Anticipated joint venture between Stena and P&O to acquire Cairnryan Port

No. ME/1237/03

The OFT's decision on reference under section 33 given on 22 August 2003

PARTIES

Stena AB (Stena), Stena Metall AB and Stena Sessan AB, are part of the Stena group, controlled by the Sten A. Olsson family.  Stena Line provides ferry services for freight and passengers in Scandinavia, the UK, Ireland, the Netherlands, Germany and Poland. For the year ended 31 December 2002, the Stena group reported a turnover of 3.16 billion Euro, of which [] (see note 1) Euro was achieved in the UK and the Republic of Ireland.  The holding company of the P&O Group (P&O) is a UK listed company and the group comprises ports, ferries, logistics and cargo shipping businesses. For the year ended 31 December 2002, P&O reported a turnover of £4,519 million, of which [] was generated in the UK.

TRANSACTION

Stena and P&O propose to establish a joint venture company (JV).  The JV will purchase P&O's port assets and operations at Cairnryan and then oversee the financing and construction of new berths.  After completion of the construction phase the JV will be limited to ensuring safe navigation at the port, maintaining the port infrastructure and providing security.  Stena intends to transfer its existing service to Belfast from the port it owns at Stranraer, which is 20 minutes sailing time further into Loch Ryan, to Cairnryan sometime in 2005.  P&O will continue to offer its ferry service to Larne from Cairnryan.  There is no proposal to combine P&O's and Stena's ferry services from Cairnryan and Northern Ireland.

The transaction has been notified to the OFT in the form of a Memorandum of Understanding (MoU).  This decision applies to the JV as described in that notified MoU and further explained in a submission from Stena's solicitors dated 7 August 2003, in particular with its scope limited to redeveloping the port at Cairnryan to accommodate both parties and the limited role in its operation described above. 

The MoU on the JV was notified to the OFT at the same time as a separate transaction involving the proposed acquisition by Stena of certain assets and vessels operated by P&O on two routes across the Irish Sea between Fleetwood and Larne and between Liverpool and Dublin.  A separate decision has been made upon that merger situation.  P&O also simultaneously announced that it intended to cease to operate its ferry service from the Port of Mostyn in Wales to Dublin and to time charter the two ships currently operating from Mostyn to Stena, for use outside the Irish Sea. 

The administrative deadline for a decision is 22 August.

JURISDICTION

As a result of this transaction P&O and Stena will acquire joint control of the JV.  The parents overlap in the supply of port services for freight in Great Britain for routes from Great Britain to Northern Ireland across the Irish Sea and the share of supply test in section 23 of the Enterprise Act 2002 is met.  A relevant merger situation has therefore been created.

The cessation of P&O's services from the Port of Mostyn is [] (see note 2) not ancillary to the merger situation as it is clearly not necessary to the JV, nor does it form a relevant merger situation in its own right. 

RELEVANT MARKET

The port at Cairnryan provides facilities and services for passenger and freight ferry operations sailing between Great Britain and Ireland.  The transaction sees Cairnryan changing from a port exclusively owned and used by P&O to an expanded port exclusively owned and used by both P&O and Stena.  As such there is no concern relating to an increase in concentration in port or ferry services and therefore the extent to which other ports represent a competitive constraint on Cairnryan is not an important consideration.  Consequently there is no need to reach a conclusion as to the relevant frame of reference here.

COMPETITION ISSUES

Downstream from the JV, both Stena and P&0 are active in the provision of ferry services from Great Britain to Ireland.  The JV may raise the question of possible co-ordinated effects or collusion.

Stena currently operate a passenger and freight service from Stranraer to Belfast and P&O from Cairnryan to Larne, north of Belfast.  Post transaction, the parties will be operating from the same port, further aligning their service.  Although such alignment can promote competition, it can also reduce the parties' incentive to compete.  Such concerns about co-ordination or collusion were expressed by third parties. 

In this case, the separate transfer of P&O's Fleetwood to Larne service to Stena will mean that they will each account for about [25-35 per cent] of the freight ferried from Great Britain to Northern Ireland.  They will also have some [70-80 per cent] of all passengers on the same routes.  In addition the conditions for coordination may already exist in both freight and passenger services for a number of reasons:

• ability to co-ordinate via published sailing times and prices, although discounting is common
• incentives to maintain coordination through the ease of spotting changes in capacity and the ability to punish by switching spare capacity from other routes; although there may be an incentive to maximise capacity in order to increase profitability
• this is a relatively stable industry, although differential growth of routes would make market sharing of routes difficult and the parties have clearly stated that the division of the port dues and any profits from them will be fixed, thus preventing their use as a means to re-balance profits across the routes, and
• the parties' strong shares of the traffic on these routes could make co-ordination profitable even without including competitors, although Norse Merchant Ferries (currently in administration but expected to come out as a viable competitor) has been an aggressive competitor in the past.

However, even if such conditions are seen as sufficient to lead to co-ordination or collusion, any change to that ability or incentive to do so caused by the JV is difficult to characterise as substantial.  The services are already similar.  The move from Stranraer to Cairnryan merely cuts 20 minutes from Stena's sailing time and adds 10 minutes to the road journey to the port.  The JV port will only share a harbour master, security services and common maintenance.  Each party will have separate access, booking, loading and other services.  Accordingly, in this case and on the basis of the facts presented to us by the parties, the OFT does not believe that it is or may be the case that the transaction may be expected to result in a substantial lessening of competition by virtue of increasing the incentive or ability to co-ordinate the parties' behaviour. 

THIRD PARTY VIEWS

Third party views varied from those who were concerned that the JV was a mechanism for co-ordinating the parties' behaviour to those who saw it as a means for increasing investment in facilities and therefore improving services.

ASSESSMENT

The JV to extend and operate a port at Cairnryan does not lead, in itself, to an increase in concentration in the provision of port or ferry services.  Concerns were expressed that it may increase the parties' incentive and ability to co-ordinate their behaviour in the downstream provision of ferry services.  Conditions for co-ordination may already exist in that pricing, capacity and the ability to cheat are relatively transparent, the industry is relatively stable and the parties may have a sufficient market position to operate without consideration of other competitors.  However, the structure of the JV, the limited nature of the common port facilities and the marginal increase in the similarity of services arising from the JV means that any increase in incentive and ability to co-ordinate cannot be characterised as substantial.

Consequently, the merger does not appear to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services.

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