Stagecoach Holdings Plc and S B Holdings Limited: A report on the merger situation

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In December 1994 Stagecoach Holdings plc (Stagecoach) acquired a 20 per cent holding in the shares of S B Holdings Limited (SBH). 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.

SBH was created to take over the municipal bus operation of Strathclyde Regional Council in 1993. 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 Stagecoach's 20 per cent shareholding. In October 1994 SBH acquired the whole of the share capital of Kelvin Central Buses Limited (Kelvin). That transaction has been the subject of another reference to us, on which we are reporting separately. SBH now has a fleet of some 1,300 buses operating mainly in Glasgow and the outlying towns to the north and east of the Glasgow conurbation.

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, where it has some 5,700 buses. Stagecoach's worldwide turnover is now £400 million a year, of which £360 million is in the UK.

We conclude that a merger situation qualifying for investigation has been created. First, contrary to the two companies' submissions we believe that, as a result of the transaction, Stagecoach has the ability to exercise material influence over SBH's policy. Secondly, the share of supply test is satisfied in a substantial part of the UK-the region of Strathclyde in that SBH supplies 51 per cent of bus services in this region and subsidiaries of Stagecoach supply 10 per cent.

SBH is by far the largest operator in the area with over two-thirds of the market in several districts in and around Glasgow. Surrounding the area, however, there are subsidiaries of three substantial operators, each larger than SBH. The presence of powerful adjacent operators constitutes the main safeguard against any attempt by SBH to abuse its dominant position. Stagecoach, the biggest of these three, was about to enter into active competition with SBH before acquiring its 20 per cent stake. The merger situation has eliminated the likelihood of competition between Stagecoach and SBH and deterred another of the adjacent operators from entering into further competition with SBH for the time being. The remaining constraints will not in our view put enough pressure on SBH to maintain services and keep down fares.

There are unlikely to be any benefits to the public interest such as to offset the detriment to competition, and we conclude that the merger situation is against the public interest. We recommend by way of remedy that Stagecoach should be required to divest itself of its shareholding in SBH.

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