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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