English Welsh & Scottish Railway Holdings Ltd (“EWS”)/ Marcroft Holdings Ltd Adam Land Director...
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Transcript of English Welsh & Scottish Railway Holdings Ltd (“EWS”)/ Marcroft Holdings Ltd Adam Land Director...
English Welsh & Scottish Railway Holdings Ltd (“EWS”)/ Marcroft Holdings Ltd
Adam LandDirector of Remedies and Business Analysis
Usual disclaimer: Personal views, not to be taken to indicate Competition Commission endorsement
The acquirer
EWS
• Largest provider of rail freight haulage in Great Britain (market share ~ 70%).
• Turnover 2005: £497.5m, profit before tax £35m
• Carries out own in-house freight wagon maintenance
The acquired
Marcroft Engineering Limited
• Largest provider of wagon maintenance services to third parties in Great Britain.
• Turnover 2004 £12.7 million, loss before tax £1.5 million
• Specialist maintainer of wagons: no haulage business, no passenger coach maintenance
A customer ofMarcroft
Freightliner
• Second largest rail haulage company after EWS
• Created by privatisation of BR container business, entered heavy haul market in 2005
• Carried out some of its own maintenance, but all heavy haul maintenance contracted to Marcroft.
The maintenance market – workshop services
The maintenance market – workshop services
The maintenance market – outstation work
The merger
• Agreement for EWS to acquire Marcroft announced 4 November 2005, merger completed on 1 February 2006
• OFT referred the merger to the CC on 6 February 2006;
• Interim undertakings accepted by CC on 13 March 2006 to prevent further integration.
Marcroft
Other3rd
party
Maintenance services
Haulage services
Market structure, including self-supply
End-customers
Market definition
• Product market: Wagon maintenance services
• Geographic market: Great Britain
• Is self-supply in the same market as third-party?
The significance of self-supply for market shares
Post-merger
Including self-supply
56.7% 18.9% 75.6%
3rd-party only 2.5% 55.8% 58.3%
Source: EWS figures for light in-field maintenance quoted in CC Report page 10
Should self-supply be in the market?
Yes:– EWS already supplies some 3rd party maintenance. Could it do more?
– In-house represents capacity available for potential competition acting as a constraint, even if limited presence in 3rd-party
– Conceptual argument that ‘bundle’ of maintenance and freight services provides an indirect competitive constraint between EWS self-supply maintenance and 3rd-party maintenance (eg Inderst and Valetti).
No:– Detailed examination of the activities and future plans for EWS
maintenance business
– Uncompetitive EWS cost structure
– No evidence of historical effect of EWS in limited number of bids
– Capacity and indirect arguments regarded as “speculative”
CC concluded that self-supply was not in the market
Marcroft
Other 3rd party maintenance
Pre-merger
Little horizontal effect in 3rd party maintenance
Other 3rd partymaintenance
Post-merger
Marcroft
Othermaint
…but possible vertical effect arises
3rd-party maintenance services
Other 3rd partymaintenance
Haulage services
Theory of harm: raising rivals’ costs
From Church report. A vertical merger:
• Eliminates double marginalisation
• But creates an incentive to supply less upstream
• Complete foreclosure possible (if commitment credible) if gains downstream exceed losses upstream
• Downstream rivals have incentive to counter-merge
• Welfare effects depend on credibility of foreclosure, and the impact of double marginalisation
Application of RRC theory to this case EWS ~70% market share in downstream haulage market, vertically integrates with Marcroft ~60% market share in upstream 3rd-party maintenance market
• No elimination of double marginalisation. 3rd-party maintenance market is solely used by EWS’s competitors, and EWS is already vertically integrated pre-merger
• Incentive for EWS/Marcroft to reduce service quality or increases price to rivals. This would strengthen EWS position in downstream haulage markets.
• Alternative supply available to downstream competitors only at higher prices or lower quality. Also risk of alternative supplier acquiring market power as ‘residual monopolist’
• Benefits of softer competition in £800m haulage market seem likely to exceed losses in smaller maintenance market. But no formal modeling.
Conclusions on vertical theory of harm
• EWS already had market power in rail haulage (supported after report by finding of abuse of dominant position)
• Merged entity would have market power in 3rd party maintenance
• Cost/benefit trade-off of foreclosure was good for EWS/Marcroft: reduced quality significantly diminishes competition downstream for little financial loss upstream
• No benefit from elimination of double-marginalisation
• CC considered that competition law (eg Article 82 EC) would make it less likely that EWS/Marcroft would foreclose, but not so much as to overcome incentive and ability
Substantial Lessening of Competition finding, leading to remedies
Remedies
Behavioural remedies
– Offered but not considered effective
– How could you prevent a fall in service quality?
Structural remedies
– No need to divest workshop
– Full divestment of outstation business would be effective;
– Partial divestment of outstation business could also be effective.
Challenges for partial divestment
– Purchaser risks (eg competition problems, capability)
– Composition risk (is a viable business being sold?)
A partial divestment was (eventually) made to Davis, a small competitor in 3rd party maintenance
Reflections• Role of market definition in framing theories of harm:
– If narrow 3rd party maintenance market, concerns about vertical Raising Rivals Costs theory
– If wider maintenance market, potential concerns about horizontal concentration
• Indirect constraint argument – when should it apply?
• Vertical theories difficult for non-economist decision-makers and advisors (Church report = 382 pages)
• Vertical theories of harm can create requirements for assessment of other markets (eg haulage)
• Challenges of remedying completed mergers