire to customers.