A report under section 125(4) of the Fair Trading Act 1973 on the advice given on 30 November 2001 to the Secretary of State for Trade and Industry under section 76 of the Act
A&P Group Holdings Ltd (A&P) supplies ship repair and conversion services at its docks on the South Coast and the Tyne. In the year ended 31 December 2000 it reported a pre-tax loss of £6.3m on turnover of £55.8m, and gross assets of £45m.
Before going into receivership in April 2001, Cammell Laird Group plc (Cammell Laird) supplied ship repair and conversion services at its docks at Birkenhead, Tyneside and Teeside. It also operated docks worldwide. In the year ended 30 April 2000 it reported a pre-tax profit of £16m on turnover of £138m, and gross assets of £68m.
A&P acquired the following parts of Cammell Laird: the freehold of the dry dockyards at Birkenhead and Tyneside; an option to acquire the lease from the local authority of the dry dockyard on Teesside; the freehold of the land surrounding the Teesside dry dockyard; and the plant and equipment for all the above yards. Assets not acquired included work in progress; employment contracts; intellectual property; and any equipment or docks leased from third parties.
Given that Cammell Laird was in receivership at the time of the transaction, with no work in prospect, it might be argued that it did not constitute an 'enterprise' within the meaning of section 63(2) of the Fair Trading Act. In that case no merger situation would have existed as the transaction would not amount, as required by section 64(1) of the Act, to two or more enterprises ceasing to be distinct. It appears, however, that Cammell Laird still had many of the elements of an active business at the time it went into receivership, and that the assets acquired by A&P would make it possible for that business to be continued. It therefore appears that it is, or at least may be, the fact that two or more enterprises have ceased to be distinct. That being the case, the acquisition would qualify for investigation on the share of supply test of the Act.
The parties overlap in the supply of repair and conversion services for Royal Fleet Auxiliary (RFA) vessels, and for commercial vessels up to 40m wide.
Royal Fleet Auxiliary
The supply of repair and conversion services for the RFA is restricted to the United Kingdom, as the Ministry of Defence appoints those who can undertake such work and limits itself to dockyards in this country. The MoD uses a competitive tendering process and is likely to benefit from considerable buyer power. It had no concerns about the merger. The parties' combined share of supply has varied considerably between 1996 and 2001, from 43 per cent to 92 per cent. Although they have clearly been significant suppliers to the MoD, a number of alternatives exist, and further entry is possible.
Commercial vessels up to 40m
The appropriate geographic frame of reference for assessing the effect on competition in the supply of services to commercial vessels is largely determined by the distance which it is possible, and commercially viable, for them to travel. With the exception of emergency repairs, such vessels will generally travel for up to 48 hours to a lower cost dry dock, but will prefer to use docks on or close to their normal routes. For the purposes of this analysis, the UK's eastern and western coastlines have been considered separately. Vessels operating out of ports on these coastlines will have a preference for suppliers in their own areas. Nevertheless seagoing vessels, which are generally greater then 25m, are well able to use dry docks throughout the UK and elsewhere in Northern Europe, or even further afield. Such facilities therefore need to be taken into account in assessing the effect of this merger on competition.
The merged entity will have a share of approximately 50 per cent of the supply of services to vessels up to 40m on the east coast, rising to approximately 75 per cent when docks not capable of taking the 25m-plus seagoing vessels are excluded. However, most vessels of this size are ferries or cargo vessels trading in Europe and beyond. They therefore have ready access to dockyards in Scandinavia, the Baltic, Germany, France, Belgium and the Netherlands. This view is supported by the fact that no customers had concerns, and two competitors saw competition in the areas as fierce. The relevant geographic area for the purposes of competition assessment is therefore probably at least as wide as these Northern European countries in addition to the UK.
The situation on the west coast is similar. Here the merged entity has a share of approximately 30 per cent of the supply of services to vessels up to 40m, which rises to approximately 40 per cent if the smaller docks are excluded. However, ships operating out of this coast have easy access to Eire, Northern France, Belgium and the Netherlands. Again, therefore, the relevant geographic area is probably at least as wide as these countries in addition to the UK.
The parties' estimated combined share of supply of conversion and repair services for commercial vessels up to 40m in Northern Europe (Scandinavia to France) is less than 5 per cent. On this basis, a substantial degree of choice will remain to UK operators following the merger, and no significant competition concerns arise.
The operators of smaller vessels (less than 25m wide) are less likely to be able or willing to send them to dry docks far from their local area, in particular elsewhere in Europe. The appropriate geographical frame of reference for assessing the effect on competition in the supply of services to them is, therefore, likely to be national at the widest. Although the merged entity has approximately 40 per cent of all dry dock capacity in the UK, account should be taken of the fact that vessels under 25m are also able to use the numerous slipways and marinas, so that the range of alternatives open to them will not be substantially reduced as a result of the merger.
The OFT has received a large number of representations about this transaction from Members of Parliament, trade unions and members of the public, which raise two issues not related to competition: the role of the receiver, and the possible consequences on employment of Cammell Laird being purchased by A&P rather than one or more of the attempted management buyouts. The paramount consideration in the competition policy assessment of mergers is, however, the prospective effect on competition.
On these grounds we recommend that this merger is not referred to the Competition Commission.