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English Welsh & Scottish Railway Holdings Ltd (“EWS”)/ Marcroft Holdings Ltd. Adam Land Director of Remedies and Business Analysis Usual disclaimer: Personal views, not to be taken to indicate Competition Commission endorsement. The acquirer. EWS

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english welsh scottish railway holdings ltd ews marcroft holdings ltd

English Welsh & Scottish Railway Holdings Ltd (“EWS”)/ Marcroft Holdings Ltd

Adam Land

Director of Remedies and Business Analysis

Usual disclaimer: Personal views, not to be taken to indicate Competition Commission endorsement

slide2
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
slide3
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
slide4
A customer of

Marcroft

  • 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.
slide8
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.
market structure including self supply
Market structure, including self-supply

Marcroft

Other

3rd

party

Maintenance services

Haulage services

End-customers

market definition
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
The significance of self-supply for market shares

Post-merger

Source: EWS figures for light in-field maintenance quoted in CC Report page 10

should self supply be in the market
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
little horizontal effect in 3 rd party maintenance
Little horizontal effect in 3rd party maintenance

Marcroft

Other 3rd party

maintenance

Pre-merger

Post-merger

Other 3rd party

maintenance

but possible vertical effect arises
Marcroft

Other

maint

Other 3rd party

maintenance

…but possible vertical effect arises

3rd-party maintenance services

Haulage services

theory of harm raising rivals costs
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
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
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
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
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
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