Completed acquisitions by Stagecoach Group plc of Eastbourne Buses Limited, and Cavendish Motor Services

Affected market: Local buses

No. ME/4031/09

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 22(1) given on 13 May 2009. Full text of decision published on 02 June 2009.

PARTIES

Stagecoach Group plc (Stagecoach) is a wholly-owned subsidiary of the Stagecoach Group, an international public transportation group, with operations in the UK, USA and Canada. Prior to the two transactions under consideration (the Transactions), Stagecoach's wholly-owned subsidiary, Stagecoach in East Kent & Hastings, employed about 1,000 people and ran a fleet of about 330 buses from six depots across East Kent and Hastings. While it did not operate local bus services in Eastbourne, it operated two inter-urban services (Services 98 and 99) between Eastbourne and Hastings.

Eastbourne Buses Limited (Eastbourne Buses) provided local bus services in the town of Eastbourne, the neighbouring town of Hailsham, and East Grinstead. Eastbourne Buses was majority (80 per cent) owned by Eastbourne Council and 20 per cent owned by Keolis, a French transport company. Eastbourne Buses' turnover for the year ending 31 December 2008 was £5.6 million.

Cavendish Motor Services (Cavendish) provided local bus services in the town of Eastbourne and neighbouring town of Hailsham. Cavendish was a wholly-owned subsidiary of Renown Coaches Limited (Renown), a bus operator based in Bexhill, East Sussex. Cavendish's turnover for the year ending 31 July 2008 was £620,000. 

TRANSACTION

On 18 December 2008, Stagecoach acquired the entire share capital of Eastbourne Buses. Eastbourne Buses' assets included 50 buses,152 employees and a depot in Eastbourne with capacity for 100 buses.

On 2 October 2008, Stagecoach signed a share purchase agreement for the entire share capital of Cavendish. The acquisition was completed on5 January 2009. Cavendish's assets consisted of 28 buses and 65 employees. Renown's bus depot located in Bexhill was not included in the transaction.

JURISDICTION

As a result of the Transactions, Stagecoach has ceased to be distinct from Eastbourne Buses and has ceased to be distinct from Cavendish.

Section 23(9) of the Enterprise Act 2002 (the Act) states that the question whether a relevant merger situation has been created shall be determined immediately before the time when the reference has been, or is to be, made. As a result of the operation of this section, Stagecoach is to be treated as overlapping with both Eastbourne and Cavendish in the supply of bus services in Eastbourne and Hailsham  for jurisdictional purposes. 

Stagecoach has questioned whether Eastbourne should be treated as constituting a 'substantial part of the UK' for the purposes of the share of supply test under section 23(4) of the Act. It contends that the population of Eastbourne is approximately 95,000 (much less than one per cent of the UK) and has only a small geographic area (44.2 square kilometres). Further, it argues that it is doubtful that Eastbourne is of such geographic or financial importance as to make it a 'substantial part of the UK', given that its primary income is derived from tourism. Finally, Stagecoach argues that the Eastbourne local bus market cannot be considered economically important, being valued at only £6.22 million. Stagecoach thus questioned whether the OFT was acting reasonably in asserting jurisdiction under the share of supply test in this case.

While there is no statutory definition of what constitutes a 'substantial part of the UK', the House of Lords in Regina v Monopolies and Mergers Commission and another; ex parte South Yorkshire Transport Limited ('ex parte South Yorkshire') , involving the merger of two local bus companies in South Yorkshire, considered that this definition required that an area or areas must be considered of such size, character and importance as to make it worth consideration for the purposes of merger control. In that case, Lord Mustill stated that:

'…where the task is to interpret an enabling provision, designed to confer on the commission the power to investigate mergers believed to be against the public interest the court should lean against an interpretation which would give the commission jurisdiction over references of the present kind in only a small minority of cases. This is the more so in the particular context of local bus services, since the provision of adequate services is a matter of importance to the public, as witness the need felt by Parliament to make special provision for them in the Transport Act 1985.'

The OFT has taken proper account of this comment in determining its approach to the application of the 'substantiality' criterion under section 23(4) of the Act. Despite its comparatively small population and geographic area, Eastbourne appears to have a vibrant tourism economy, receiving approximately four million visitors each year.  The OFT notes that while the population of Eastbourne alone is approximately 95,000, Hailsham's population is likely to be at least 19,000 , making the combined area nearly as large as Slough (approximately 120,000), which the CC found to constitute a substantial part of the UK in its report on Tesco/Co-Op Slough. 

In light of the above factors, in particular of Lord Mustill's comments in ex parte South Yorkshire above, and taking account of the fact that the OFT is required to decide on the existence of a relevant merger situation on an 'is or may be the case' standard, the OFT considers it reasonable to consider that Eastbourne is a substantial part of the UK for the purposes of UK merger control.

For each transaction, the combined share of supply share significantly exceeds 25 per cent in relation to the supply of bus services in Eastbourne, and the share of supply test in section 23 of the Act is therefore met. As such, the OFT believes that in relation to each transaction it is or may be the case that a relevant merger situation has been created. In any event, the OFT notes that the share of supply test would also likely be met on the basis of the wider geographic area of Eastbourne and Hastings.

THIRD PARTY VIEWS

None of the third parties who were contacted by the OFT during the course of its investigation raised any competition concerns about the transactions, nor were any concerns expressed by customers. Eastbourne Council, the previous majority owner of Eastbourne Buses, was reluctant to express any view on the potential impact on competition of the merger.

ASSESSMENT

Routes operated by Eastbourne Buses and Cavendish in Eastbourne overlapped extensively on 70 flows pre-merger. As a result of the acquisitions, Stagecoach is a monopoly provider of commercial local bus services in Eastbourne. Rail services may be a constraint on up to three flows but the OFT did not conclude on this point.

Absent the transactions, the OFT considers that it is at least realistic that two different bus operators would have continued to operate and compete against each other in Eastbourne, albeit that it is far from clear that those operators would have continued to be Eastbourne Buses and Cavendish. The transactions are regarded as having foreclosed this possibility.

The main barrier to entry to supplying commercial bus services is local depot capacity. Although Cavendish entered in 2006 using a portakabin and a depot 12 miles away it used every month or so for maintenance, the OFT was unable to identify any other company with a proximate depot from which to enter. Commercial garages were not considered a cost-effective alternative for maintaining buses. In any event, no potential entrant indicated it would be willing to enter in the event of a SSNIP or a decrease in quality. Notably, the most likely entrant, Cavendish's former owner, Renown, stated it would not enter under these conditions, although it may if an Eastbourne-like situation came up again. In any case, Renown was barred from entering by a two year non-compete clause.

Consequently, the OFT believes that it is or may be the case that each 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

These mergers will therefore each be referred to the Competition Commission under section 22(1) of the Act.

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