Competition Bureau statement regarding WESCO's acquisition of Anixter
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GATINEAU, QC, September 11, 2020 — On August 6, 2020, the Commissioner of Competition announced that he had entered into a consent agreement with WESCO International, Inc. (together with its affiliates, WESCO) that resolves the Commissioner’s competition concerns related to its acquisition of Anixter International Inc. (together with its affiliates, Anixter). The consent agreement requires WESCO to sell its WESCO Utility division in Canada, as well as its Canadian business associated with the distribution of data communication products (the WESCO Datacom Business).
The Commissioner is satisfied that the sale of the WESCO Utility and WESCO Datacom Business will address the likely substantial lessening of competition in the distribution of data communications (Datacom) products and pole line hardware (PLH) in the Canadian marketplace.
WESCO and Anixter (collectively, the Parties) are multinational distributors of electrical products to a wide range of customers, including telecommunications firms, utilities, and electrical and building contractors. While the Parties distribute a variety of electrical components and equipment in Canada, the Bureau’s review of the transaction ultimately focused on the sale and distribution of Datacom and PLH products. These products are inputs used in the construction and maintenance of networks for the delivery of electricity, communications and internet connectivity to Canadians.
Following a four-month review, the Bureau concluded that the transaction would likely result in a substantial lessening of competition in the distribution of Datacom products in markets across Canada, and, separately, in the distribution of PLH in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario (collectively, the Affected Markets). Pursuant to the consent agreement, WESCO is required to sell the WESCO Datacom Business and WESCO Utility to independent purchaser(s) approved by the Commissioner.
In its assessment of the transaction, the Bureau relied on information collected from a wide range of market participants, including customers, suppliers and competitors, as well as documents and data produced by the Parties in response to a Supplementary Information Request.Footnote 1
The Bureau determined that the relevant markets of concern were the distribution of Datacom and PLH products at the provincial or regional level. Datacom products, which include fibre optic cable, connectors, patch cords, racks, and cabinets, are generally used to provide the passive infrastructure for public communications networks and private enterprise networks or datacenters. PLH includes a variety of high or medium voltage equipment installed on an electrical transmission or distribution line, such as fuses, insulators and grounding equipment. Distributors sell bundles of these products to their customers, including telecommunications companies, electrical utilities and contractors, through both competitive tender processes and spot sales.
The Bureau’s review focused on sales to small and medium-sized customers, who rely on distributors such as the Parties for supply of Datacom and PLH products and related services. The Bureau found that a limited number of very large customers are not likely to be affected by the transaction as it is economically feasible for these customers to establish internal warehouses or otherwise circumvent distributors in response to an exercise of market power.
Customers purchasing Datacom or PLH products often require timely deliveries and as a result, distributors generally must maintain inventory within the same province as a prospective customer in order to offer acceptable lead times, particularly for day-to-day, spot or time-sensitive purchases.
Prior to the transaction, WESCO and Anixter were, by far, the largest national distributors of Datacom and PLH products in Canada. The Bureau found that the Parties were one another's closest rivals in the Affected Markets, and competed vigorously for relationships with manufacturers and customers. This rivalry included close competition on price, delivery times, and the provision of other value added services, and significantly benefitted Canadian customers.
The Bureau assessed remaining distributors of Datacom products and PLH in the Affected Markets, including through review of internal business records, analysis of recent tender processes, and interviews with stakeholders, and concluded that no other competitor would be in a position to constrain the merged entity’s market power. Other competing distributors of Datacom and PLH products generally have a limited presence in the Affected Markets, and frequently lack key product lines offered by the Parties. The Parties benefit from established preferential relationships with key manufacturers that are based on their significant volumes and national presence. Remaining distributors often receive less favorable supply terms resulting in higher cost structures and more limited product portfolios. As a result of these arrangements, competitors were found to be unable to offer comparable product selection, pricing and service to WESCO and Anixter.
The Bureau also considered non-traditional distribution channels, including big box retail and e-commerce platforms. While some Datacom products are available through these channels, the Bureau found that these competitors generally do not have access to key product lines carried by the Parties, and cannot offer value-added services such as customization of products, kitting and product expertise. On this basis, the Bureau found that non-traditional distribution channels are unable to compete effectively with the Parties in the Affected Markets.
The Bureau also examined whether manufacturers would likely constrain an exercise of market power by distributors, including through direct sales to customers. Manufacturers rely on their authorized distributors to market, supply and deliver Datacom or PLH products to Canadian customers, and generally do not have the facilities or logistical capabilities to competitively supply such products and related services. As a result, direct sales are typically limited to those large customers with the capability to warehouse products and therefore accept longer lead times. On this basis, the Bureau concluded that manufacturers are unlikely to constrain an exercise of market power by the Parties.
The Bureau therefore concluded that the transaction would likely result in significant competitive effects by eliminating the close rivalry between WESCO and Anixter, and that remaining competitors would not be sufficient to constrain an exercise of market power.
Barriers to Entry and Expansion
Barriers to entry and expansion in the relevant Datacom and PLH markets are high. Potential entrants face challenges related to accessing specialized employees, establishing adequate warehousing, storage, and transportation infrastructure, and securing access to key product lines. The Bureau also determined that competitors must achieve significant scale in order to obtain competitive pricing from manufacturers.
The Bureau found that many customers strongly prefer specific product lines of equipment because of technical specifications, interoperability concerns, warranty provisions, training and familiarity with existing product lines. Distributors therefore depend upon favorable access to a limited number of suppliers in order to compete effectively, while manufacturers often limit the number of distributors that sell their products. The evidence indicated that new entrants with limited volumes would be unlikely to secure access to key product lines in the Datacom and PLH markets, given entrenched relationships with the Parties.
The Bureau also found that entrants were unlikely to achieve sufficient scale to obtain competitive pricing from available manufacturers. As manufacturer pricing and discounts are tied to a distributor’s volume of sales, the Parties' pre-merger volumes allowed them to obtain favorable pricing arrangements that were unavailable to their competitors. These arrangements often effectively precluded WESCO and Anixter’s competitors from competitively bidding against the Parties. The Bureau found that following recent consolidation among electrical distributors, driven by WESCO and Anixter, there was little prospect for remaining competitors to achieve sufficient volumes to secure crucial relationships with manufacturers and key customers through acquisition or otherwise.
The Bureau determined that the merged entity, post-transaction, would further expand its product offerings and have greater bargaining power with key distributors, making product access more difficult for competitors. As a result, the Bureau concluded that effective entry or expansion is not likely in the Affected Markets.
Pursuant to a consent agreement registered with the Competition Tribunal on August 6, 2020, WESCO is required to sell the WESCO Datacom Business and WESCO Utility to independent purchaser(s) to be approved by the Commissioner. These sales will include employment contracts with key personnel, product inventory, leases for warehouse space where necessary, and customer and supplier relationships. The entities to be sold had sales of approximately $150 million in 2019.
The consent agreement also requires WESCO to hold the WESCO Datacom Business and WESCO Utility separate from all other WESCO businesses, with an appointed monitor approved by the Commissioner. The hold separate arrangements will remain in place until the WESCO Datacom Business and WESCO Utility are sold in accordance with the terms of the consent agreement.
The Commissioner is satisfied that the sale of the WESCO Datacom Business and WESCO Utility will address the likely substantial lessening of competition in the Canadian market with respect to the distribution of Datacom products and PLH, respectively.
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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