Anticipated acquisition by National Express Group plc of the Greater Western franchise
Affected market: Passenger transport services
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 33 given on 30 September 2005. Full text of decision published 19 October 2005.
National Express Group plc (NEG) is a leading operator of public transport services in the UK with interests in rail, bus and coach operators. Its principal bus interests in the UK are in the West Midlands, with smaller operations in Dundee and London. NEG's coach division comprises three separate brands: National Express (NEL), Airlinks and Eurolines. NEG currently operates eight train operating companies of which Wessex Trains will be absorbed into the new Greater Western Franchise. In addition, NEG currently controls Central Trains (CT), whose operations include services between Hereford and Worcester and between Newport and Cardiff.
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.
NEG is one of three pre-qualified bidders in the competition for the GWF. FirstGroup plc (First, the parent company of FGW and FGWL) and Stagecoach Group plc (Stagecoach), 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 transaction was notified on 21 June 2005 and, with NEG's agreement, the OFT extended its review beyond the 40 working-day administrative deadline, which expired on 20 September 2005.
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 NEG's bid for the GWF is successful, NEG 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 (the Act).
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.
THIRD PARTY VIEWS
The OFT has received representations from the SRA and another third party. The SRA said that the CT franchise is currently being remapped and that the structure of the new franchise will be announced in autumn. The SRA is proposing to postpone the end of the franchise to September 2007. An introduction of dedicated fares on the flows serviced by both GWF and CT would be unlikely, but not impossible.
NEG is one of the three competing bidders for the award of the GWF franchise by the SRA. The GWF franchise 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 coach or rail services already provided by NEG, the merger would result in 338 coach/rail overlaps and 16 rail/rail overlaps. In many cases NEG would be the only supplier of public transport services post-merger.
The key issue raised by these coach/rail overlaps is whether the combination of these otherwise independent public transport alternatives for a given journey would in fact reduce competition such that post-merger NEG would have the incentive to increase bus fares and/or reduce frequencies. The degree of competition that coach and rail impose upon one another derives from the degree to which passengers would switch between the modes in response to price increases. On this fundamental question the OFT had no significant empirical evidence in relation to over 300 point-to-point flows at issue. In lieu of direct evidence, the OFT has sought to test how realistic it is to expect merger-induced 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 NEG to raise coach fares on between 20 and 55 flows. These are mainly flows to/from London and Gatwick and destinations in the West Country and south Wales.
Such changed pricing incentives attributable to the merger may be lessened or removed if the presence or threatened entry or expansion by rivals were a sufficient constraint. However, barriers to entry and expansion in coach services appear to be substantial. From the available evidence, at least, it appears that Megabus may currently only compete with NEG on specific flows/routes and for certain customer groups. Competition from air travel is not considered to pose a substantive constraint on coach fares between the West Country and London.
Post-merger incentives to reduce coach frequency are less clear. The potential profitability of frequency reductions will depend on whether or not it would be possible for NEG to reduce frequency only on overlapping flows.
In sum, the theory of competitive harm in relation to coach fare increases 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 SLC in relation to a minimum of 20 and a maximum of 55 coach/rail overlaps. Despite best efforts, it has not, however, been possible during first-phase review and with the limited direct evidence of substitutability to conclude more definitively among the flows identified between those that do and do not raise such concerns.
As the coach/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 rail/rail overlaps, albeit of limited duration.
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.
This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.