Anticipated acquisition by FirstGroup plc of the ScotRail Franchise

Affected market: Passenger rail transport service

No. ME/1427/03

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, conclusion, and decision.

The OFT’s Decision on reference under section 33 given on 13 January 2004

PARTIES

FirstGroup plc (First) is a UK-based international transport company which in the year to March 2003 had a turnover (before exceptional items) of £2.3 billion and made pre-tax profits before interest of £190 million.  First operates a wide range of bus services in Scotland.

The ScotRail franchise concerns the operation of approximately 95 per cent of the passenger rail services in Scotland, of which approximately 50 per cent are operated on behalf of the Strathclyde Passenger Transport Executive (SPTE). ScotRail also operates sleeper services between Scotland and London as well as certain through services to Newcastle. In the year to 31 December 2002, ScotRail Railways Limited (the National Express subsidiary currently operating the ScotRail franchise) had turnover of £367.9 million and made a pre-tax loss of £10.5 million.

TRANSACTION

The prospective merger situation arises from a competition for the ScotRail franchise. The Strategic Rail Authority (SRA) has pre-qualified three bidders to operate the franchise: First, Arriva and National Express. It is understood that the SRA will select its preferred bidder by April 2004, with the franchise commencing in October 2004. First has said to us that its bid is conditional on approval being received from the OFT on terms satisfactory to First. Accordingly, a decision to refer may have the effect of reducing competition to win the ScotRail franchise. Regulation of certain rail fares and service levels will be stipulated in the franchise agreement with the ultimate winner of the competition for the franchise.

JURISDICTION

As a result of this anticipated transaction, First and ScotRail 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) of the Enterprise Act 2002.

CONCLUSION

This anticipated merger situation arises from the current competition for the ScotRail franchise being conducted by the SRA.  The successful bidder for that franchise will be subject to regulation by the SRA and SPTE in respect of the fares and service levels of the railways as specified in the Service Level Commitment, and many of First's bus services in Scotland are anyway subject to price and frequency regulation by the SBH undertakings. Within these parameters, is it possible that the merger situation that will result if First wins the franchise competition will lead to a substantial lessening of competition?

Whether, and to what extent, there is competition between bus and rail depends on the characteristics of overlapping routes.  Certain third parties have put forward views suggesting that the characteristics of certain point-to-point routes indicate competition between bus and rail services on those routes. The analysis above has focused on overlapping routes with no current competing operators and where the bus journey time is no more than double the rail time. First has advanced a number of reasons, discussed above, why it would not have the incentive and/or ability to give poorer value for money to bus passengers as a result of becoming the rail franchise operator. In our view, these arguments have considerable weight.  However, third parties have expressed contrary views (and also fears about increased prospects of anticompetitive behaviour) which cannot confidently be rejected on the available evidence and within the time available for the OFT investigation. In short, we were unable confidently to conclude that if First wins the ScotRail franchise this would not substantially lessen competition on those routes considered.

For these reasons, there is therefore a credible view that the merger may be expected to result in a substantial lessening of competition. The evidence currently available is not sufficient for the OFT to be able confidently to reject that view.  Therefore, consistent with the recent judgment of the CAT in IBA the OFT has decided to refer this merger to the Competition Commission.

The OFT's Substantive Assessment Guidance indicates that undertakings in lieu will only be accepted if they represent a clear cut remedy to a clearly identified competition concern. The timeframe of the OFT investigation has not permitted clear identification of possible detriments to competition. Although the parties have offered [ ] (see note 1), it would therefore not be appropriate to accept them at this stage.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

NOTES

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