COMPLETED ACQUISITION BY GROUPE EUROTUNNEL SA OF CERTAIN ASSETS OF SEAFRANCE SA (IN LIQUIDATION) INITIAL SUBMISSION 19 November 2012 1 COMPLETED ACQUISITION BY GROUPE EUROTUNNEL SA OF CERTAIN ASSETS OF SEAFRANCE SA (IN LIQUIDATION) 1. INTRODUCTION 1.1 This submission to the Competition Commission ("CC") sets out the background to the completed acquisition by Groupe Eurotunnel SA ("GET") of three ferries ("the Vessels") and a collection of other assets from the liquidator of SeaFrance SA ("SeaFrance") ("the Asset Acquisition")1. 1.2 The Asset Acquisition was referred to the CC by the Office of Fair Trading ("OFT") in a decision dated 29 October 2012 ("the Decision"). This submission explains why there are no grounds to believe that the Asset Acquisition will result in a substantial lessening of competition in the UK ("SLC") on the balance of probabilities threshold. 1.3 To avoid undue repetition, this initial submission has not repeated all of the arguments and re-submitted the data previously provided to the OFT and the French Competition Authority ("FCA") pursuant to GET's notification of the Asset Acquisition to the FCA under French national merger control laws. To assist the CC, a further copy of submissions (including convenience translations) to the FCA is provided at Appendix 7. 1.4 The FCA approved the Asset Acquisition subject to certain limited behavioural undertakings on 8 November 2012. A convenience translation of the confidential version of the FCA's clearance decision was provided to the CC on 16 November. A brief summary of certain of the points made in the FCA's decision is included at Appendix 7. 1.5 Information in this submission that is confidential to GET is marked [REDACTED]. 1 In this submission, "Eurotunnel" refers to the business within GET responsible for operating and maintaining the Channel Tunnel, and for running freight and passenger shuttle services through the Channel Tunnel. 2 2. EXECUTIVE SUMMARY 2.1 GET considers that the Assets Acquisition will not give rise to an SLC for the following reasons: 2.2 The Vessels do not amount to an "enterprise" 2.2.1 The statutory definition of an "enterprise" focuses on activities. However, GET acquired bare assets, including the Vessels, which had not been used in the operation of a business for a period of nine consecutive months before MyFerryLink ("MFL") began operations. 2.2.2 The assets acquired by GET were not sufficient to conduct a business on their own; additional business critical services, resources and inputs were needed by MFL from other parties before the Vessels could be used to create and start the activities of a business. The other assets which were acquired by GET were of limited value due to the previous commercial difficulties of SeaFrance and the delay since it had been operational. 2.2.3 In the period of nine months whilst the Vessels were not operational, all of SeaFrance's freight and passenger customers were forced to move their business to alternate service providers. The timing and circumstances of SeaFrance's cessation of activities, and the duration of its absence from the market, in conjunction with the absence of ongoing customer contracts, mean that no customers or business (i.e. no goodwill) transferred to GET with the Vessels and other assets it acquired from the liquidator. This is self- evident from the very low freight and passenger volumes that have been achieved to date by MFL (see section 11 below). 2.3 The increase in GET's share of supply is minimal (below 1%2) 2.3.1 SeaFrance ceased operating on 16 November 2011, at which point its turnover and share of supply was redistributed in its entirety amongst its remaining competitors, principally P&O and DFDS. 2.3.2 MFL is not continuing the previous operations of SeaFrance using the Vessels: it has instead commenced a new ferry operation from scratch, using fewer ferries and different branding3. SeaFrance's pre-liquidation market share was about 16% and 11% for freight and passenger transport, respectively, whereas three months after launch MFL has achieved a share of less than 1%. 2.3.3 The number of ferries in active operational use by SeaFrance has declined over time: (a) Until 2009 SeaFrance had operated seven ferries; the Renoir, Manet, Cézanne, Molière, Berlioz, Rodin and Nord-Pas-de-Calais.4 2 The freight transport sales achieved by MFL since it started business on 20 August 2012 have, on an average ongoing basis and per month, been equivalent to a market share of less than 1%. If measured consistently on an average basis since 20 August, MFL's freight sales have also been equivalent to a market share below 1%. During the Half Term week of 29 October 2012 to 2 November 2012 MFL ran a promotion, advertising passenger tickets on its ferries for 1p (which was then refunded to passengers) per crossing. This led to a temporary increase in MFL's sales, increasing its share of passenger traffic if measured on a snapshot basis for October to about [REDACTED]%. However, offering passenger tickets for free is obviously not a sustainable business model for a ferry operator. GET therefore considers it accurate, and it has done so in this submission, to refer to MFL's true average market share, which is below 1%. 3 The Vessels are operating under the brand of MFL and will not operationally use the SeaFrance brand or trademark, not least because the SeaFrance brand is considered to have negative connotations for customers. 4 The Cézanne was withdrawn from service in February 2009 and sold in 2011. The Rénoir was withdrawn from service in March 2009 and also sold in 2011. The Manet was withdrawn from active service in April 2008 and was sold in 2009. 3 (b) Immediately before going into liquidation in January 2012 SeaFrance had just four operational ferries – the Molière, Berlioz, Rodin and Nord-Pas-de-Calais. (c) Upon entering liquidation the Molière (which had been hired by SeaFrance) was returned to its owners. The Molière had on its own accounted for 22% and 29% of SeaFrance's total revenues for freight and passenger transport, respectively, prior to it ceasing business. In October 2012 it was chartered by DFDS for use by them on the Dover-Calais route, A competitor of MFL is therefore operating another of SeaFrance's previous ferries and is achieving circa. 3% market share from that vessel alone., (d) The three remaining ferries operated by SeaFrance immediately prior to entering liquidation – the Berlioz, Rodin and Nord-Pas-de- Calais – were sold to GET as part of the Asset Acquisition. 2.3.4 The Berlioz and Rodin are the only two Vessels acquired by GET that are currently used on a day-to-day basis by MFL. The third acquired Vessel, Nord-Pas-de-Calais, may well cease operations by the end of 2015 because it is currently 28 years old, is expensive to operate on a daily basis and will require considerable investment to comply with new environmental legislation if it was to operate beyond 2015. 2.3.5 SeaFrance ceased trading 7.5 months before the Assets Acquisition. The correct analytical approach if the CC evaluates the impact of the Asset Acquisition is by reference to the turnover achieved by MFL since it acquired the Vessels. This represents an increase in Eurotunnel's prior share of supply of below 1%. 2.4 The demise of SeaFrance is a paradigm example of the Exiting Firm Scenario (see section 6 below), which on its own indicates that no SLC will result from the Asset Acquisition. 2.5 GET faces strong competition and the difficulty of its own capacity constraints 2.5.1 Following the Assets Acquisition MFL and Eurotunnel continue to face strong competition from ferry companies operating much wider route networks connecting the UK with Continental Europe and Ireland. Eurotunnel and MFL operate only between Dover-Calais. This gives larger ferry companies a material benefit in winning and retaining business, as they can offer pricing and transport packages across different routes; 2.5.2 Ferry operators have considerable spare capacity and low barriers to market entry and expansion, which give them the incentive and scope to compete very aggressively for sales with GET (as recognised by the FCA after their detailed investigation; 2.5.3 The ferry companies have a further significant advantage in trying to expand their business, because [REDACTED]: it also relies on a single route to market (i.e. the Tunnel). Ferry companies however have greater flexibility and resilience of service because they operate across several ferries and routes; (a) [REDACTED] Faced with this need for capacity GET purchased the Vessels, diversifying from the capacity-constrained Eurotunnel business because it felt that a complementary ferry business could be profitable and offer greater choice for customers if run properly. 4 (b) As a new start-up MFL, which has to date been run on an arm's- length basis from Eurotunnel, has so far failed to make material commercial inroads into the freight and passenger markets. Following the complete break from SeaFrance’s previous activity, MFL has been building its operations and goodwill from scratch and since it started operating the Vessels on 20 August, has achieved an extremely small turnover, equivalent to an annualised share of supply of below 1%: such a small increase to the turnover achieved by Eurotunnel cannot give rise to an SLC. The size of market achieved to date by MFL also indicates the intensity of competition share. 2.6 The Asset Acquisition is pro-competitive 2.6.1 MFL is currently a weak competitor and Eurotunnel is becoming capacity constrained, and both are operating in only one segment of the wider market.