Completed acquisition by Stagecoach Group plc of the East Midlands Franchise

Affected market: Rail travel

No. ME/3291/07

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 4 February 2008. Full text of decision published on 14 February 2008.

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

PARTIES

Stagecoach Group plc (Stagecoach) is an international public transport group, with operations in the UK, USA and Canada. Stagecoach is a UK listed public company. Its business includes bus, train, tram and express coach operations. East Midlands Trains (EMT) is a wholly owned subsidiary of Stagecoach, and was established specifically for the purpose of pre-qualifying for, bidding for and operating the East Midlands Franchise (the Franchise).

The Franchise consists of the former Midland Mainline passenger franchise and part of the former Central Trains passenger franchise, operating trains from London St Pancras to South Yorkshire and the East Midlands. It also serves a number of other urban areas including Newark, Lincoln and Grimsby. In addition there are a number of 'cross country' services from Liverpool to Norwich.

TRANSACTION

EMT was awarded the Franchise on 21 June 2007 and started operating the Franchise on 11 November 2007. It will continue to operate it until 1 April 2015 provided that preset performance criteria are met.

The transaction was notified on 11 September 2007. The Office of Fair Trading's (OFT) (extended) statutory deadline for deciding whether to refer the merger to the Competition Commission (CC) is 21 February 2008.

JURISDICTION

The European Community Merger Regulation (ECMR) does not apply because the Community-wide turnover of Stagecoach and that of the Franchise do not reach the turnover thresholds in Article 1 of the ECMR.

The award of the Franchise to EMT constitutes an acquisition of control of an enterprise by virtue of section 66(3) of the Railways Act 1993 and therefore Stagecoach and the Franchise ceased to be distinct. As the anticipated turnover from the first year of operating the Franchise is expected to exceed £70 million by some margin (turnover for the financial year 2006/2007 on the Franchise flows was £[       ]) the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

No third parties raised any competition concerns in relation to this merger.

ASSESSMENT

Stagecoach commenced operations of the Franchise on 11 November 2007. The merger resulted in a large number of overlaps between the Franchise and Stagecoach's existing bus, coach, tram and rail transport interests. As in previous cases, the OFT considered the effect of the transaction on a flow by flow basis, on the basis that the degree of substitutability between different modes can vary from flow to flow.

The merger resulted in two rail-on-rail/tram overlaps and two coach-on-rail, overlaps, none of which raised concern due to the small increment caused by the merger, or the continuing presence of effective competition. There were a number of bus-on-rail overlaps. While many of these overlaps could be dismissed on the basis of a preliminary analysis, and a number fell within certain filters which the OFT considered were appropriate to apply in this case, the OFT and Stagecoach agreed that ten bus-on-rail flows would be the subject of further analysis by way of a passenger survey.

The passenger survey suggested relatively high diversion ratios from bus to rail on all flows in the event of a ten per cent increase in bus prices. Stagecoach and the OFT each produced profitability analyses based on these diversion ratios. Given the different set of assumptions used to construct the profitability analyses, these produced different results on the incentive for Stagecoach to increase bus prices on the overlap flows following the merger. The OFT therefore considered each flow in turn, taking into account the features of the flow that make up the generalised cost for each mode of transport, the different results of the profitability analysis under the different assumptions, other qualitative factors arising from the survey and the arguments made by Stagecoach as to its ability and incentive to increase fares on the individual flows even in the event of an increase in profit on that flow.

Taking all of the above factors into account, the OFT considered that the merger could raise competition concerns on four of the overlapping flows: Luton - Bedford, Worksop - Whitwell, Worksop - Creswell, Chesterfield - Sheffield.

Given the OFT's conclusion on the above flows, the OFT could not rule out competition concerns on either the filtered flows or the flows that were left out the passenger survey due to the small number of bus passengers travelling on those flows. However, the OFT's decision on its duty to refer does not depend on the competitive assessment of these flows, and therefore the OFT did not consider these flows further.

Consequently, the OFT believes 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 pursuant to section 22(1) of the Act.

On this basis, the OFT is under a duty to make a reference to the Competition Commission. However, the OFT has considered whether it would be appropriate to exercise its discretion to apply the exception to the duty to refer pursuant to section 22(2)(a) of the Act to the facts of this case.

Overall, given the cumulative weight of (1) the peculiar issues raised by rail franchise awards cases, (2) the lack of a deterrence multiplier, (3) the small scale of the issues at stake, and (4) the lower 'realistic prospect' standard of belief the OFT has in relation to its substantial lessening of competition findings, the OFT considers that the total impact of the merger on consumer welfare is likely to be limited, and that the costs associated with a CC inquiry are disproportionate to the prospect of benefits from such action. Accordingly, given that the OFT does not consider that undertakings in lieu are, in principle, clearly available, and taking into account all the relevant facts specific to rail franchise awards and this award in particular, the OFT exercises its discretion not to refer because the markets are of insufficient importance to warrant a reference.

DECISION

This merger will therefore not be referred to the Competition Commission pursuant to section 22(2)(a) of the Act.

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