EN Official Journal of the European Union C 134/4

SUMMARY OF COMMISSION DECISION

of 19 September 2007

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case COMP/M.4525 — Kronospan/Constantia)

(Only the English version is authentic)

(Text with EEA relevance)

2009/C 134/04

On 19 September 2007, the Commission adopted a Decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, and in particular Article 8(2) of that Regulation. A non-confidential version of the full decision can be found in the authentic language of the case and in the working languages of the Commission on the website of the Directorate-General for Competition, at the following address:

http://ec.europa.eu/comm/competition/index_en.html

I. SUMMARY

1. On 4 May 2007, the Commission received a notification of a proposed concentration pursuant to Article 4 of Regulation (EC) No 139/2004 (‘the Merger Regulation’), following a referral pursuant to Article 4(5) of that Regulation, by which the undertaking Kronospan Holding GmbH (Germany), a sub-holding of the Kronospan Group (hereinafter referred to as ‘Kronospan’ or ‘the Notifying Party’), acquires within the meaning of Article 3(1)(b) of the Merger Regulation sole control over the raw and coated particle board as well as the decorative laminates and components businesses Fundermax GmbH (‘Fundermax’, Austria), Falco CC (‘Falco’, Hungary), and Sprela GmbH (‘Sprela’, Germany) (together ‘the original Target’) of the seller Constantia Industries AG (‘Constantia’, Austria, and together with the acquirer hereinafter referred to as ‘the Parties’).

2. Kronospan has worldwide activities concerning the production and sale of wood-based boards and related products, in particular the production of raw particle board, coated particle board, decorative laminates, post formed wooden elements (components) as well as related products, such as resin and specialty overlay paper.

3. The original Target was part of the Austrian Constantia group. It is active in the production of raw and coated particleboard, decorative laminates, cement-bonded wood particleboards and semi-finished products called ‘semis’ (‘Halbteile’) or post formed elements (components), i.e. raw particleboards coated with high pressure laminate (HPL) or continuous pressure laminate (CPL), which are sold as finished elements, such as worktops and window sills, or as raw material, such as bonded panels. The raw and coated particle board business of Constantia is carried out at two production sites situated relatively close to each other: Fundermax in Neudörfl/St. Veit (Austria) and Falco in Szombately (Hungary).

4. After examination of the notification, the Commission concluded that the operation fell within the scope of the Merger Regulation and raised serious doubts as to its compatibility with the common market and with the EEA Agreement. It therefore decided on 14 June 2007 to initiate proceedings pursuant to Article 6(1)(c) of the Merger Regulation.

5. On 12 July 2007, the Parties submitted a proposal to modify the concentration and commitments with a view to rendering the concentration compatible with the common market. Pursuant to that proposal, Kronospan would acquire only two of the three original Target plants, namely the companies Falco and Sprela (hereinafter ‘the new Target’), whereas Fundermax would remain with the seller, Constantia. Moreover, Kronospan would undertake not to acquire, or have an undertaking controlled by or affiliated with it acquire, Fundermax — wholly or in part — for a certain period of time. (1)

6. After carrying out a market investigation of the proposed modification and commitments, the Commission concluded that the modification of the concentration and the commitments entered into by Kronospan would remove the serious doubts as to the compatibility of the notified operation with the common market and the EEA Agreement.

7. The Parties were informed about the outcome of the market test of the modified transaction and commitments. On 31 July 2007, they signed an Amendment Agreement to the Framework Agreement (Annex 1 to the commitments, hereinafter ‘the Amendment Agreement’) and Kronospan submitted the final commitments, in which it undertook not to acquire sole or joint control over Fundermax for a certain period of time (the exact time span is confidential).

8. The notified operation, as modified, was therefore declared compatible with the common market and with the EEA Agreement pursuant to Article 2(2) of the Merger Regulation, subject to compliance with the Commitments.

II. EXPLANATORY MEMORANDUM

1. The relevant product markets

9. Both Parties are active in the manufacture and supply of wood based products. Their activities overlap in the production and supply of raw particle board, coated particle board, components and decorative laminates.

10. The Parties submit that the market for raw particle board constitutes a separate product market. This has been confirmed in the market investigation and is also in line with the findings in a recent merger case (2), where the products were identical with those in the present case. It can therefore be concluded that raw particle board constitutes a separate product market.

11. Coated particle board is raw particle board that has been further refined through coating. The Parties submit that this market constitutes a separate product market. The market investigation has confirmed this market definition, which is also in line with the findings in the recent case mentioned above. Coated particle board, thus, forms a separate product market.

12. Decorative laminate consists of several layers of resin or melamine impregnated craft papers (for the core) and decor paper (for the surface) sealed together. It is used e.g. in shower cabins, facades and balconies. A distinction can be drawn between high pressure laminate (HPL), continuous pressure laminate (CPL) and compact laminate.

13. There are no indications for competition concerns under any possible product market definition of decorative laminates. The question of a sub-segmentation of the market, for example according to different types of decorative laminates or different decor papers, can thus be left open for the purposes of this decision.

14. Components or post-forming elements are pieces of particle board to which laminate (HPL or CPL) has been glued and which have been shaped to the required profile. Since there are no indications of competition concerns under any possible alternative product market definition, the exact scope of the product market can be left open.

2. The relevant geographic markets

Raw particle board

15. The data that the Commission retrieved during its investigations confirms that the vast majority of shipments (81 % in 2006) are within a radius of 500 km from the plants.

16. In particular for those countries within proximity to the two plants of Constantia at the Austrian/Hungarian border – Slovakia, Hungary, Czech Republic, Slovenia and Austria – the Commission calculated the share of shipments to customers from plants located within 500 km of the customer and found this share to be significant. Based on the shipment data of the main raw particle board suppliers in that area, [90-100] (*) % of raw particleboard sold to Slovakian customers was delivered from plants located within 500 km of the customer. The respective figures for the other Member States are: Hungary [90-100] (*) %, Czech Republic [90-100] (*) %, Slovenia [80-90] (*) % and Austria [80-90] (*) %. In other words, the overwhelming majority of customers in those Member States source their raw particle board from plants located within 500 km of their own facilities.

17. However, national market shares are imperfect indicators of post-merger market power, as national boundaries do not necessarily reflect the competitive interaction between plants (e.g. two plants located on each side of a border would be closer substitutes than two plants in the same country but located far from each other). What ultimately matters for the competitive assessment is the change in the set of alternative suppliers that customers will be able to economically source from after the merger.

18. The Commission considers that the geographic area where the originally intended transaction may have affected the conditions of competition lies within a circle with a radius of about 500 km around the original Target's production facilities (hereinafter referred to as ‘the affected area’). (3) The Commission is of the opinion that customers inside this area that have identical sets of realistic supply alternatives are likely to belong to the same relevant geographic market because they are likely to face homogeneous conditions of competition. In applying this approach, the Commission considers that transportation distances for raw particle board can be used as a first proxy to determine whether or not a particular production plant belongs to a set of realistic supply alternatives for a given customer.

Coated particle board

19. The initial investigation confirmed the Parties′ views that transport costs are less important for coated compared to raw particle board. Some customers, however, indicated that the relevant geographic market could be more limited in scope than submitted by the Parties and pointed at shipping distances of approximately 1 000 km rather than EU-wide. Furthermore, given that the Parties′ market shares on this product market also differ largely from country to country, the Commission doubted that market shares presented by the Parties (calculating sales at the EU level) appropriately captured the competitive interaction in this product market.

20. In view of the significant amount of coated particle board that is shipped more than 1 000 km, it can be concluded that the relevant geographic market for coated particle board in the present case includes at least Central Europe and may be even wider. For the purposes of this decision, however, it can be left open whether the geographic market is EEA-wide, since it can be excluded that the supply conditions for customers in the affected areas, where the activities of the Parties overlap, would change to a significant extent as a result of the merger.

Decorative laminates and components

21. The Parties submit that the geographic market for decorative laminates and components is at least EEA-wide. They state, that — relative to the prices — transportation cost is less decisive for components and decorative laminates, as these products have a higher added value than raw particle board. During the Commission's market investigation, customers confirmed that the relevant geographic markets for decorative laminates and components could be regarded as EEA-wide. A few customers even indicated that the market for decorative laminates could be regarded as worldwide in scope.

22. These findings are in line with the outcome of previous market investigations (4). The Commission therefore considers that the relevant geographic market for decorative laminates and the relevant geographic market for components are EEA-wide. (5)

3. Competitive assessment

Raw particle board

23. The table below shows that the originally intended transaction would have led to high market shares in the market for raw particle board in the countries roughly coinciding with the affected area around the original Target's production facilities. The new entity would have held a dominant position with a market share of [60-80] (*) %. The transaction would have brought together two players holding a significant share of output, with an increment of around [30-40] (*) % (6).

Table 1: Market Shares in the region covering Austria, Hungary, Slovakia, Slovenia and Czech Republic. — Source: Market Investigation

Affected Area Market Share % Kronospan (30-40) % Constantia (30-40) % Combined (60-80) % Egger (10-20) % Sonae/Glunz (0-10) % Kronoswiss (0-10) % Pfleiderer (0-10) % Fantoni (0-10) % Lesna (0-10) % DDL (0-10) %

24. In the affected area customers for raw particle board have only limited possibilities to switch suppliers. From a supply-side point of view the market investigation showed that the delineation of the geographic market should be based on a distance between customers and their suppliers (plants) of roughly 500 km. From a customer perspective the closeness or relative distance to alternative suppliers is the decisive factor in this type of market. Thus, although the market shares presented above provide a first indication of the effects of the transaction, these cannot be fully captured by merely looking at these figures.

25. A large number of customers in the affected area have so far been sourcing from both the acquirers′ facilities and from the original Target. Both Parties have a significant proportion of their sales to common customers in the affected area. The originally notified transaction would have the effect that customers would loose a significant independent source of supplies and that the merged entity would be able to raise prices. This ability of the originally intended new entity to raise prices would, in particular, not be constrained by increased supplies from alternative sources given the capacity constraints and rising demand in the market.

26. In view of the above, in Slovenia, Slovakia, the South-Eastern part of Austria and the major part of Hungary, the realistic set of supply alternatives for some customers would have been reduced from four to three main suppliers as a result of the originally intended transaction. (7). Whereas customers in this area could have sourced from Pfleiderer, Constantia, Kronoswiss and Kronospan before the transaction, after the transaction their supply alternatives would be limited to Pfleiderer, Kronoswiss and the new entity.

27. The limited possibilities of switching supplier would have made customers in the affected area particularly vulnerable to price increases. If prior to the merger one of the merging firms had raised its price, it would have lost some sales to the other merging firm. The merger would remove this particular constraint. Moreover, non-merging firms would also benefit from this reduction in competitive pressure as the price increase by the merging firms may switch some demand to them, which would allow them to increase prices as well. The reduction in these competitive constraints and their magnitude as evidenced by the market shares could lead to a significant price increase in the affected area.

28. The Commission's market investigation confirmed that the main suppliers do not have significant spare capacity to increase supplies into the affected area. Expanding capacity would need a considerable investment and a significant lead time. Although some capacity is expected to come on stream in the EEA over the next two years, notably from new Egger facilities in Romania and the United Kingdom and from a new Kronospan facility in Slovakia (8), these additional capacities would barely be sufficient to meet the increasing demand for raw particle board of approximately (400 000-500 000) m3.

29. The Commission considers that Constantia's raw particle board business, in particular Fundermax, is an important competitive force in the affected area that would have been eliminated as an independent competitor through the originally intended transaction.

Coated particle board

30. Since transport costs are less important in coated particle board given the higher added value of the product, the distances over which such products can be economically supplied are longer. As outlined above, the Commission has concluded that a significant amount of coated particle board is shipped more than 1 000 km and, thus, that the affected market includes at least Central Europe and may even be wider. On the basis of this geographic delineation, the Commission has concluded that there would be no concerns with respect to the compatibility of the originally intended transaction with the Common Market.

31. Based on the supply data gathered in the market investigation in phase II, these customers have already sourced and would post-merger be able to source coated particle board from suppliers based, e.g., in Austria, Germany, Belgium or France such as Egger, Pfleiderer, Sonae, Kronoswiss, as well as several smaller suppliers. The originally intended transaction would not have significantly impeded effective competition in the market for coated particle board.

Coordinated effects

32. There are several features of the market for raw particle board that appear to be conducive to facilitate coordination aimed at selling at higher prices. Suppliers also appear to have a good knowledge of the prices of their competitors. In addition, it appears that suppliers sometimes cross-sell between each other. Customers have voiced the suspicion that the leading suppliers know each others′ prices. According to some competitors, they are aware of their competitors′ prices mainly through the customer response to their offers.

33. The originally intended transaction might have increased the likelihood that suppliers of particle board would have been able to coordinate their behaviour or would have made coordination easier, more stable or more effective, as the number of suppliers of particle board would have been reduced as a result of the transaction. However, any such concerns have in any event been removed by the modification of the transaction and the commitment entered into by the Notifying Party, which will maintain a market structure similar to the one prevailing before the transaction.

Vertical effects

34. The leading suppliers of coated particle board, Sonae, Pfleiderer, Egger and Kronospan, are all vertically integrated companies. However, some competitors to the leading coated particle board suppliers do not have their own in-house production of raw particle board; these are mostly smaller suppliers of coated particle board.

35. Non-vertically integrated competitors in the market for coated particle board depend on raw particle board producers for their input material. Given that the major suppliers of raw particle board are vertically integrated, and are at the same time competitors in the market for coated particle board, some competitors and customers have indicated that the new entity would have the ability and the incentive to foreclose its competitors on the market for coated particle board by ceasing to supply raw particle board, increasing the prices of raw particle board or delivering on uncompetitive terms.

36. However, given that supply of coated particle board takes place over distances of more than 1 000 km, the situation of customers of coated particle board would only be changed if their supply alternatives on such a broader geographic scale would be affected. Thus, even though coated particle board producers source their supplies from within an area of not more than 500 km, when it comes to vertical effects the availability of raw particle board as an input material must be considered on the geographic scale for coated particle board. On this basis, it should be noted that the merger would only increase the Notifying Party's output of raw particle board for the merchant market by (400 000-500 000) (*) m3 (taking into account the original Target). Assuming that this entire amount is currently used for coating, it would be equivalent to three percent of the overall coating production in the EEA so that a foreclosure would seem unlikely.

4. Commitments

37. In order to enable the Commission to declare the concentration compatible with the Common Market and the EEA Agreement even prior to issuing a Statement of Objections, in line with Article 10(2) of the Merger Regulation, the Parties undertook to modify the originally notified concentration.

38. The Parties proposed to amend the Framework Agreement dated 8 December 2006 prior to a Commission Decision pursuant to Article 8(2) of the Merger Regulation, to the effect that Kronospan will only acquire control in Sprela and Falco, while Fundermax shall be retained by Constantia. Moreover, Kronospan proposed a commitment not to acquire, or have an undertaking controlled by or affiliated with it acquire FunderMax, be it wholly or in part, for a certain period of time (*).

39. The proposed modification would have the effect of, on the one hand, securing in the affected area the significant volume of at least (400 000-500 000) m3 of non-captive production of raw particle board. It would also keep the number of significant suppliers at pre-merger level. According to the Notifying Party, another (30 000-40 000) m3 would become available for the merchant market, because sales of Fundermax to Sprela would after the modified transaction have to be considered merchant sales (and might not continue at all) (9).

40. Having been part of the same group until now, Falco and Fundermax have so far targeted different regions. Falco has been directing its sales mainly towards the East (notably Hungary), whereas Fundermax has been directing its sales towards the West. Following the modified transaction, Fundermax will continue to compete in the regions where it was already active, but will also be able to direct its marketing and sales efforts towards the East. Falco's customers in the affected areas (in particular in Hungary, Slovakia and Slovenia) will still be able to approach Falco/Kronospan, but will in addition gain a supply alternative through the Fundermax business.

41. Respondents to the market test have pointed out that Fundermax is relatively close to Falco (70 km) and is therefore in a good position to compete effectively with the latter.

III. CONCLUSION

42. For the reasons outlined above the notified operation, as modified, was declared compatible with the common market and with the EEA Agreement pursuant to Article 2(2) of the Merger Regulation, subject to compliance with the Commitments in the Annex to the Decision.

(1) Parts of this text have been edited to ensure that confidential information is not disclosed; those parts are enclosed in square brackets and marked with an asterisk.

(2) Commission Decision of June 28 2006, Case COMP/M.4165 Sonae Indústria/Hornitex.

(3) The two production sites for raw particle board are located within a distance of 70 km away from each other.

(4) Cf. Commission Decision of June 12 2006, Case COMP/M.4048 (Sonae Indústria/Tarkett/JV) and Commission Decision of June 28 2006, Case COMP/M.4165 (Sonae Indústria/Hornitex). In these decisions, however, the geographic market definition was left open.

(5) These EEA-wide markets are not affected, since the Parties′ combined market share (taking into account the original Target) would have amounted to less than 10 % on both markets.

(6) It should be noted that the Commission estimated market shares by using the shipment data from the main suppliers into the affected area: Kronospan, Constantia, Kronoswiss, Pfleiderer, Sonae, Egger, Fantoni, DDL and Lesna. These market shares may be slightly overestimated as the Commission did not obtain data from smaller competitors but their market share in the area is likely to be minimal.

(7) Although some fringe players are active in the areas mentioned, their presence is limited according to the market share data that was submitted by the Parties. Moreover, customers have confirmed not to regard those fringe players as a viable alternative, especially not for larger orders.

(8) Kronospan plans to invest and extend capacity in Zvolen.

(9) Whereas Fundermax has currently a total production capacity for raw particle board of around 625 000 m3, Falco's capacity amounts to around 300 000 m3. Out of this total production, Fundermax supplies approximately 400 000 m3 to third party customers of raw particle board, which do not belong to the Constantia group. Falco mainly produces for in-house production of value-added products, such as coated particle board, and can only sell around 40 000 m3 to the merchant market.