Northgate plc / Arriva Vehicle Rental Ltd
OFT closed case: Completed acquisition by Northgate plc of Arriva Vehicle Rental Limited.
Affected market: Provision of rental vehicles
The OFT’s Decision on reference under section 22 of the Enterprise Act 2002 given on 18 May 2006. Full text of decision published 31 May 2006.
Northgate plc (Northgate) is active in the UK in the supply of vehicles for hire, specialising in the hiring out of light commercial vehicles (LCVs), from over 70 locations throughout the UK.
Arriva Vehicle Rental Limited (AVR) was, prior to the merger, a vehicle rental subsidiary of Arriva plc, also specialising predominantly in the hiring out of LCVs, with 33 branches throughout England. The UK turnover of AVR in the year ending 31 December 2004 was £109.7m.
Northgate has acquired the entire issued share capital of AVR and the transaction was completed on 3 February 2006. The statutory deadline is 2 June 2006 and the OFT’s administrative deadline for dealing with this case is 18 May 2006.
As a result of this transaction Northgate and AVR have ceased to be distinct. The UK turnover of AVR exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
The parties are both principally engaged in the hiring out of LCVs. They also overlap in the hiring out of other vehicle categories, such as cars and larger vehicles.
The hiring out of vehicles can be considered by type of vehicle or by method of hire.
Vehicle hire companies provide LCVs, cars, and larger vehicles to customers. The parties submit that while demand-side substitution between such vehicle categories may be limited, supply-side substitution is possible. They point to some suppliers such as Enterprise Rent-A-Car and Avis Rent-A-Car which, while traditionally focussing on hiring out vehicles other than LCVs, have recently increased their LCV numbers significantly.
Third parties differed in their views on the supply side substitutability of vehicle categories. One third party suggested that supply side substitution is easy as the basic processes involved in the hiring out of vehicles are the same, while another believed that although supply side substitution was possible, customer requirements and regulatory issues are different (with for instance more stringent vehicle inspection and maintenance requirements for LCVs) and significant investment may be required to address such matters.
Given the lack of a conclusive view on substitution as between the parties and third parties a cautious view is taken and individual vehicle categories are considered separately. In terms of the hire of vehicles other than LCVs, Northgate submits that the shares of the parties in the provision of the hire of vehicle categories other than LCV are very small (certainly less than 5 per cent), and no third parties raised issues with regard to cars or larger vehicles. These other overlaps are therefore not considered further.
LCV rental companies offer rental over different time periods and with differing degrees of flexibility. Broadly speaking these can be characterised as flexible daily rental or less flexible longer term contract hire. LCV rental companies tend to specialise in one or the other. The parties themselves offer a flexible service for longer term hire that can be cancelled at a day's notice thereby falling within the definition of ‘daily rental’ (this flexible service forms the vast majority of Northgate’s and AVR’s LCV rental business). The parties submit that supply-side substitution is sufficient to include all such forms of LCV hire in a single market. Third parties stated that they saw flexible longer term daily rental as offered by the parties as being aimed at competing with contract hire and representing a ‘grey area’ between daily rental and contract hire. Northgate provided examples of them losing customers to standard contract hire operators and several daily rental companies such as Burnt Tree, Newtown and Sixt offer contract hire. This evidence suggests a degree of commonality between the businesses. It therefore appears that the parties do compete to some extent with contract hire companies for customers with long-term needs.
The parties’ internal business documents suggest that there is a limit to competition between contract and daily or flexible rental. For example, Northgate’s Strategic Business Plan 2006/09 comments in reference to a competitor that ‘in the contract hire market there has been, and continues to be, a move to greater flexibility in their product offering. They do operate in some sectors of our market but are unable to offer the flexibility and network provided by Norflex and Northgate across the majority of our customer base.’
Third parties differed in their views of the ease of supply side substitution between the business models. One competitor suggested that the majority of suppliers have chosen to specialise in the provision of either contract hire or daily rental. They claimed that this confirms the view that there are significant differences in terms of customer requirements, risk profile and systems and administrative support. However, another competitor commented that it was relatively easy to switch between the two methods of supply with only some additional administrative and staffing costs being incurred.
Overall, the evidence suggests that businesses specialising in each form of rental exercise some competitive constraint on each other. However, given the lack of concern on both a narrow (looking at daily rental alone) and a wider definition (combining all rental) it is not necessary to reach a conclusion on this issue.
The parties submit that the relevant geographic market is at least as wide as the UK. While there are some regional companies active in the sector the parties point to a number of major UK wide companies operating in the sector. Due to the lack of concerns expressed at either a national or a regional level it is not necessary to conclude on this issue in this decision and shares of supply used below are given on a UK wide basis.
In the overall LCV rental sector, the merged parties are the leading company in terms of fleet size with a combined share of supply of less than 20 per cent. There are a number of other players present with shares of around 5-10 per cent including Lex, TLS, Lloyds TSB and Sixt. Taking into account the number of competitors active on the market with significant shares of supply, and the large number of smaller players also present, no concerns arise on this wider frame of analysis.
Considering daily rental by itself, data provided in Northgate’s 2006 Business Plan shows Northgate as the largest daily rental company with Arriva fourth largest after TLS and Leaseway. Sixt, Newtown and Burnt Tree also have sizeable fleets and there are many smaller players.
Third parties differed in their view of how closely the parties competed prior to the merger, with a number mentioning them as close or closest competitors and describing them both as large companies specialising in daily LCV rental. However, all third parties who responded to our enquiries, including eight customers (using both daily and flexible hire), believed that there were sufficient companies in the sector to maintain competition post merger and none raised any competition concerns. On the basis of the above analysis, the OFT considers that competition concerns do not arise in respect of this transaction.
THIRD PARTY VIEWS
Various competitors and customers were contacted and as noted above no competition concerns were raised about this particular transaction.
The parties overlap in the hiring out of LCVs in the UK. Considering the overall LCV rental sector, the parties have less than 20 per cent share post merger and third parties were of the view that sufficient competition remains in the sector. This is also the case if the frame of reference is segregated down to the supply of daily rental services alone. No third party concerns were raised in respect of the transaction.
Consequently, the OFT does not believe 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.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.