Anticipated acquisition by Firstgroup plc of the Thames Trains franchise

Affected market: Rail and bus services

No. ME/1581/04

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, assessment, and decision.

The OFT's decision on reference under section 33 given on 26 March 2004.

PARTIES

FirstGroup plc (First) is a UK-based international transport company which operates both bus and rail services in the UK, as well as transport services in the USA.  It operates four rail franchises in the UK — First Great Western, First Great Eastern, First North Western, and the TransPennine Express.  The Thames Trains franchise (Thames franchise) operates services between London Paddington and the Thames Valley, Kennet Valley and Cotswolds areas, as well as on the North Downs line between Reading and Gatwick airport. The term of the franchise is 2 years, running from 1 April 2004 to 31 March 2006. The franchise is currently operated by Thames Trains Limited, a subsidiary of the Go-Ahead Group, which in the year to 28 June 2003 had a turnover of £105.36 million.

TRANSACTION

First was selected as the preferred bidder for the franchise by the Strategic Rail Authority (SRA) on 4 November 2003. The SRA intends to combine the Thames franchise on its expiry on 31 March 2006 with the Great Western and Wessex Trains franchises, to become the Greater Western franchise.  The parties notified the transaction to the OFT on 23 January 2004; the administrative deadline is 26 March 2004.

JURISDICTION

As a result of the transaction, First and the Thames franchise will cease to be distinct. The award of a rail franchise constitutes an acquisition of control by virtue of section 66(3) of the Railways Act 1993 as amended. The transaction will create a relevant merger situation under section 23(1)(b) of the Enterprise Act 2002 (the Act) as the turnover test is met.

ASSESSMENT

This case raises three separate issues: (i) loss of rail on rail competition, (ii) loss of competition between bus and rail on point-to-point overlap routes and (iii) the potential for foreclosure of competing bus operators should First issue multi-modal (bus/rail) tickets valid only on its own services.

With regard to rail-on-rail competition, the parties are each others' closest competitor for point-to-point journeys along the London Paddington to Newbury or Hereford routes, with very limited other sources of rail competition. However, a number of factors give rise to the conclusion that any competition concerns which arise from this transaction are negligible. Most importantly, contractual agreements with the SRA limit the potential for a worsening of service and/ or increase in fares, and the SRA has announced its intention to merge these franchises from April 2006. This restricts the ability of First to make any detrimental changes to services as these take time to enact, as well as limiting the incentive for such changes as it would not be logical for First to jeopardise its bid for the much more important Greater Western franchise.

With regard to rail-on-bus overlaps, the competition issues appear to be minimal. There are three bus and rail point-to-point routes where journey times are broadly comparable and there is no competing operator.  Given the absence of third party concern and the presence of local competitors in the vicinity, the creation of these bus/rail overlaps by the merger is unlikely to result in a substantial lessening of competition.

Finally, the possibility appears remote that the merger would foreclose competition from rival bus operators should First introduce exclusive multi-modal ticketing schemes. Various factors – notably the limited take-up of existing schemes in the areas of overlap, the conditions imposed by the SRA in certain areas and the lack of competitor concern – all indicate that a substantial lessening of competition is unlikely to result in this respect.

In light of our finding that any loss of competition arising from the merger is insubstantial, it is unnecessary in this case to assess further the claims that countervailing customer benefits outweigh potential detriments to competition.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

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