Anticipated acquisition by SvitzerWijsmuller A/S of Adsteam Marine Limited

Affected market: Harbour towage, terminal towage, ocean towage and salvage

No. ME/2520/06

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 31 August 2006. Full text of decision published 8 September 2006.
 
Please note that square brackets indicate figures or text which have been deleted at the request of the parties for reasons of commercial confidentiality.

PARTIES

SvitzerWijsmuller A/S ('Svitzer'), a wholly owned subsidiary of A.P. Møller – Mærsk A/S, is a Danish marine services company. It is active in harbour, ocean and terminal towage, salvage, emergency response and rescue, and crew boat services. Svitzer is a subsidiary of A.P. Moller-Maersk Group. Svitzer is active in the UK through its subsidiaries Svitzer Marine Limited and Tyne Towage Marine Limited.

Adsteam Marine Limited ('Adsteam') is an Australian company and a provider of harbour towage, terminal towage, salvage and agency services around the world. It is the parent company of Adsteam UK Limited which operates in the UK with a turnover in the last financial year of some £46 million.

TRANSACTION

Svitzer intends to acquire shares in Adsteam by way of a public bid. The offer is subject to approval by the OFT and the offer closes on 29 September 2006, unless extended.

The OFT's administrative deadline for deciding whether to refer the merger to the Competition Commission is 31 August 2006.

JURISDICTION

As a result of this transaction Svitzer and Adsteam will cease to be distinct. The parties overlap in the supply of harbour towage services in the UK, and their combined share of supply of harbour towage services in the UK is [80-90 per cent]. Consequently, the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

The vast majority of harbour towage customers contacted by the OFT expressed concerns about the proposed merger. Most comments were consistent among each other and provided a good insight into the dynamics of the markets in question. No concerns were raised in relation to terminal towage, and only one third party was concerned about the effects of the proposed merger on salvage work.

ASSESSMENT

The OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition in salvage or owner terminal towage services. Given that the reference test is met with respect to harbour towage services (see below), the OFT does not need to reach a conclusion on whether it is or may be the case that the proposed merger may be expected to result in a substantial lessening in competition in customer terminal towage services.

The merging parties argue that the geographic scope of harbour towage services is each individual port area, which is supported by low supply and demand side substitution. However, the limited pricing data available, combined with evidence that the parties are subject to competitive constraints arising from outside each port area, suggest that the appropriate geographic scope may be wider than each individual port area.

The only port area where the parties overlap is Liverpool, where the merger will result in a reduction in the number of competitors from two to one. All customers using Liverpool port area that responded to the OFT are concerned about the proposed merger as they believe that Svitzer and Adsteam actively compete with each other in that port area and that the merger will lead to a substantial lessening of competition and, as a result, an increase in prices above the competitive level within the Liverpool port area. In addition, competition in Liverpool has spillover effects across the country as customer comments suggest that it helps them achieve better prices in ports in which one of the parties is the sole operator.

The parties questioned whether having two towage operators in Liverpool was the proper counterfactual since they argued that Liverpool would become a single-operator port even in the absence of the merger. However, based on the evidence before it, the OFT was not convinced that the proper counterfactual should be changed from the current situation of the Liverpool port area having two towage operators as it did not receive any evidence to support this arguments nor to demonstrate that business is unsustainable if there are two harbour towage operators in the Liverpool port area. If one of the parties were to exit Liverpool, this would potentially open up more contracts for a new entrant to contest than would the elimination of that firm through merger.

Taking the UK as a whole, the proposed transaction brings together the largest and the second largest towage operators with a combined share of supply of [80-90 per cent] per cent. The next largest operator undertakes [0-5] per cent of UK tug jobs and there is only one other tug operator who operates in more than one UK port (it operates in two).

Barriers to entry into harbour towage services are high and there has been extremely limited entry in recent history. Most UK ports can only sustain one tug operator (due to the substantial economies of scale required) and therefore entry requires displacement of the incumbent operator. In addition, contracts with customers are staggered which forms a barrier to some extent to achieving a minimum efficient scale. Finally, it is possible for companies operating in a number of ports to implement fidelity-inducing pricing arrangements, such as multi-port arrangements similar to the ones operated by Adsteam, which may increase barriers to entry.

In spite of the high barriers to entry, the merging parties are constrained in their behaviour by the threat of entry of a new competitor into a port area. One of the reasons for this may be that, although the likelihood of a threat of entry into a port materialising is not very high, the impact it would have in case it does happen is so high that it is sufficient to constraint the parties' behaviour.

However, while the parties contend that the most likely new entrants are low cost, non-unionised operators, there are a number of reasons that lead the OFT to believe that the strongest threat of entry into each other's areas comes from the parties themselves.

First, the history of entry by low-cost operators is extremely limited. Second, no third parties identified low-cost operators as likely entrants into this market, even though a number of customers transport goods in and out of the UK and therefore are aware of alternative towage operators who could enter the UK market. Third, parties provided little documentary evidence that their commercial decisions are influenced by the threat of entry by low-cost operators, and the OFT was not persuaded that this is the case. Fourth, the parties are active in a large number of UK ports and therefore are capable of offering multi-port arrangements, which may cause barriers to entry to new entrants to be higher than they are for the merging parties. Fifth, the parties estimate that the minimum efficient scale for low cost (non-unionised) harbour towage operators is [ ] of that of a unionised supplier such as Svitzer and Adsteam; the fact that low-cost entry has not happened in the past (apart from in the Humber, where barriers to entry are lower due to its ability to sustain two operator) is an indication that the credibility of the threat posed by low cost operators is not high. Finally, even if low-cost suppliers could also enter the UK market, the merger in any case causes the loss of a major potential entrant already with reputation in the UK.

An important element in this case is the scale and strength of customer comments, the vast majority of which expressed consistent concerns about the proposed merger. The merging parties provided plausible arguments as to why competition concerns may not arise as a result of the merger. However, in view of the high market shares and barriers to entry, the substantial customer concerns and the lack of documentary evidence from the merging parties to support their claims, the OFT has decided that it is or may be the case that the merger may be expected to result in a substantial lessening of competition in the supply of harbour towage services in the Liverpool port area and in the UK generally.

UNDERTAKINGS IN LIEU

Where the duty to make a reference under section 33(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from the parties concerned such undertakings as it considers appropriate for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has resulted, or may result, from it.

The OFT's 'Mergers – substantive assessment guidance' states that undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut.

Svitzer offered the following undertakings. [ ]. In addition to each of these options, [ ].

While very much welcoming the willingness of the parties to put forward structural remedies, the OFT does not consider that these offers are capable of maintaining the competitive dynamic in the supply of harbour towage services and remove the risk of a substantial lessening of competition arising.

[ ]. The widest structural undertaking offered ([ ]) would not restore the pre-merger competition dynamics: the new entrant would have a market share of around [ ] per cent, which is less than the increment that the merger will cause ([20-30] per cent), and would operate in a significantly smaller number of ports than the number in which Svitzer and Adsteam currently operate. While this divestment could be enough to protect marginal customers, it would not guard infra-marginal ones.

In any event, in this case, whilst the OFT has concluded that competition concerns do arise from a loss of potential competition resulting from the merger, triggering its duty to refer, it has not been possible to quantify the precise magnitude of this loss of potential competition at first phase. The OFT therefore considers that the extent of the competition concerns raised by the merger and the undertakings offered by Svitzer are not clear cut, and the duty to refer remains.

Conclusion

Consequently, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

Back to top