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On 20 December 1994 the Secretary of State for Trade and Industry asked the MMC to investigate and report on a merger situation, as defined in the Fair Trading Act 1973 (the Act), arising from the acquisition by Service Corporation International (SCI) of Plantsbrook Group Plc (Plantsbrook). The terms of reference are at Appendix 1.1.

SCI is a US company, whose business comprises funeral homes, cemeteries and related activities in the USA, Canada, Australia and the UK. It entered the UK market in August 1994 when it acquired Great Southern Group (GSG). SCI purchased Plantsbrook in September 1994. At that time Plantsbrook had about 8.7 per cent and GSG 4.0 per cent of the UK market for funeral directors' services and they were both active in the supply of prepaid funerals. GSG also owned crematoria but Plantsbrook did not.

As a result of the merger, SCI increased its share of funeral directing services in an area comprising central, south, south-west and south-east London, the remaining part of the county of Surrey and the counties of East and West Sussex—an area (the determined area) which, in our view, constitutes a substantial part of the UK—from around 20 per cent to around 28 per cent, satisfying the requirements for our investigation under the Act.

Our investigation indicates that although funeral directors do compete on price the competition is muted. The market is a long way from functioning effectively. Entry is likely to be particularly difficult where a powerful well-run supplier has a large share of the market, the situation which this merger has created or reinforced in ten specified localities (the ten localities) in the determined area. We also have concerns about the degree of transparency of funeral directors' charges, the lack of transparency of ownership of funeral directing outlets and the ability of funeral directors unduly to influence the choice of funeral arrangements.

Consumers of funeral directing services are vulnerable in an imperfect market. The merged companies' market share in the determined area is itself a cause for concern, but given the local nature of competition such concern will in practice arise in particular localities. In the ten localities we have identified the merged companies' shares range from about 29 per cent in Eastbourne to about 51 per cent in Battersea.

We find the following detriments relating to the supply of funeral directing services arising from the merger:

(a) SCI may be expected generally to raise prices excessively, ie by more than would be possible in a competitive market, in the ten localities, to the detriment of consumers in those localities.

(b) SCI's failure to disclose to consumers the ownership of its branches will add significantly to the inability of consumers in the determined area to make informed decisions.

(c) Choice of funeral director will be materially reduced in the ten localities, to the detriment of consumers in those localities.

SCI estimated that prepaid funerals now accounted for some 1 to 1.5 per cent of all UK funerals. Chosen Heritage (CH), which SCI purchased as part of GSG, was the next major entrant in the UK after the Co-operative Societies (Co-ops), in 1985. SCI acquired Dignity Limited (Dignity), another prepaid funeral company, as part of Plantsbrook. There are another six prepayment plans marketed on a national basis, an unknown number of local arrangements and a number of insurance-based schemes. We believe that SCI's acquisition of Dignity has added little to its strong position in the supply of prepaid funerals. Overall we consider that in respect of prepaid funeral plans no detriment arises from the merger.

When the merger took place, SCI owned 13 crematoria accounting for about 6 per cent of crematoria in the UK, and Plantsbrook none. However, we found considerable disquiet about the vertical integration of SCI's activities as funeral director and operator of crematoria. In particular there was the fear that the merger would increase the opportunity for SCI to channel funerals to its own crematoria.

We consider that it would be natural for SCI to take advantage of the vertical integration brought about by its ownership of funeral directing businesses and crematoria where it can. The position has been exacerbated by the acquisition of Plantsbrook. We have identified those crematoria in the determined area—South London (Streatham Vale), Randalls Park (Leatherhead), Surrey and Sussex (Crawley), all owned by SCI, and Downs (Brighton) in the course of being acquired by SCI—where we would expect SCI to channel funerals carried out by the former Plantsbrook branches to those crematoria. As prices at SCI's crematoria are generally higher than those of competitors, this would be a clear loss to consumers. It would also be detrimental to competition between crematoria.

We therefore conclude that the merger may be expected to operate against the public interest.

Regarding the supply of funeral directing services we recommend that SCI should be required:

(a) in the five following localities, defined in Appendix 4.6, to reduce its market share to no more than 25 per cent by selling funeral directors' businesses:

— Camberwell;

— Chiswick;

— Sidcup;

— Brighton and Hove; and

— Eastbourne; and

(b) in the five following localities, defined in Appendix 4.6, where it had a market share in excess of 25 per cent before the merger, to sell the funeral directors' businesses it has acquired from Plantsbrook:

— Battersea;

— Fulham;

— Putney;

— Bromley; and

— Crawley.

It is clear that SCI intends to make further acquisitions of funeral directing businesses in the UK and in this process could purchase further businesses in the ten localities, thus diluting or removing the effect of our recommendations. We accordingly also recommend that an undertaking should be obtained from SCI not to acquire any funeral directing business within the ten localities unless the Director General of Fair Trading (DGFT) has given prior approval to the acquisition as unlikely to give rise to the adverse effects set out at (a) and (c) of paragraph 1.6.

As to the adverse effect set out at (b) of paragraph 1.6, we recommend that the DGFT should secure an undertaking requiring SCI to disclose its ownership of funeral directing businesses in the determined area prominently in all documentation presented to customers and in all advertisements or other promotional material used in connection with those businesses. We believe it is highly desirable that the disclosure of ultimate ownership of funeral directing branches should be general practice throughout the UK. We suggest that this might best be achieved by the DGFT negotiating appropriate additions to the National Association of Funeral Directors (NAFD), Funeral Standards Council (FSC) and Society of Allied and Independent Funeral Directors (SAIF) Codes of Practice.

SCI has offered behavioural undertakings to remove any doubt about its intentions regarding the supply of crematoria services. It said that it would be prepared to give an undertaking that it would `post' details of competing crematoria at every SCI funeral directing branch in the area of an SCI crematorium. It would also be prepared to give an undertaking that it would not operate a two-tier pricing system favouring its own funeral directors. Such undertakings would be useful, and we recommend that the DGFT should secure them, but in our view they do not go far enough. We therefore also recommend that the DGFT should secure an additional undertaking that its funeral directors in the determined area should inform customers of the prices of competing crematoria.

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