1. English Welsh & Scottish Railway Holdings Ltd (“EWS”)/ Marcroft Holdings Ltd Adam Land Director of Remedies and Business Analysis Usual disclaimer: Personal views, not to be taken to indicate Competition Commission endorsement

2. The acquirer EWS Largest provider of rail freight haulage in Great Britain (market share ~ 70%). Turnover 2005: £497.5m, profit before tax £35m Carries out own in-house freight wagon maintenance

3. The acquired Marcroft Engineering Limited Largest provider of wagon maintenance services to third parties in Great Britain. Turnover 2004 £12.7 million, loss before tax £1.5 million Specialist maintainer of wagons: no haulage business, no passenger coach maintenance

4. A customer of Marcroft Freightliner Second largest rail haulage company after EWS Created by privatisation of BR container business, entered heavy haul market in 2005 Carried out some of its own maintenance, but all heavy haul maintenance contracted to Marcroft.

5. The maintenance market – workshop services

7. The maintenance market – outstation work

8. The merger Agreement for EWS to acquire Marcroft announced 4 November 2005, merger completed on 1 February 2006 OFT referred the merger to the CC on 6 February 2006; Interim undertakings accepted by CC on 13 March 2006 to prevent further integration.

9. Marcroft Other 3 rd party Maintenance services Haulage services Market structure, including self-supply End-customers

10. Market definition Product market: Wagon maintenance services Geographic market: Great Britain Is self-supply in the same market as third-party?

11. The significance of self-supply for market shares Post-merger Including self- supply 56.7%18.9%75.6% 3 rd -party only2.5%55.8%58.3% Source: EWS figures for light in-field maintenance quoted in CC Report page 10

12. Should self-supply be in the market? Yes: –EWS already supplies some 3 rd party maintenance. Could it do more? –In-house represents capacity available for potential competition acting as a constraint, even if limited presence in 3 rd -party –Conceptual argument that ‘bundle’ of maintenance and freight services provides an indirect competitive constraint between EWS self-supply maintenance and 3 rd -party maintenance (eg Inderst and Valetti). No: –Detailed examination of the activities and future plans for EWS maintenance business –Uncompetitive EWS cost structure –No evidence of historical effect of EWS in limited number of bids –Capacity and indirect arguments regarded as “speculative” CC concluded that self-supply was not in the market

13. Marcroft Other 3 rd party maintenance Pre-merger Little horizontal effect in 3 rd party maintenance Other 3 rd party maintenance Post- merger

14. Marcroft Other maint …but possible vertical effect arises 3rd-party maintenance services Other 3 rd party maintenance Haulage services

15. Theory of harm: raising rivals’ costs From Church report. A vertical merger: Eliminates double marginalisation But creates an incentive to supply less upstream Complete foreclosure possible (if commitment credible) if gains downstream exceed losses upstream Downstream rivals have incentive to counter-merge Welfare effects depend on credibility of foreclosure, and the impact of double marginalisation

16. Application of RRC theory to this case EWS ~70% market share in downstream haulage market, vertically integrates with Marcroft ~60% market share in upstream 3 rd -party maintenance market No elimination of double marginalisation. 3 rd -party maintenance market is solely used by EWS’s competitors, and EWS is already vertically integrated pre-merger Incentive for EWS/Marcroft to reduce service quality or increases price to rivals. This would strengthen EWS position in downstream haulage markets. Alternative supply available to downstream competitors only at higher prices or lower quality. Also risk of alternative supplier acquiring market power as ‘residual monopolist’ Benefits of softer competition in £800m haulage market seem likely to exceed losses in smaller maintenance market. But no formal modeling.

17. Conclusions on vertical theory of harm EWS already had market power in rail haulage (supported after report by finding of abuse of dominant position) Merged entity would have market power in 3 rd party maintenance Cost/benefit trade-off of foreclosure was good for EWS/Marcroft: reduced quality significantly diminishes competition downstream for little financial loss upstream No benefit from elimination of double-marginalisation CC considered that competition law (eg Article 82 EC) would make it less likely that EWS/Marcroft would foreclose, but not so much as to overcome incentive and ability  Substantial Lessening of Competition finding, leading to remedies

18. Remedies Behavioural remedies –Offered but not considered effective –How could you prevent a fall in service quality? Structural remedies –No need to divest workshop –Full divestment of outstation business would be effective; –Partial divestment of outstation business could also be effective. Challenges for partial divestment –Purchaser risks (eg competition problems, capability) –Composition risk (is a viable business being sold?)  A partial divestment was (eventually) made to Davis, a small competitor in 3 rd party maintenance

19. Reflections Role of market definition in framing theories of harm: –If narrow 3 rd party maintenance market, concerns about vertical Raising Rivals Costs theory –If wider maintenance market, potential concerns about horizontal concentration Indirect constraint argument – when should it apply? Vertical theories difficult for non-economist decision- makers and advisors (Church report = 382 pages) Vertical theories of harm can create requirements for assessment of other markets (eg haulage) Challenges of remedying completed mergers