No express clearance: CMA red-lights Hitachi-Thales merger over rail signalling concerns

Introduction

The UK Competition and Markets Authority (“CMA”) has referred the proposed merger between Hitachi Rail, Ltd and Thales SA’s Ground Transportation Systems business for an in-depth “Phase 2 investigation” under the Enterprise Act 2002 (the “Act”), on the basis that the merger may result in a substantial lessening of competition within a market or markets in the United Kingdom.

After an initial consideration of the impact of the merger on the market, the CMA concluded the merger will result in the creation of a relevant merger situation.  Furthermore, there was a reasonable prospect that the acquisition would lead to a substantial lessening of competition (“SLC”) within a market or markets in the United Kingdom (the “SLC Decision”).

Background to acquisition

Hitachi Rail, Ltd is a wholly owned subsidiary of Hitachi, Ltd. The company plans to acquire Thales SA’s Ground Transportation Systems business (“Thales”).

Pursuant to section 73A(1) of the Act, if a Party wishes to offer undertakings for the purposes of section 73(2) of the Act, it must do so before the end of the five working day period specified in section 73A(1)(a) of the Act.

Typically, parties seeking clearance for a controversial merger may offer structural undertakings, such as offering to sell off part of the merging business in order to preserve competition in the affected market.  Behavioural undertakings may also be offered – those can include signing up to binding commitments not to increase prices or to continue supplying specified goods or services on reasonable terms.

The SLC Decision stated that the CMA would refer the Merger for a phase 2 investigation pursuant to section 33(1), and in accordance with section 34ZA(2) of the Act, if no satisfactory undertakings were provided to the CMA.  On 16 December 2022, the Parties confirmed they would not be offering any undertakings. The CMA will now proceed to a Phase II investigation of the merger under the Enterprise Act 2002.

Previous cases involving rail signalling

The proposed merger between Hitachi Rail and Thales Ground Systems is not the first time that European regulators have considered competition in the field of railway signalling systems. In 2017, the EU Commission blocked the Siemens-Alstom merger, based on concerns for mainline signalling systems. The parties proposed a remedy, the remedy proposed was a complex mix of Siemens and Alstom assets, with some assets transferred in whole or part, and others licensed or copied. Businesses and production sites would had to be split, with personnel transferred in some cases but not others. Moreover, the buyer of the assets would have had to continue to be dependent on the merged entity for a number of licence and service agreements. As a result, the proposed remedy did not consist of a stand-alone and future proof business that a buyer could have used to effectively and independently compete against the merged company.

The Commission sought the views of market participants about the proposed remedy. The feedback was negative for both areas. This confirmed the Commission’s view that the remedies offered by Siemens were not enough to address the serious competition concerns and would not have been sufficient to prevent higher prices and less choice for railway operators and infrastructure managers.

ORR study of signalling markets in UK

The supply of mainline signalling in Great Britain is currently undergoing significant change. A market study carried out by the Office of Rail and Road (“ORR”), which concluded in 2021, found that the introduction of digital technology is expected to drive one of the most significant modernisation programmes in the nearly 200-year history of Britain’s railway infrastructure.

ORR noted that the shift from legacy to digital standardised signalling systems has the potential to revolutionise the way the railway operates, delivering transformative improvements to increase capacity, lower unit costs, and reduce disruption. ORR also noted that investment in signalling systems is expected to increase significantly in the near future, with a projected five to six-fold increase in the volume of renewal works, as Network Rail, the principal customer of mainline signalling systems, plans to renew and upgrade the signalling infrastructure across the country.

Phase II investigation – what happens now?

The CMA’s investigation will focus on the impact of the merger on competition in the market for the supply of digital signalling systems in Great Britain. The CMA will be examining whether the merger is likely to result in higher prices, reduced choice, or less innovation for customers, including Network Rail and other railway operators and infrastructure managers. The CMA’s investigation will also consider the potential impact of the merger on competition in other markets, such as the market for the maintenance and upgrade of existing signalling systems.

The CMA will be gathering evidence from a wide range of sources, including the Parties, customers, suppliers, and other market participants. The CMA will also be conducting an in-depth analysis of the relevant markets and the competitive dynamics within them.

Other jurisdictions

The UK is only one of thirteen jurisdictions where the deal is under review.  The parties claim they have already achieved merger clearances in nine of those. Hitachi Rail has said that it remains in in discussion with the European Commission’s Directorate-General for Competition (DG Competition) with a view to securing approval of the transaction under the EU Merger Control Regulation.  Failure to achieve clearance in any of these jurisdictions could well scupper the whole project (or force a restructured deal).

Closing comments

In conclusion, the CMA’s referral of the proposed merger between Hitachi Rail and Thales Ground Systems for an in-depth investigation means that third parties who are involved in UK rail signalling projects will have an opportunity to get involved and seek to influence the CMA’s deliberations. The CMA will be gathering detailed evidence from a wide range of sources, including the parties, customers, supplier, other market participants who may be impacted by the merger.  They can submit their views, concerns and evidence during the investigation process.

The legal time frame for completing the in-depth investigation is around 24 weeks.  Once concluded, the CMA will decide whether to clear the merger (either on a conditional or unconditional basis), or to prohibit the merger outright.  It is therefore important for third parties to keep track of the developments and to make their voice heard during the investigation process, in order to ensure that their interests are taken into account.

Our firm has experience assisting parties in merger control processes, including through the submission of evidence and advocacy work for third parties.  If we can assist you, please don’t hesitate to get in touch.