Octagon Motorsports Limited and British Racing Drivers Club Limited: A report on the merger situation

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Summary

Introduction

The Secretary of State for Trade and Industry asked us to investigate the acquisition by Octagon Motorsports Limited (Octagon) of assets of British Racing Drivers Club Limited (BRDC) (see Appendix 1.1 for our terms of reference).

Octagon, formerly called Brands Hatch Leisure Group Limited (BHL), has since November 1999 been a subsidiary of the Interpublic Group of Companies Inc of the USA, a large advertising and marketing services company. Before the BRDC acquisition, Octagon owned four licensed motor-racing circuits in the UK, including Brands Hatch.

BRDC is a company limited by guarantee whose main objects are to provide a members' club and promote British motor sport. It owns the Silverstone motor-racing circuit.

The merger

In 1999 Octagon (then BHL) signed contracts with Formula One Administration Limited (FOA) under which it would replace BRDC as promoter of the British Grand Prix. Initially Octagon offered to acquire Silverstone from BRDC, hoping to stage the race there, but BRDC refused its offer. Octagon then applied for planning permission to upgrade Brands Hatch to Formula One standards but its application was called in by the Secretary of State for the Environment, Transport and the Regions with a view to his making a decision following a pub-lic inquiry. The resulting delay would have put Octagon in breach of its contract with FOA. Octagon therefore negotiated the agreement with BRDC which is the subject of our inquiry.

Under the agreement Octagon was granted a 15-year lease of the Silverstone circuit and took over the operation of the circuit from BRDC. Octagon agreed to carry out an investment programme costing up to US$60 million to upgrade Silverstone, which had been criticized by FOA for not keeping up with current standards. It was agreed, however, that BRDC and FOA would each contribute $20 million to the cost: BRDC through a reduction in rent under the lease and FOA through a reduction in the fees which Octagon had agreed to pay for the right to promote the British Grand Prix. FOA also agreed to extend Octagon's contract to promote the race, previously due to run from 2002 to 2007, to 2010.

The markets affected

Three product markets are affected by the merger: a downstream market for the supply to final consumers of motorsport activities based at licensed circuits; an upstream market for the supply of track time to organizations offering motorsport activities to final consumers; and an upstream market for the promotion of motorsport events at licensed circuits.

The downstream market has three segments:

- spectator events;

- participatory activities for consumers with their own vehicles; and

- participatory activities for consumers who are provided with vehicles by the supplier of the activity.

The geographical extent of these downstream segments ranges from international to national and local. Further, there are differences in the extent to which consumers in these seg-ments see alternative leisure activities as substitutes. The two upstream markets, by and large, operate on a national basis.

Assessment of the merger's effects

As a result of the merger Octagon now controls five of the 18 licensed circuits in the UK, including two of the best known. The merger has increased Octagon's share of turnover from circuit operations from 28 to 72 per cent. If the British Grand Prix is excluded from the figures, the increase is from 39 to 60 per cent. Further, Silverstone is more important as a competitor to Brands Hatch than the other way around because Brands Hatch is relatively isolated from other circuits whereas Silverstone is not far from three other circuits, which are operated by parties other than Octagon. The merger has therefore given Octagon control of one of the main rivals to Brands Hatch.

In order to assess the merger's effects on the public interest, we had to consider what would have happened in the absence of the merger. It was put to us that the merger had ensured that a round of the Formula One championship would continue to be held in the UK. In our judgement, however, if the merger agreement had not been reached, an alternative arrangement, not involving a merger between Octagon and BRDC, was likely to have been made to keep the British Grand Prix.

A sizeable proportion of the spectators at major motor-racing events are likely to see other sporting and leisure activities as acceptable substitutes for motorsport. This constrains the ability of circuit operators to raise prices for major events. Smaller events are attended mainly by enthusiasts and draw from a more limited geographical area. For such events, however, Octagon could not raise prices at Silverstone above market rates because of the competition that it faces from other circuits in the Midlands. Given that the catchment areas of Silverstone and Brands Hatch overlap, a constraint on prices at Brands Hatch would remain largely unchanged. Accordingly, we consider that the merger does not significantly reduce competition for spectators of motorsport events.

As regards customers for participatory activities, we consider that motor-racing clubs, track-day organizers (TDOs) and teams wanting to carry out testing have sufficient choice of venues to prevent Octagon acquiring significant market power in the supply of circuits to these cat-egories of customer. (The exception is Formula One teams, for which Silverstone is cur-rently the only usable UK circuit, but that situation is not changed by the merger.) Customers for experience days, who are primarily non-enthusiasts for motor sport who visit a circuit on a one-off or occasional basis, are likely to see the experience as one form of leisure activity among a number which they would be happy to engage in. Moreover the provision of these activities is not restricted to licensed circuits. There are therefore ample substitutes on both the demand and supply sides for these activities.

Octagon is vertically integrated in the supply of track days-when circuits are opened to members of the public to drive their own vehicles-through On Track, its in-house TDO. At present On Track organizes only one-fifth of the track days held at Octagon circuits. There would be grounds for concern if Octagon excluded other TDOs from its circuits and there have been complaints that it has done so in some cases. However, the merger makes only a small difference to the share of demand taken by Octagon-controlled circuits.

Octagon is also vertically integrated in the promotion of motorsport events through its involvement with British Motorsport Promoters Limited (BMP), the most important domestic promoter, with two major car-racing championships and one motorcycle championship in its portfolio. BMP is jointly owned by operators of licensed circuits, and the ownership of voting shares reflects the number of rounds of the three championships which are held at each share-holder's circuit(s). The merger has resulted in Octagon having a majority of the voting shares and formal control of the company. However, in our view, Octagon was already in effective control of BMP before the merger.

Conclusion

Accordingly, we have found that the merger will not give rise to adverse effects and we conclude that it is not against the public interest. We do, however, have some concerns for the future. These stem partly from the combination of Octagon's horizontal strength in the control of licensed circuits and its vertical links in the provision of track days and the promotion of spectator events, though they potentially apply to other circuit operators too. We propose that the Director General of Fair Trading should review the operation of the relevant markets within five years. There is also a more immediate need for improvements in some aspects of the workings of BMP, which is the responsibility of both Octagon and the other shareholders.

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