March 12, 2012 1:12 pm

TNT Express/UPS regulatory probe could examine increased risk of collusion

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The merger of TNT Express [TNTE NA] and UPS [UPS US] could face increased regulatory scrutiny due to the potential risk of collusive behavior among the remaining players in the market, competition lawyers told dealReporter.

UPS’s EUR 9 per share offer for TNT Express has been rejected by the Dutch delivery and logistics groups, but the two are still in talks over a possible deal. Industry sources have cited competition concerns and social issues as the two main barriers to the deal, though it was said that the competition aspects of the deal were unlikely to be insurmountable.

The UPS camp is understood to have been working to assure TNT Express over the competition risks involved and is said to envisage a short process with Phase I clearance. The US company is said to have carried out detailed analysis on a granular level and has assessed that the competition risk is manageable. While the US group is prepared to look at remedies and divestments to get the deal through, it is understood to believe that these are not strictly necessary.

One competition lawyer noted, however, that a Phase I clearance would require “more sweeping remedies” because of the limited 25 working day timeframe of the investigation. If it goes to Phase II, parties have much more time to argue and smaller remedies may be accepted, he said. He also played down the likelihood of discussing remedies in pre-notification talks with the European Commission. “UPS may not want to concede immediately to the Commission,” the lawyer speculated. “One of the points of negotiations [with TNT Express] may be that TNT wants assurances that UPS will be willing to offer remedies so that it is not in a prolonged period of uncertainty.”

There are four main players in the European market for express parcel delivery; namely TNT Express, DHL, UPS and FedEx. The competition lawyer said the deal may face increased regulatory risk because the number of key players post-merger will be reduced to just three, making the market more transparent. One of the things on Commission’s checklist will be whether that increased transparency will make collusive behaviour more likely, he said; “even if the three parties do not engage in it – this in itself may be a sufficient reason to block the deal.”

Two other competition lawyers agreed, describing the reduction of main players from four to three as “critical” in increasing the risk of collective dominance or coordinated effects. The regulator will analyse how transparent the market is and whether there has been a record of collusion, one of the lawyers said.

Although reduction from four to three is usually a critical case, another lawyer added that the risk depends on the structure of the market after the deal. “If the three parties have similar market shares, or very similar cost structure, there may be concerns,” he said. If they are dissimilar, they are more likely to compete and the Commission is less likely to go for collective dominance or collusion argument, the lawyer noted.

The EC may be cautious about blocking deals on basis of collective dominance or collusion, this lawyer said, because it has had a number of court defeats in the past. Another lawyer agreed that the Commission used to be quite “trigger happy” on issue of collective dominance, but said now in industries where players are reducing in number, the intensity of competition between them is considered. “To talk about risk of collusion based on this deal is too simplistic,” he said.

According to one analyst report the deal is expected to be positive on pricing for other main players, including DHL; in “a rational marketplace” the deal should have a positive effect on pricing for other players.

It is understood, however, that not all competitors view the transaction as positive, and at least one rival has already hired legal advisors to lodge objections against the deal.

International vs domestic scope of services

Another competition lawyer, who has looked at the sector, said he thought the EC will likely look at distinct product markets when investigating the deal: standard and express delivery, domestic and international parcels delivery, mail, logistics and freight forwarding.

The market for services like freight forwarding will likely be considered as international, according to lawyers, while mail and parcel delivery will be looked at on a national basis, they said.

Previously, the EC divided the market into mail or document and parcel delivery on the one hand, and freight forwarding on the other. The regulator segmented these markets further into express or standard and deferred delivery as well as into domestic and international services. The EC also found that international business mail is distinct from the market for private mail and considered that a distinct market was appropriate for business to business (b2b).

When the EC looked at Deutsche Post’s [DPW GR] acquisition of DHL, it distinguished between domestic and international services as competitors and customers in the postal and delivery sectors increasingly adopt strategies on a European or even a global basis. This distinction was also because the regulator concluded that different national regulatory environments, local customs, and the need for providers of services to have a local presence influence the competitive environment in the industry.

Another approach could be to make a distinction between delivery within Europe and delivery between Europe and the rest of the world. This was the approach taken by the EC when Deutsche Post [DPW GR] took over DHL, but at the time the regulator left the exact scope open. In that deal probe, the EC listed UPS, Federal Express and TNT as key competitors for DHL. When the EC looked at UPS’s takeover of Lynx, it noted that, while markets are largely of national nature, “a tendency towards wider geographic scope appears to evolve”.

In the European international express delivery market, the four main players had a combined market share of 86% in 2009, according to research sourced from Davy Stockbrokers and DHL. Of the 86%, DHL accounted for 37%, FedEx for 10%, while a combined TNT Express/UPS would have held 39%. In the intra-European b2b market, TNT Express is the market leader with 17%, followed by DHL with 15%, UPS 10% and DPD/La Poste 7%.

Two of the lawyers both cited potential issues in the Benelux, and particularly in the Netherlands where the parties together could account for more than 35% of the international express parcel services market. When the EC looked at UPS/Lynx deal, it found that UPS’s market share exceeded 25% in international express parcel services in Belgium and the Netherlands.

Another competition expert said he thought a combination of UPS and TNT could potentially face competition hurdles in the UK where together they may account for 25%-30% of international standard and expedited parcel delivery services. While in Germany, UPS and TNT together hold almost a third of the international express parcel services.

One of the lawyers speculated that the merging parties will likely argue that they would face sufficient competitive pressure from the remaining two rivals, DHL and FedEx, while there is also sufficient competition from traditional mail players in national markets such as the Royal Mail and Post Danmark for parcels delivery.

The Commission has also previously looked closely at vertical relationships between parcel delivery and freight services. The regulator also assessed whether deals in the sector could lead to conglomerate effects because of increase of the utility of parcel delivery network.

In the DP/DHL deal however the Commission ruled out such potential effects because other competitors were not in any way dependent on DP’s infrastructure, and UPS, FedEx and TNT operated on their own worldwide and local infrastructure.

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