European Union: European Commission Opens Phase II Investigation Into Proposed Acquisition Of Alstom By Siemens

On 13 July 2018, the European Commission ("EC") opened an in-depth Phase II investigation into the proposed acquisition by Siemens of Alstom under the EU merger control rules.  The EC is concerned that the merger may reduce competition in the supply of certain types of trains and signalling systems.

In particular, the proposed merger would combine the two largest suppliers of rolling stock and signalling solutions in the European Economic Area ("EEA") not only in terms of size of the combined operations, but, also in terms of geographic footprint of their activities.

The EC is due to take a final decision by the end of this year.  If approved, the proposed merger is expected to be completed in the first half of 2019.  The deal has been approved unconditionally in China, however, it is still awaiting competition and other clearances in other jurisdictions.

Siemens / Alstom – Background

In March 2017, German industrial group Siemens and French rival Alstom announced the planned rail merger. This was followed by a memorandum of understanding announced in September 2017 and on 17 July 2018 the shareholders of Alstom approved the proposed merger by a majority of over 95%.

Siemens and Alstom are global leaders in rail transportation. Both companies have a wide product portfolio and compete in tenders for the manufacture and supply of:

• High speed, mainline and urban rolling stock (trains). High speed rolling stock includes trains operated for long-distance travel at speeds above 250 km/h, mainline rolling stock includes intercity and regional trains and urban rolling stock includes metros and trams.
• Mainline and urban signalling solutions. Signalling solutions include signalling systems that provide safety controls on mainline and urban rail networks.

The transaction was notified to the EC on 8 June 2018 and the EC had a total of 25 working days to decide whether to grant approval in Phase I or start an in-depth Phase II investigation if it had concerns that the deal could significantly impede effective competition in the EEA or any substantial part of it.

On 13 July 2018, the EC referred the proposed deal to a Phase II investigation. Despite having the opportunity to avoid such a reference by offering up remedies to the EC in Phase I to allay any competition concerns, the parties chose not to do so. The EC now has 90 working days to take a decision, but recently announced on 16 July 2018 that it had extended the initial deadline of 21 November 2018 to 19 December 2018.

Importantly, the opening of an in-depth investigation does not prejudge the outcome of the investigation. The companies can still offer remedies such as asset sales and/or allow competitors access to key technology or services to address any competition concerns. Likewise, they can look to further develop their competition law arguments to try and persuade the EC to clear the proposed merger without any remedies.

Competition concerns

The EC's initial Phase I investigation found that the merged parties would create a strong competitor in rolling stock and rail signalling with a significant stronghold in several markets. Siemens-Alstom would be the global leader with three times the market share of its closest rival and was unlikely to be constrained by competitors.

In particular, and as outlined by Competition Commissioner Margrethe Vestager, the EC's Phase II investigation will focus around the following: "Trains and the signalling equipment that guide them are essential for transport in Europe. The Commission will investigate whether the proposed acquisition of Alstom by Siemens would deprive European rail operators of a choice of suppliers and innovative products, and lead to higher prices, which could ultimately harm the millions of Europeans who use rail transportation every day for work or leisure."

More specifically, the EC has raised the following concerns:

• For rolling stock, the proposed transaction would remove a very strong competitor and reduce the number of suppliers. In relation to high speed trains, the EC has examined the impact of the transaction both within the EEA and on a worldwide basis (excluding China, Japan and Korea which appear to have barriers preventing imports from foreign suppliers). On both of these geographic markets, the merged entity would be the undisputed market leader, over three times larger than the closest competitor. The merged entity will also become the market leader in mainline (including regional trains) and metro rolling stock in the EEA. Furthermore, after the proposed transaction, competitors in the sector would struggle to compete against the merged entity's track-record and installed-base of rolling stock.
• For signalling solutions, the proposed transaction would remove a very strong competitor from several mainline and urban signalling markets. After the proposed transaction, the merged entity would become the undisputed market leader, with around three times the market share of the closest competitor and in this way would be unlikely to face significant competitive pressure.

Interestingly, the EC has dismissed Siemens' arguments that the deal is to stave off the competitive threat from bigger Chinese rival CRRC (China Railways Rolling Stock Corporation) and Canada's Bombardier Transportation. Rather, the EC has indicated that Chinese suppliers were unlikely to enter the market for rolling stock and signalling solutions markets in the foreseeable future. Ultimately, it is well known that market entry into the sector is difficult. The question will be whether there is already meaningful competition in Europe and whether in fact there is any real and demonstrable willingness or ability of other foreign companies wishing to enter the European market. CRRC with an annual turnover of US$35 billion dwarfs Siemens' rail unit Siemens Mobility, Alstom and Bombardier. It already has two projects in Britain and the Czech Republic, such that the parties consider that CRRC could easily increase its position in the European market.

Bombardier has said that the EC should take a closer look at the deal. Its general counsel, Daniel Desjardins said: "Our view is that this deal will distort fair competition and enable one player to leverage dominance in the signalling space to lock-out competition in rolling stock and hold the industry captive, at the expense of all its stakeholders".

In addition, the British rail regulator the Office of Rail and Road ("ORR") has welcomed the investigation into the proposed merger, noting that the union could have a significant detrimental impact on competition in the British rail markets. The ORR considers that together Siemens and Alstom would represent approximately 75% of the British signalling market – and that in fact - this share could well be higher in specific areas of signalling, such as interlocking. The ORR effectively considers the proposed deal a '2 to 1' merger, creating a single monopoly supplier for signalling. For rolling stock, the ORR has also warned that the merger could reduce the number of potential bidders for new rolling stock manufacturers, citing the case of the HS2 rolling stock tender in which Alstom and Siemens were two of the five bidders. Siemens and Alstom have historically and in recent tenders been close rivals. According also to certain estimates, the merger could lead to a rise in costs by tens of millions of pounds each year due to significantly reduced competition. Network Rail would absorb these costs, which are currently covered by taxpayers and passengers. The ORR have pledged its support for the EC to protect the UK's public interest on the matter and it is understood that it is pressing for significant structural remedies to ensure competition in the key railway supply chains is protected.

On the other hand, the parties consider that the transaction brings together two innovative players in the railway market and that the two businesses largely complement each other in terms of activities and geographies. In particular, the companies consider that the proposed merger would deliver substantial value to the mobility sector, customers and everyday users. Siemens and Alstom have indicated that they aim to save a significant €470 million a year by joining forces and that the deal will create jobs and innovation. In short, it will increase the competitiveness of Europe's rail industry. The parties are working closely with the EC to explain the rationale and benefits of the merger as well as the dynamics of the relevant markets.

The EC will now carry out an in-depth investigation into the effects of the transaction to determine whether its initial competition concerns are confirmed. Ultimately, the EC will no doubt be considering if the deal is really necessary to compete in Europe and what the deal enables the companies to do that they could not otherwise do independently.

Third Party Merger Interventions

Where a proposed transaction makes it difficult for other players to compete in the market, such as it is alleged may well be the case in respect of the proposed acquisition of Alstom by Siemens, third parties may wish to intervene to oppose the proposed deal. Third parties generally include customers, suppliers or other competitors in the market that are considered to have a sufficient interest in the matter.

In particular, if a third party has sufficiently credible arguments corroborated with strong evidence (and ideally supported by other players in the market), it can:

• Scupper the deal thereby forcing the merging parties to abandon the transaction or persuading the competition authority to prohibit the deal;
• Strategically position a third party to purchase any divestments imposed by the competition authority in a conditional clearance decision;
• Ensure the competition authority is looking at the markets and competitive dynamics in the right way (especially if the merging parties have failed to disclose important information about the deal) in order to set a sensible precedent for any future cases (this is useful where a third party may be contemplating a merger concerning the same markets in the near future); and/or
• Simply make life difficult for the merging parties by pushing them into a lengthy and burdensome investigation.

Third parties can intervene and make comments on a merger to the EC at any time and may even do so before any notice inviting comments is published or indeed, even before any transaction is officially notified to the EC. After a deal has been notified and during its Phase I review, the EC will publish a notice in the Official Journal inviting third parties to comment; but it will also regularly send out information requests and even contact third parties directly.

In particular, during a Phase II investigation third parties can receive numerous information requests from the EC at different points of the timetable, including shortly after the start of the Phase II investigation, after any State of Play¹ meeting and/or following the submission of any remedies by the merging parties. In Phase II, third parties can also receive a non-confidential summary of key arguments contained in the Phase I decision (and may have some form of limited access to the EC's file) as well as being sent the Statement of Objections²  (non-confidential summary). Third parties can also participate in any oral hearing if the notifying parties request such a hearing. Given the effectiveness of interventions by third parties at oral hearings in the past, there is an increasing reluctance on the part of notifying parties to request an oral hearing.

It is also useful to remember that, increasingly, merging parties are offering up wider and more substantial remedies to address a competition authority's concerns, such that a third party can really take advantage of the process and intervene for its own commercial benefit.

A few final thoughts…

Should you wish to intervene and submit any concerns your company may have to the EC in respect of the proposed acquisition of Alstom by Siemens, carefully plan out your strategy:

• What do you expect to achieve? An infringement/prohibition decision, or, an opportunity to purchase divested assets?
• Do you have substantive competition grounds on which to challenge the merger? Can such grounds be supported by concrete evidence?
• Are you prepared to commit the necessary resources in terms of time, legal fees and econometric analysis (if necessary) to support your case?
• Could an intervention impact your relationship and any future relationships with the competition authority in any adverse way? Also, is your "house in order"?
• Are you prepared to litigate the decision if it does not go your way?
• Are there any public relations considerations that you need to take into account?

While intervening in merger cases will involve time, money and effort, the long-term strategic and commercial advantages can very often outweigh any apparent short-term disadvantages.

However, any intervention needs to be raised in the correct form and effectively managed to your commercial advantage.

Footnotes

1 A State of Play meeting is a forum for the exchange of information between the EC and the parties to a transaction at key points of the procedure to ensure transparency and communication.

2 A Statement of Objections is a detailed document which sets out the EC's theory of harm as to why the proposed transaction is likely to eliminate or adversely affect competition in the marketplace.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.