Stagecoach Holdings Plc and Mainline Partnership Limited: A report on the merger situation between Stagecoach Holdings Plc and Mainline Partnership Limited

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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 buyout 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 reestablish 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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