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 • 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 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.
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 Marcroft Other 3rd party Maintenance services Haulage services 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 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
Little horizontal effect in 3rd party maintenance Marcroft Other 3rd party maintenance Pre-merger Post-merger Other 3rd party maintenance
Marcroft Other maint Other 3rd party maintenance …but possible vertical effect arises 3rd-party maintenance services 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