Anticipated acquisition by Stagecoach Group plc and Brunel Trains Ltd. of the Greater Western Passenger Rail Franchise

Affected market: Passenger transport services

No. ME/1800/05

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(1) given on 30 September 2005. Full text of decision published 19 October 2005.

PARTIES

Stagecoach Group plc (Stagecoach) is an international transportation group active in the UK, the USA, Canada and New Zealand. Its UK bus division comprises 16 regional companies. In 2003, Stagecoach launched megabus.com, a long-distance inter-city bus transport service that operates a similar business model to a budget airline (with web-ticketing etc.). Stagecoach's rail division in the UK operates two wholly-owned passenger rail franchises: South West Trains (SWT from Waterloo) and the Island Line (Isle of Wight). It also operates the Sheffield Supertram system. Stagecoach also holds a 49 per cent shareholding in Virgin Rail Group Holdings Limited, which operates the West Coast Mainline and Cross Country franchises (VXC). Stagecoach has also been invited to tender for two other franchises, the Integrated Kent Franchise (IKF) and the Thameslink Greater Northern Franchise (TGN). There is no overlap between either the IKF or TGN franchise and the GWF.

Greater Western Rail Franchise (GWF) will consolidate the existing operations of the First Great Western (FGW), First Great Western Link (FGWL) and Wessex Trains (Wessex) franchises within a single franchise. It will operate long distance, regional and local services in the Thames Valley, Cotswolds, Avon and the West of England and some cross-border services into South Wales. The Strategic Rail Authority's (SRA) Draft Long Form Report for the GWF states that turnover for 2003/2004 across the three current franchises was £601 million.

TRANSACTION 

Stagecoach's (wholly-owned) bidding vehicle, Brunel Trains Limited, is one of three pre-qualified bidders in the competition for the GWF. National Express Group plc (NEG) and FirstGroup plc (First), the parent companies of the incumbent Wessex, FGW and FGWL franchisees respectively, have also pre-qualified to take part in the competition. The current FGW franchise expires on 5 February 2006 and the FGWL and the Wessex franchises expire on 31 March 2006. The SRA anticipates that a preferred bidder will be selected and a new franchise agreement closed by Winter 2005/2006, following the issue of the Invitation To Tender in June 2005. The term of the new GWF is proposed to run for seven years from 1 April 2006, with an automatic extension of three years if agreed performance targets are met.

The parties notified the transaction on 21 June 2005 and, with their agreement, the OFT extended its review beyond the 40 working-day administrative deadline, which expired on 16 August 2005.

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. If Stagecoach's bid for the GWF is successful, Stagecoach and GWF will cease to be distinct. The combined annual UK turnover of the three franchises which will make up the GWF exceeds £70 million, meeting the turnover test in section 23(1)(b) of the Enterprise Act 2002.

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

Stagecoach is one of the three competing bidders for the award of the GWF by the SRA. The GWF will be subject to extensive SRA regulation. Assessment of this merger must take account of the surrounding regulatory context.

For point-to-point journeys where the GWF rail services overlap with bus services already provided by Stagecoach, in many cases Stagecoach would be the only supplier of public transport services post-merger.

As to bus/rail overlaps, the key issue raised by the transaction is whether the combination of these formerly independent public transport alternatives for a given journey would in fact reduce competition such that post-merger Stagecoach would have the incentive to increase bus fares and/or reduce frequencies as a result of the merger. The degree of competition that bus and rail impose upon one another derives from the degree to which passengers would switch between the modes in response to price increases (and/or frequency reductions). On this fundamental question the OFT had no significant empirical evidence in relation to the 84 point-to-point flows at issue. However, preliminary price correlation was consistent with the possibility that on individual flows there might be a material degree of substitutability between bus and rail. In lieu of direct evidence, the OFT has had regard to CC in ScotRail and has sought to test how realistic it is to expect merger-induced bus price increases or frequency reductions by simulation using a range of assumptions.

On assumptions that we believe not to be unreasonable there would appear to be a substantial incentive for Stagecoach to raise bus prices (and/or lower frequencies) and perhaps also to raise unregulated rail fares as a result of the merger. The theory of competitive harm therefore cannot be dismissed as incompatible with the facts available at this stage of merger review. Accordingly, the OFT believes there is a realistic prospect of a SLC in relation to bus/rail overlaps. Despite best efforts, it has not, however, been possible during first-phase review and with the limited direct evidence of substitutability to engage in precise segregation of flows between those that do and do not raise such concerns.

As the bus/rail undertakings in lieu offered do not represent a clear-cut solution to a clear-cut concern, this exception to the duty to refer could not be applied. Given the OFT's duty to refer in any event, it was unnecessary to reach definitive views on issues raised by the many (nearly 300) rail/rail overlaps, albeit of limited duration, or in relation to multi-modal ticketing.

In conclusion, 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.

DECISION

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

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