SUMMARY OF S B HOLDINGS LIMITED AND
KELVIN CENTRAL BUSES LIMITED: A REPORT ON THE MERGER SITUATION
Under the reference (Appendix 1.1) we have to investigate the merger
in October 1994 whereby S B Holdings Limited (SBH) acquired the whole
of the share capital of Kelvin Central Buses Limited (Kelvin) for consideration
worth 11.1 million.
SBH was created to take over the municipal bus operation of Strathclyde
Regional Council in 1993. Before the merger it had a fleet of some 800
buses operating mainly in the Glasgow city area. In the year to end-March
1994 the company generated turnover of 58.2 million and an operating
profit of 2.7 million. SBH is owned by its employees and directors,
apart from a 20 per cent shareholding acquired by Stagecoach Holdings
plc (Stagecoach) in December 1994. That acquisition has been the subject
of another reference to us, on which we are reporting separately (the
Stagecoach/SBH report).
Kelvin, a former subsidiary of the Scottish Bus Group, operates mainly
in the outlying towns to the north and east of the Glasgow conurbation.
Until acquired by SBH it was owned by its employees and directors. In
1993 Kelvin's business, with a fleet of some 500 buses, made an operating
loss of 1.5 million on turnover of 27.6 million.
In that part of Strathclyde region which we identify as the relevant
area for the purpose of our inquiry, SBH and Kelvin are the two biggest
suppliers of local bus services with 43 and 23 per cent of the total
market respectively. Although the operations of the two companies overlap
to some extent, actual competition between them immediately before the
merger was muted. More important is the loss of potential competition
brought about by the merger: Kelvin would probably have been bought by
another operator if SBH had not taken it over.
We identify various factors which are likely to constrain any attempt
by SBH to abuse its strong market position. These include the presence
of a large number of small operators, heavily subsidized local rail and
underground services and, most importantly, the presence of three national
operators, each larger than SBH, which surround the SBH/Kelvin area of
operations.
There are benefits which we expect to accrue from the merger, including
through ticketing, co-ordinated timetables, a reduction in congestion
from the elimination of duplicate services and improvements in the quality
of buses. Some but not all of the benefits could have been achieved in
other ways. There are also substantial financial savings, the benefit
of which may be expected to accrue to the public given our expectation
that there will be effective competitive pressures on SBH.
In our assessment of the public interest we emphasize the crucial importance
of potential competition from large adjacent operators, one of which
is Stagecoach. Our normal practice in merger inquiries is to take into
account post-merger events which we regard as relevant, but the acquisition
by Stagecoach of a 20 per cent interest in SBH (see paragraph 1.2) is
dealt with fully in the Stagecoach/SBH report. We therefore leave it
out of account in assessing the effects of the SBH/Kelvin merger for
the purposes of the present inquiry.
On that footing, and after carefully balancing the considerations mentioned
in paragraphs 1.4 to 1.6, we conclude that the merger is not against
the public interest. One member of the Group, Professor Eilon, disagrees;
his views are set out in a note of dissent following Chapter 2.
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