SvitzerWijsmuller A/S and Adsteam Marine Ltd

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

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

3. 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.

4. The parties’ UK harbour towage activities

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

6. 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

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

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

9. 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.

10. 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

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

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

13. 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

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

15. 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

16. 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.

17. Sorry about that!

18. 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.

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

20. 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.

21. 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.