Completed acquisition by Stagecoach Group plc of the South Western Franchise

Affected market: Passenger Transport

No. ME/2726/06

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, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 27 February 2007. Full text of decision published 8 March 2007.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

Stagecoach Group plc (Stagecoach) is an international public transportation group, with operations in the UK, the USA and Canada. It established Stagecoach South Western Trains Limited (SSW) for the purpose of pre-qualifying for, bidding for and operating the South Western Franchise (SWF).

The SWF consolidates two existing passenger franchises, the South West Trains (SWT) franchise, operating in the South and South West of England and the Island Line franchise, operating in the Isle of Wight. Stagecoach currently operates both the SWT and the Island Line franchise through operating subsidiaries. Both franchises commenced in 1996, and have a combined turnover of £687 million for the 2005/2006 financial year.

TRANSACTION

The SWF franchise runs for 10 years, commencing 4 February 2007 and expiring in February 2017, with the last three years conditional upon set criteria being met. The merger arises from a competitive bidding process, originally tendered by the Strategic Rail Authority, but which is now managed by the Department for Transport.

SSW was notified on 20 December 2005 that it had pre-qualified to bid for the SWF. It submitted its bid on 30 June 2006 and on 21 September 2006 it entered into the Franchise Agreement with the Department for Transport (DfT) to operate the SWF. The Franchise Agreement closely prescribes the services to be operated by SSW. SSW commenced operations on 4 February 2007. The statutory deadline for consideration of this transaction is 1 June 2007.

JURISDICTION

The award of a rail franchise constitutes an acquisition of control of an enterprise by virtue of section 66(3) of the Railways Act 1993. Therefore, on 4 February 2007, SSW and the SWF ceased to be distinct. The combined annual UK turnover of the franchises which will make up the SWF exceeds £70 million, meeting the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act).

Accordingly, the OFT believes that arrangements have been carried into effect, which has resulted in the creation of a relevant merger situation for the purposes of section 22(1)(a) of the Act.

THIRD PARTY VIEWS

We received very little in the way of substantive responses from third parties. Despite explaining the unique nature of the counterfactual in our questions to third parties, many suggested that the acquisition would not materially change competition in the area given Stagecoach was the incumbent operator. Most transport operators argued that they were constrained by private travel. A number of third parties also supported Stagecoach's submission that their rail and bus activities are conducted independently of one another. No third parties had concerns regarding the acquisition.
 
ASSESSMENT

Stagecoach's successful bid for the SWF gives rise to a number of overlaps within the franchise area. The overlaps involve rail-on-rail (with VXC), rail-on-coach (with megabus) and rail-on-bus (with Stagecoach's bus operations) services.

The OFT used the supply of passenger transport services on point-to-point routes as the relevant frame of reference, while also assessing the overall network effects of the acquisition. We considered these frames of reference against a counterfactual of the award of the SWF franchise either to a company that would raise no competition concerns or to one in respect of which any competition concerns would be remedied through behavioural remedies. Given that Stagecoach was the incumbent operator in this case, the theory of harm involved an assessment of whether the award of the SWF to Stagecoach would prevent the introduction of competition, and hence a reduction in bus, coach, and/or unregulated rail fares or an increase in services on the overlapping flows.

In respect of the rail-to-rail overlaps, given that the Cross Country franchise was due to expire on 11 November 2007 we found that it was not necessary to reach a conclusion on either the competition between VXC and SWF or the constraint provided by FGW on the overlap flows. The OFT will have the opportunity to assess the competitive situation on these flows if Virgin Voyager is selected as the new franchisee for this franchise.

The coach-on-rail overlaps were created after Stagecoach originally acquired the SWT franchise, and National Express operates coach services on each of the overlapping flows. These National Express services are more frequent than the corresponding Stagecoach megabus coach services and in a number of the overlapping flows the start and end point of the National Express service are closer to the rail stations than the corresponding megabus services. Therefore, we do not expect that there would be significantly more competition between coach and rail services on these overlaps if the franchise was awarded to a different TOC.

In respect of the bus-on-rail overlaps, the theories of harm rested on two assumptions; first that the overlapping services in question are close substitutes from the perspective of passengers and second that, recognising this, Stagecoach increased prices / reduced service frequency on these services when it first acquired the SWT franchise ten years ago. In relation to Stagecoach South West services, we found that Stagecoach was already constrained by a combination of tenders and rail competition such that we do not consider that there would be significantly more competition between the rail and bus services on this flow if the SWF was awarded to a different TOC.

In relation to Stagecoach South bus services, we found no evidence that Stagecoach did increase bus or unregulated rail fares above competitive levels, or reduced service frequencies below competitive levels, following its original acquisition of the SWT franchise. We also found that the bus and rail services in question have different characteristics and the evidence from the consumer survey supported the view that they are not close substitutes. Therefore, as compared to the counterfactual, we do not expect that a standalone bus and rail company would have an increased incentive to significantly lower fares or increase frequencies on these flows.

Finally, we considered the effect on network competition from the award of the franchise to Stagecoach. We found that Stagecoach obtained very little revenue from sales of multi-modal tickets in the franchise area. In addition, we found that the SWF franchise agreement contained sufficient measures to promote multi-modal integration of transport, such that Stagecoach would not be able leverage its position as a rail operator to weaken any competition to its bus services.
 
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or 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 22(1) of the Act.

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