SvitzerWijsmuller A/S and Adsteam Marine Ltd Julie Bon Adam Land ACE conference November 2007 Personal views, not those of CC

Outline of talk Background Market definition Entry conditions Theories of harm Outcome and issues for discussion

The parties to the merger Global merger: UK only country where the two companies’ activities overlap. Svitzer: 41 tugs in 7 UK ports. Owned by APMM, the world’s largest shipping operator. Adsteam: 42 tugs in 6 UK ports. Significant activities in Australia and Far East.

The parties’ UK harbour towage activities Svitzer Adsteam Avonmouth Belfast Felixstowe Greenock Humber Liverpool Newport Medway Tees Southampton Tyneside Thames Estuary

Outline of talk Background Market definition and market structure Entry conditions Theories of harm Outcome and issues for discussion

Geographic market definition Demand side substitution? Costly to switch ports (eg fixed infrastructure) Harbour towage a small share of port-calling costs Changes in relative prices did not induce switching Supply-side substitution? Costly (time and money) to move tugs between ports Parties’ ports not located close to each other => Each port is a separate economic market

Market structure Liverpool – Svitzer vs Adsteam Humber – Adsteam vs SMS All other ports – single operator only

Outline of talk Background Market definition and market structure Entry conditions Theories of harm Outcome and issues for discussion

History of entry in UK ports in last 15 years West Coast Towing. Entered Newport in Financial problems. Acquired by Svitzer in BI tugs. Entered Medway in Exited in Murray Tugs. Entered Medway in Exited in SMS. Entered Humber in Vigorous response from Adsteam. Still going.

Cost structure of harbour towage A minimum number of tugs is needed to operate in each port High fixed costs per tug Labour as a quasi-fixed cost High legacy costs of incumbents

Steps needed to enter harbour towage market 1.Acquire a fleet of tugboats 2.Hire people to operate tugboats 3.Obtain permission to operate in port 4.Develop a customer base  1–3 were not significant barriers  We looked at entry models to see how many customers were needed to enter.

Svitzer / RBB entry model: version 1.0 More on this from Andrea Lofaro!

Assessment of entry conditions Entry is possible but not easy Need to obtain and maintain substantial market share in face of vigorous response Sustained inefficiencies of incumbents was itself evidence of entry barriers Entry relatively more likely in larger UK ports

Outline of talk Background Market definition and market structure Entry conditions Theories of harm Outcome and issues for discussion

Theories of harm Loss of direct competition in Liverpool Loss of potential competition between the parties outside Liverpool Raising barriers to entry –Increased threat of retaliation in other UK ports –Increased threat of retaliation in overseas ports –Inability to attract APMM (“Maersk”) as a customer Maersk would receive preferential treatment in Adsteam ports

Loss of direct competition in Liverpool (2 to 1) Parties argued: threat of entry would keep prices down. We found: Tariff rises generally lower in Liverpool than elsewhere Parties granted more discounts and generally higher discounts from tariff in Liverpool than in other ports Entry in Medway and Humber had lowered prices. =>Direct competition a stronger constraint on prices than threat of entry. SLC in Liverpool.

Sorry about that!

The other theories of harm Loss of potential competition between the parties outside Liverpool? Svitzer and Adsteam not most likely entrants. No SLC Raising barriers to entry No material impact of merger on entry barriers. Incentive or ability to foreclose missing. No SLC. Maersk would receive preferential treatment in “Adsteam ports”. Harbour master, not tug owner, calls the shots. No SLC.

Outline of talk Background Market definition and market structure Entry conditions Theories of harm Outcome and issues for discussion

Outcome Report published 9 Feb Svitzer required to divest either Adsteam or Svitzer operations in Liverpool. CC could appoint divestiture trustee. But this was not necessary. Adsteam Liverpool operations sold in March 2003.

Talking points Theory of harm methodology CC ended up at the ‘obvious’ answer, but had worked through all the angles. Analysis of potential competition We found actual competition was stronger constraint than threat of entry. Entry models – and dialogue with advisers – helped inform CC assessment of entry conditions.

Critique of simple entry model New entrant will have to offer discount to win business. Incumbent may respond to entry by cutting prices Large customers generally face lower prices  Updated entry models submitted to CC  These were used to assess breakeven market shares in each port.