FirstBus Plc and S B Holdings Limited: A report on the merger situation

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Summary

In June 1996 FirstBus plc (FirstBus) acquired 100 per cent of the issued share capital of S B Holdings Limited (SBH). Under the reference (see Appendix 1.1) we have to decide whether, as a result of this transaction, a merger situation qualifying for investigation has been created and, if so, whether that situation operates or may be expected to operate against the public interest.

SBH has a fleet of some 1,200 buses operating mainly in Glasgow and the outlying towns to the north and east of the Glasgow conurbation. In the year ended 31 March 1996 it generated a turnover of £91.9 million and an operating profit of £11.2 million representing 12.2 per cent of turnover. SBH conducts its operations through three subsidiaries, Strathclyde Buses Limited (SBL), Comlaw 313 Limited trading as GCT and Kelvin Central Buses Limited (Kelvin).

FirstBus's Scottish operations (apart from SBH) are in Aberdeen and north-east Scotland, central Scotland and the Scottish Borders, and have a fleet of some 850 buses. In the year ended 31 March 1996 FirstBus's Scottish operations generated a turnover of £60.4 million and an operating profit of £9.2 million representing 15 per cent of turnover. FirstBus is the largest UK provider of local bus services with over 19 per cent of the total, measured by turnover. It has a UK fleet of some 6,800 vehicles. In the year ended 31 March 1996 its UK operations generated a turnover of £356.3 million and an operating profit of £35.1 million representing 9.9 per cent of turnover.

We conclude that a merger situation qualifying for investiga-tion has been created. The share of supply test is satisfied in a substantial part of the UK: the area comprising the unitary authorities of Argyll and Bute, East Ayrshire, East Dunbartonshire, Renfrewshire, Glasgow City, Inverclyde, North Ayrshire, North Lanarkshire, South Ayrshire, South Lanarkshire, West Dunbartonshire and East Renfrewshire. In that area SBH supplies 53 per cent of the bus services and FirstBus's other subsidiaries 1 per cent. The operations of FirstBus's subsidiary Midland Bluebird Limited (Midland Bluebird) are adjacent to the north and east of SBH's territory. Midland Bluebird's operations have recently been enhanced by the addition of part of the operations and assets of another FirstBus subsidiary, Eastern Scottish Omnibuses Limited (known as SMT); we refer to this enhanced business as the enlarged Midland Bluebird.

We consider that in the deregulated market actual and potential competition from large adjacent operators is the main safeguard against abuse of a dominant position. Following the merger this element is significantly reduced for the foreseeable future. FirstBus is by far the largest operator in central and south-east Scotland where SBH supplies 40 per cent of the bus services and FirstBus's other subsidiaries 21 per cent. The merger situation has eliminated competition and potential competition between FirstBus and SBH. The scale and dominance of FirstBus/SBH in central and south-east Scotland is likely to deter competition with SBH from the two other large adjacent operators, Stagecoach Holdings plc (Stagecoach) and Cowie Group PLC (Cowie). It will also deter entry by others. We do not believe the remaining constraints will put sufficient pressure on FirstBus to ensure that fares and subsidies are kept down and the frequency of services maintained.

Nor do we believe there are likely to be any benefits to the public interest arising from the merger such as to offset the detriment to competition. We conclude that the merger situation is against the public interest.

Behavioural remedies would be inadequate to remedy the adverse effects we have identified. Nor do we consider that the divestment of the enlarged Midland Bluebird would be sufficient, because we are not confident that this would reinstate the sort of potential competition that would keep SBH on its toes.

We recommend that FirstBus should be required to divest:

(a) the enlarged Midland Bluebird; and

(b) part of the business of SBH including, as a minimum:

(i) one of the four central Glasgow depots and associated assets;

(ii) a network of routes spread reasonably over Glasgow representing 20 per cent of SBH's turnover; and

(iii) a bus fleet appropriate to service these routes,

to a single buyer approved by the Secretary of State. FirstBus should further be required to identify a firm buyer with whom agreement in principle has been reached to purchase the businesses concerned, within nine months of the publication of this report. Should the recom-mended divestment of part of the business of SBH prove to be impractical, we recommend that FirstBus should be required to divest SBH in its entirety, without divestment of any of Midland Bluebird's operations.

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