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OFT decides not to refer Cambridgeshire Busway merger

107/08    18 September 2008

The OFT has used its 'de minimis' exception in deciding not to refer the completed acquisition of Cavalier Contracts Limited by Stagecoach Bus Holdings Limited to the Competition Commission.

Stagecoach and Cavalier are both bus operators in Cambridgeshire and Peterborough. No competition concerns arise in relation to the very limited direct overlaps between their operations. However, the OFT also carefully considered whether there was a loss of potential competition arising from the merger - a concern that led to the OFT's most recent bus merger reference to the CC in 2004. In this case, however, the evidence did not support a theory of harm based on potential competition.

The OFT's concerns were therefore limited to the forthcoming Cambridgeshire Guided Busway, a purpose-built high-speed bus corridor between Cambridge and St. Ives, due to open in spring 2009.

The merging parties make up two of the three operators that have an, in essence, exclusive license to operate on the Busway for an initial five-year period. As such, the merger reduces the number of future operators on the Busway from three to two. The exclusivity provisions in the Busway arrangements meant that OFT could not rely on the prospect of new entry by additional bus operators to resolve its concerns.

As a general matter, a merger reducing the number of rivals from three to two in a market with sizeable entry barriers could raise substantial competition concerns, in absence of good evidence to the contrary. However, in exercising its 'de minimis' discretion not to refer, the OFT relied on the cumulative impact of the following considerations, which suggest a relatively modest potential for the merger to have a significant impact:

• the estimated affected market size is relatively small, in the region of £3 million per year at least in the foreseeable future during the first few years of Busway operation from 2009 
• a substantial lessening of competition only arises if Cavalier would have definitely become a Busway operator without the merger, and it is not entirely clear this would have been the case, and
• aside from competition from the other planned Busway operator, Whippet, Stagecoach will also be constrained to a significant degree by Busway regulation by the Cambridgeshire Council, which limits the degree to which the merger could have an adverse impact.

Simon Pritchard, OFT Senior Director of Mergers, said:

'In this case, our concerns were particular to the new Busway, a relatively small future market that is not yet operational and will be subject to regulatory constraints. Overall, our modest concerns do not justify the further scrutiny of the Competition Commission. It will be critical, however, that stakeholders do not misread this case as a precedent for bus merger policy in general: we remain on guard against bus mergers likely to harm competition and passengers, and will intervene whenever appropriate.'

NOTES

1. Loss of potential bus competition can be a concern for two reasons. First, because the threat of entry can force an incumbent to offer cheaper bus tickets or more frequent services currently. Second, future entry onto the other operator's routes, absent the merger, could improve the offer to passengers once the new rival is operational. In 2004, the OFT to referred the Arriva/Sovereign bus merger in Hertfordshire to the Competition Commission based on potential competition concerns. Although the Competition Commission ultimately cleared that merger, it was by a three to two majority, which underlines the validity of the OFT's decision to refer under the realistic prospect test for reference. See the Competition Commission website. 

2. 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, as in the four previous 'de minimis' cases, see press release 180/07 and 16/08 and 90/08. The OFT did not believe that, as a matter of principle, clear-cut undertakings in lieu of reference were available. It reached the opposite conclusion in the Berkshire newspaper case, see press release 15/08. The OFT's approach to the factors it will take into account in exercising its 'de minimis' discretion in this case is in line with its recent decision in BOC/Ineos (although in that case the OFT ultimately concluded against exercising its discretion, see press release 68/08 and followed in the Nufarm/AH Marks case, see press release 102/08). Download more information on the guidance (pdf 122 kb).

3. 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.

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 the decision will appear in the mergers section as soon as possible.

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