Anticipated acquisition by FirstGroup plc of the InterCity East Coast Franchise

Affected market: Rail franchise

No. ME/1347/04

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 21 December 2004

Please note square brackets indicate information excised at the parties' request.

PARTIES

FirstGroup plc (FirstGroup) is a UK-based international transport company with year end turnover in March 2004 of £2.5 billion.  FirstGroup is active in the passenger rail sector and is the parent company of the train operating companies (TOCs) currently running five rail passenger franchises:  namely, First Great Western; TransPennine Express (TPE); First Great Western Link; First North Western;  and First ScotRail.  In addition, FirstGroup also operates a further TOC, Hull Trains.  FirstGroup also has a number of passenger bus operations in the UK.

InterCity East Coast Passenger Rail (ICEC) Franchise operates long distance high speed services linking London with parts of East Anglia, East Midlands, Yorkshire, North East of England and Scotland.  The current TOC for the ICEC franchise, GNER Holdings Limited (GNER), had turnover of around £429 million for the 52 weeks ended 4 January 2004.  The current ICEC franchise agreement with GNER expires on 1 May 2005.

TRANSACTION

FirstGroup has submitted a bid to the Strategic Rail Authority (SRA) to be awarded the new ICEC franchise.

In May 2004, the SRA announced that four parties, one of which is FirstGroup, had successfully pre-qualified as a bidder for the new ICEC franchise.  The other three pre-qualified bidders are:  the incumbent operator, GNER;  Danish Railways (DSB);  and Inter City Railways Limited, jointly owned by Virgin Group Investments Limited and Stagecoach Group plc.  The SRA issued an Invitation to Tender to the pre-qualified bidders on 6 October 2004 and is expected to announce its choice of preferred bidder in February 2005.  The franchise term (a period of six years and 11 months) is expected to commence on 1 May 2005.

The anticipated transaction was notified by FirstGroup on 20 October 2004.  The 40-working day administrative deadline was 15 December 2004.

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 (as amended).  If FirstGroup's bid for the ICEC franchise is successful, FirstGroup and ICEC will cease to be distinct.  The franchise's turnover in the UK in the last financial year was in excess of £70 million.  Therefore, the transaction meets the turnover test in section 23 of the Enterprise Act 2002 (the Act). 

Accordingly, the OFT believes that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation for the purposes of section 33(1)(a) of the Act.

ASSESSMENT

FirstGroup is one of the four competing bidders for the award of the ICEC franchise by the SRA.  The ICEC franchise will be subject to extensive SRA regulation.  Assessment of this merger must therefore take account of the surrounding regulatory context.

Focusing on point-to-point journeys where the ICEC franchise rail services overlap with rail or bus services already provided by FirstGroup, it is possible to identify a number of key overlaps where, post-merger, FirstGroup would be the only or the major supplier of rail services, particularly on Scottish routes, in North-East England, and on certain flows between Doncaster and London.

Those overlaps affecting ScotRail do not give rise to concerns.  In most cases, ICEC is not currently a key competitor to ScotRail and the merger will not, therefore, substantially change the competitive position.  On the small number of other flows where the ICEC runs more than three trains per day, there is no realistic prospect of a substantial lessening of competition.  Here, the differentiated nature of the ScotRail and ICEC services, the effects of regulation, and/or continued competition from other public transport operators (such as Virgin, Stagecoach and Citylink) are relevant factors.

Three flows served by both Hull Trains and the ICEC franchise have raised particular third party concern.  While [  ] proportion of Hull Trains' revenues on these flows derive from [  ], the possibility for post-merger changes in ticket availability or mix, and the prospects for continued availability of dedicated fares on the current Hull Trains services give rise to concerns about increases in average ticket prices.  The loss of Hull Trains, an independent competitor largely unconstrained by regulation, could therefore lead to a substantial lessening of competition.

As regards Trans-Pennine Express, the very small number of flows, passengers and revenues makes detailed analysis difficult.  Again, [  ] fares appear to account for [  ] of TPE's fare revenues.  However, there remains evidence that leads the OFT to believe that as a result of the merger there may be a realistic prospect of a substantial lessening of competition. 

The undertakings given by FirstGroup in the context of the First/ScotRail merger inquiry most competitive concerns on point-to-point bus-rail overlaps.  Only one bus overlap route falls outside the scope of the undertakings and that does not meet the criteria set out in the First/ScotRail report for identifying overlap concerns.  In addition, the ICEC franchise runs long distance services, with relatively few stops. Therefore it is likely to meet a different customer demand to that served by FirstGroup's local bus services, so that network effects concerns do not appear to arise.  Accordingly, the OFT has no reason to believe that the bus on rail overlaps may give rise to competition concerns.

In conclusion, the OFT believes that it is or may be the case that the acquisition may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom in particular on certain rail flows between Doncaster and London and around Northallerton in Yorkshire.

DECISION

The OFT is therefore referring the anticipated acquisition by FirstGroup of the ICEC Franchise to the Competition Commission on the information currently available under section 33(1) of the Act.

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