SvitzerWijsmuller A/S and Adsteam Marine Ltd

Julie BonAdam 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 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 1993.

Financial problems. Acquired by Svitzer in 2001.

• BI tugs. Entered Medway in 1996. Exited in 1998.

• Murray Tugs. Entered Medway in 1999. Exited in

2000.

• SMS. Entered Humber in 2003. 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 tugboats2. Hire people to operate tugboats3. Obtain permission to operate in port4. 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

To

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Fixedcosts

Break-evenpoint

Marketsize

Profits

Losses

Total revenue atcurrent prices

Total costsfor low-costoperator

Number of tug jobs

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.

TABLE 11 Results of the regression of Svitzer discounts over all ports

Discount Coefficient Standard

error t-stat P>t 95% confidence

interval Year (relative to year 2000) Year 2001 Year 2002 Year 2003 Year 2004 Year 2005 Port (relative to Avonmouth) Belfast Forth Greenock Liverpool SE Wales Tees Tyne Type of ship Container ship Number of ports used by customer Number of tug jobs by the customer in

that port and year Total number of tugs by the customer in

all Svitzer ports in that year Relative importance of customer in terms

of number of tug jobs in the port* Constant Source: CC, based on Svitzer data. *For each customer, port and year, this is equal to:

(number of tug jobs by the customer in that port) / (total number of tug jobs in the port) * 100 Notes: Number of observations: 985. Method of regression: OLS. R-square: 0.52. Statistically significant effects (at the 5 per cent level) are given in bold. In Avonmouth and SE Wales, volumes are accounted for differently than in other ports and we discounted these by one-third to make them comparable.

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 2007.

• 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 competitionWe found actual competition was stronger constraint than threat of entry.Entry models – and dialogue with advisers – helped inform CC assessment of entry conditions.