S B Holdings Limited and Kelvin Central Buses Limited: A report on the merger situation

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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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