Completed acquisition by Menzies Aviation (UK) Limited of part of the business of Airline Services Limited Decision on relevant merger situation and substantial lessening of competition ME/6746/18 The CMA’s decision on reference under section 22(1) of the Enterprise Act 2002 given on 7 August 2018. Full text of the decision published on 21 August 2018. Please note that [] indicates figures or text which have been deleted or replaced in ranges at the request of the parties for reasons of commercial confidentiality. SUMMARY 1. On 4 April 2018, Menzies Aviation (UK) Limited (Menzies) acquired part of the business of Airline Services Limited (Airline Services) (the Merger). Menzies and Airline Services are together referred to as the Parties. 2. The Competition and Markets Authority (CMA) believes that it is or may be the case that each of Menzies and Airline Services is an enterprise, that these enterprises have ceased to be distinct as a result of the Merger, and that the share of supply test is met. The four-month period for a decision, as extended, has not yet expired. The CMA therefore believes that it is or may be the case that a relevant merger situation has been created. 3. The Parties overlap in the supply of: (a) De-icing services at Edinburgh airport (EDI); (b) De-icing services at Glasgow airport (GLA); (c) De-icing services at London Heathrow airport (LHR); 1 (d) Ground handling services1 at London Gatwick airport (LGW); (e) Ground handling services at Manchester airport (MAN); and (f) Internal presentation services at MAN. 4. The CMA examined whether the Merger raises competition concerns as a result of horizontal unilateral effects for each of the overlaps above. In relation to the overlaps for de-icing and ground handling services (ie those set out at paragraphs 3(a) to 3(e) above), the CMA found that the Parties compete closely and there will be few credible providers remaining at these airports post-Merger. Evidence received by the CMA also indicates that providers not currently present at each of these airports would not exert a sufficient constraint on the Parties post-Merger. For these reasons, the CMA believes that the Merger gives rise to a to a realistic prospect of a substantial lessening of competition (SLC) as a result of horizontal unilateral effects in relation to each of these overlaps. 5. The CMA found that competition concerns did not arise in relation to the supply of internal presentation services at MAN, in particular because the increment to Menzies’ share of supply brought about by the Merger is small, the Parties do not compete closely and there are a number of credible competitors remaining post-Merger. 6. The CMA also examined whether there may be a loss of actual potential competition for the supply of ground handling services at other airports and examined, in particular, each of EDI and GLA, as Airline Services told the CMA that it had plans to enter these airports absent the Merger and Menzies currently has a significant position as a ground handler at these airports. The CMA believes that there is a realistic prospect that Airline Services would enter EDI and GLA for the supply of ground handling services absent the Merger and that such entry would lead to greater competition, given that customers have a very limited choice of ground handlers at these two airports. However, the CMA found that competition concerns did not arise at these airports, as evidence received by the CMA indicates that there are other credible potential entrants who are at least as well placed as Airline Services to enter these two airports. 7. The CMA is therefore considering whether to accept undertakings under section 73 of the Enterprise Act 2002 (the Act). Menzies has until 14 August 2018 to offer an undertaking to the CMA that might be accepted by the CMA. 1 See paragraph 33 for an explanation of the product frame of reference for ground handling services. 2 If no such undertaking is offered, then the CMA will refer the Merger pursuant to sections 22(1) and 34ZA(2) of the Act. ASSESSMENT Parties 8. Menzies is a provider of ground handling, de-icing, aircraft presentation, cargo handling and cargo forwarding services to airlines at various airports in the UK. Menzies operates at 16 airports in the UK.2 Menzies is wholly owned by John Menzies plc. In total, John Menzies plc operates at approximately 213 airports in 35 countries. John Menzies plc is a public company listed on the London Stock Exchange and reported worldwide turnover of £2,517.7 million and UK turnover of £[] for the year ended 31 December 2017. 9. The target business, Airline Services, is primarily a provider of de-icing, ground handling and aircraft presentation services. It operates at 16 airports in the UK and generated turnover of around £[] in the UK for the year ended 30 April 2017. 10. Prior to the Merger, Airline Services was owned by Airline Services Limited (ASL). ASL’s ultimate controlling entity was Lloyds Development Capital (LDC), the private equity division of Lloyds Bank plc. LDC is active in the private equity mid-market and provides funds for buyouts and development capital transactions in UK unquoted companies. Transaction 11. Menzies acquired Airline Services for approximately £[] (subject to certain adjustments) by means of an asset purchase agreement entered into between ASL and Menzies on 4 April 2018, pursuant to which Menzies acquired all the relevant assets, contracts and employees relating to Airline Services. The Merger completed on 4 April 2018. 12. Menzies stated that the rationale of the Merger is to expand its de-icing and aircraft presentation offerings, expand its geographical coverage in the UK and [].3 ASL stated that, as a private equity owned business, its strategy was to grow Airline Services and increase the value of the business, with the 2 [] 3 See Annexes 9.2 and 9.3 to the Merger Notice submitted by Menzies on 11 June 2018 (the Merger Notice). 3 ultimate aim of realising this increase in value through the sale of Airline Services.4 Procedure 13. The Merger was considered at a Case Review Meeting.5 Jurisdiction 14. Each of Menzies and Airline Services is an enterprise. As a result of the Merger, these enterprises have ceased to be distinct. 15. The Parties overlap in the supply of de-icing, ground handling and aircraft presentation services. Their combined share of supply exceeds 25% for either de-icing services or ground handling services at several airports. This includes, for example, the supply of de-icing services at EDI where the Parties’ combined share of supply by number of aircraft ‘turns’6 is approximately [70-80]% and the increment from the Merger is approximately [20-30]%.7 The CMA therefore believes that the share of supply test in section 23 of the Act is met. 16. The Merger completed on 4 April 2018 and was first made public on 5 April 2018. The four-month deadline for a decision under section 24 of the Act is 7 August 2018, following extension under section 25(2) of the Act. 17. The CMA therefore believes that it is or may be the case that a relevant merger situation has been created. 18. The initial period for consideration of the Merger under section 34ZA(3) of the Act started on 13 June 2018 and the statutory 40 working day deadline for a decision is therefore 7 August 2018. Counterfactual 19. The CMA assesses a merger’s impact relative to the situation that would prevail absent the merger (ie the counterfactual). For completed mergers, the CMA generally adopts the pre-merger conditions of competition as the counterfactual against which to assess the impact of the merger. However, the CMA will assess the merger against an alternative counterfactual where, 4 Call with the Chairman of ASL on 29 May 2018. 5 See Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2), January 2014, from paragraph 7.34. 6 Turns (or turnarounds) refers to the process of loading, unloading, and servicing an aircraft. 7 See Tables 2 to 6 below. 4 based on the evidence available to it, it believes that, in the absence of the merger, the prospect of these conditions continuing is not realistic, or there is a realistic prospect of a counterfactual that is more competitive than these conditions.8 Financial constraints on Airline Services 20. Menzies submitted that the counterfactual should take into account that Airline Services would have been constrained from expanding due to [].9 For example, the Parties noted that: (a) []; and (b) []. 21. Internal documents and board minutes from ASL note, however, that [] and that ASL’s strategy absent the Merger involved growing the ground handling business of Airline Services in the UK.10 The board minutes also note the possibility of [].11 This position was confirmed by the Managing Director of Airline Services, by the Chairman of ASL and by LDC in evidence provided orally to the CMA.12 In particular: (a) The Managing Director of Airline Services noted that Airline Services planned, absent the Merger, to continue growing its ground handling and de-icing businesses, including seeking to open ground handling operations at a third airport by []; (b) The Chairman of ASL noted that ASL’s strategy was to grow the ground handling business of Airline Services and that LDC was supportive of this strategy; and (c) LDC noted that []. 8 Merger Assessment Guidelines (OFT1254/CC2), September 2010, from paragraph 4.3.5. The Merger Assessment Guidelines have been adopted by the CMA (see Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2), January 2014, Annex D).