CMA expands on why Veolia/Suez merger would ‘lessen competition’

SPECIAL REPORT: Following the provisional decision of the Competition and Markets Authority (CMA) to rule out a merger of Veolia and Suez in the UK, James Langley looks at its newly released findings.

Veolia’s bid to create a “champion of ecological transformation” through a merger with Suez has hit a stumbling block after the CMA concluded it would lead to a loss of competition in the UK.

In a strong provisional ruling published last week (19 May), the CMA recommended that Veolia should sell Suez UK or even Veolia UK to ensure sufficient competition (see letsrecycle.com story).

Veolia has agreed to acquire Suez at a price of €20.50 per share

The CMA released more information on 23 May as to how it reached its decision. Much of the document is redacted. However, it still provides a useful insight into the CMA’s workings.

After months of fevered speculation, Veolia finally agreed to acquire the whole of Suez in May 2021 (see letsrecycle.com story). The CMA then launched an investigation into the merger’s impact on competition in the waste management market. It looked at several topics, including local authority contracts, commercial and industrial (C&I) waste and material recycling facilities (MRFs).

The investigation identified Biffa, Viridor, FCC Environment, Serco, Urbaser and Beauparc as the “main rivals” to Veolia and Suez. Veolia and Suez were the largest and second largest industry players active in the UK in terms of global revenues in 2020, the CMA says. Their combined revenues of nearly £40 billion were approximately seven times the next largest, FCC, at £5.5 billion. In terms of revenue in the UK, Veolia was the largest industry player with £1.5-2 billion and Suez was the third largest with £800-900 million.

‘Complex’ contracts

During its investigation, the CMA requested data on all the non-hazardous waste management contracts currently held by Veolia and Suez’s local authority customers. Some local authority requirements prove “complex” because they might be “materially risky” difficult to fulfil, the CMA says, and, as a result, credible bidders might face “relatively little” competition. On average, local authorities listed 4.2 credible bidders for a contract, ranging between a minimum of two and a maximum of six.

One of the refuse collection vehicles used by Suez as Somerset’s waste collection contractor (picture: SWP)

Veolia and Suez were listed most often and rated highest by the local authorities. The CMA says the responses indicate the local authorities “value both Veolia and Suez’s experience in the waste management industry.” Biffa and FCC are also seen as credible, the CMA says, although they are rated lower than the Veolia and Suez.

As such, the CMA concluded that the merger would reduce the number of bidders for complex contracts. One contributor, Essex county council, told the CMA: “Should we wish to procure an integrated contract in the future the market is already very limited due to the size of our requirement. Removing Suez from the marketplace further restricts the competition and risks a monopoly situation.”

MRFs

The CMA identified contracts for the supply of operation and maintenance (O&M) services to local authorities for MRFs as being particularly complex. There were 112 operational MRFs in 2019, the CMA found, 48 of which are local authority-owned and developed under PPP/PFI contracts, while the remainder are privately owned. Local authorities ‘self-supply’ the O&M services for 17 of the local authority-owned MRFs, the CMA says, while the remaining 31 are operated by third party suppliers. The CMA believes there have been no “standalone” O&M contracts procured by local authorities, but it expects that such contracts would be brought to market when the PPP/PFI contracts expire.

Veolia’s Hollingdean MRF sorts and bulks household waste from East Sussex and Brighton and Hove

Biffa is the largest operator of MRFs in the UK, the CMA says and, along with Veolia and Suez, is the only other supplier that operates more than 10 MRFs. Using an external dataset prepared by Tolvik Consulting, the CMA calculated that Veolia and Suez are the second and third largest operators of MRFs by capacity in the UK, with a combined market share of 40-50%. Post-merger, Biffa and Veolia would account for more than 80-90% of the market. No other provider would have a share exceeding 5%. As such, the CMA found the merger would increase concentration “by a significant degree” in an “already highly concentrated” market and Veolia would face limited competition.

Collections

The CMA also investigated the supply of non-hazardous municipal waste collections, including recyclable waste, food waste, garden waste and residual waste from the kerbside.

A Veolia operative collects food waste from the kerbside in Westminster

The CMA says the merged entity would be the largest supplier in the market – almost as large as the next two competitors combined – with a combined share of 30-40% of the households analysed during the investigation. FCC (20-30%), Biffa (10-20%) and Serco (10-20%) each has a “significant share of supply”, the CMA says, and Urbaser would also have a share of 5-10%, comparable to Suez’s share on its own.

In terms of in-house services, the CMA says the evidence from local authorities which currently outsource their waste collection indicates that they “often” consider ‘self-supply’. However, the evidence also indicates that the main reasons local authorities choose not to self-supply were the high costs and a “lack of expertise”. The only instance the CMA found of a local authority bringing collection services back in-house was where performance issues with their previous supplier combined with a “lack of interest” from alternative suppliers meant it provided value for money.

Considering that there is typically “a small number of bidders for each individual contract”, the CMA provisionally found that the merger would lessen competition in this market.

C&I

The CMA also found the merger was likely to lessen competition in the supply of non-hazardous C&I waste collection services. The market is already “highly concentrated”, the CMA says. While Suez is a smaller market player than Veolia and Biffa, there is a “considerable degree of competitive interaction” between the parties, the CMA says, and the merger will remove a “material competitive constraint” on Suez.

Only Biffa would remain as a “strong competitor” for C&I waste collection services if the merger went ahead, the CMA says

Outsourcing and energy services company Mitie and waste broker Reconomy have established a “material marker presence”, the CMA says, but it also found some national customers prefer to minimise the level of subcontracting. Therefore, broker and facility management competitors offer a “weaker alternative” to Suez, the CMA says. And, although Suez is “considerably smaller” than either Biffa or Veolia, it is the “most important” of the other competitors in a market in which Veolia only faces one strong rival.

Related link
Provisional findings report 

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