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OFT uses revised 'de minimis' exception for third rail franchise merger

16/08    4 February 2008

The OFT has used its 'de minimis' exception in deciding not to refer the award of the East Midlands Rail Franchise to Stagecoach plc to the Competition Commission (CC). This is the third case of this kind following the November 2007 publication of the OFT's revised merger guidance, which raised the threshold for considering this exception from £400,000 to £10 million, subject to case-by-case evaluation.

Download more information on the guidance (pdf 122 kb).

Although bus and rail may not be close competitors in many UK markets, specific evidence in this case suggested that for certain journeys many passengers would switch from Stagecoach bus to rail services if bus prices increased. While this raises sufficient concerns to result in a reference to the CC, the OFT exercised its de minimis discretion not to do so by concluding that a reference would be disproportionate - in other words, that the markets concerned are not of sufficient importance to justify a reference. 

The OFT's de minimis reasoning in this decision should be read in parallel with the OFT's undertakings in lieu decision in Berkshire newspapers, also announced today. The OFT's analysis is also consistent with that of two earlier de minimis cases, focusing on:

• the peculiar issues raised by rail franchises awards
• the lack of impact on deterrence if the exception were used
• the conclusion that the OFT’s concerns were more marginal than in many other reference cases, and
• the fact that the relevant turnover in this case was quite modest - below £3 million under any scenario.

Simon Pritchard, OFT Senior Director of Mergers, said: 'Our recent track record shows we are determined to avoid disproportionate references. But our de minimis discretion is not a blank cheque from consumers to business. We are increasing our surveillance of merger activity, and completing on mergers to monopoly is at the acquirer’s peril. In risky deals - big and small - there’s a choice: get certainty from the OFT first, or gamble against the CC unscrambling your merger.'

NOTES

1.  De minimis guidance and early cases - the de minimis exception is formally known as the 'markets of insufficient importance' exception to the duty to refer under the Enterprise Act 2002.  In this case, like in the two previous de minimis cases involving rail franchises (see press release 180/07) the OFT did not believe that, as a matter of principle, clear-cut undertakings in lieu of reference were available.  It has reached the opposite conclusion in the Berkshire newspaper case (see press release 15/08).
 
2. The reference test - the OFT has a duty to make a reference to the CC if the OFT believes that it is or may be the case that a relevant merger situation has been created; and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

3. The OFT's duty to refer in this case - in this case the OFT considered that the concerns were realistic enough to establish a duty to refer, but did not conclude they were likely on a balance of probabilities standard (that is, above 50 per cent or more likely than not). In other words, the cases met the 'may be the case' element of the test for reference but not the 'is the case' test.  It is therefore far from certain to the OFT that the CC would have identified concerns at the end of its inquiry. 

4. Merger jurisdiction - under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.

5. The full text of this decision will appear in the mergers section.

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