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REGULATION (EEC) No 4064/89 MERGER PROCEDURE

Article 6(1)(b) NON-OPPOSITION Date: 29/06/2000

Also available in the CELEX database Document No 300M1972

Office for Official Publications of the European Communities L-2985 Luxembourg

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 29.06.2000 SG(2000)D/

In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EEC) No 4064/89 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information omitted has been replaced by ranges of figures or a general description.

PUBLIC VERSION

MERGER PROCEDURE ARTICLE 6(1)(b) DECISION

To the notifying parties

Dear Madam/Sir,

Subject: Case No COMP/M.1972 – Granada/Compass Notification of 25/05/00 pursuant to Article 4 of Council Regulation No 4064/89

1.On the 25 May 2000 the Commission received a notification of a proposed concentration pursuant of Article 4 of Council Regulation (EEC) No. 4064/89, whereby Granada Group PLC (Granada) UK and Compass Group PLC (Compass) UK enter into a full merger.

2.After examination of the notification, the Commission has concluded that the notified operation falls within the scope of Council Regulation (EEC) No 4064/89 and does not raise serious doubts as to its compatibility with the common market and with the functioning of the EEA Agreement.

I THE PARTIES

3.Granada is a publicly quoted company listed on the London Stock Exchange. Granada’s principal activities are in media (broadcasting, programme production and pay TV), hospitality (hotels, contract catering, motorway service areas and roadside restaurants) and television rental.

4.Compass is a publicly quoted company listed on the London Stock Exchange it is active in contract catering, concession catering and vending services.

1OJ L 395, 30.12.1989 p.1 corrigendum OJ L 257 of 21.09.1990, p.13; Regulation as last amended by Regulation (EC) No 1310/97 (OJ L 180, 9.7.1997, p1, corrigendum OJ L 40, 13.2.1998, p 17)

Rue de la Loi 200, B-1049 Bruxelles/Wetstraat 200, B-1049 Brussel - Belgium Telephone: exchange 299.11.11 Telex: COMEU B 21877. Telegraphic address: COMEUR Brussels.

II THE OPERATION

5.The merger was announced on 17 May 2000 and notified on 25 May 2000. It will be implemented by means of inter-conditional schemes of arrangement whereby a new company, Granada Compass Plc, will be put in place above both Granada and Compass companies. Shareholders will receive shares in the new company in lieu of their present shareholdings. On completion of the merger Granada securities will receive approximately 66.25% of the share capital of Granada Compass Plc. Compass securities receive the remaining 33.75%. Within 12 months of the merger a demerger will take place to separate Compass Hospitality and Granada Media.

III CONCENTRATION

6.The operation is a concentration in the sense of Article 3(1)(a) of the Merger Regulation since Granada and Compass will cease to exist as separate legal entities.

IV COMMUNITY DIMENSION

7.The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 billion(Granada: EUR 6.5 billion, Compass: EUR 7 billion) in 1999. The aggregate Community-wide turnover of each party exceeds EUR 250 million (Granada: EUR 5925 million, Compass: EUR 3817 million), but they do not achieve more than two-thirds of their aggregate Community-wide turnover within one and the same Member State. The notified operation therefore has a Community dimension.

V COMPETITIVE ASSESSMENT

8.Both Granada and Compass are active in contract foodservice and concession foodservice, they overlap in contract foodservice in the UK and Ireland and in concession foodservice in the UK.

A THE RELEVANT PRODUCT MARKET

(i) Contract foodservice

9.Contract foodservice consists of the preparation, presentation and delivery of food and beverage services to clients and their customers where clients have chosen to outsource this activity on its premises. The client pays the contract caterer a fee for the provision of the catering service and the food is often sold to consumers at subsidised prices. Contract catering services are carried out in various sectors, these include business and industry (staff canteens in both public and private sectors); healthcare (hospitals, nursing homes); and education (schools, universities). The largest sector is business and industry which represents 40%of all meals served. This is followed by education which accounts for 23.1% of meals served.

2Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Notice on the calculation of turnover (OJ C66, 2.3.1998, p25). To the extent that figures include turnover for the period before 1.1.1999, they are calculated on the basis of average ECU exchange rates and translated into EUR on a one-for-one basis.

3British Hospitality: Contract Catering Survey 2000

Demand side considerations are driven by the desire to outsource catering requirements at the client’s premises, this is generally carried out through a tendering process. The parties suggest, that there are no significant supply side differences between the client segments and refer to the Accor/Wagons-Lits decision (M126) where the Commission argued against segmentation of the market on the basis that the basic know-how is the same and the majority of undertakings were engaged in all the above market segments. This also applies in the present case, although, the Commission notes that the sectors differ in respect to the margins earned, growth projections and penetration rates.

For the purpose of this case, however it is not necessary to decide whether different catering segments constitute relevant product markets, because irrespective of the definition adopted the analysis and assessment of this concentration would be the same.

(ii) Concession foodservice

12.Concession is the provision of foodservice requirements to the public in travel related locations such as airports, railway stations, ferries, roadsides, retail related locations such as departments stores and sports stadia and leisure venues. The principal purpose of the customer’s visit is not for the consumption of food or beverage but for an alternative purpose. The contractor pays the client a rent for the right to trade at the premises; the contractor’s income is sourced entirely from sales made to the public.

13.Brands both internal and franchised are playing an increasing role in this market. High-street brands, such as KFC and Burger King, for which the parties both hold franchises, have penetrated the transport concessions segment but has had limited impact on the sports and leisure concessions.

14.The inclusion of shopping malls in the market definition, by the parties, is contrary to their own description of the market in published documents and third party descriptions of the market. The Commission has doubts whether such an inclusion is justified but accepts that there are certain similarities between outlets at shopping malls and other concession outlets.

15.For the purpose of this case, however it is not necessary to decide whether concession foodservice or some segmentation thereof constitutes the relevant product markets, nor is it necessary to decide whether shopping malls should be considered as part of the concession foodservice market because irrespective of the definition adopted the analysis and assessment of this concentration would be the same.

(iii) Concession and contract catering

There are supply side similarities between contract and concession foodservice, (the outsourcing element, the provision of a service to consumers whose main reason for being at the location is generally not the consumption of food or drink, the joint management of these services and the joint purchasing of supplies). However, only few companies operate in both markets and these are the larger competitors. The barriers to entry into concession foodservice are higher in terms of investment, reputation and access to established brands. In addition concession contracts are generally longer and the prices to consumers at these outlets higher. The conditions of competition also differ whereas contract caterers compete only at the tendering stage, concession caterers, whilst also subject to tendering, often face competition from other outlets within the facility.

B RELEVANT GEOGRAPHIC MARKET

18.When defining the relevant geographic market the parties refer to the Accor/Wagons-Lits decision where the Commission viewed the markets as national. This definition was based on legislative differences (public procurement and labour laws); national preferences (in terms of quality, charging and prices) and strong differences with respect to in-house providing of feeding needs. The parties argue that this analysis applies equally well to contract foodservice markets in the UK and Ireland and to concession foodservice in the UK.

19.The Commission notes that the market is opening up with some contract catering contracts being signed on a European or even global level. This type of business however is still developing and has yet to change the geographical scope of the market.

20.The Commission concludes that the market is national at present and considers the relevant geographic markets are the UK and the Ireland for contract foodservice and the UK for concession foodservice.

C ASSESSMENT

1. CONTRACT FOODSERVICE

(i) Ireland

21.The parties estimate the size of the contract foodservice market in Ireland to be EUR 203 million. The market leader is Campbell Catering with [40-50]%, followed by Sodexho with [15-25]%. The combined market share of the parties is [15-25]% (Granada [15-25]%, Compass [<5%]).

22.The market is very concentrated at present with the top three players accounting for [80-90]% of the market. This concentration, however, only involves a small increase in market share and does not change the market structure significantly.

23.The Commission concludes that the concentration does not give raise to serious doubts as to its compatibility with the common market in Ireland.

(ii) United Kingdom

24.The parties estimate the UK market for contract foodservice to be worth EUR 4.7 billion. On the basis of these figures the parties would have a combined market share of [35-45]% (Granada [20-30]% and Compass [10-20]%), the present market leader Sodexho Alliance has [20-30]% of the market. The next largest competitor is Alpha Catering with [1-10]% of the market but it is only active in the in-flight catering sector. It is followed by a group of companies with market shares between 1-4%. The market has a large number of small companies with market shares below 1% these account for [5-15]% of the total market.

Segmenting the market by client type results in the following market structures:

Business and Industry (%) [25-35]2 [15-25] [20-30] [1-10] [<1] [1-10] [45-55]

Healthcare (%) [20-30] [10-20] [35-45] [<1] [<1] - [30-40]

Education (%) [10-20] [10-20] [15-25] [1-10] [15-25] [<1] [25-35]

Granada Compass Sodexho Aramark Initial Elior Granada Compass Combined

26.The merged entity would become market leaders in all sectors but healthcare where Sodexho has [35-45]% as compared to the parties [30-40]%. In the Business and Industry sector the combined market share will be [45-55]% with Sodexho at [20-30]% and in Education it will have [25-35]% with Sodexho at [15-25]%.

27.With scale economies in purchasing the concentration would give the merged entity a cost advantage over small companies in particular as the parties have other hospitality business (hotels, motorway service areas and roadside restaurants) for which joint purchasing is possible. However Sodexho, a French company which is active world-wide, is a large established competitor in the UK foodservice market. There are also a group of players (Elior (Avenance), Aramark and Initial) with substantial competitive strength derived from their activities in overseas catering markets or in other business service market in the UK. Elior, belongs to a French catering group, which during this investigation acquired Nelson Hind, a food services company in Scotland and the Midlands, and thereby became the third largest caterer in the UK. Aramark is large US foodservice supplier and Initial is part of the Rentokil Initial Group. Other smaller competitors also provide effective competition at the local level because they can provide a personal touch and are more flexible in terms of process, decision making, contractual terms and operation. Market testing carried out by the Commission confirmed this view.

28.Barriers to entry into the UK contract catering market are considered to be low owing to the small initial outlay needed (premises and equipment are provided by the client and staff is often inherited from previous contractor); high level of transparency (contracts are awarded by tender and listing of companies which outsource are available); short contracts (between two to five years); market growth (the total market is estimated to be growing at 2-3% pa, with higher growth expected in the education and healthcare sectors) and the use of catering consultants (with market knowledge).

29.The contract caterer is generally chosen through a tendering process whereby a handful of companies will be invited. Typically the contracts are short term with a right of termination after three to six months. According to the parties 20% of tenders are arranged through catering consultants which will generally handle the larger and more complex contracts. Consultants are awarded largely on savings made on contracts and therefore have incentives to ensure keen competition.

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30.With respect to multiple-site contracts the merger will reduce the number of eligible companies which can fulfil such contracts because some smaller contract caterers are unable to tender for reasons of cash flow, geographical coverage, multiple-site management expertise and investment requirements. The parties state that multiple-site contracts account for 15-20% of their overall business, these contracts however are subject to close scrutiny of experienced buyers and are re-tendered frequently. Market testing confirmed this and commented that the merger would represent an opportunity for a smaller company to be included in the tendering process. Moreover, if the client wishes to have greater choice between caterers it can split the contract down into smaller contracts for which there would be more eligible providers or could take the catering function in-house.

31.The Commission therefore concludes, not withstanding its high market share, the merged entity will continue to face substantial competition. The concentration thus does not raise serious doubts as to its compatibility with the common market.

2. CONCESSION FOODSERVICE

32.The parties estimate that the concession catering market in the UK is worth EUR 2949 million, if shopping malls are excluded this falls to EUR 1740 million. The combined market share of the parties including shopping malls in [15-25]% without shopping malls it is [25-35]%. The next largest competitor is Sodexho with market shares of [1-10]% or [5-15]% respectively.

When considering the market segments the structure is as follows:

Airport Railway (%) (%) [10-20] [20-30] [65-75]

On-Ferry (%) [30-40]

Sports and Leisure (%) (%) [<5] [15-25] [<5] [15-25] [<5] [15-25] [<5] [55-65] [70-80] [90-100] [15-25] [15-25] [<5]

Granada Compass Sodexho Others Granada Compass Combined

[55-65] [25-35] [35-45] [65-75] [60-70] [30-40]

34. The on-train segment is excluded because neither party is active in that sector. The only substantial overlap is in the airport sector where the combined market share is [35-45]%. The main customer in this sector is BAA with substantial countervailing power. It requires concession caterers to charge ‘high street prices’ and monitors carefully the share of turnover within BAA airports held by each company.

35.Compass estimates it has [65-75]% of the railway concessions segment, but Granada is not active in this segment. Compass purchased Travellers Fare from British Rail during the privatisation process in 1994, and many of these outlets are governed by the Landlord and Tenants Acts which entitles Compass to a renewal of the lease unless the landlord proposes refurbishment or development and are thus not open to other competitors. At major stations, however, competition is opening up with more sites are being developed by Railtrack, concessions there are subject to competitive tender.

36.The On-Ferry sector is characterised by a high degree on in-house provision, the parties estimate the proportion of outsourcing to be 43% whereas it is 97% in the Airports segment and 100% for railways. Granada has [30-40]% of the outsourced market whereas Compass is not active in this market.

37.Entry costs into the concession foodservice market are higher than for contract catering as the entrant needs to invest in the premises, pay the rent and access to an established brand. In addition contracts are of a longer duration 5-7 years to allow the provider to recoup its initial investment.

38.However, the clients are mainly large and in some cases have an incentive to ensure value for money for the ultimate consumers. This is because poor service or high pricing would reflect on the reputation of the client. Moreover other concession providers, although small, do exist and the client can encourage these into the facility thereby providing more competing outlets. In addition there appears to be nothing preventing established high-street brands from tendering for concession outlets. Furthermore, clients also have the option of taking catering in-house although the feasibility of this option may be limited in some cases.

39.For all those reasons, the Commission concludes that the concentration does not raise serious doubts as to its compatibility with the common market.

VI CONCLUSION

40.For the above reasons, the Commission has decided not to oppose the notified operation and to declare it compatible with the common market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EEC) No 4064/89.

For the Commission,

Mario MONTI,

Member of the Commission

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