Affected market: Domestic and international parcel delivery
The OFT’s decision on reference under Section 22(1) given on 7 March 2007. Full text of decision published 21 March 2007.
Please note that square brackets indicate text or figures which have been deleted or replaced with a range at the request of the parties and third parties for reasons of commercial confidentiality.
BET UK Limited (BET UK) is a wholly-owned subsidiary of Rentokil Initial plc (Rentokil Initial). BET UK Limited is an investment holding company and owns Initial City Link Limited (City Link), Rentokil Initial's parcel delivery business. City Link offers national and international parcel delivery services and focuses on the UK overnight timed (express) delivery market. The annual network turnover [note 1] of City Link in the year ended 31 December 2006 was [ ].
Target Express Holdings Limited (Target Express) provides a range of national and international parcel delivery services for customers throughout the UK. Its primary focus is on the UK overnight timed delivery market. The UK turnover of Target Express in the year ended 30 April 2006 was approximately [over £70 million].
Rentokil Initial has acquired, through BET UK Limited, the entire issued share capital of Target Express. The transaction was completed on 29 November 2006 and the statutory deadline therefore expires on 28 March 2007. The 40-working-day administrative deadline expires on 15 March 2007.
As a result of this transaction BET UK and Target Express have ceased to be distinct. The UK turnover of Target Express exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that a relevant merger situation has been created.
FRAME OF REFERENCE
The parties have followed the same approach as the European Commission (Commission) in previous cases [note 2] The Commission distinguished markets for standard and express services, and domestic and international services respectively, and these markets have tended to be considered national in scope. The Commission decisions have distinguished four separate frames of references for parcel delivery: domestic standard parcel delivery, domestic express parcel delivery international standard parcel delivery, and international express parcel delivery. The parties overlap in i) domestic express parcel delivery services, which cover same day and next day delivery and ii) international express parcel delivery services, which cover next day delivery to European destinations.
Standard and express parcel delivery services
On the demand side, previous EC decisions have distinguished between
standard and express delivery services, on the basis of speed and
reliability of the delivery and value-added services. The parties and
third parties who commented on this case have agreed that the difference
in terms of price, speed of delivery and the certainty of guaranteed
delivery by a certain time continue to be relevant.
On the supply-side, the parties noted that most operators do not offer solely a standard service, but either an express service alone or both a standard and an express service. This has been confirmed by third parties. One competitor estimated that it could take between six months and two years to develop the necessary distribution network.
However, notwithstanding this lack of supply- and demand-substitution between standard and express parcel delivery services, it is not necessary to reach a conclusion on the product frame of reference in this case, as no competition concerns arise, even if standard and express parcel delivery services are considered separately.
Domestic express parcel and international express parcel delivery services
Some EC decisions [note 3] have acknowledged that domestic and international express delivery markets could have become integrated as some competitors and customers are adopting strategies to supply or procure these services on a European or even global basis. However, most Commission decisions [note 4] have emphasised that the main features distinguishing domestic and international services continue to persist. The OFT has not been provided with any evidence to support departing from this approach.
On the supply-side, the parties have submitted that it would be relatively easy for a domestic service provider to provide international express delivery services, either through a contract with an existing provider or a forwarding arrangement with domestic providers in other countries. Third parties estimated that it would take at least three years to enter the market without a partner already established in the market.
It is not necessary to reach a conclusion on this product frame of reference as no competition concerns arise, even if, in light of the limited demand- and supply-side substitution discussed above domestic express parcel delivery services are considered as distinct from international express parcel delivery service.
On the basis of customer perception, price differences, and the national organisation of pick-up, delivery and marketing, the Commission's past decisional practice [note 5] has deemed both domestic and international express delivery services respectively as national in scope. Some decisions [note 6] have, nonetheless, suggested that there is a current trend towards a European or global market due to the emergence of some global customer accounts.
The parties submitted that for international express parcel services demand-side substitution was weak and a UK-based customer would not generally consider, for example, a French operator without UK operations for international services. However, they noted that some major international operators, for example Deutsche Post and Fedex, already have established UK businesses.
As for domestic express parcel services the parties and their main competitors operate networks covering Great Britain and Northern Ireland and there is no evidence to suggest that it would be appropriate to consider regional sub-markets.
The balance of the evidence points towards a UK-wide frame of reference for both domestic and international express parcel services. However, this transaction does not raise any competition concerns on this national basis. It has therefore not been necessary to conclude on the geographic scope.
Conclusion on frame of reference
While it is not necessary to reach a conclusion on the product frame of reference in this case, as no competition concerns arise even taking into account the narrowest reasonable frame of reference, the OFT has considered the relevant frames of reference to be i) domestic express parcel delivery services in the UK and ii) international express parcel delivery services in the UK.
Domestic express parcel delivery services in the UK
Post-merger, the parties estimated their combined share of supply to be about [10-20] per cent, with an increment of about [0-10] per cent. Four competitors with a share of supply of above 10 per cent remain, two of which hold a similar share to the new entity.
The parties submitted that competition is strong in domestic express parcel delivery services on the basis of price levels, service levels and ease of switching. Although contracts exist with more than [ ] per cent of customers, the parties submitted that there are no contractual volume requirements and that a customer is free to use an alternative service at any time without impediment or penalty. For some larger City Link customers, a notice period of [ ] exists in contracts. [ ] Third party responses largely confirmed the parties' submission.
The parties submitted that they do not consider each other as closest competitor. They submitted lost business reports showing that Target Express lost business to at least [ ] different providers and only [ ] per cent of its lost business was lost to City Link. Similarly, City Link lost business to at least [ ] different providers. Various internal documents show that the parties did not consider themselves to be particularly close competitors. This was confirmed by most third party responses.
International express parcel delivery services in the UK
The parties estimate their combined share of supply in international express services to amount to less than [0-10] per cent at the most. Other major competitors in this field are DHL/Omega, TNT, UPS/Lynx and ANC/Fedex. The parties submitted that international express delivery services are characterised by many of the same features as domestic express services with prices also expected to fall in the future due to competition from other providers.
THIRD PARTY VIEWS
All third parties who responded have been unconcerned about this transaction.
The parties overlap in the supply of domestic and international express parcel delivery services in the UK. Their estimated combined share of supply in international services amounts to less than [0-10] per cent. In domestic services, the parties achieved post-merger a combined share of supply of about [10-20] per cent. A wide range of viable alternative suppliers with similar or marginally lower shares of supply will continue to exist post-merger and the parties have submitted evidence demonstrating that the parties are not considered to be each other's closest competitors. Third parties who have commented on this merger have confirmed this. In addition, third party respondents did not consider switching to be difficult and none were concerned.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- The network turnover includes the turnover of the franchisees. The parties submitted that network turnover is the true measure of external customer sales.
- For example COMP/M.3155 – Deutsche Post/Securicor, COMP/M.2908 – Deutsche Post/DHL, COMP/M.1405 – TNT Post Group/Jet Services, COMP/M.1347 – Deutsche Post/Securicor.
- For example IV/M.1168 – DHL/Deutsche Post.
- For example IV/M.1347 – Deutsche Post/Securicor.
- For example IV/M.843 PTT Post/TNT/GD Worldwide.