Badgerline
Holdings Ltd and Midland Red West Holdings Ltd
A report on the acquisition by Badgerline Holdings Limited
of Midland Red West Holdings Limited
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Summary
On 17 October 1988, the Secretary of State asked the Commission
to investigate the acquisition of Midland Red West Holdings
Ltd (MRWH) by Badgerline Holdings Ltd (BHL) on 22 April 1988.
MRWH, trading as City Line, provided bus services in the centre
and suburbs of Bristol and elsewhere not relevant to this
inquiry while BHL, trading as Badgerline, served the area
surrounding Bristol and linked it to the centre of the city.
In order to determine whether there was a merger situation
qualifying for investigation, we had to be satisfied that
the combined enterprises supplied at least one-quarter of
the bus services in the County of Avon and its environs and
that this area (the specified area) was a substantial part
of the United Kingdom. We found that the combined enterprises
supplied around 82 per cent of bus services, shared roughly
equally between them in the specified area. We also found
that the
specified area, although less than 2 per cent of the area,
and having less than 3 per cent of the population, of the
United Kingdom, played a significant part in the overall life
of the United Kingdom (considered as a geographical and economic
unit) and could not be regarded as not substantial. We therefore
concluded that the area was of sufficient importance to be
described as a substantial part of the United Kingdom and
that the market share test was accordingly satisfied. One
member dissented from this conclusion; in his view the specified
area could not be so described by any ordinary use of the
word substantial.
We found that the quality of the services provided by Badgerline
and City Line was generally appreciated and noted that restoration
of interavailability of tickets between them had been popular
with passengers. We also accepted that benefits in respect
of rationalization and the associated cost savings would be
substantial.
There was considerable opposition to the merger from other
bus companies on the ground that it had increased the dominance
of the combined enterprises within the specified area to the
extent that it was now overwhelming. In considering this we
found it useful to look at competition for the provision of
bus services in the specified area in two parts, commercial
services and local
authority supported services (contract services).
As regards commercial services, we found that Badgerline and
City Line had not competed with each other prior to the merger.
They had regarded their services as complementary and head-to-head
competition as futile. We recognized that despite this there
was the potential for competition which might have served
to keep the companies on their toes. BHL argued that the main
incentive for it to maintain standards was to avoid loss of
patronage and in particular to resist competition from other
modes of transport. We found this a persuasive argument and
taking into account also the lack of competition between the
merged enterprises before the merger, we concluded that there
was no material loss of potential competition in the provision
of commercial services.
As to contract services, we found that some 80 per cent by
value in the specified area were let by the County of Avon.
The County feared that if Badgerline and City Line did not
continue to compete for its contracts, the effect, given that
its funds were limited, would be to drive up tender prices
leading eventually to some curtailment of contract services.
These services met a variety of
social needs not met by commercial services. BHL, which gained
over 14 per cent of its revenue from contract services, contended
that there would be no loss of competition for Avon's contracts
because Badgerline and City Line would continue to work independently
and would still face competition from other operators.
We expected that Badgerline's and City Line's bidding for
Avon's contracts would be co-ordinated to the extent that
it was commercially advantageous to do so, unless this was
prevented. We concluded that there was a real expectation
that effective competition between Badgerline and City Line
for these contracts would disappear as a result of the merger
with the loss of one of the two principal bidders for the
contracts as an independent competitive force. We found that
there was no prospective competitor of equal weight to City
Line in the specified area.
We identified serious detriments to competition for Avon's
contract services as a result of the merger. The first detriment
was the expectation of an increase in the anti-competitive
practice whereby Badgerline, having deregistered certain commercial
services, had reregistered them partially or wholly after
failing to win the tendered contracts for the subsidized services
replacing them. The second was the loss of City Line as an
independent major competitor for Avon's
contract services. Substantial benefits arose from the merger
but in our view these benefits were not sufficient to outweigh
the particular detriments we had identified. We concluded
therefore that the merger may be expected to operate against
the public interest. The particular effect adverse to the
public interest was that the merger would weaken competitive
tendering and thus increase the cost to Avon of supporting
socially necessary bus services or, in certain circumstances,
make it
impossible for Avon to support these services to the full
extent that it would wish to support them.
We considered that divestment would be an unnecessarily drastic
remedy if there was a satisfactory alternative which would
preserve the benefits arising from the merger. We therefore
recommend that the Director General of Fair Trading should
seek undertakings from BHL as to its future behaviour in regard
to Avon's contract services on the basis of the proposals
we have made. Should the Director General be unable to obtain
satisfactory undertakings, we recommend that the merger should
not be allowed and BHL should be required to divest itself
of MRWH in part by selling City Line to a third party or to
dispose of MRWH as a whole to a third party.
Two members dissented from the above conclusions. They agreed
with the majority that the merger had not reduced competition
for commercial services. They accepted that the merger had
removed a major competitor for Avon's contract services. However,
they considered that this was being offset by increased competition
from other bus companies. There was now no reasonable expectation
that the merger would lead to an increase in tender prices
or to the withdrawal of
socially desired services. They did not find that Badgerline's
reinstatement of commercial services was anti-competitive,
and there was no evidence that it had deterred competitors.
They concluded that neither of the proposed undertakings was
necessary, and both undertakings had serious disadvantages.
They agreed with the majority that the benefits of the merger
would be substantial.
Furthermore, they thought it reasonable to give more weight
to the actual and potential benefits than to the possibility
of increases in tender prices in a small and decreasing number
of cases, at a time when competition from other firms seemed
to be strengthening. The two members concluded that the merger
may be expected not to operate against the public interest.
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