With clients ranging from Costa Cruises to Holland American Lines, as well as MSC, Cunard and many more, Italian company Fincantieri owns one of the largest and busiest cruise shipyards in the world.

In January last year, the giant announced plans to merge with one of its two largest competitors in Europe: France’s Chantiers de l’Atlantique.

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Given the scale of the proposal, it was perhaps unsurprising that the move quickly backfired, leading the European Commission (EC) to open an antitrust investigation into the consequence of the deal in October 2019.

In particular, Brussels is currently assessing the potential implications of the deal on local competition, as the two currently handle a significant portion of cruise ship orders in Europe and worldwide along with Germany’s Meyer Werft.

According to preliminary conclusions, the latter risks being penalised by the merger, which would reduce the number of leading European shipyards from three to two and in turn disrupt the continent’s market dynamics.

Despite being a major cause of concern for Germany, France and local trade unions, the deal is nevertheless gaining approval among many stakeholders, who believe it could boost Europe’s international prestige in the face of growing competition with Asian and American shipyards.

As debates continue both inside and outside the European Parliament, the Commission now has until April 2020 to decide on the companies’ fate. Whatever the verdict will be, it is likely to re-shape the future of the European shipbuilding sector for the decades to come.

A timeline of the deal

It all started in 2016, when Chantiers de l’Atlantique – which was then known as STX France – was put up for sale after its owner STX Corporation announced bankruptcy.

“In 2016, the company was initially placed under a receivership,” explains Arnaud Touati, an associate lawyer at Paris-based firm Hashtag Avocats who is specialised in corporate law. “This is a collective procedure that is not yet a liquidation, but rather a way of allowing the company to put itself in the best possible conditions, to help it breathe financially.”

In the following months, the company was temporarily nationalised and put under France’s direct control. As a result, the government currently owns an 84% stake in Chantiers de l’Atlantique through its French Government Shareholding Agency.

“This is a collective procedure that is not yet a liquidation, but rather a way of allowing the company to put itself in the best possible conditions.”

Fincantieri itself has a similar ownership structure, with the Italian Government – in the form of state-run financial management company Fintecna – currently detaining over 71% of the company’s share capital.

Yet on France’s front, this model lived a rather short life, as in 2017, Fincantieri announced having reached a deal to purchase a 50% stake in the company from the French state.

As part of the deal, Reuters reported at the time, Paris also agreed to lend a 1% stake to Fincantieri for 12 years, effectively giving it voting rights and access to Chantiers de l’Atlantique’s share dividends. In return, the Italian company made a number of commitments on jobs, governance and intellectual property.

However, as of February 2020, the deal is still yet to come to life. In January 2019, the transaction was suspended and brought to the attention of the EC by the German and French governments, who jointly signed a referral to the EU antitrust authority.

Although Paris has not disclosed the reasons behind its U-turn, Touati says that the prospect of becoming a minority shareholder in Chantiers de l’Atlantique could have influenced the decision. “If the transaction does take place,” he explains, “it would mean that the French state won’t have more than [a] 41.67% stake [in] Chantiers de l’Atlantique.”

As he continues, this change would be particularly significant when comparing the two companies’ turnovers in 2018. “In that year, Chantiers de l’Atlantique registered a turnover of €1.5bn, while on the other hand, Fincantieri’s turnover was about €5m,” he explains.

“This is key information to analyse the financial operation, which at the moment is undergoing extensive review by the European Commission,” states Touati, “and if successful, will make the French state a minority shareholder.”

The Commission’s investigation

Regardless of the motives at play, in October 2019 France and Germany’s joint request triggered the EC’s in-depth antitrust investigation, whose findings were initially announced as being released in March, but have since been postponed to April 2020.

In the aftermath of the first announcement, Commissioner Margrethe Vestager, who oversees competition policy, said: “Demand for cruise ships is booming globally. Chantiers de l’Atlantique and Fincantieri are two global leaders in this sector. This is why we will carefully assess whether the proposed transaction would negatively affect competition in the construction of cruise ships to the detriment of the millions of Europeans taking cruise holidays every year.”

“The Commission has identified high barriers to entry in this market, related to the very complex nature of cruise shipbuilding.”

Preliminary conclusions have already identified the transaction as unable to meet the turnover thresholds of the EU Merger Regulation, as well as a potentially damaging for a continent that is already struggling with capacity constraints.

“The Commission has identified high barriers to entry in this market, related to the very complex nature of cruise shipbuilding,” a European Commission press release read. “Cruise shipbuilding requires, in particular, specific infrastructure, established engineering and design capabilities as well as important project management skills to coordinate hundreds of suppliers and sub-contractors all along the construction process.”

While Chantiers de l’Atlantique has so far remained silent on the issue, Fincantieri issued a statement prior to the launch of the EC’s investigation. “Fincantieri expresses its firm disapproval of such decision, if confirmed, particularly in case it was based on the alleged reduction of the European players from three to two,” the Italian shipbuilder said.

“Following the transaction, there would still be three cruise shipbuilders in Europe, as opposed to the current four.”

Contrasting views across the industry

With the European Commission just two months away from announcing its decision, opinions remain divided.

Among the loudest opponents to the deal is French trade union Force Ouvriere, which represents employees at Chantiers de l’Atlantique’s shipyard in Saint-Nazaire, on the west coast of France.

“We should have one or two European shipbuilding candidates that are much stronger and more powerful.”

Commenting on the EC’s investigation in October, the union argued in a blogpost that the transaction would make the shipyard lose its authority and governance, with potentially negative consequences on direct employment and subcontracting.

“Our yard has the ability to land orders without being backed by a large group and the ability to finance them at more attractive rates than those enjoyed by Fincantieri,” the post added.

On the other side of the Alps, however, Italy’s point of view looks radically different. In January this year, a number of Italian MEPs openly criticised the review, labelling it an obstacle to the development of the European economy.

“In the shipbuilding industry, we [Europe] are already losing our lead on almost all fronts,” Massimiliano Salini, a member of the European People’s Party, told Business Insider Italy. “China and South Korea are now ahead of us in fields ranging from submarines to motorboats, but we remain a leader in cruise shipbuilding. […] This temporary block is weakening us and damaging us especially from a manufacturing point of view.”

Echoing his words, Arnaud Touati believes that creating one or two “European champions” – instead of remaining more locally fragmented – would make the continent more competitive against American and Asian shipyards.

“We should have one or two European shipbuilding candidates that are much stronger and more powerful,” he claims. “There are shipyards all over Europe, from France to Germany to Belgium and Italy, which being so small, will never try and impose themselves at an international level.

“As a result, I think that the EC is lacking a global vision, and has failed to understand that it should spend more time supporting the formation of these European groups instead of trying to make sure that there are small regional actors that have no market confidence.”