Archived — Acquisition of Control of Matériaux Coupal inc. by RONA inc.

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Technical Backgrounder

August 2006


This technical backgrounder is intended to summarize the main findings of the Competition Bureau's (the "Bureau") review of the acquisition by RONA Inc. ("RONA") of 51% of the operating businesses of Matériaux Coupal inc. ("Coupal").

Readers are advised to exercise caution in interpreting the Bureau's assessment of this transaction. Enforcement decisions are made on a case-by-case basis, and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner of Competition (the "Commissioner"). The legal requirements of section 29 of the Competition Act (the "Act") and the Bureau's policies and practices regarding the treatment of confidential information limit the Bureau's ability to disclose certain information obtained during the course of a merger review.

In September 2005, RONA contacted the Bureau regarding its intention to acquire a 51% interest in the operating businesses of Coupal. The Bureau then began a review to determine the effects of the acquisition on competition. Subject to an undertaking by the parties not to close the merger without giving the Bureau six weeks of notice, the Bureau exceptionally agreed to the parties' request not to immediately communicate with third parties (clients, competitors and suppliers).1

In the meantime, however, the parties responded to the Bureau's requests for data and documents, enabling the Bureau to continue its examination of the case. The Bureau also had the benefit of the knowledge it had acquired during previous merger reviews in the hardware and building materials sector, many of which had involved RONA. In early February, the merger proposal was made public and, as had been agreed, the Bureau commenced calls to third parties.

Despite some remaining concerns about the impact of the merger, particularly in the Granby region, the Bureau found that sufficient grounds did not exist to initiate proceedings before the Competition Tribunal with respect to the transaction. In the circumstances, although the Bureau issued a no-action letter, the Commissioner decided to use the three-year period provided in the Act (s. 97) within which a merger may be challenged for the purposes of monitoring the relevant markets. To this end, the Commissioner sought RONA's cooperation in obtaining information that would assist the Bureau in monitoring more closely the competitive effects of the merger. The Bureau will continue to track RONA's position as a result of its successive acquisitions of merchants and recruitment of member merchants (whether or not they adopt one of the RONA banners), and the potential effects on upstream markets as well as on the competitiveness of the other players in the industry.

The remainder of this document is a description of the relevant facts in this matter as well as the Bureau's main findings.

The Parties

RONA, both a distributor and retailer of hardware, renovation and gardening products, is a leader among Canadian businesses in the sector. As of September 15, 2005, a total of 563 stores belonged to the RONA network, including 384 affiliates, 156 corporate stores and 23 franchised stores. The network also includes several different store formats and banners. On September 15, 2005, RONA had 67 big box stores, 304 traditional merchants and 192 specialized stores.

Coupal operates nine retail outlets selling lumber and building materials in Greater Montreal, Haut-Richelieu and Estrie. Coupal also operates two plants, in St-Lin-Laurentides and Granby, that manufacture roof trusses, joists and prefabricated walls.

Product Market

The Bureau determined that, generally, consumer sales constitute a distinct market from the market composed of commercial, institutional and industrial sales.2 The Bureau in this case specifically focussed its analysis of the effects of the transaction on the sales of lumber and building materials to home building contractors, who represent a major share of the client base for Coupal's outlets and some RONA merchants. There is an important service dimension to the sale of lumber and building materials to home building contractors which does not exist to the same extent with in-store sales to consumers (sale representatives, delivery with boom trucks, credit lines, etc.).

Another relevant market considered in the merger review was the manufacture and sale of structural products, such as roof trusses and joists. Since RONA does not operate any plants in Quebec that manufacture these products and there is sufficient unintegrated manufacturing capacity available to RONA competitors, the Bureau found that the transaction would likely not result in a substantial lessening or prevention of competition in this regard.

Finally, the Bureau studied the impact of the merger on the supply markets for lumber and building materials (upstream markets). Some market participants expressed concerns about RONA's buying power. However, as to upstream markets, the Bureau found that, at this time, sufficient grounds do not exist for making an application to the Tribunal.

Geographic Market

In defining the relevant geographic market, the Bureau obtained information from Coupal pertaining to delivered sales to construction sites, by outlet and by invoicing town/city. Based on these data, approximately 80% of delivered sales to home building contractors in the Montreal area, occurred within a 30-km radius and involved less than 30 minutes of travel time. However, some of Coupal's competitors indicated that they cover the entire Greater Montreal area, delivering directly to their clients' construction sites. Taking a conservative approach, according to the competitive overlap of Coupal's and RONA's activities, the Bureau determined that it was appropriate to subdivide the markets as follows: North of Montreal and Laval, South Shore of Montreal, West Montreal, East Montreal and Lanaudière and the Haut-Richelieu and the Granby areas.

Market Shares and Concentration

Although a precise calculation of RONA's post-acquisition market shares would be difficult without an accurate measure of the total value of each relevant market (which was unavailable), based on the information provided by the parties and gathered from third parties, the Bureau estimated that RONA's operations would generate approximately 50% of total retail sales of lumber and building materials to home building contractors in the Granby area, and between 30% and 35% of such sales in the Greater Montreal markets and Haut-Richelieu market. The level of concentration in the Granby area was sufficiently high to be viewed as a concern.

Remaining Competition

In each of the submarkets in the Montreal area and in the Haut-Richelieu market, competition appeared to be sufficient to prevent RONA from exercising market power. Although the degree of rivalry remaining in these markets after the merger varies considerably, home building contractors will be able to choose from between two and four other direct competitors of RONA and Coupal.

However, in the Granby area, there is only one real competitor to the merged entity with respect to the sale of lumber and building materials to home building contractors, and many of the clients interviewed said they feared that prices would rise as a result of the merger. Indeed, Coupal's entry into the Granby market in 2004 had a very positive impact on home building contractors in the region.

Conditions of Entry

The Bureau found that there were moderate barriers to entry in the relevant markets, including the need to be a member of a buying group to source building materials. To serve building contractors effectively, an entrant would have to make major investments in logistics; a specialized fleet of trucks, the ability to process transactions quickly and the ability to offer payment terms are all factors that could make entry difficult. In the Montreal area markets, specifically, the new firm must secure an appropriate site with proper access to main roads. The current excess capacity in the markets and the time required to earn customer confidence were identified as additional factors making entry of a new player into the markets unlikely in the short term.

Nonetheless, some competitors indicated that they might consider expanding their businesses by adding trucks, provided conditions were favourable. These indications of a real potential for expansion by competitors in the event of a price increase significantly reduce the Bureau's concerns associated with the possible impact of the merger.

RONA's Upstream Position

The Bureau assessed the impact of RONA's acquisition of Coupal in light of its increased purchasing volume and the potential impact on the competitiveness of the other players in the markets, including the ILDC buying group to which Coupal had belonged. The Bureau found that RONA has some leverage with suppliers by virtue of its purchasing volume. This enables RONA to obtain preferential terms, which may be beneficial for consumers provided retail markets are sufficiently competitive. However, the Bureau remains concerned about the possibility that RONA will obtain preferential treatment resulting in the exclusion of competitors if there is excessive growth in its market power upstream in the future. For this reason, most particularly, the Bureau found that it is necessary to monitor the effects of the transaction.

Conclusions

The Bureau is satisfied that the merger does not provide sufficient grounds for challenging the merger by making an application to the Competition Tribunal pursuant to section 92 of the Act. With RONA's help, the Bureau will continue to monitor the effects of the transaction for a period of three years and take appropriate measures if required.


Footnotes

1 Parties submitting a request for an advanced ruling certificate or filing a notification regarding a proposed transaction must generally expect the Bureau to contact stakeholders immediately.

2 In the context of this analysis, it was not considered necessary to be more specific about the definition of the relevant product markets. It could be relevant in the analysis of another merger to draw distinctions within the ICI clientele.

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