Affected market: Ferry services
The OFT's decision on reference under section 33(1) given on 2 November 2005. Full text of decision published 8 November 2005.
Norfolkline Shipping B.V. (Norfolkline) is part of the A.P. Møller-Mærsk Group, one of the leading container line operators. Norfolkline is a leading provider of freight and passenger roll-on roll-off (ro/ro) services and container services in Northern Europe, also offering door-to-door freight transport services and intermodal services between Northern and Southern Europe. Norfolkline provides freight and passenger ferry services in the English Channel and ferry services on the North Sea.
Norse Merchant Group Limited (NMG) owns and operates passenger and freight ro/ro ferry services between England and the island of Ireland. NMG's UK turnover in 2004 was approximately £109.5 million.
Norfolkline proposes to acquire the entire issued share capital of NMG. A satisfactory submission was received on 20 September after 17.00 and the extended statutory deadline expires on 2 November 2005.
The transaction was cleared by the Irish Competition Authority on 10 October 2005.
As a result of the transaction, Norfolkline and NMG will cease to be distinct. The UK turnover of NMG exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 is satisfied. 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.
FRAME OF REFERENCE
The only segment in which the parties' activities coincide is in the provision of passenger and freight ferry services. However, there is no geographic overlap in this segment due to the fact that Norfolkline offers ferry services between the east coast of the UK and continental Europe, whereas NMG operates between the west coast of the UK and the island of Ireland. The geographic scope of this sector will be discussed below.
However, the parties' business activities overlap vertically as Norfolkline's door-to-door freight services division is a customer of NMG on the Irish Sea.
In previous cases in this sector the OFT has distinguished between tourist ferry services and freight ferry services. The OFT did not receive any evidence suggesting that it should depart from this approach.
The Competition Commission in Stena AB / P&O (see [note 1]) included the supply of ro/ro and lift-on/lift-off (lo/lo) container services ferry services in the same relevant market, although it remarked that it did not expect lo/lo to provide a major competitive constraint on ro/ro. The CC also concluded that accompanied and unaccompanied freight should be treated as a single relevant market. Since the parties did not dispute the CC's conclusions and third party responses indicate that market conditions have not changed materially since the CC report, the appropriate product scope is therefore considered to be the supply of ro/ro and lo/lo ferry services for accompanied and unaccompanied freight.
Norfolkline also operates a door-to-door freight service to customers in the UK and the Republic of Ireland, and elsewhere, on a European-wide basis and as such it is a customer of NMG on its Irish Sea routes (see [note 2]). Door-to-door services providers arrange for the transport of freight or cargo from wherever it may be to a specified location. This will typically involve a number of subcontractors, including road haulage companies, air freight companies, rail, and, should a sea crossing be required, ferry operators or container transporters.
Large customers such as supermarkets have sophisticated transport and logistics operations of their own and consequently may be able to 'self supply' effectively or un-bundle door-to-door services. Therefore, there may be sufficient substitutability between general freight services and the door-to-door freight sector to suggest a wider product frame of reference encompassing both.
However, since no competition concerns arise on any feasible market definition, it is not necessary to conclude definitively on the appropriate product scope with respect to door-to-door services.
With regard to ferry services, the CC concluded that the Irish Sea comprises three distinct geographic markets: the Northern, Central and Southern corridors. Third parties that responded to the OFT's information requests were of the view that conditions in the ferry services sector have not changed materially since the CC concluded its report.
NMG is active in the Northern and Central corridors, but not in the Southern corridor. Third party responses in relation to this case indicate that it is relatively easy for customers to use alternatives to the NMG routes where those routes originate and arrive at geographically proximate locations; however, routes that involve long detours by road will result in additional fuel and driver costs and as a result are considered to be poor substitutes.
In view of the above, there is no reason to depart from the CC's conclusions on the geographic market with respect to ferry services and therefore the appropriate geographic scopes are considered to be the Northern and Central corridors across the Irish Sea.
The geographic frame of reference with respect to door-to-door services appears to be at least national. However, it is not necessary to conclude on the geographic scope with respect to door-to-door services as no competition concerns arise on any feasible geographic frame of reference.
This case does not raise any horizontal issues as the activities conducted by the parties do not overlap on a horizontal level.
In view of the fact that Norfolkline is a customer of NMG on its Irish Sea routes as part of its door-to-door freight services, third parties raised the issue that post-merger the NMG routes could be operated in favour of Norfolkline's door-to-door shipments, by either offering preferential rates to Norfolkline or offering preferential access.
Nonetheless, the OFT does not believe that such a prospect is realistic. Paragraph 5.1 of the OFT's 'Mergers - Substantive assessment guidance' provides that '…vertical merger concerns are likely to arise only if market power exists or is created in one or more markets along the supply chain'.
The parties' shares of supply in both ferry services (28 per cent in the Northern corridor and 29 per cent in the Central corridor) and door-to-door services (less than 5 per cent of all door-to-door freight traffic between Great Britain and the island of Ireland), are generally insufficient to confer any market power. It is therefore considered unlikely that the parties would have the ability to foreclose any of their door-to-door rivals.
Third parties have noted that there is a general lack of spare capacity on alternative ferry routes in the Irish Sea, which could potentially hinder switching suppliers and lead to a degree of market power by the merged entity vis-à-vis its door-to-door customers.
However, there are a number of factors that suggest that the merged entity would not have the incentive to foreclose the market in this way, even if it had the ability to do so. First, Norfolkline does not offer preferential rates or access to its door-to-door division in any of the areas where it currently also operates ferry services (i.e., the English Channel) (see [note 3]). Second, when sailings are full, a vertically integrated ferry operator has no obvious incentive to replace a customer paying a higher fee with one of its own trucks at a lower rate. Third, the transport of freight contracted by Norfolkline last year as part of its door-to-door service accounted for only [less than 5 per cent] of the total number of units transported on NMG's ferries on the Irish Sea and as a result it would be commercially damaging for the merged entity to imperil the remaining [more than 95 per cent] of third party custom by offering preferential access or preferential rates to Norfolkline.
It is therefore considered that this merger does not give rise to vertical competition concerns.
BARRIERS TO ENTRY
Barriers to entry in the operation of ferry services are in general relatively high. Notwithstanding these barriers, entry onto routes on the Irish Sea has occurred in the past, albeit infrequently. Regarding the door-to-door services sector, barriers do not seem to be substantial. However, given that no substantive competition concerns arise as a result of this case, it is not necessary to conclude on the level of barriers to entry in either ferry or door-to-door services.
It is not necessary to conclude on the issue of countervailing buyer power as this merger does not cause any competition concerns.
THIRD PARTY COMMENTS
A small number of third parties raised concerns about this deal, which were discussed above. The majority of third parties were unconcerned.
This merger does not result in any accretion to the parties' shares of supply in either door-to-door or freight services since there is no horizontal overlap between the parties' respective activities. As a result, no horizontal concerns arise as a result of this merger.
It was considered whether the fact that Norfolkline is a customer of NMG's ferry services may lead to foreclosure of rivals in the door-to-door freight services sector. However, the parties do not appear to have market power at either level of the supply chain and, even if the parties had the ability to foreclose, the evidence suggests that they not would have an incentive to do so.
Consequently, 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 within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- Stena AB and the Peninsular and Oriental Steam Navigation Company: A report on the proposed acquisition of certain assets relating to the supply of ferry services on the Irish Sea between Liverpool-Dublin and Fleetwood-Larne, February 2004.
- Although it also uses other ro/ro ferry operators on the Irish Sea.
- Norfolkline has provided the OFT with data on the rates charged to their major customers supporting this claim.