Anticipated acquisition by Arriva plc of the assets of the Hertfordshire bus operations of Sovereign Bus and Coach Company Ltd

Affected market: Bus services

No. ME/1144/04

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, exceptions to the duty to refer and decision.

The OFT's decision on reference under section 33 given on 3 August 2004

PARTIES

Arriva the Shires (Arriva) is part of the ARRIVA group, a transport company operating bus and train services across the UK. In the year ending 31 December 2002, Arriva's UK turnover was £42 million. Sovereign Bus and Coach Company Ltd. (Sovereign) is a Hertfordshire-based bus operator and a subsidiary of Blazefield Holding Limited, which also operates buses in Lancashire and Yorkshire. It sold its St Albans operation in 2004 and its Huntingdon operation in 2003. In the year ending 31 December 2003 Sovereign's UK turnover (including the St Albans operation) was £7 million (see note 1).

TRANSACTION

Arriva proposes to acquire the assets owned and/or operated by Sovereign for the purposes of its Hertfordshire bus operations for £[] (see note 2).  The extended statutory deadline in this case is 5 August 2004.

JURISDICTION

As a result of this transaction enterprises carried on by or under the control of Arriva and Sovereign will cease to be distinct. The parties overlap in the supply of bus services in a substantial part of the UK and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.


ASSESSMENT

The transaction qualifies under the share of supply test. Consistent with previous inquiries and third party views, the frame of reference in this case concentrates on commercial and tendered bus services on a point to point basis and aggregates thereof, in this case, within Hertfordshire.

Arriva is the leading bus operator in Hertfordshire; Sovereign, with significant scope and scale, is second largest. For reasons detailed above, the merger appears to remove the most likely entrant on each other's routes and thereby eliminate a substantial competitive constraint.

Third parties would not appear to be likely to replicate the threat posed by Sovereign through entry or expansion in the area.  Majors are unlikely to enter; smaller scale entry or expansion, where not deterred altogether by Arriva's ability to strategically respond, cannot be expected to do so on the scale of Sovereign's operations.

Consequently, the OFT believes 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.

Arriva and Sovereign also compete head-to-head on a number of flows. Although these overlaps are limited in scale, on a number of these flows the merger will eliminate bus competition, or leave one competitor in place. Given the OFT's above concerns, it is not necessary to decide whether the loss of direct competition on these overlaps, individually or in aggregate, itself amounts to a substantial lessening of competition for the purposes of s 33(1) of the Act.

EXCEPTIONS TO THE DUTY TO REFER

The parties cited two exceptions to the duty to refer: markets of insufficient importance and undertakings in lieu. As the OFT's concern is loss of potential competition and Sovereign's services alone represent annual turnover [projected at £3.7 million for 2004}, the first exception is inapplicable.

The parties' undertakings in lieu proposals are behavioural undertakings, comprising, in effect, (i) a service frequency undertaking, guaranteed to maintain the existing number of and age of buses; and (ii) a price cap, either by comparison with all other [commercial] services in Hertfordshire (all of which the parties believe are subject to competition) or linked to RPI increases. Both would apply to certain (though not all) overlapping services for a period of two years. The undertakings do not purport to address the OFT's primary concern, the loss of potential competition. Nor is it clear that such mechanisms sufficiently restore pre-merger incentives to compete in areas of actual competition. Accordingly, the remedies proposed cannot be accepted as undertakings in lieu of reference.

DECISION

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

NOTES

1. From turnover figures supplied subsequent to decision.

2. Business secret deleted at request of the parties.

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