The UK Competition Commission (CC) cleared the Stagecoach acquisition of two troubling Eastbourne local bus operators: a case of ailing firm defence?

By a decision of 22 October 2009 the Competition Commission (CC) has unconditionally cleared the Stagecoach acquisition of two local bus operators in Eastbourne, Eastbourne Buses Limited (EBL) and Cavendish referred by the OFT on the basis of Section 22(1) of the Enterprise Act 2002. Though both the purchased undertakings fell short of the scope of application of the failing firm defence, the CC held that because of the poor market performances of EBL and Cavendish the transaction would not have substantially lessened competition.

Considering the small premerger presence of Stagecoach in the relevant market for the provision of bus services in Eastbourne, the more appropriate counterfactual was whether, should the merger have not proceeded, either EBL or Cavendish would have exited the market in the foreseeable future or would have downsize operations, thereby ceasing to exert competition constraint on the other.

EBL would have not exited the market in the short term, but it was more likely to be bought by an alternative purchaser ready to use the EBL assets to provide bus services in the Eastbourne area. Alike, Cavendish was not expected to exit the market immediately as a result of its inability to cover the direct costs of all the routes operated but to withdraw from the loss-making routes. Thus, neither Cavendish nor EBL qualified for the failing firm defence.

In a longer time-horizon, Cavendish might have significantly retrench its level of services because of difficulty to compete with a likely rejuvenated EBL with the ensuing inability to generate enough revenue to cover total costs. Instead the EBL profitability in the long-run has been indicated by the willingness of two bidders to pay substantial sums of money to buy it.

Even in the absence of the merger head to-head competition between EBL and Cavendish would have reduced because of the probable Cavendish retrenchment of most of its services, to the effect that EBL would have no more perceived it as a competition constraint. The same was expected as regard potential competition.

The CC authorized the merger because it did not found any causality links between the transaction and SLC, given that a reduction in competition would have occurred in any case due to the poor financial conditions of the undertakings purchased. Importantly, to reach this conclusion the CC did not rely upon the failing firm defence. EBL and Cavendish did not met the first condition for the application of the defence, being unlikely to exit the market in the short-run. Instead, the CC took into consideration the poor financial conditions that undermined the profitability of undertakings concerned, forcing them to downsize activities rather than leave the market. Can the reasoning followed by the CC labelled as a sort of “ailing firm defence”? Labelling exercises apart, it is important to point out that during economic recession mergers concerning troubling undertakings are expected to be quite frequent. So, the CC decision bodes well for the parties to such transactions.

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