CELEX: 31996M0683
Language: en
Date: 1996-03-05 00:00:00
Title: Commission Decision of 05/03/1996 declaring a concentration t be compatible with the common market (Case No IV/M.683 - GTS- Hermes Inc. / HIT Rail BV) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31996M0683

Commission Decision of 05/03/1996 declaring a concentration t be compatible with the common market (Case No IV/M.683 - GTS- Hermes Inc. / HIT Rail BV) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 157 , 01/06/1996 P. 0013

  COMMISSION DECISION of 05/03/1996 declaring a concentration  to be compatible with the common market (Case No IV/M.683 -  GTS-Hermes Inc. / HIT Rail BV) according to Council  Regulation (EEC) No 4064/89   (Only the English text is authentic).  The paper version of the decision is available through the  sales offices of the Office of Official Publications of the  European Communities.  PUBLIC VERSION  MERGER PROCEDURE  ARTICLE 6(1)(b) DECISION  To the notifying parties  Subject: Case N  IV/M.683  GTSHermes Inc/HIT Rail BV  Notification of  a concentration pursuant to Article 4 of  Council Regulation N  4064/89  1. On 2 February 1996, the Commission received a  notification of a proposed concentration pursuant to Article  4 of Council Regulation (EC) No 4064/89 [OJ No L 395 of  30.12.1989; Corrigendum OJ No L 257 of 21.09.1990, p.13.] by  which the undertakings GTSHermes Inc. (GTS) and the parties  from 2 to 12, the latter acting through HIT Rail B.V. (HIT  Rail), acquire within the meaning of Article 3 (1) b of the  Council Regulation joint control of their 50/50 joint  venture Hermes Europe Railtel B.V. (Hermes).  2. After examination of the notification, the Commission has  concluded that the notified operation falls within the scope  of Council Regulation No 4064/89 and does not raise serious  doubts as to its compatibility with the common market and  within the functioning of the EEA Agreement.  I. THE PARTIES  3. GTS develops and operates a broad range of valueadded  telecommunications services, primarily in the Commonwealth  of Independent States, Central Europe and Asia. In Western  Europe, its only activity is a joint venture with the PTO in  Monaco.  4. The ten European national railway undertakings, the  parties from 2 to 6 and 8 to 12, are principally active in  the transportation of freight and passengers, mainly within  their national territories. In addition, most Railways have  other business activities, e.g. travel agencies, banking,  mechanical fabrication, electronic and dataprocessing  services, energy and real estate management.  5. RacalBR Telecommunications Ltd. (Racal) is part of the  Racal Electronics group. Its main activity is the provision  of the business and operational telecommunications services  to British Railways Board in the United Kingdom excluding  Northern Ireland together with the maintenance of  railwayspecific terminal systems. Racal´s network facilities  are those originally operated by British Railways Board and  therefore national. The Racal Electronics group does not  provide international transmission capacity to third  parties.  II. THE OPERATION  6. GTS, the ten above mentioned national railway  undertakings and Racal intend to create a joint venture  Hermes, which will introduce a panEuropean  telecommunications network dedicated to the crossborder  transport of telecommunication traffic primarily along the  rights of way of the railway undertakings by public network  operators, carrier consortia, cellular telephone companies  and other authorised telecommunication operators.  III. CONCENTRATION  7. Hermes will be controlled equally by GTS and the parties  from 2 to 12, who will act together through HIT Rail. HIT  Rail is used in order to facilitate decisionmaking amongst  the parties from 2 to 12 and to ensure that they speak and  act as one.   8. HIT Rail is a Dutch company in which the parties from 2  to 12 have equal voting rights in the general meeting, where  decisions are taken by a simple majority.  The supervisory  board consists of 7 members, one from each of the parties  from 2 to 12, rotating periodically.  The general meeting  reserves certain issues for its own decision, including the  appointment of the representatives of HIT Rail on Hermes.   At least six of the parties from 2 to 12 must agree on a  proposal in the general meeting.  This configurationensures  that the parties from 2 to 12 can exercise a decisive  influence with the other acquiring company, GTS, over Hermes  and avoids the situation where that other acquirer could  exercise sole control because of their inability to reach a  unified position on any decision. [See Commission decision  IV/M.102  TNT/Canada Post and others]  9. The railway undertakings and Racal act through HIT Rail  which was originally formed in 1990 for the purpose of  managing international IT projects for its members. In this  role, HIT Rail has been involved in two or three joint  projects of the Railways, the most important of which is  Hermesplus, a project providing for network signalling and  ticketing systems. Its primary function now is to serve as a  vehicle through which the railway undertakings and Racal  jointly participate in Hermes. Furthermore, Racal has a  common interest with the railway undertakings. Racal  represents the privatized telecommunications activities of  British Railways. It is partner of Hermes because with  respect to Hermes it has the same kind of business and  interest as the railway undertakings.  10. GTS and HIT Rail basically have equal rights as  shareholders. Decisions of the General Assembly are adopted  on the basis of a twothirds majority unless and until either  GTS or HIT Rail holds two thirds of the votes, in which case  simple majority suffices, except for some decisions which  require unanimity. At the moment, both companies have a 50%  share. GTS and HIT Rail are also equally represented on the  Supervisory Board, where decisions are taken by simple  majority. In case of deadlock, there is no casting vote but  provision exists for further discussions and final reference  to an independent committee of experts. The Supervisory  Board has complete and exclusive power to supervise the  policy of the Management Board and the general course of  affairs of Hermes and its business.  11. Hermes will operate as an independent economic entity  which possesses all the assets and resources to act  autonomously on the market. It will obtain the necessary  rights of way and/or dark fibre from the Railways, through  negotiations at arm´s length, or from third parties. It will  have complete endtoend operational control of its network.  Hermes acts as a single entity in selecting its prime  contractor for the construction of the network. It will act  autonomously in relation to its customers, which may include  the Railways and GTS. The provisions of infrastructure  facilities by Hermes to the Railways and GTS will be on an  arm´s length basis.  12. The creation of Hermes does not give rise to  coordination of the competitive behaviour of the parties.  None of the parent companies is active in the market of the  joint venture, which is the market for carrier´s carriers.  According to the Phoenix notice under Regulation 17/62 art  19 (IV/35.617, 15 December 1995), the market for carrier´s  carrier services comprises the lease of transmission  capacity and the provision of related services to thirdparty  telecommunications traffic carriers. Some of the parent  companies are active on a market which is downstream from  the joint venture´s market, which is the market for carriers  [See par. 14 f.]. GTS and Racal are presently active in the  field of telecommunications services but not in the same  geographical markets. Even if the national railway companies  enter into national joint ventures with other  telecommunications services operators, it is unlikely that  they will become competitors as they will probably operate  only on a national basis. The Railways are active in a  market which is upstream from the Hermes´s market as they  will provide networks to Hermes. However, they will each  provide a network for a different geographical market.  IV. COMMUNITY DIMENSION  13. The present operation has a Community dimension within  the meaning of Article 1(2) of the Merger Regulation. The  worldwide turnover of all the undertakings concerned  amounted, in 1994, to more than ECU 5 billion ([Deleted for  publication]) and more than two of the undertakings achieved  a Communitywide turnover of more than ECU 250 million. The  undertakings concerned did not achieve more than twothirds  of their respective Communitywide turnover within one and  the same Member State.  V. ASSESSMENT UNDER ARTICLE 2 OF THE MERGER REGULATION          A. Relevant product market  14. In the terminology used in the Commission's Phoenix  notice Hermes will be a carrier's carrier. More specifically  Hermes will provide infrastructure services similar to  dedicated transitservices  ie the transport of traffic over  permanent dedicated facilities through the network of the  transit carrier, using a highbandwidth digital circuit used  for both voice and data services.  15. This kind of business of a carrier of telecommunications  carriers differs generally from the business provided by a  telecommunications carrier, i.e of a typical services  provider. The latter typically provides services to  endusers, i.e. the typical customer of a services provider.  The business of a carrier´s carrier is broadly described as  providing capacity and related services for these  telecommunications operators, i.e. a kind of wholesale.  16 Two different types of business can be regarded as  forming a panEuropean carrier´s carrier market: the  provision of bandwidth (in Mbit/s) interlinking the switch  locations of carriers, and the provision of switchedminute  services (in millions of paid minutes), taking telephone  calls from one carrier and either terminating these calls  upon a company's own switched network infrastructure, or  passing them to another carrier for the final stage. The  traditional way of providing crossborder services to end  users is to make separate arrangements with a range of other  carriers. In future, especially because of the formation of  alternative national telecommunications services providers,  these carriers might seek to entrust the transport of  international traffic to a single provider or a small number  thereof.  17. Hermes will provide two categories of transmission  capacity:    During its startup period Hermes will supply crossborder  basic transport capacity (pointtopoint) targeted at carriers  requiring large bandwidth capacity between two gateway  points,    With the commencement of the liberalisation of  telecommunication infrastructure markets in the EU from 1996  Hermes will provide instead a panEuropean virtual private  transport network supplying bulk capacity to carriers who  will subsupply to endusers.  18. According to the parties these services should be  located in two separate product markets: the first is merely  an alternative to the traditional pointtopoint connections  offered by PTOs  by combining two or more halfcircuits;  the  second is a part of a new and distinct product market  the  provision of panEuropean transport networks  which in  consequence of liberalisation will develop as the role of  traditional PTOs on the market for international  infrastructure services gradually decreases.  19. For the purposes of the present decision the Commission  can leave open the definition of both the product markets  involved, since on the narrowest definitions  those given by  the parties    no competition problems arise.          B. Relevant geographic market  20. Hermes will initially supply its telecommunications  network between some of the countries whose railway  undertakings participate in the operation; it will then  extend its activities to other countries in the present  network. It is possible that railway undertakings in other  countries in the EEA will join the operation at a later  date. The Commission accordingly concludes that the relevant  product market is at least EEAwide.          C. Competitive Assessment  21. In the first market described by the parties   crossborder basic transport capacity (pointtopoint)  Hermes  will compete with PTOs and will have an insignificant  share.  22. The parties claim that, since the second market  described by the parties  the provision of panEuropean  transport networks  is new, no valid market share data are  available. However, market players with global network  infrastructures or regional ones will be in a position to  provide a variety of services to telecommunications  carriers. If the creation of a panEuropean network like that  one of Hermes is part of an already existing carrier´s  carrier market, the creation of a market dominating position  cannot be expected because of the market power of the  national PTOs. Only if the provision of a panEuropean  network by the parties creates a new product market, will it  be possible to conclude that, as the first entrant into it,  Hermes will in the immediate future enjoy a very high share,  possibly even 100 pc, of this new market.  23. Even if a seamless panEuropean telecommunications  network is a product of its own, the Commission is confident  that the potential competitors of Hermes are equally or more  powerful andthat Hermes will have no opportunity to  foreclose the market. The principal source of such  competition is the national PTO operators; as the national  regulation of telecommunications, the main barrier to entry,  diminishes in the next few years, they will have the  capacity to combine into a panEuropean network resources  (particularly infrastructure) which are much greater than  those available to the parties. Furthermore, the national  PTO operators are dominant in the field of crossborder  traffic with respect to the existing connections between the  several PTOs which enable crossborder telecommunications to  take place at the moment. Another type of infrastructure  suitable for telecommunications is that of the national  energy and water undertakings; already the electricity grid  in Germany is used as the infrastructure for  telecommunications, [Commission decision IV/M.618 Cable &  Wireless/Vebacom] and there is no reason why following the  liberalisation of telecommunications energy and water  undertakings should not in cooperation with  telecommunications operators create crossborder networks of  comparable strength to those of Hermes. Competition could  also be provided by such telecommunications consortia as  Unisource Carrier Services, Orion and Atlas/Phoenix; these  consortia have the advantage of vertical integration both  upstream and downstream, whereas Hermes will have to  negotiate with each of the railway companies on an arm's  length basis and will not have the resources to supply  telecommunications services to endusers. Furthermore, one  has to take into account that the proposed Hermes  infrastructure still has to be set up. Further market  entries can already be expected from 1 January 1998.  24. Therefore, even if the business of Hermes is regarded as  a new product, it cannot be foreseen that the formation of  Hermes will lead to the creation of a marketdominating  position. Furthermore, this conclusion is underlined by the  fact that the potential customers of Hermes are strong and  well informed companies which have considerable buying power  and will be able to limit the market power of any supplier  of carrier´s carrier services, especially with respect to  existing alternatives.  25. The proposed concentration therefore does not raise  serious doubts as to its compatibility with the common  market.  VI. ANCILLARY RESTRAINTS  26. The parties have requested that certain restrictions be  considered as ancillary to the concentration. To answer  their request, the assessment made below is also related to  the question whether a provision is an integral part of the  operation.  27. HIT Rail and GTS agree not to assist or cooperate in the  development of any other panEuropean Telecommunications  operator while HIT Rail and GTS remain shareholders in  Hermes;  for HIT Rail the obligation continues for a further  year. The evaluation of this clause must take account of the  characteristics peculiar to concentrative joint ventures.  This prohibition on the parent undertakings competing with  the joint venture aims at expressing the reality of the  lasting withdrawal of the parents from the market assigned  to the joint venture. However, insofar as this clause is a  restriction of competition, it can be regarded as an  ancillary restriction.  28. The parties agree not to disclose confidential  information relating to Hermes. This restriction is directly  related and necessary to the implementation of the  concentration.  Therefore it can be regarded as ancillary to  the concentration.  29. Hermes agrees not to provide telecommunication network  facilities services at a national level, unless on the  application of a customer the relevant national railway  consents. Insofar as this is only a definition of the scope  of business of Hermes, it can be regarded as an integral  part of the concentration, since it reflects the decision of  the parent companies to limit the business of the joint  venture to international services. Nevertheless, the second  part of the clause leads to the conclusion that the  limitation is not an integral part of the concentration as  this part of the clause in question provides an exemption  from the limitation. This part of the clause therefore  cannot be regarded as an integral part of the operation.  Furthermore, as this clause imposes an obligation only on  Hermes, it cannot be regarded as ancillary to the  concentration.  30. Hermes will not be obliged to obtain dark fibre and  rights of way from the railway companies; nor will the  railway companies be obliged to supply those assets to  Hermes. Rights of way and relatedagreements will be  concluded on an arm´s length, commercial basis. This clause  is not restrictive of competition.  31. However, Hermes will be obliged to negotiate with the  railways concerning contracts for the installation and  maintenance of the network; only if fair and commercial  terms cannot be agreed will Hermes be entitled to contract  with other suppliers. This provision cannot be regarded as  directly related and necessary to the implementation of the  concentration.  Therefore it cannot be regarded as ancillary  to the concentration.  VII. CONCLUSION  32. For the above reasons, the Commission has decided not to  oppose the notified operation and to declare it compatible  with the common market and with the functioning of the EEA  Agreement. This decision is adopted in application of  Article 6(1)(b) of Council Regulation N  4064/89.   For the Commission,