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Summary

On 24 November 1988 we were asked to investigate and report on a merger in contemplation involving the acquisition of Pittard Garnar pic (Pittard Garnar) by Strong & Fisher (Holdings) pic (Strong & Fisher) (see Appendix 1).

We concluded that a merger situation qualifying for investigation was in contemplation.

Both Strong & Fisher and Pittard Garnar are tanners, with no significant interests outside leather, although their businesses are somewhat different.

Strong & Fisher concentrates on the production of ovine leather for clothing. It is interested in the earlier stages of production (salting and fellmongering skins) primarily to obtain the material to make its finished product. It normally only sells material at earlier stages of processing which does not reach the quality required for its subsequent processing.

Pittard Garnar produces gloving leather, other ovine leather for clothing, diaries and bookbinding and other uses, and chamois, as well as bovine leather for shoe manufacture and other purposes. Pittard Garnar buys hides and skins not only for subsequent processing but also for sale outside the group.

The two companies' activities overlap in:
(a) the purchase of raw sheep and lamb skins;
(b) the salting of raw skins;
(c) the removal in fellmongeries of wool from skins and the preservation of pelts by pickling; and
(d) the production of wool-off clothing leather by the tanning of pickled pelts.

Much of the business is subject to international competition; there are considerable imports and exports of salted skins, pickled pelts and finished leather.

The main matters which we put to the parties suggesting possible public interest issues involved competition in the four United Kingdom markets in which a merged group would operate; the impact on exports and on research and development; and the future of Pittard Garnar's bovine leather businesses.

In considering the issues involving competition we took account of the fact that in the respective markets a combined group would be subject to competition not only from other United Kingdom operators but also from imports and because of the lack of barriers to entry. In addition there was a ready market overseas for United Kingdom exports of salted skins and pickled pelts. We concluded, unanimously, therefore, that no effects adverse to the public interest would be expected to arise over competition in the four United Kingdom markets.

We disagreed over the impact of a merger on the competitiveness of United Kingdom clothing leather in overseas markets. Three members (including the Chairman of the group) considered that the extent of foreign competition more than compensated for any loss of competition within the United Kingdom. The other three members thought, however, that a merged group would be a less effective competitor in overseas markets.

We were divided equally also on the impact on research and development. Three members (including the Chairman) thought there was no reason to assume that Strong & Fisher would not maintain the necessary level of research and development. The other three members were impressed by Pittard Garnar's in-house research which they felt might be diminished or extinguished.

We were also divided equally over the various issues arising from the future of Pittard Garnar's bovine businesses which Strong & Fisher intended to sell. Three members (including the Chairman) considered that it was likely that the bovine businesses would be sold as going concerns and would, therefore, continue to serve their customers; in addition there were other suppliers. Such sales would not necessarily give rise to unemployment. The other three members thought that the sale of the businesses to more than one purchaser would reduce the effectiveness of this source of supply to United Kingdom users, and would also reduce the scope for exchanging the results of research with the bovine side of the merged group. They were also concerned about the prospect of direct and indirect redundancies following a closure or fragmentation of the bovine businesses.

On the final issue of gearing, five members of the group (including the Chairman) thought Strong & Fisher's plans for reducing gearing were acceptable. The sixth member thought, however, that a highly-geared group would be more vulnerable to the volatility of leather markets and to rises in skin prices. The further reduction in gearing envisaged by Strong & Fisher could be expected to have adverse effects through a reduction in research and collaborative development, and an
increased risk of further disposals and of unemployment.

We will be reporting shortly on a rival proposal to acquire Pittard Garnar, by Hillsdown Holdings pic.

We concluded, by a majority of four (including the Chairman's casting vote) to three, that this proposed merger would not be expected to operate against the public interest.

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