The Competition Commission provisionally finds that a local merger bus will substantially lessen competition

The UK Competition Commission (CC) has provisionally found the Stagecoach acquisition of Eastbourne Buses and Cavendish Motor Services, referred to it by the OFT, as anticompetitive. In October and December 2008, Stagecoach acquired the entire share capital of two Eastbourne local bus operators, first of Eastbourne Buses and then of Cavendish Motor Services. These mergers drew the OFT attention since Stagecoach will be the sole supplier of local bus services in Eastbourne.

The OFT determined that Eastbourne constituted a substantial part of the UK under sec. 23(4) of the Enterprise Act 2002 and that the merger met the test 'it is or may be the case that the above acquisitions creates a relevant merger situation' and asserted jurisdiction on the Stagecoach acquisition of Eastbourne Buses and Cavendish Motor Services. To establish jurisdiction on the mergers, the OFT relied on the fact that Eastbourne have the same population as Slough the CC held to constituted a substantial part of the UK and also has a vibrant tourist economy. Furthermore, the transactions significantly exceeded the 25% share of service supply for the purpose of section 23.

To study the competitive effects of transport mergers the OFT employs a flow-by-flow-analysis, or where appropriate a network-base analysis. In the Eastbourne Buses case it opted for a network-wide basis given that Eastbourne Buses and Cavendish competed on a network-wide basis rather than on flow-by-flow basis.

The OFT was asked by Stagecoach to consider whether the failing firm defence applied. Because of the relevant merger situation consisted of two consecutive transactions, the relevant question in counterfactual was whether the Stagecoach acquisition of an additional bus operator created the realistic prospect for a substantial lessening of competition. Eventually, the OFT rejected the defence because Cavendish was a viable concern, which, absent the merger would have continued on trading, although with less services, and other bus operators were willing to bid for targets.

As for the assessment of horizontal effects, pre-merger the networks of Eastbourne Buses and Cavendish overlapped extensively, with the targets competing on price and service on 70 flows. In the post-merger market competition between Eastbourne Buses and Cavendish would have disappeared and Stagecoah would have gained a monopoly position and entry of new operators was improbable. New competitors would be put off by the likely Stagecoach aggressive reaction to new rivals rather than by difficulty to find a suitable bus depot. Small scale entry, though feasible in the past, now appear to be unlikely given the strong Stagecoach market position.

The OFT did not apply the de minimis exception to the mergers. To calculate the relevant annual value of the markets concerned, as the parties competed on frequencies and quality of services, rather than on price, the OFT also factored in revenues generated by concessionary fares. The value of the market in Eastbourne Buses was so determined in the region of £ 6 millions, then well below the £10 million threshold beyond which, as indicated by the OFT, the de minimis shall not apply. Notwithstanding that, the OFT refused to apply the de minimis given that the merger would result in the creation of a monopoly. So a deterrent factor was expected from the second-phase investigation into merger rather from the application of the minimis exception and referred the merger to the CC. As a result, the OFT decided to refer the merger to the CC.

The OFT is growing concerned on competition in local bus market. Because of the ongoing consolidation process, this market is quite concentrated, with nearly two-thirds of services now controlled by five large operators. Thus it started a survey to assess the impact of concentration on fares and services, and on competition between operators bidding for tendered services. As John Fingleton, OFT Chief Executive, said: 'The OFT receives regular complaints about bus prices, service levels and a perceived lack of competition between companies bidding for tenders. At the same time many claim that even where there is competition it has failed to deliver improvements in local bus services. The study will test these issues against the available evidence’. By the same token the OFT decided to refer to the CC two two-to one mergers in local bus markets giving the entity resulting from the merger very high market shares (Preston Buses and Eastbourne Buses).

As for Eastbourne Buses, the CC embraced the results of the OFT investigation and provisionally found that the merger will lead to a substantially lessening of competition. Had Eastbourne Buses and Cavendish Motor Services not been bought by Stagecoach they would have been likely to continue competing on the provision of local bus services in Eastbourne, though on a reduced scale. The market power of Stagecoach is unlikely to be restrained by inter-mode competition and entry of new competitors in the market is improbable.