Competition Bureau statement regarding Kingspan’s acquisition of Vicwest and AGI’s acquisition of Westeel

OTTAWA, June 16, 2015 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition of Vicwest Inc.’s (Vicwest) Building Products Division by Kingspan Group plc (Kingspan) and Vicwest’s Westeel Operating Division (Westeel) by Ag Growth International Inc. (AGI).

The Bureau announced on May 19th that it had reached an agreement with Kingspan concerning its proposed acquisition of business rival Vicwest, a supplier of exterior building products. Following its review, the Bureau concluded that Kingspan’s acquisition of Vicwest’s Building Products Division would likely result in a substantial lessening of competition for the supply of insulated metal panels (IMPs) in Ontario as a result of barriers to entry and the elimination of competition between Kingspan and Vicwest. To address these competition concerns, Kingspan entered into a consent agreement with the Bureau to sell Vicwest’s manufacturing facility in Hamilton, Ontario following its acquisition. With respect to the Westeel portion of the acquisition, the Bureau concluded that AGI’s acquisition of Westeel would not result in a substantial lessening or prevention of competition with respect to the supply of grain storage bins in Canada.

Background

On November 10, 2014, Vicwest entered into an arrangement agreement with Kingspan and AGI. Pursuant to that agreement, Kingspan acquired Vicwest’s Building Products Division (Kingspan Transaction) and AGI acquired Vicwest’s Westeel Operating Division (AGI Transaction). The Bureau conducted a review of each of the two portions of the acquisition in light of the unique nature of the businesses being acquired.

The focus of the Bureau’s review of the Kingspan Transaction was on whether the proposed transaction would substantially lessen competition for the sale of IMPs, a type of building envelope product. A building envelope fromis the physical separator between the conditioned and unconditioned environments of a building, protecting the building from heat, rain, wind and other elements. The review of the AGI Transaction focused on assessing the competitive impact of AGI’s acquisition of Westeel on the supply of on‑farm, corrugated steel wall grain storage bins.

Over the course of its reviews, the Bureau consulted with a broad range of market participants, including customers, competitors and industry stakeholders. The Bureau also analyzed a substantial volume of documentary evidence and made use of a range of qualitative and quantitative analytical tools.

Relevant markets

Grain Bins

There are two configurations of on‑farm grain storage bins sold in Canada: hopper topper bins and flat bottom bins. On‑farm hopper topper bins, due to the weight bearing limitations of hopper cones, have a lower maximum bushel capacity than flat bottom bins, which are constructed on a cement foundation. Hopper toppers are considered more of a commodity product compared to the larger flat bottom bins, as the latter require additional accessories and construction expertise.

To date, US‑based manufacturers have a greater presence in Canada supplying flat bottom bins, with fewer hopper topper sales by comparison.

Insulated Metal Panels

IMPs are pre‑fabricated panels that are comprised of two outer facing metal panels and an insulated core. Compared to other building envelope products, IMPs provide superior thermal performance and increased speed of build at the construction site, which can reduce the amount of labour required during installation. The Bureau found that architects and building owners, given the unique characteristics of IMPs, rarely switch from IMPs to other building envelope products and are unlikely to do so even if faced with a small but significant price increase. As a result, the relevant product market used for the Bureau’s analysis was IMPs.

Kingspan and Vicwest compete head‑to‑head from their facilities in Ontario. While Kingspan also has a facility in Western Canada, Vicwest does not have a significant presence in that region. IMPs are primarily transported by truck from the manufacturing facility to the job site. The Bureau determined that freight costs play an important role in a customer’s decision of where to source IMPs, which affords a significant advantage to local manufacturers. As such, the focus of the Bureau’s review of the impact of the Kingspan Transaction was on competition for the supply of IMPs in and around Ontario.

Analysis

Grain Bins

Westeel is the dominant supplier of on‑farm grain storage bins in Canada; AGI, along with others, are much smaller suppliers in comparison. The Bureau’s analysis focused on barriers to entry and expansion and concluded that, in the event of a material price increase, entry and expansion would be likely that an exercise of market power would not be sustainable.

Insulated Metal Panels

The Bureau found Kingspan and Vicwest to be direct competitors for the sale of IMPs in Ontario, where their manufacturing facilities in Southern Ontario are located less than 100 km apart. The parties’ geographic proximity, similarity of product and reputation as reliable manufacturers resulted in Kingspan and Vicwest frequently bidding against each other on IMP projects, resulting in downward pressure on prices. This appeared to particularly be the case in early 2014 when Vicwest’s aggressive pricing put considerable pressure on prices.

In Ontario, there are limited alternative competitive options. Other than smaller regional players, the nearest major IMP competitor is located approximately 800 km away from the parties’ manufacturing facilities.

The Bureau determined that it was unlikely that another IMP manufacture would expand activities into Ontario post‑transaction in the event of a material price increase. Furthermore, the Bureau found that barriers to entry into the manufacturing of IMPs are relatively high. In particular, the need to establish a strong reputation with installers and general contractors appears to increase the period of time required for effective entry. As a result, potential entry would require a company to first build a facility, establish proficient production, obtain the necessary Canadian certifications, and then develop a reputation as a supplier of quality IMPs, such that entry is not likely to be sufficiently timely to discipline a price increase by Kingspan post‑transaction.

Conclusion

Grain Bins

The Bureau concluded that entry or expansion was likely in the event of a material price increase post‑transaction.

Insulated Metal Panels

The investigation concluded that the Kingspan Transaction is likely to result in a substantial lessening of competition in the market for the supply of IMPs in Ontario. As a result, the Bureau entered into a consent agreement with Kingspan that requires it to sell Vicwest’s IMP manufacturing facility in Hamilton, Ontario. The Bureau is satisfied that the consent agreement addresses its concerns by providing for a purchaser of the Hamilton facility to quickly be in position to manufacture IMPs in Ontario and begin to overcome reputational hurdles to being an effective competitor in that region.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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