SUMMARY OF STAGECOACH HOLDINGS PLC
AND MAINLINE PARTNERSHIP LIMITED A REPORT ON THE MERGER SITUATION BETWEEN
STAGECOACH HOLDINGS PLC AND MAINLINE PARTNERSHIP LIMITED
In September 1994 Stagecoach Holdings plc (Stagecoach)
and Mainline Partnership Limited (Mainline) entered into a share exchange
agreement, one effect of which was to give Stagecoach a 20 per cent holding
in Mainline's ordinary shares. Under the reference (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.
Mainline, which was created as an employee-owned company,
is the successor to South Yorkshire Transport Limited, the municipal bus
company owned by South Yorkshire Passenger Transport Authority (SYPTA)
whose operations were sold to Mainline in November 1993. The consideration
for the buy-out was effectively 1 million, payable over five years out
of cash flow, plus the proceeds (if any) of certain clawback provisions—in
particular, SYPTA would receive the whole of the consideration in any
disposal of a majority interest in Mainline in the first five years and
a reducing share over the following five years. In recent years the business,
with a fleet of some 800 buses, has generated annual turnover above 50
million but has made losses or small profits. At March 1994 Mainline had
shareholders' funds of only 1.6 million.
Stagecoach, whose origins are in the private sector,
has grown rapidly since deregulation of the bus industry in 1986, chiefly
by acquiring former public sector companies either on their initial privatization
or subsequently. It was floated on the Stock Exchange in April 1993 and
is now the largest bus operator in the UK, with some 5,500 buses. Its
world-wide turnover in the year to end-April 1994 was 191 million and
the Chairman reported in December 1994 that acquisitions since then had
added 158 million to annualized turnover.
Under the share exchange agreement Mainline issued sufficient
new ordinary shares to give Stagecoach the 20 per cent stake referred
to above. In return Stagecoach issued shares valued at some 1 million
to Mainline. Stagecoach's Chairman, Mr Brian Souter, became a director
on Mainline's Board. In the event of a proposed transfer of control of
Mainline, Stagecoach has the right to make a matching offer, although
to succeed this would have to be recommended by Mainline's Board and accepted
by 90 per cent of shareholders.
We have concluded that a merger situation qualifying
for investigation has been created. First, and contrary to the two companies'
submissions, we believe that as a result of the transaction Stagecoach
has the ability to exercise material influence over Mainline's policy.
Secondly, the share of supply test is satisfied in a substantial part
of the UK—namely the reference area, defined as South Yorkshire and
certain districts of North Derbyshire and North Nottinghamshire—in
that Mainline supplies 46 per cent of bus services in this area and East
Midland, a subsidiary of Stagecoach, 10 per cent.
Mainline is by far the largest operator in Sheffield,
Rotherham and Doncaster. We have particularly focused on Sheffield, where
the majority of Mainline's business is. Mainline's market share in Sheffield
is 64 per cent and no other substantial operator has over 10 per cent.
The merger situation has reduced competition in South Yorkshire by removing
actual and potential competition between East Midland and Mainline and
by enhancing Mainline's ability to weaken the existing small operators
in the area. Most importantly, we believe the prospect of new entry has
been substantially reduced (see below).
There are also benefits. Mainline's perceived weakness
hitherto has made it vulnerable to competitive attack and the results
have not been an unmixed blessing for Sheffield. The strengthening of
Mainline as a result of the merger situation may be expected to improve
its quality of service, to increase reliability and stability in local
bus services and to reduce congestion and pollution. We received a number
of letters from commercial interests in Sheffield, from Sheffield City
Council and from a local MP, all of which supported the merger for these
reasons. In view of the prospect that Mainline will re-establish a position
of dominance in Sheffield, however, we believe it is essential that there
should be a real potential for competition from substantial outside operators
in order to provide a continuing stimulus for Mainline to maintain standards
and keep down fares. Most such operators, however, told us that they now
regarded South Yorkshire as `Stagecoach territory' and expected Stagecoach
to take full control of Mainline in due course. Because of Stagecoach's
reputation for aggression against competitors, which emerged strongly
from the evidence we received, its association with Mainline constitutes
a significant deterrent to potential competitors.
We believe the weakening of competition is not offset
by the benefits identified and that the merger situation may be expected
to operate against the public interest. We consider that a requirement
on Stagecoach to divest would, however, be disproportionate to the adverse
effects as well as putting at risk the benefits. What is important is
to change the perception of other operators that Mainline is now identified
with the Stagecoach group. To achieve this desired change we recommend
that Stagecoach be prohibited from increasing its holding in Mainline
above the present level of 20 per cent.
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Last Revised 04/99
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