European Commission clears ‘4 to 3’ transaction in small package delivery services market: FedEx/TNT Express

Posted by Chantal Lavoie on 10 January 2016

Almost three years since prohibiting UPS’ proposed acquisition of TNT Express, the European Commission approved on 8 January 2016 under the EU Merger Regulation FedEx’s own takeover proposal for the same company. Following an in-depth Phase II investigation, the Commission concluded that the merged entity’s position in the markets concerned is “moderate”, that FedEx and TNT Express are not ‘particularly close competitors’ and that the merged entity will continue to face sufficient competitive constraints from its rivals, essentially DHL and UPS.

In 2013, the Commission had prohibited UPS’s own proposal to acquire TNT Express, essentially on the basis that the remaining rivals would not exert sufficient competitive constraint on the merged entity in the intra-EEA express delivery services market to prevent price increases, thereby causing harm to customers. Whilst the analysis of the market does not appear to have changed substantially since 2013, the relatively weaker market position of the merging parties appears to have tipped the balance for an unconditional approval.

The transaction was also recently cleared unconditionally by the US FTC and the Taiwan Competition Commission. Merger reviews remain pending in Brazil and China.

Relevant markets

The relevant markets are those for international deliveries of small packages in the EEA. In its press release, the Commission indicated that these markets were further sub-divided in the markets for intra-EEA express delivery services (small packages picked up from an EEA country and delivered to another EEA country) and the markets for extra-EEA delivery services. It will be interesting to read the Commission’s analysis when the decision is published as regards extra-EEA delivery services markets which did not figure in the competition assessment in the UPS/TNT Express decision.

The Commission had identified concerns in its press release announcing a Phase II investigation (the Phase II press release) in relation to both express and ‘deferred’ (regular) markets for the international delivery of small packages. The Commission had noted that both FedEx and TNT Express provide small package deferred delivery services outside the EEA and that the merged entity would hold “very high market shares” for services to some destinations. This explains the wider scope of review of the extra-EEA delivery services markets (express and deferred) than for the intra-EEA express delivery services markets (focusing on express only). Regarding the geographic scope and assuming the analysis in the UPS/TNT Express case was maintained, the markets will have been defined as national.

The European Commission’s assessment

The Commission concluded that the merged entity will face sufficient competitive constraints from its rivals. There are two types of players in the markets for the international delivery of small packages in the EEA: integrators and non-integrators. ‘Integrators’ are companies with a comprehensive air and road network for the delivery of small packages. These are DHL, UPS, TNT Express and FedEX. Whilst this is not explicitly stated in the press release, the Commission appears to have followed the same line of reasoning as in the UPS/TNT Express case to the effect that non-integrated small package delivery companies (e.g. postal operators; freight forwarders) do not exert a sufficient competitive constraint in these markets. As a result, only three integrators were taken into account as being able to constrain the merged entity. However, the two remaining integrators following the FedEX/TNT Express acquisition – DHL and UPS – were found to be able to exert sufficient competitive pressure on the merged entity.

Based on its press release, the Commission’s findings in the intra-EEA express delivery markets are as follows:

  • the merged entity will be in a “moderate” position;
  • FedEx and TNT Express are “not particularly close competitors”. FedEx has a limited network in Europe and therefore exerts a “weaker competitive constraint” on other integrators; and
  • The acquisition will bring about verifiable and merger-specific efficiencies which will benefit consumers.

The Commission’s findings in the extra-EEA delivery markets are as follows:

  • the merged entity will be in a “moderate” position;
  • FedEx and TNT Express are “not particularly close competitors”. TNT’s business focus is intra-EEA;
  • Rivals, DHL and UPS, will be an efficient competitive force. The Commission’s press release does not address previously mentioned concerns regarding the ‘very high market shares’ of the merged entity for services to some destinations; and
  • The acquisition will produce efficiencies.

Analysis and comments

A combination of factors are likely to have contributed to the Commission’s unconditional clearance:

  • This is essentially a complementary merger: FedEx’ strength is in the US and extra-EEA international delivery services. TNT’s main area of focus is intra-EEA delivery services and targeted more specifically at business to business customers.
  • Contrary to the UPS/TNT Express deal, the merger removes the least competitive force in Europe amongst the integrators, namely FedEx. In addition, TNT Express is not the market leader amongst integrators. Finally, the market will continue to benefit from two strong rivals, DHL and UPS. In UPS/TNT, the merger was viewed by many as amounting to a ‘3 to 2’ operation given the weak competitive pressure which FedEx exerted in many of the affected markets. The decision should shed further light on how rivals will be in a position to exert sufficient competitive constraints, including in the extra-EEA delivery services markets.
  • On closeness of competition, FedEx and TNT were not found to be particularly close competitors. The Commission’s reasoning is likely to be in line with its assessment in the UPS/TNT Express decision where UPS, TNT Express and DHL were considered as close competitors in the intra-EEA express delivery services markets, but not FedEx. It will be interesting to read the Commission’s findings in the FedEx/TNT Express decision as regards the extra-EEA delivery services markets which were not analysed in the UPS/TNT Express decision and where FedEx’s strength lies. The complementary nature of the merger is likely to figure highly in the considerations, in particular that TNT’s business focus is intra-EEA and therefore FedEx and TNT Express are not close competitors in the extra-EEA delivery services market.
  • According to the press release, the price concentration analysis carried out by the Commission supports the Commission’s finding that the acquisition will not lead to competition concerns. It is not clear whether this means that the merger is not likely to lead to price increases (for instance, because of the discipline which the other two integrators - DHL and UPS - will exercise on prices) and/or whether efficiencies were accepted as a countervailing factor for any likely price increases in affected markets. As the UPS/TNT Express decision has shown, a price concentration analysis can be a key and overwhelming element to determine the impact of a transaction on price increases in differentiated markets. Based on a superficial reasoning and against the UPS/TNT Express background, one might conclude that a ‘4 to 3’ transaction in a highly concentrated market with very limited potential for entry or expansion risks leading to price increases. However, the ‘moderate’ market position of the merged entity will no doubt have influenced the price concentration analysis.
  • Efficiencies played a role in the positive outcome of the FedEX/TNT Express review. How significant? The published decision should provide an answer. The press release lacks detail on this point but suffice it to say that, in both the intra-EEA express delivery markets and the extra-EEA delivery services markets, the efficiencies defence appears to have met the three conditions for acceptance, namely that they be verifiable, merger-specific and benefit consumers. It is unclear however if the efficiencies which were accepted were ultimately found sufficient (on their own or to what extent) to offset competition concerns.
  • The Commission’s review appears to have focused on the unilateral effects of the merger. No mention is made in the press release of coordinated effects. It will be interesting to read in the decision whether the Commission considered if the merger -in what was viewed already in 2013 as a highly concentrated market with very high barriers to entry – will bring about a risk of coordination on prices amongst the remaining three integrators in the markets for international delivery of small packages in the EEA.

The decision is an important one for several reasons.

First, the decision clear unconditionally after a Phase II review a horizontal acquisition which changes market dynamics from ‘four to three’ in a highly concentrated market. Only a handful of merger cases are cleared without remedies in Phase II. In 2015, Siemens/Dresser-Rand was the only case to have been cleared without commitments following an in-depth Phase II inquiry.

Second, the Commission appears to have accepted some merger efficiencies to countervail competition concerns stemming from the acquisition. This is one of the few cases where the Commission has recognized the existence of efficiencies. Historically the Commission has almost consistently rejected efficiency arguments in its reviews of horizontal mergers since being recognised as a ‘countervailing factor’ in the revised EU Merger Regulation and the Horizontal Merger Guidelines in 2004. More recently, efficiency defences have been partially accepted, for instance in UPS/TNT Express and in Deutsche Börse/NYSE Euronext. However, efficiency arguments have never been found sufficient on their own to remedy competition concerns and avoid a prohibition decision. In the UPS/TNT Express decision, the Commission accepted that certain efficiencies outweighed the price increase concerns in some markets. However since the efficiencies were not verifiable or sufficient in several other markets, the transaction was ultimately prohibited. The FedEX/TNT Express decision should shed more light on whether the Commission is willing to let efficiencies play a greater role in clearing a transaction than in the past.

Third, the FedEx/TNT Express decision arises at a time when the Commission’s prohibition decision in UPS/TNT Express is under scrutiny before the General Court following UPS’ appeal lodged on 5 April 2013. The General Court’s judgment expected possibly later this year will decide whether to annul the Commission’s decision on the basis of alleged errors in law or assessment committed by the Commission. Unsurprisingly, the Commission’s press release announcing the adoption of its clearance decision in FedEX/TNT Express goes to great length to emphasise that its assessment and in particular its price concentration analysis was fully in line with its review in the UPS/TNT Express case.

Fourth, the FedEx/TNT Express decision is adopted amid expected measures to be announced in spring 2016 by the Commission in the area of parcel delivery to boost and improve access to digital goods across Europe as part of the roadmap for completing the Digital Single Market. The Commission vowed in its Digital Single Market Agenda to address stakeholder concerns regarding lack of transparency, excessive costs of small shipments and lack of interoperability between operators involved in cross-border shipments. For now, the measures are expected to be aimed at improving price transparency and enhancing regulatory oversight of parcel delivery.* This transaction could prompt the Commission to fine tune its expected package of measures. No doubt the Commission will also be monitoring closely the effect of this acquisition on cross-border online small parcel deliveries and in particular on price competition. On one hand of the spectrum, the European market will shrink from four to three with potentially less incentives for price competition as between operators and on the other hand of the spectrum, the acquisition will place FedEx on a comparable market share position with DHL and UPS thereby possibly creating a more competitive market place. Will this make cross-border online small parcel deliveries more efficient and less expensive? Watch the space.

* See the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the Digital Single Market Strategy for Europe dated 6 May 2015, COM(2015), 192 final, at paragraph 2.2.



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