EN Official Journal of the European Union C 34/5

Summary of Commission Decision

of 4 April 2007

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case COMP/M.4403 — Thales/Finmeccanica/Alcatel Alenia Space & Telespazio)

(Only the English version is authentic)

(2009/C 34/05)

On 4 April 2007, the Commission adopted a Decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, and in particular Article 8(1) of that Regulation. A non-confidential version of the full decision can be found in the authentic language of the case and in the working languages of the Commission on the website of the Directorate-General for Competition, at the following address:

http://ec.europa.eu/comm/competition/index_en.html

I. THE PARTIES

(1) Thales is a French company jointly-controlled by the French State (through TSA) and Alcatel, which is active in the development and integration of critical information systems for the industries of defence, aeronautics and transport and for civil security.

(2) Finmeccanica is an Italian diversified engineering group, solely controlled by the Italian State, which is active in aerospace, defence systems, energy, communications, transportation and automation.

(3) AAS is a French company jointly-controlled by Alcatel and Finmeccanica, which is active in the design and manufacture of ground and space systems, including satellites and satellite subsystems. Telespazio is an Italian company jointly-controlled by Alcatel and Finmeccanica, which provides services and end-user applications using or related to satellites-based solutions and products.

II. THE OPERATION

(4) Through the proposed operation, Thales will acquire Alcatel's shareholdings in AAS and Telespazio (1). Post-merger, Thales and Finmeccanica will jointly control AAS and Telespazio, including the space activities contributed by Thales and Finmeccanica to these two joint ventures, within the meaning of Article 3(1)(b) of the Merger Regulation. The transaction thus constitutes a concentration within the meaning of the Merger Regulation.

III. THE RELEVANT PRODUCT MARKETS

(5) In previous cases in the space sector, the Commission has identified two main segments, the space segment and the ground segment, which can each be further divided into (i) launchers; (ii) space transportation and space infrastructure; and (iii) satellites.

(6) The present case concerns more particularly the markets of commercial telecommunications satellites, and the specific satellites subsystems for telecommunications satellites.

A. Commercial telecommunications satellites

(7) The Commission has previously distinguished between satellites used for military applications, for commercial applications and for institutional applications. The market investigation has confirmed that commercial, institutional and military satellites belong to distinct relevant product markets.

(8) Commercial satellites are used in the field of telecommunications (fixed telephony, mobile telephony, internet, etc.) and television broadcasting and are purchased by private satellite operators through competitive tendering.

B. Travelling Wave Tubes (‘TWTs’)

(9) TWTs are electronic components used to amplify microwave (radio-frequency) signals received by the satellite before the signals are retransmitted to the earth. There are several TWTs per satellite (generally 40-50, up to 60 TWTs). TWTs are available in different frequencies that determine the radio frequency of the satellite (e.g. C-band, Ka-band, Ku-band, L-band). It should be noted that TWTs of different frequencies are often loaded on the same satellite.

(10) On the demand side, the market investigation has indicated that there is no or very low substitutability between TWTs of different frequencies. Demand for a TWT of a specific frequency is determined not only by the satellite's specific mission (TWTs of different frequency bands serve different end applications) but also by frequency coordination and orbital allocation issues. On the supply side, the market investigation has shown that (i) the underlying technology is the same for all TWT frequencies; (ii) manufacturing equipment, production line, testing equipment and qualified personnel are common to the different frequencies; and (iii) the two existing TWT suppliers (TED, a wholly-owned subsidiary of Thales, and L3) have both the technical expertise to produce TWTs of all frequency bands and output power. The Commission therefore concludes that there is a single product market for the supply of TWTs, but with different segments based on the frequency bands and power output of the TWTs.

C. Electronic Power Conditioners (‘EPCs’)

(11) EPCs provide the power supply for the TWTs. EPCs can be single, providing the energy necessary for one TWT, or dual, providing the energy necessary for two TWTs. On the demand side, the choice of the EPC does not depend on the frequency band of the TWT but on the input voltage and output power of the TWT, and the satellite platform bus. On the supply side, the market investigation has confirmed that technology is similar for all EPCs. The Commission therefore concludes that there is a single market for the supply of EPCs.

D. Travelling Wave Tube Amplifiers (‘TWTAs’)

(12) TWTs and EPCs are integrated to form TWTAs. This electronic device is the main transmitter on a satellite, used to amplify the microwave signal before it is broadcasted back to earth. Linearisers (‘LINs’), channel amplifiers (‘CAMPs’), and linearised channel amplifiers (‘LCAMPs’) are fitted to the vast majority of TWTAs in order to improve the linearity and compression of the microwave signal. The Commission's investigation has confirmed that TWTAs and further integrated TWTAs to which a lineariser and/or a channel amplifier are added (TWTA+s) belong to a single product market (2).

IV. THE RELEVANT GEOGRAPHIC MARKETS

(13) In line with the Commission's approach in previous cases, the markets for commercial telecommunications satellites and satellite subsystems such as TWTs, EPCs and TWTAs are considered to have a worldwide geographic dimension as sourcing takes place on a worldwide basis. However, the Commission takes into account in its competitive assessment the existence of various segments where the respective subsystem suppliers and prime contractors face different constraints due the US Export Administration Regulations (‘EAR’) and US International Traffic in Arms Regulations (‘ITAR’) which exclude US suppliers from competitions to supply satellites and satellite subsystems to operators in some black-listed countries.

V. ASSESSMENT

(14) The proposed concentration give rise to a vertical relationship between the TWTs produced by TED, a wholly-owned subsidiary of Thales, and markets downstream of TWTs at two levels: (i) TWTAs; and (ii) commercial telecommunications satellites. The Commission's in-depth investigation examined whether Thales, as the new parent company of AAS, would be likely to foreclose TED's and AAS' downstream rivals on these two markets (3).

(15) In Phase I, the Commission identified serious competition concerns and took the view that the behavioural remedies offered by the parties were not sufficiently clear-cut to entirely remove these concerns. The Commission however recognized that the case at hand is a complex vertical case and already indicated in its decision to open an in-depth investigation that it needed to thoroughly examine the constraints on the ability and the incentive of the new entity to foreclose its downstream rivals.

(16) It should be noted as a preliminary remark that the vertical integration brought about by the merger is only partial (as Thales will only have a 67 % shareholding in AAS) and indirect (since TED and AAS will be sister companies, and will remain separate legal entities with a different shareholding structure and different and independent decision-making bodies).

A. Market structure

1. Commercial telecommunications satellites

(17) There are six main suppliers on the market for commercial telecommunications satellites: Boeing Space Systems (‘Boeing’) ([20-25 %]* market share over 2001-2005), Lockheed Martin Commercial Space Systems (‘Lockheed Martin’) ([20-25 %]*), Alcatel Alenia Space (‘AAS’) ([15-20 %]*), Space Systems Loral (‘Loral’) ([10-15 %]*), EADS Astrium (‘Astrium’) ([5-10 %]*), and Orbital Sciences Corporation (‘Orbital’) ([0-5 %]*). Japanese prime manufacturers (Melco and Mitsubishi) are significantly smaller. New players are emerging in India (ISRO), China (CAST), Russia (NPO PM and Russian Satellite Communications Company (‘RSCC’)), and Israel (IAI).

(18) Given the massive investments needed in R & D, the industry is characterised by a certain degree of specialisation and concentration. This aspect is particularly accentuated in Europe, where space companies have developed particular expertises as equipment manufacturers, payload suppliers and solution providers.

(19) Satellite operators are the final customers for satellites. Luxembourg-based SES GLOBAL is the largest operator. Intelsat (USA), Eutelsat (France), PanAmSat (USA), JSAT (Japan), Telesat (Canada) and Hispasat follow in order of declining importance.

(20) The markets for satellites and for satellite subsystems are bidding markets. When ordering a new telecommunications satellite, a satellite operator will generally request bids from several satellite prime contractors. Before submitting their bid for the prime contracting of the satellite to the satellite operator and in order to be able to do so, satellite prime contractors request bids for the most important equipment beforehand.

(21) Specifically with regard to TWT(A)s (4), satellite manufacturers request bids (i) either separately for TWTs, EPCs and other components; or (ii) for a TWTA. In case the satellite manufacturer opts for an integrated TWTA, the TWTA integrator that is invited to bid will in turn request an offer for a TWT from the TWT supplier (either TED or L3). The TWTA integrator that has won the bid will then assemble and integrate the TWT with the EPC, and test the obtained TWTA and provide it to the satellite prime contractor within the schedule for integration on the satellite itself. In case the satellite manufacturer opts for separately procuring the TWT and EPC (including services for assembly, integration and testing (‘AIT’)), he will issue separate requests for TWTs and the other components. The integration of the TWT with the EPC into a TWTA may be carried out by the satellite manufacturer itself — in case that manufacturer has internal EPC production (5) — or by a third party TWTA integrator such as Tesat or L3. In the latter case, the satellite prime contractor will procure the TWT and will have it delivered at the TWTA integrator's facility for AIT with the TWTA integrator's own EPC. In such case, the TWTA manufacturer will sell an EPC+AIT, and invoice its margin on these components/services. The TWTA is then provided to the satellite prime contractor within the schedule for integration on the satellite itself.

(22) It is important to stress that market demand has evolved to integrated products. For around 70 % of recent satellite orders, prime contractors now request and purchase TWTAs or more integrated products rather than issuing separate quotations for TWTs and EPCs. The market investigation has shown that the procurement of integrated TWTAs brings significant benefits to prime contractors (notably, cost savings and simplification in the procurement process, shifting of the liability for performance of the overall TWTA+ subsystem to the TWTA subcontractor). It appears that currently only AAS — and to a much lesser extent Loral — continue to procure separately TWTs and EPCs+AIT.

2. TWTs

(23) There are only two suppliers of TWTs worldwide: TED and the US company L3 Communications Electron Technologies, Inc ETI (‘L3’). TED produced, on average over three years, approximately [70-80 %]* of the TWTs and L3 the remaining [20-30 %]*. However, L3's share of TWT production has increased to more than [30-40 %]* in 2006.

(24) The Commission's investigation has shown that L3 is a credible competitor of TED for the most common commercial frequency bands, in particular C-band and Ku-band, where L3's TWTs are currently more competitive than TED's TWTs (21 % and 34 % of the market respectively). L3 does not currently have qualified TWTs with sufficient flight heritage for the commercial market for L-band (7 % of the market), high power Ku-band (12 %), and Ka-band (10 %). L3 has, however, the competence and expertise to develop and manufacture TWTs in all frequency bands and has already qualified a 32 GHz Ka-band TWT for institutional applications. Despite the fact that L3 has slightly less flight heritage than TED, most satellite prime contractors consider L3 as a credible alternative for TWT frequencies where it has a product offering.

3. EPCs

(25) There are two main suppliers of EPCs worldwide, Tesat (a subsidiary of EADS/Astrium), and L3. Other space companies have the capability to manufacture EPCs for in-house applications but have not been active on the merchant market, such as Lockheed Martin or ETCA, a subsidiary of AAS.

(26) Both L3 and Tesat have large production capacities, a broad product range, including dual EPCs, an extensive flight heritage and an established position on the merchant market. By contrast, ETCA has a much more limited production capacity, only produces single EPCs and integrated most of its EPCs to supply its parent company AAS. The major satellite prime contractors (other than AAS) only deal with Tesat and L3 for EPCs and are not familiar with ETCA's EPC products.

(27) The Commission has investigated in-depth ETCA's EPC capabilities as it is essential for the competitive assessment. The Commission' investigation has shown that: (i) ETCA has a modern and competitive medium power single EPC, which however still lacks sufficient flight heritage; (ii) ETCA has an older generation high power single EPC; (iii) ETCA could qualify a competitive dual EPC in [2009-2012]*, which could have acquired flight-heritage by [2012-2015]*; and (iv) ETCA could qualify a competitive high power EPC in [2009-2012]*, which could have acquired flight-heritage by [2012-2015]*.

4. TWTAs

(28) Due to their strong position at the level of EPCs, L3 and Tesat are the two leading integrators of EPCs globally. They are the only two integrators with significant assembly and testing facilities, an installed base of TWTAs on satellites with extensive flight heritage and a significant presence on the merchant market. ETCA and TED have limited TWTA integration activities, ETCA having essentially supplied its parent company AAS for institutional satellites.

B. Impact of the merger on the TWTA market

(29) The Commission has investigated whether the new entity would have the ability and incentive to discriminate in the supply of TWTs to rival TWTA integrators so as to favour its downstream activities on the TWTA market, and, if so, whether this would have a significant detrimental effect on effective competition on the TWTA market. The Commission's in-depth investigation has revealed that the new entity's ability and incentive to foreclose rival integrators would be seriously constrained for several reasons.

(30) First, in order to foreclose Tesat on the TWTA market, the new entity needs to have access to EPCs to integrate with its TWTs. The Commission's in-depth investigation has revealed that (i) AAS' subsidiary, ETCA, only has a limited range of EPCs; and (ii) ETCA is also constrained by its limited EPC and AIT production capacity. Secondly, prime contractors and satellite operators purchase conservatively and have strong preferences for the EPCs and TWTAs of Tesat and L3. Thirdly, the market investigation has revealed that margins are considerably lower at the TWTA level which is characterised by more competitive pressure than at the TWT level. Fourthly, since it will acquire a 67 % shareholding in AAS, Thales will only have 67 % of the additional margins it makes on TWTAs (which would be integrated by AAS' subsidiary ETCA) whereas it benefits from the full margins for TWTs.

(31) In light of these constraints, the likelihood of the new entity engaging in input foreclosure requires a detailed analysis that takes into account (i) the various input components of TWTAs, and (ii) the prime contractor and its potential preferences. On the basis of such an assessment market segment by market segment, the Commission has established that foreclosure would be likely only for a limited market segment, that are ITAR-restricted and where ETCA could meet AAS' EPC demand, and that account for [0-5 %]* of the TWTA market. The Commission has also concluded that foreclosure is possible, but not to a degree such as to consider that it would be likely, in the market segment where the new entity is active (single EPC) and does not face currently a competitive constraint from L3's TWTs (high power Ku-band, L-band and Ka-band). These market segments altogether represent [10-15 %]* of the TWTA market. The Commission has also determined that there is no possibility for foreclosure on the market segments where there is (i) dual EPC demand; (ii) a competitive constraint from L3's TWTs or (iii) a strong preference of prime contractors for either L3 or Tesat. This altogether represents the vast majority of the TWTA market (i.e. more than [80-85 %]*).

(32) Based on this assessment, it is estimated that an input foreclosure strategy by the new entity could allow it to capture [0-5 %]* of the TWTA market in the short term (in particular ITAR-restricted markets segments). For [10-15 %]* of the TWTA market, a market entry of the new entity can also be considered as possible although the new entity would need to demonstrate that it is a reliable TWTA supplier capable of meeting satellite manufacturers' requirements, which would in turn require significant investments. By contrast, foreclosure on the bulk of the TWTA market does not appear likely and could only start if the new entity obtains an EPC product range that is comparable to Tesat and L3 (i.e. as of [2012-2015]* in the best case scenario).

(33) In any event, entry of the new entity on these segments of the TWTA market in the near future — which was up to now divided between Tesat and L3 — would as such increase the number of credible competitors on the market from 2 to 3, thereby increasing competition.

(34) The Commission therefore concludes that the concentration does not lead to a significant impediment to competition on the TWTA market.

C. Impact of the merger on commercial telecommunications satellites market

(35) The Commission has investigated whether the new entity would have the ability and incentive to discriminate in the supply of TWTs to rival prime contractors in order to gain an advantage in competitions for commercial telecommunications satellites and, if so, whether this would have a significant detrimental effect on effective competition on the market for commercial telecommunications satellites.

(36) The Commission first notes that the ability and incentive of the new entity to engage in input foreclosure at the prime contracting level is necessarily linked to the market situation at the intermediate level of TWTAs, since most prime contractors — except AAS — are increasingly purchasing TWTAs (in particular TWTA+s). As explained above, foreclosure at the TWTA level is however unlikely. This, in itself, strongly suggests that an input foreclosure strategy relating to the supply of TWTs directly to prime contractors could not be effective.

(37) Secondly, the transaction will in fact place Thales/AAS in a similar position on the satellite prime contracting market as that of Astrium/Tesat (i.e. as a supplier of TWTAs present at the prime contracting level) prior to the transaction. However, there have been no allegations that Astrium engaged in an input foreclosure strategy for TWTAs (through its control of Tesat) so as to gain advantages in prime competitions. This confirms that there is no incentive for such strategy, especially in a space industry characterized by complex interdependences, and that this strategy is unlikely post-merger.

(38) The Commission has nonetheless assessed the ability and incentive of the new entity to foreclose rival prime contractors post-merger, assuming that such input foreclosure could be carried out through direct supply of TWTs and thus independent of the success of an input foreclosure strategy at the TWTA level.

(39) The Commission has however identified a number of serious constraints faced by the new entity if it were to engage in input foreclosure. First, as regards the ability of AAS to be independent for its EPC needs, the Commission's investigation has shown that (i) ETCA does not have dual EPCs, which account for around half of the market, and it is not expected to have qualified such EPCs with sufficient flight heritage before [2012-2015]*; (ii) ETCA does not have competitive (in terms of performance and costs) high power single EPCs and is not expected to have qualified such EPCs before[2012-2015]*; (iii) ETCA is not yet considered by prime contractors as a competitive supplier of EPCs, and (iv) L3 does not have an incentive to supply EPCs to AAS if it can sell integrated TWTAs. As regards the ability of the new entity to engage in a TWT input foreclosure, the Commission's investigation has shown that (i) L3 is a reliable and competitive TWT supplier for the frequency ranges where it has a qualified product and that (ii) an input foreclosure strategy risks leading to loss of significant TWT sales for TED if prime contractors turn to L3 in reaction. As regards the incentives, the Commission found that TED's sales of TWTs are profitable due to the current strong position of TED while it is far from certain that a TWT foreclosure strategy would allow the new entity to be decisively more competitive than all its rival prime contractors.

(40) As for the TWTA level, the Commission has carried out its assessment at the prime contracting level on the basis of the various market segments and differences in competitive conditions in order to consider all the different foreclosure scenarios. On the basis of such assessment market segment by market segment, the Commission has concluded that the new entity is likely to have both the ability and the incentive to foreclose rival prime contractors only in market segments accounting for around [10-15 %]* of the overall market. For the remainder of the market, it is unlikely that the new entity would have both the ability and the incentive to foreclose.

(41) In view of the above, even if foreclosure were to occur in some market segments, the new entity's foreclosure strategy would not have a significant impact on competition for commercial satellites. In particular, that foreclosure strategy is not likely to affect rival prime contractors' ability to compete with AAS for most satellite programmes.

VI. CONCLUSION

(42) The Commission takes the view that, on the basis of the evidence available, it is not likely that the merged entity would have the ability and incentive to foreclose its competitors at any level of the supply chain and that the proposed transaction would, as a result, significantly impede effective competition. The Commission therefore declares that the proposed merger is compatible with the common market and the functioning of the EEA Agreement.

(1) In 2005, Alcatel and Finmeccanica merged their activities related to space systems through the setting up of two joint ventures, AAS and Telespazio. Alcatel and Finmeccanica respectively held 67 % and 33 % of AAS capital and 33 % and 67 % of Telespazio's capital. The creation of the two joint ventures was cleared by the Commission (See Commission decision of 28 April 2005 in Case COMP/M.3680 — Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio).

(2) For the purposes of the present document, TWTAs and the further-integrated TWT-based subsystems CTWTA, LTWTA, LCTWTA are altogether referred to as ‘TWTAs’ for ease of reference. Where it is necessary to distinguish TWTAs from the further integrated TWTAs (LTWTAs, CTWTAs, LCTWTAs), the reference ‘TWTA+ subsystems’ is used.

(3) There are some horizontal overlaps and vertical relationships between the activities of Thales and AAS in the ground segment but none of them give raise to any competition concerns.

(4) Comparable procurement processes apply in the case of the selection of the EPC, the linearizer and channel amplifier functions.

(5) Some satellite prime contractors, such as Lockheed Martin, have in-house production capabilities for EPCs and LCAMPs and in-house integration capabilities.