The enterprises of Alan J Lewis and Jarmain & Son Ltd: A report on the acquisition of Jarmain & Son Ltd by enterprises carried on by or under the control of Mr Alan J Lewis

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Summary

On 24 December 1990, Juststrong Ltd, a shelf company controlled by Mr Alan J Lewis (Mr Lewis), acquired the entire issued share capital of Jarmain & Son Ltd (Jarmain), a supplier of commission scouring services. As another of Mr Lewis's companies, Illingworth, Morris Ltd (IM), holds 75 per cent of Woolcombers (Scourers) Ltd, a commission scourer trading under the name of Alston Scouring Company (Alston), we were asked to investigate the completed merger (see Appendix 1.1).

Scouring is the treatment of raw or greasy wool to remove grease and other impurities in order to produce clean or scoured wool, and wool loses about 30 per cent of its weight in the process. Of the 111 million kg of greasy wool available for scouring in the United Kingdom in 1990, about 30 per cent went into the integrated worsted process for which only insignificant amounts were separately processed by commission scourers. The remainder was scoured for the woollen process. Such scouring was almost entirely done either by seven commission scouring companies (around 70 per cent) or in-house by carpet manufacturers or merchants (around 30 per cent). The evidence we received suggests a firm continuing demand for commission scouring services in the United Kingdom, which cannot practically or economically be provided elsewhere. We conclude that there is a separate market in the United Kingdom for such services. The central public interest issue arising from the merger is its effect on competition in this market.

There has been a substantial increase in concentration as a result of this merger of the first and third largest commission scourers. Based on 1990 figures, today's top two companies Jarmain/Alston and Haworth Scouring Company (Haworth) have some 81 per cent of the market. Prior to the merger, the two top companies at that time, Jarmain and Haworth, had 61 per cent. The merger gave Jarmain/Alston a market share-again on the basis of 1990 figures-of about 52 per cent; Haworth has 29 per cent and J Bailly-Ancion Ltd (Bailly-Ancion) 13 per cent. The three other commission scourers we identified had some 6 per cent of the market between them.

After the merger Jarmain/Alston had 57 per cent of the commission scourers' total normal working capacity under its control. One of Alston's scouring lines has since been transferred to Jarmain's premises and the other two closed, leaving Jarmain/Alston in a strong market position with normal annual working capacity of 29 million kg, roughly equal to Jarmain and Alston's throughput in 1990, and representing about 47 per cent of the commission scourers' estimated total normal working capacity at 1 May 1991. Jarmain/Alston's position has been further strengthened by the retention of Alston's senior management and the acquisition of Alston's customer list. The fundamental question we have to address is whether Jarmain/Alston, backed by one of the largest textile groups in the United Kingdom, will be able to exploit its strong market position, to the detriment of the public interest.

We conclude that the merger has given rise to a significant loss of competition on the following grounds:

(a) based on 1990 figures, the top two commission scourers have 81 per cent of the market and the top three 94 per cent;

(b) there are no customers in the market capable of exercising countervailing market power;

(c) the in-house scourers do not generally compete with the commission scourers and are therefore unlikely to constrain the behaviour of Jarmain/Alston;

(d) any overcapacity in commission scouring is likely to be temporary and is therefore unlikely to be a constraint on Jarmain/Alston, other than in the short term;

(e) new entry into commission scouring seems unlikely in the face of present levels of concentration in the market, the physical problem of effluent treatment, and the relatively high cost of plant, all leading to an uncertain prospect of profitability;

(f) wool grown in the United Kingdom accounts for a substantial part of the throughput of the commission scourers and only a small proportion of this could feasibly be scoured abroad;

(g) the scope for increased competition from imports of scoured wool is limited and not sufficient to counterbalance the market power afforded by the increased concentration arising from the merger; and

(h) the present vigorous price competition in the industry is therefore likely to be temporary.

We do not believe that any benefits of rationalisation brought about by the merger are sufficient to justify this loss of competition.

We conclude that the merger operates and may be expected to operate against the public interest. The particular adverse effect is the diminution of competition which may be expected to lead over time to higher prices for commission wool scouring than would have been expected in the absence of the merger.

As to remedies, we are dealing here with a merger which has not only taken place but has been virtually fully consummated. The two businesses have to all intents and purposes been combined. We have considered requiring the divestment of Jarmain but believe it is not necessary to go so far. Our main recommendation is that Alston's three scouring lines, including the one transferred to Jarmain, should be sold by public auction to the highest bidder.

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