UK Merger Control 9781509904938, 9781509904914
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- Jonathan Parker
- Adrian Majumdar
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THE AUTHORS Jonathan Parker is a partner in the Antitrust and Competition practice of Latham & Watkins LLP in London. Prior to joining Latham & Watkins, Jonathan was the Director of Mergers at the Competition and Markets Authority (“CMA”) from 2014 to 2016. Jonathan has over 15 years’ experience of advising clients in private practice on a wide range of UK and EU merger control cases, market studies, cartels/restrictive agreements, and abuse of dominance cases and has represented clients in relation to appeals to the UK’s Competition Appeal Tribunal and the General Court in Luxembourg. In 2012, Jonathan was short-listed for the Global Competition Review’s top 40 global antitrust practitioners aged under 40. Jonathan graduated in law from St Hugh’s College, Oxford University in 1998 and qualified as a solicitor of England and Wales in 2002. Adrian Majumdar is a partner in the London office of RBB Economics. Prior to joining RBB in 2004, Adrian was the Deputy Director of Economics at the Office of Fair Trading (a predecessor of the CMA). Adrian has been involved in many of the leading competition cases and has been advising on competition matters since 1995 covering mergers, abuse investigations, cartels and vertical agreements, market investigations, regulation, litigation and compliance advice. He is on the Advisory Board of the British Institute of International and Comparative Law Competition Law Forum and is a non-governmental advisor for the UK to the International Competition Network. Adrian lectures for King’s College London, where he is a Course Director of the Postgraduate Diploma/Masters in Economics for Competition Law. Adrian graduated in economics from Emmanuel College, Cambridge University, and obtained his PhD at the Centre for Competition Policy at the University of East Anglia.
TABLE OF CASES European Court of Justice Aer Lingus Group v Commission, Case T–411/07 ............................................................................76 Commission v Tetra Laval BV, Case C–12/03 P, [2005] ECR I–987 ..............................................793 Royal Philips Electronics NV v Commission, (Case T–119/02) [2003] ECR II–1433 ...................133 European Commission Decisions Aggregate Industries/Foster Yeoman, Case No COMP/M.4298, Commission decision of 6 September 2006.................................................................................132 Ahold/Superdiplo, Case No COMP/M.2161, Commission decision of 23 October 2000 ......................................................................................................................128 AIG Capital Partners/Bulgarian Telecommunicatio NS Company, Case No COMP/M.4721, Commission decision of 27 July 2007 ...............................................128 Amadeus/Navitaire, Case No COMP/M.7802, Commission decision of 19 January 2016 ........................................................................................................142 Anglo American/Tarmac, Case No COMP/M.1779, Commission decision of 13 January 2000 ....................................................................................................132–3 Apax Partners/Telenor Satellite Services, Case No COMP/M.4709, Commission decision of 20 June 2007 ....................................................................................141–2 Arla Foods/Express Dairies, Case No COMP/M.3130, Commission decision of 10 January 2003 ...............................................................................132–3 BIC/Gillette and Others (Case No IV/33.486), 10 November 1992 ................................................546 Birla/Colombian Chemicals, Case No COMP/M.6191, Commission decision of 18 October 2011 ...................................................................................142 Blackstone (TBG CareCo)/NHP, Case No COMP/M.3669, Commission decision of 1 February 2005 .................................................................129–30, 132–3 British Aerospace/GEC Marconi, Case No IV/M.1438, Commission decision of 21 May 1999 ........................................................................................148 British Aerospace/VSEL, Case No IV/M.528, Commission decision of 24 November 1994 ....................................................................................................148 C3D/Rhone/Go-Ahead, Case No COMP/M.2154, Commission decision of 20 October 2000 ....................................................................................................132–3 Cargill/Cerestar, Case No COMP/M.2502, Commission decision of 18 January 2002 ....................................................................................................132–3 Carnival Corporation/P&O Princess, Case No COMP/M.2706, Commission decision of 24 July 2002 .................................................................................119, 133 Compass/Restorama/Rail Gourmet/Gourmet Nova, Case No COMP/M.2639, Commission decision of 26 February 2002 .............................................................................132–3 Danisco/Abitec, Case No COMP/M.5109, Commission decision of 17 April 2008 ...................141–3 EADS/Astrium (II), Case No COMP/M.3156, Commission decision of 26 May 2003..............................................................................................................146 EDF/British Energy, (Case No COMP/M.5224), 22 December 2008 .............................................511
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EDF/London Electricity, Case No IV/M.1346, Commission decision of 21 January 1999 .......................................................................133, 145–6 Exxon/Mobil, Case No IV/M.1383, Commission decision of 29 September 1999.........................133 Finmeccanica/(Case No COMP/M.3559), 20 September 2004; report to the Secretary of State for Trade and Industry, 29 September 2004 ...................................................184 GEES/Unison, Case No COMP/M.2738, Commission decision of 17 April 2002 .....................141–2 GEHE/Lloyds Chemists, Case No COMP/M.716, Commission decision of 22 March 1996 .........................................................................119, 132–3 Glatfelter/Crompton assets, Case No COMP/M.4215, Commission decision of 15 May 2006 ....................................................................................141–2 Govia/South Connex Central, Case No COMP/M.2446, Commission decision of 20 July 2001 .............................................................................129, 132–3 Hanson/Pioneer, Case No COMP/M.1827, Commission decision of 24 March 2000 ......................................................................................................132–3 Hutchison 3G UK/Telefonica UK, Case No COMP/M.7612, Commission decision of 4 December 2015 .......................................................119–20, 130–1, 133 Interbrew/Bass, Case No COMP/M.2044, Commission decision of 22 August 2000..............................................................................................119, 132–3 Lafarge/Redland, Case No COMP/M.1030, Commission decision of 16 December 1997 ................................................................................................132–3 Lesaffre/GBI UK, Case No COMP/M.5020, Commission decision of 11 July 2008 ..........................................................................................................141–2 Lyonnaise des Eaux/Northumbrian Water, Case No IV/M.567, Commission decision of 21 December 1995 ...........................................................................146–7 McKesson/UDG Healthcare (Pharmaceutical Wholesale and Associated Businesses), Case No COMP/M.7818, Commission decision of 3 March 2016 .......................................................................130, 132, 134 MAG/Ferrovial Aeropuertos/Exeter Airport, Case No COMP/M.3823, Commission decision of 8 August 2005 ..................................................................................132–3 Motor Oil (Hellas) Corinth Refineries/Shell Overseas Holdings, Case No COMP/M. 5637, Commission decision of 15 March 2010.......................................128–9 Nabisco/United Biscuits, Case No COMP/M.1920, Commission decision of 5 May 2000 ..........................................................................................133 Orange/T-Mobile Case No COMP/M.5650, Commission decision of 1 March 2010..............................................130 see also T-Mobile/Orange Owens-Illinois/BSN Glasspack, (Case COMP/M.3397), Commission decision of 9 June 2004 ..........................................................................................395 P&O Princess/Carnival, Case COMP/M.2706 ................................................................................119 Procter & Gamble/Sara Lee Air Care, Case COMP/M.5828, Commission decision of 17 June 2010 ................................................................................139, 142 Promatech/Sulzer, Case No COMP/M.2698, Commission decision of 24 July 2002 .................141–2 Rewe/Adeg, (Case COMP/M.5047), Commission decision of 23 June 2008 .................................395 Rewe/Meinl, (Case IV/M.1221), Commission decision of 3 February 1999 ..................................395 RMC/UMA/JV, Case No COMP/M.2596, Commission decision of 12 March 2003 .....................129 StatoilHydro/ConocoPhillips, Case No COMP/M.4919, Commission decision of 21 October 2008 ...........................................................................128, 395 T-Mobile/Orange, Case No COMP/M.5650, Commission decision of 1 March 2010 ................133–4 Tarmac/Steetley, Case No IV/M.180, Commission decision of 12 February 1992 ..................................................................................................132–3
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Tesco/Carrefour, Case No COMP/M.3905, Commission decision of 22 December 2005 ..............128 Thomas Cook/Co-op Midlands, Case No COMP/M.5996, Commission decision of 6 January 2011 .........................................................................130, 132–3 Thrane & Thrane/NERA, Case No COMP/M.4465, Commission decision of 21 March 2007 .................................................................................140–2 Veolia/Cleanaway, Case No COMP/M.4318, Commission decision of 21 September 2006 ....................................................................................................134 Vivendi Environment/Southern Water, Case No COMP/M.2829, Commission decision of 23 August 2002 ....................................................................................147 Warner-Lambert/Gillette and Others (Case No IV/33.440), 10 November 1992 ............................546 United Kingdom Aberdeen Journals Limited v the Office of Fair Trading (2003) CAT 11 ........................................659 A.C. Nielsen Company Limited v Competition and Markets Authority [2014] CAT 8 .......................................................................................................771, 799 Adan v Newham London Borough Council [2001] EWCA Civ 1916; [2002] 1 WLR 2120 .....................................................................................................................782 AG of the Gambia v N’Jie [1961] AC 617 ......................................................................................779 Aggregate Industries v OFT (Case No 1086/4/1/07) .......................................................................733 Akzo Nobel N.V. v Competition Commission [2013] CAT 13 .......................................................771 Albion Water (Bath House) v DGWS [2005] CAT 23; [2006] CAT 23 ..........................................791 Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 ..................788, 796 BAA v Competition Commission, Case No 1110/6/8/09, Notice of Appeal dated 22 May 2009 ..........................................................................................791 BAA v Competition Commission [2012] CAT 3 .............................................................................783 BetterCare Group Limited v Director General of Fair Trading [2002] CAT 6 ................................776 British Sky Broadcasting Group plc v Competition Commission [2010] EWCA Civ 2...................................................................................80, 771, 792–3, 795, 806 British Sky Broadcasting Group plc v Competition Commission and The Secretary of State [2008] CAT 7; [2008] CAT 25 .....................................176, 303–4, 771, 785, 788, 791–2, 796–8, 804–5 British Telecommunications v OFCOM [2010] CAT 17 .................................................................795 British Telecommunications Plc v Telefónica and others [2014] UKSC 42; [2014] Bus LR 765; [2014] 4 All ER 907 ............................................................................782, 793 Celesio AG v Office of Fair Trading [2006] CAT 9.........................................................449, 771, 794 Celesio AG v Office of Fair Trading (Costs) [2006] CAT 20 ..........................................................806 Co-operative Group (CWS) Limited v Office of Fair Trading [2007] CAT 24 ................729–30, 734, 771, 797–8 Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374........................................................................................239, 783, 788 Crest Nicholson v Office of Fair Trading [2009] EWHC 1875 (Admin) ........................................777 CTS Eventim AG v Competition Commission [2010] CAT 7 ............................................771–2, 777, 791, 799 Edwards v Bairstow [1956] AC 14 ..................................................................................................796 Everything Everywhere Limited v Competition Commission [2013] EWCA Civ 153...................782 Federation of Wholesale Distributors v Office of Fair Trading [2005] CAT 8; [2005] CAT 11 ................................................................771, 777, 780
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GCHQ case see Council of Civil Service Unions v Minister for the Civil Service Global Radio Holdings Limited v Competition Commission [2013] CAT 26 ................................771 Groupe Eurotunnel S.A. v Competition Commission [2013] CAT 30 (Eurotunnel I)...........................................................................................41–2, 771, 786–7, 799 IBA Health Limited v Office of Fair Trading [2003] CAT 27; [2003] CAT 28; [2004] CAT 6 ..............................................................................235, 237–40, 352, 771–3, 777, 792, 797, 806 Interbrew S.A. v Competition Commission [2001] EWHC Admin 367; [2001] UKCLR 954 .........................................................................................................776, 790–1 Merger Action Group v Secretary of State for Business, Enterprise and Regulatory Reform [2008] CAT 36 ................................................176, 771, 773–4, 778–9, 783, 804 Napp v Director General of Fair Trading [2002] CAT 1..................................................................791 Office of Fair Trading & others v IBA Health Limited [2004] EWCA Civ 142; [2004] 4 All ER 1103 .......................................................352, 771–2, 788, 791–2, 795–7, 806 OFT v IBA Health [2004] EWCA Civ 142 ..........................................................................235, 241–2 Pearlman v Governors of Harrow School [1979] QB 56 .................................................................785 Project Kangaroo see BBCW/Channel Four Television Corportion/ITV R v Commissioners of Customs and Excise ex parte Greenwich Property Ltd [2001] EWHC Admin 230; [2001] STC 618 ..........................................................782 R v Commissioners for Local Administration, ex parte Croydon LBC [1989] 1 All ER 1033 ..........................................................................................................782 R v Council for Licensed Conveyancers, ex parte Bradford and Bingley [1999] COD 5...........................................................................................782 R v Hillingdon BC ex parte Pulhofer [1986] AC 484 .....................................................................792 R v Inland Revenue Commissioners ex parte National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617 ......................................................806 R v Inspectorate of Pollution ex parte Greenpeace Ltd (No 2) [1994] 4 All ER 329 ......................779 R v Licensing Authority ex parte Novartis Pharmaceuticals Ltd [2000] COD 232 ........................781 R v Monopolies and Mergers Commission ex parte Argyll Group [1986] 1 WLR 763..................241 R v Monopolies and Mergers Commission ex parte Elders IXL Ltd [1987] 1 WLR 1221 .......................................................................................................776 R v Monopolies and Mergers Commission ex parte South Yorkshire Transport [1992] ECC 1 ......................................................................................93 R v Monopolies and Mergers Commission ex parte South Yorkshire Transport Ltd [1993] 1 WLR 23 ...................................................93, 97, 242, 789 R v Secretary of State ex parte Hammersmith and Fulham LBC [1991] 1 AC 521.....................................................................................................797 R v Secretary of State ex parte Nottinghamshire CC [1986] AC 240 .............................................797 R v Secretary of State for the Environment ex parte Rose Theatre Trust Co [1990] 1 QB 504 ..............................................................................................780 R v Secretary of State for Foreign and Commonwealth Affairs ex parte Rees-Mogg [1994] 2 WLR 115; [1994] 1 All ER 457; [1994] QB 552 ......................................779 R v Secretary of State for Foreign and Commonwealth Affairs ex parte World Development Movement Ltd [1995] 1 All ER 611 .............................................779 R v Takeover Panel ex parte Guinness plc [1990] 1 QB 146 ..........................................................796
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R (A1 Veg Ltd) v Hounslow London Borough Council [2003] EWHC 3112 (Admin) [2004] LGR 536 ......................................................................................781 R (British Aggregates Associates) v HM Treasury [2002] EWHC Admin 926; [2002] 2 CMLR 51 ......................................................................................782 Ryanair Holdings v Competition Commission [2012] CAT 21 .......................................................771 Ryanair Holdings v Competition and Markets Authority [2014] CAT 3; [2015] CAT 14 ...........................................................................................................76, 771 Ryanair Holdings v Competition and Markets Authority [2015] EWCA Civ 83.....................................................................................................77, 771, 806 Ryanair Holdings v Competition and Markets Authority, Order of the Chairman of 24 June 2015.......................................................................................803 Ryanair Holdings v Competition and Markets Authority, Order of the President of 19 June 2015 .......................................................................................803 Ryanair Holdings v Office of Fair Trading [2011] CAT 23 .......................................................76, 771 Ryanair Holdings v Office of Fair Trading [2012] EWCA Civ 1579 ................................................76 S, Re [1998] 1 FLR 790 ...................................................................................................................782 Société Coopérative de Production SeaFrance S.A. v Competition and Markets Authority [2015] EWCA Civ 487 ..................................................................771, 787, 806 Société Coopérative de Production SeaFrance S.A. v Competition and Markets Authority [2015] UKSC 75 ......................................................................41–2, 45, 47, 771, 787, 794–5 Somerfield plc v Competition Commission [2005] CAT 37; [2006] CAT 4 .......................................................................................................731, 771, 794, 804 Sports Direct International v Competition Commission [2009] CAT 32 .................................................................................................295–7, 771–2, 774–6 SRCL Limited v Competition Commission [2012] CAT 14............................................................771 Stagecoach Group plc v Competition Commission [2010] CAT 1; CAT 14 .................................................................................................305, 310–11, 771–2, 785–6, 788, 790, 798–9 Stericycle International v Competition Commission [2006] CAT 21 ....................................................................................283–4, 771, 788 Tesco plc v Competition Commission [2009] CAT 6; [2009] CAT 9 .............................................................................................................782–3, 789–90 Tweed v Parades Commission for Northern Ireland [2007] 1 AC 650...........................................................................................................................804 Unichem Limited v Office of Fair Trading [2005] CAT 8 ..........................................................................................................771–2, 788, 791, 793, 796–7, 799 United States of America U.S. v EI Du Pont de Nemours & Co, [1956] 351 U.S. 377 ...........................................................406
TABLE OF LEGISLATION European Union
Treaties EC Treaty Art 81 (now TFEU, Art 101)................................................................................................612, 614 Art 82 (now TFEU, Art 102)........................................................................................................612 Treaty on the Functioning of the European Union (TFEU) .....................................................108, 112 Art 101 ......................................................................................................................11, 33, 73, 208, 589, 651 Art 102 .....................................................................................................................................11, 33 Art 346 (ex Art 296).............................................................................................................111, 148
Directives Dir 86/635/EEC ...............................................................................................................................106
Guidelines EU Horizontal Merger Guidelines ...................................................................................................315 para 20..........................................................................................................................................457 para 43..........................................................................................................................................611 EU Non-Horizontal Merger Guidelines ...........................................................................................655 paras 23–24 ..................................................................................................................................655 para 25..................................................................................................................................647, 655 paras 26–27 ..................................................................................................................................655 para 33..........................................................................................................................................642 para 45..........................................................................................................................................649 para 58..........................................................................................................................................653 para 61..........................................................................................................................................655 para 66..........................................................................................................................................655 para 68..........................................................................................................................................656 paras 73–74 ..................................................................................................................................658
Notices Ancillary Restraints Notice ..........................................................................................................231–2 paras 1–3 ......................................................................................................................................231 paras 12–13 ..................................................................................................................................232 para 18..........................................................................................................................................232 paras 20–23 ..................................................................................................................................233 Case Referral Notice ....................................................................................112–15, 118–20, 125, 127 paras 8–11 ....................................................................................................................................112 para 12..........................................................................................................................................113 paras 13–14 ..........................................................................................................................113, 118
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paras 16–17 ..................................................................................................................................114 para 18..................................................................................................................................115, 124 paras 19–20 ..................................................................................................................................115 paras 21–22 ..................................................................................................................................118 para 35..........................................................................................................................................127 para 36..........................................................................................................................................128 paras 38–39 ..................................................................................................................................128 paras 43–44 ..................................................................................................................................139 para 45..........................................................................................................................................140 para 49..........................................................................................................................................136 fn 39 .................................................................................................................................120, 122 para 50..........................................................................................................................................141 para 56..................................................................................................................................120, 136 para 60..........................................................................................................................................120 para 63..........................................................................................................................................120 para 64..................................................................................................................................120, 136 para 66..........................................................................................................................113, 120, 136 para 68..........................................................................................................................................120 Commission Notice on the definition of relevant market for the purposes of Community competition law 1997, para 57 .......................................................395 Consolidated Jurisdictional Notice ............................................................................44–5, 104–5, 110 para 24............................................................................................................................................44 para 59............................................................................................................................................56 paras 66–67 ....................................................................................................................................64 para 196..................................................................................................................................99, 105 para 197..........................................................................................................................................99 para 199........................................................................................................................................105 para 206 et seq .............................................................................................................................106
Regulations Reg (EC) No 4064/1989 (Merger Regulation) ..................................................................7, 10–11, 13 Reg (EC) No 139/2004 (Merger Regulation) ...........................................13–14, 21, 33, 39, 52, 55–6, 75, 86, 108–11, 122–4, 132, 135, 154, 179, 184, 188, 203, 395, 731 Recital 8 .......................................................................................................................................108 Recital 16 .....................................................................................................................................114 Recital 30 .....................................................................................................................................750 Art 1 .................................................................................................................................39, 86, 124 (1) .............................................................................................................................................108 (2) .............................................................................................................................................110 (3) .............................................................................................................................................111 Art 2 .............................................................................................................................................127 (3) .............................................................................................................................................127 Art 3 .............................................................................................................................................135 (1) .......................................................................................................................................80, 110 (2) .......................................................................................................................................39, 110 Art 4 .............................................................................................................................................130
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(1) .............................................................................................................................111, 120, 202 (4) .................................................................................... 109, 111, 113–15, 118–23, 125–7, 130, 132, 134, 136, 171, 200 (5) .........................................................................109, 113, 125–6, 135–9, 144, 200, 236, 268–9 (6) .............................................................................................................................................124 Art 5 .............................................................................................................................................106 (5) .............................................................................................................................................158 Art 6(1)(c) ............................................................................................................................131, 229 (2) .............................................................................................................................................133 Art 8 (2) .............................................................................................................................................133 (3) ...............................................................................................................................................76 Art 9 .................................................................................108–9, 113, 120, 126–7, 130–5, 145, 171 (1) .............................................................................................................................................229 (2) .................................................................................................................................126–7, 130 (a) .....................................................................................................................108, 127–8, 130 (b) ...........................................................................................................................109, 128–30 (3) .....................................................................................................................................127, 131 (4)(a)–(b) ..................................................................................................................................131 (5) .............................................................................................................................................131 (6) .........................................................................................................................121–2, 131, 179 (7) .............................................................................................................................................121 (8)–(9) ..............................................................................................................................121, 131 Art 10(1).......................................................................................................................................131 Art 14(1)(a) ..................................................................................................................................120 Art 21 .................................................................................................................................39, 75, 86 (3) .................................................................................................................32, 75, 108, 110, 152 (4) .............................................................................................................110, 145–6, 152–3, 184 Art 22 .....................................................................................................109, 126, 139–45, 173, 268 (1) .................................................................................................................75, 139–40, 236, 268 (2)–(3) ......................................................................................................................................141 Art 26 .............................................................................................................................................21 Art 76 .............................................................................................................................................76 United Kingdom Broadcasting Act 1990 Pt 1 ...............................................................................................................................................164 Pt 3 ...............................................................................................................................................164 Broadcasting Act 1996 Pt 1 ...............................................................................................................................................164 Pt 2 ...............................................................................................................................................164 Communications Act 2003...............................................................................................35–6, 61, 782 s 319 .............................................................................................................................151, 164, 169 (1) .............................................................................................................................................170 s 320 .............................................................................................................................................170 s 321(2) ........................................................................................................................................170 s 375(1) ............................................................................................................................150–1, 157 Companies Act 2006 ........................................................................................................................229
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Pt 28, Ch 1....................................................................................................................................229 s 283 ...............................................................................................................................................58 s 382 .............................................................................................................................................228 s 465 .............................................................................................................................................228 Competition Act 1998 ......................................................................3, 8, 16, 35–6, 612, 659, 780, 782 Ch I.......................................................................................................................208, 255, 589, 612 Ch II .............................................................................................................................................651 s 2 ...................................................................................................................................................73 s 18 ...............................................................................................................................................651 s 45 .............................................................................................................................................3, 16 s 60 .................................................................................................................................................33 Sch 7 para 6(2) ...................................................................................................................................275 para 20(2) .................................................................................................................................276 Deregulation Act 2015 .....................................................................................................................688 Electricity Act 1989 ...........................................................................................................................36 Enterprise Act 2002.........................................................1–3, 5–7, 14–16, 19–21, 32–6, 38–41, 44–5, 48, 50, 52–8, 69, 75, 77–8, 80–1, 85–7, 89–90, 92–3, 97–9, 102, 105, 108–10, 122, 131, 135, 140, 148–9, 151–2, 157, 160–3, 171, 173, 177, 188, 193, 207, 215, 217–18, 235–7, 239–41, 243–4, 246–7, 253, 259, 261, 265, 268, 270–4, 279–81, 300–1, 303, 313, 331, 399, 543, 590, 640, 658, 668, 674, 683, 691, 700–1, 717, 727, 750, 754, 771, 777, 779, 787 Pt 3 .......................................................................................................................................102, 219 Pt 9 ...............................................................................................................................................205 s 5 ...................................................................................................................................188–90, 192 (1) .................................................................................................................................................3 ss 12–13 .........................................................................................................................................35 s 14(1)–(2)......................................................................................................................................35 s 22 .........................................................................................................99, 168, 185, 234, 236, 259 (1) .............................................................................................................................................270 (2) .....................................................................................................................................235, 243 (a) .........................................................................................................................................259 (b) .................................................................................................................................261, 263 (3) .................................................................................................................................235–6, 268 (a)–(b) ..................................................................................................................................268 s 23 .............................................................................................................................38–9, 185, 786 (1) ...............................................................................................................................................86 (b) .........................................................................................................................................100 (3) .........................................................................................................................85–6, 88, 92, 95 (4) ...............................................................................................................................85–6, 88, 92 (5) ...............................................................................................................................................87 (9) ...............................................................................................................................................87 s 24 .................................................................................................................................................73 (1) ...............................................................................................................................................40 (3) ...............................................................................................................................................73 s 25 ...............................................................................................................................................715 (1) .......................................................................................................................................74, 194
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(2) .......................................................................................................................................74, 219 (3)–(6) ........................................................................................................................................75 (8) ...............................................................................................................................................75 s 26 .................................................................................................................................................55 (1) .........................................................................................................................................54, 57 (2) ...............................................................................................................................................57 (3) ...........................................................................................................................................56–8 (4)(a) ..........................................................................................................................................55 s 27 .................................................................................................................................................80 (3) .........................................................................................................................................78, 80 (5) ...................................................................................................................................77–8, 105 (6)(a) ..........................................................................................................................................78 (8) ...............................................................................................................................................79 s 28(1) ..........................................................................................................................................100 s 29 .................................................................................................................................................79 (1) ...............................................................................................................................................80 (4) ...............................................................................................................................................80 s 30(1) ..........................................................................................................................261, 700, 751 (2)–(3) ......................................................................................................................................751 s 33 .......................................................................................................................168, 234, 236, 259 (1) ...............................................................................................................................239–41, 270 (2) .....................................................................................................................................235, 243 (b) .........................................................................................................................................267 (c) .................................................................................................................................261, 263 (3) .............................................................................................................................................236 (a)–(b) ..........................................................................................................................236, 268 (d) .........................................................................................................................................236 (za) ...............................................................................................................................235, 268 (3A) ..........................................................................................................................................269 s 34A ....................................................................................................................................121, 131 (5) .............................................................................................................................................122 s 34ZA............................................................................................................................30, 235, 268 (1)(b) ........................................................................................................................................226 s 34ZB ................................................................................................................................30–1, 219 s 35 ...................................................................................................................................272–3, 786 (1) .............................................................................................................................................272 (b) .........................................................................................................................................310 (3)–(4) ......................................................................................................................................742 (5) .....................................................................................................................................743, 751 (6)(a)–(c) ..................................................................................................................................272 s 36 ...........................................................................................................................................272–3 (1) .............................................................................................................................240, 242, 273 (b) .........................................................................................................................................242 (2)–(3) ......................................................................................................................................742 (4) .....................................................................................................................................743, 751 (5)(a)–(c) ..................................................................................................................................272 s 37(1) ..........................................................................................................................................272 s 38(1) ..........................................................................................................................................273 (2) .............................................................................................................................................274 s 39 .................................................................................................................................................15
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(1) .............................................................................................................................................274 (3)–(5) ......................................................................................................................................274 (7) .............................................................................................................................................274 (8) .............................................................................................................................................274 (8A) ....................................................................................................................................30, 277 (8B) ..........................................................................................................................................277 s 40(3)–(4)....................................................................................................................................274 s 41(2) ..........................................................................................................................................749 (4) .............................................................................................................................................749 s 41A ............................................................................................................................................746 (1)–(2) ........................................................................................................................................30 s 42 .................................................................................................................................................35 (1) .............................................................................................................................................173 (2) .....................................................................................................................................172, 268 (3) .............................................................................................................................................151 (4) .............................................................................................................................................173 (7) .....................................................................................................................................151, 173 (8)(a)–(b) ..................................................................................................................................151 s 43(1) ..........................................................................................................................................173 (2)–(4) ......................................................................................................................................174 s 44(2) ..........................................................................................................................................174 (3)(b) ........................................................................................................................................175 (4)(a)–(f) ..................................................................................................................................174 (5)–(6) ......................................................................................................................................175 (9)(a)–(b) ..................................................................................................................................164 (10) ...........................................................................................................................................157 s 44A ....................................................................................................................................165, 176 (2) ...............................................................................................................................................37 (4) ...............................................................................................................................................37 s 45 .......................................................................................................................................175, 180 (2) .............................................................................................................................................176 (3) .............................................................................................................................................177 (4) .............................................................................................................................................176 (5) .............................................................................................................................................177 (6) .............................................................................................................................................175 s 46(2) ..........................................................................................................................................175 (3)–(6) ......................................................................................................................................177 s 47 ...............................................................................................................................................304 (1)–(2) ......................................................................................................................................177 (3) .............................................................................................................................................178 (4)–(5) ......................................................................................................................................177 (6)–(10) ....................................................................................................................................178 s 50(1)–(2)....................................................................................................................................178 s 51(1) ..........................................................................................................................................178 (3) .............................................................................................................................................178 (4) .............................................................................................................................................179 (5) .............................................................................................................................................178 (6) .............................................................................................................................................179 (8) .............................................................................................................................................179 s 52(2) ..........................................................................................................................................179
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s 53(1) ..........................................................................................................................................179 (3)–(5) ......................................................................................................................................179 s 54(2)–(4)....................................................................................................................................179 (5) .............................................................................................................................................180 (7)(a)–(b) ..................................................................................................................................180 (8) .............................................................................................................................................180 s 55(2) ..........................................................................................................................................180 (3) .............................................................................................................................................181 s 57 ...............................................................................................................................................173 s 58 ...............................................................................................................15, 35, 148, 150–1, 171 (1) .............................................................................................................................................150 (2) .....................................................................................................................................150, 152 (2A) ..................................................................................................................................150, 157 (2B) ..........................................................................................................................151, 157, 161 (2C) ..................................................................................................................................151, 164 (a) .................................................................................................................................785, 797 (2D) ..........................................................................................................................................151 (3) .........................................................................................................................................150–1 (4)–(5) ......................................................................................................................................151 s 58A(1)–(2) .................................................................................................................................164 (4)–(5) ......................................................................................................................................785 (6)–(7) ......................................................................................................................................165 s 59(1)–(3)....................................................................................................................................181 (8)(a)–(b) ..................................................................................................................................181 s 60 ...............................................................................................................................................182 s 61(2)–(5)....................................................................................................................................182 s 62(2)–(3)....................................................................................................................................182 (5) .............................................................................................................................................182 s 63(1)–(3)....................................................................................................................................183 (4)(a) ........................................................................................................................................183 s 65(1) ..........................................................................................................................................183 s 66(3)–(6)....................................................................................................................................183 s 67 .......................................................................................................................................147, 151 (1) .............................................................................................................................................184 (b) .........................................................................................................................................184 (3)–(5) ......................................................................................................................................184 s 68 ...............................................................................................................................................151 s 71 ...............................................................................................................................................207 s 72 .......................................................................................................................................192, 194 (1) .......................................................................................................................................30, 208 (2) .....................................................................................................................................207, 713 (c) .........................................................................................................................................215 (3) .............................................................................................................................................713 (3B) ....................................................................................................................31, 189, 194, 217 (8) .........................................................................................................................................207–8 s 73 .................................................................................................................................................15 (2) .................................................................................................................................711, 727–8 s 73A ..............................................................................................................................30, 714, 716 (1) .............................................................................................................................................712 (2) .....................................................................................................................................712, 715
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(3) .....................................................................................................................................712, 716 (4) .............................................................................................................................712, 716, 720 s 74(1) ..........................................................................................................................................236 s 75 ...............................................................................................................................................735 s 77(2) ..........................................................................................................................................280 (8) .............................................................................................................................................279 s 78 ...............................................................................................................................................279 (2) .............................................................................................................................................280 s 80(2) ..........................................................................................................................................280 s 81 ...............................................................................................................................................281 (2) .....................................................................................................................................279, 281 (2A)–(2B).................................................................................................................................281 ss 82–83 .......................................................................................................................................748 s 94A ..............................................................................................................................................31 s 96(2)(aa) ......................................................................................................................................30 (2A) ..................................................................................................................................204, 221 s 99(5)(c) ......................................................................................................................................219 s 103 .............................................................................................................................................721 s 107 .....................................................................................................................180, 192, 226, 274 (9)(b) ........................................................................................................................................180 s 109 ...................................................................31, 179, 192, 205, 210, 218–19, 274, 287–8, 2220 (1)–(3) ........................................................................................................................31, 189, 218 (4)–(5) ..............................................................................................................................219, 288 (6) .........................................................................................................................205, 219, 288–9 (9) .............................................................................................................................................288 (A1) ..........................................................................................................................................219 s 110 .............................................................................................................................................288 (1) ...............................................................................................................................31, 205, 220 (3) .......................................................................................................................................31, 205 (8) .............................................................................................................................................289 s 110A(1)......................................................................................................................................289 s 111 .............................................................................................................................................288 (2) .............................................................................................................................................288 (3) .............................................................................................................................................289 (7) .......................................................................................................................................31, 205 (a)–(b) ..................................................................................................................................289 s 114 .............................................................................................................................................776 s 117 .............................................................................................................................................204 (3) .............................................................................................................................................205 s 119(6) ........................................................................................................................................289 s 120 ............................................................................................35, 297, 770–4, 776, 778–80, 783, 795, 797–8, 802–3 (1) .................................................................................................................297, 774, 777–8, 780 (2) .............................................................................................................................................772 (4) .....................................................................................................................................771, 782 (5) .............................................................................................................................................799 s 121 .............................................................................................................................................226 s 124(7) ........................................................................................................................................151 s 127 ...............................................................................................................................................81
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lvii
(4) .............................................................................................................................................724 s 129(1) ..........................................................................................................................................40 s 179 .............................................................................................................................................783 (4) .............................................................................................................................................783 s 237 .............................................................................................................................................300 (1)–(2) ......................................................................................................................................301 s 238 .............................................................................................................................................300 (1) .............................................................................................................................................300 ss 239–240 ...................................................................................................................................301 s 241(1) ........................................................................................................................................301 (3) .............................................................................................................................................301 s 242(1) ........................................................................................................................................301 s 244 .................................................................................................................................296, 300–1 (2) .............................................................................................................................................301 (3)–(4) ......................................................................................................................................302 Sch 8, para 19.......................................................................................................................208, 218 Sch 10 para 2(2)(f) ...................................................................................................................720–1, 745 (4) .........................................................................................................................................745 (5) .................................................................................................................................720, 745 (c) .....................................................................................................................................722 para 4........................................................................................................................................745 para 5(1) ...................................................................................................................................745 Sch 11, para 11 .............................................................................................................................744 Sch 15...........................................................................................................................................301 Enterprise and Regulatory Reform Act 2013 ....................................................Preface, 2, 16, 29, 194, 198, 205, 207, 215, 217–19, 235, 712, 746, 806 Pt 4 ...................................................................................................................................................2 s 6(8) ............................................................................................................................................194 s 23 .................................................................................................................................................29 s 25 .................................................................................................................................................30 (1)–(2) ..........................................................................................................................................2 (4) .................................................................................................................................................2 s 34ZA(3) .....................................................................................................................................198 s 96(2A) .......................................................................................................................................198 s 103 .................................................................................................................................................2 Sch 4 para 1(3) .....................................................................................................................................33 (4) ...........................................................................................................................................34 para 3(1) .....................................................................................................................................33 (2) ...........................................................................................................................................34 para 9..........................................................................................................................................33 para 28........................................................................................................................................33 Sch 8 para 5(3) ...................................................................................................................................277 para 8(2) .....................................................................................................................................30 Fair Trading Act 1973 ......................................................1–7, 9–10, 13, 15, 94, 154, 157–8, 162, 236 s 1(1) ................................................................................................................................................3 s 57(4) ..........................................................................................................................................158
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s 58 ...................................................................................................................................................9 s 64 (1) .................................................................................................................................................4 (b) .............................................................................................................................................4 (2)–(5) ..........................................................................................................................................4 (9) .................................................................................................................................................4 s 69(1) ..............................................................................................................................................5 s 70(1)–(2)........................................................................................................................................5 s 72(1)–(2)........................................................................................................................................5 s 75(1) ..............................................................................................................................................4 s 75B(2)–(3) .....................................................................................................................................5 s 76 ...................................................................................................................................................3 s 84 ...................................................................................................................................................5 Financial Services (Banking Reform) Act 2013 ................................................................................36 Financial Services and Markets Act 2000 ..........................................................................................36 Gas Act 1986 ......................................................................................................................................36 Health and Social Care Act 2012 .......................................................................................................36 s 79(5) ....................................................................................................................................37, 264 Legal Aid, Sentencing and Punishment of Offenders Act 2012 ......................................................205 s 85(1)–(2)....................................................................................................................................205 (4) .............................................................................................................................................205 Limitation Act 1980 .........................................................................................................................781 Monopolies and Mergers Act 1965 ......................................................................................................1 Radioactive Substances Act 1960 ....................................................................................................779 Railways Act 1993 .............................................................................................................................36 Railways Act 2005 .............................................................................................................................36 Supreme Court Act 1981 s 31(3) ..........................................................................................................................................778 (5) .............................................................................................................................................800 (6) .............................................................................................................................................781 Transport Act 2000.............................................................................................................................36 Utilities Act 2000 ...............................................................................................................................36 Water Industry Act 1991 ....................................................................................................36, 147, 227 Guidelines CAT Guide to Proceedings 2005..............................................................................................795, 802 para 4.6.....................................................................................................................................780–1 para 4.17.......................................................................................................................................780 paras 4.20–4.21 ............................................................................................................................781 paras 4.25–4.26 ............................................................................................................................800 para 4.27.......................................................................................................................................801 para 4.29.......................................................................................................................................801 paras 4.34–4.36 ............................................................................................................................801 para 4.43.......................................................................................................................................801 paras 4.45–4.46 ............................................................................................................................802 para 4.49.......................................................................................................................................800 para 4.57.......................................................................................................................................780 para 4.75.......................................................................................................................................803 para 4.77.......................................................................................................................................803
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para 4.86.......................................................................................................................................802 para 4.87.......................................................................................................................................803 para 4.92.......................................................................................................................................803 paras 4.95–4.96 ............................................................................................................................803 para 7.12.......................................................................................................................................804 paras 7.33–7.50 ............................................................................................................................805 paras 7.71–7.78 ............................................................................................................................795 paras 8.1–8.10 ..............................................................................................................................805 paras 8.22–8.32 ............................................................................................................................807 Competition Act Guideline, Assessment of Market Power, (2004a), para 6.4 ..........................................................................................................................529 Competition Commission Guidelines see Remedies Guidelines DeMinimis Guidance 2007 .........................................................................................244–9, 251, 255, 257–8, 260, 263 Exceptions and Remedies Guidance 2010 ............................................................32, 244–9, 255, 257, 263–4, 711, 727, 730 paras 2.14–2.15 ............................................................................................................................251 para 2.19.......................................................................................................................................259 para 2.21.......................................................................................................................................258 para 2.22.......................................................................................................................................259 paras 2.24–2.25 ............................................................................................................................260 para 2.27.......................................................................................................................................259 para 2.28.......................................................................................................................................250 para 2.30...............................................................................................................................251, 253 paras 2.31–2.32 ............................................................................................................................253 para 2.34.......................................................................................................................................254 para 2.35...................................................................................................................................254–5 fn22 ..........................................................................................................................................254 para 2.36.......................................................................................................................................255 paras 2.37–2.39 ............................................................................................................................256 para 2.40.......................................................................................................................................257 para 2.42.......................................................................................................................................257 para 2.43.......................................................................................................................................258 paras 2.45–2.47 ............................................................................................................................249 para 2.49.......................................................................................................................................249 paras 2.51–2.52 ............................................................................................................................249 para 2.53.......................................................................................................................................250 para 3.4.........................................................................................................................................267 para 4.3.........................................................................................................................................261 fn 36 .........................................................................................................................................261 para 4.4.................................................................................................................................261, 263 para 4.9.........................................................................................................................................263 para 4.10.......................................................................................................................................264 fn 40 .........................................................................................................................................263 para 5.6.........................................................................................................................................728 paras 5.8–5.9 ................................................................................................................................728 paras 5.11–5.12 ............................................................................................................................729 paras 5.15–5.17 ............................................................................................................................730 paras 5.19–5.20 ............................................................................................................................730 paras 5.21–5.22 ............................................................................................................................731
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para 5.26.......................................................................................................................................733 para 5.27.......................................................................................................................................734 para 5.31.......................................................................................................................................717 paras 5.33–5.34 ............................................................................................................................718 paras 5.39–5.43 ............................................................................................................................738 Good practice in the design and presentation of consumer survey evidence in merger inquiries March 2011 ........................................................................561 Guidance on Disclosure, Revised 2013 .......................................................................................300–1 para 1.5.........................................................................................................................................300 para 1.6.........................................................................................................................................300 para 4.2.........................................................................................................................................301 para 4.4.........................................................................................................................................301 para 7.3.........................................................................................................................................292 Jurisdictional and Procedural Guidance 2009...............................................40, 56, 58, 60, 69, 78, 80, 102, 111, 232, 711, 743 para 3.19.........................................................................................................................................58 para 3.51, footnote 68 ....................................................................................................................33 para,4.5, fn 25 ............................................................................................................................52–3 paras 4.6–4.7 ..................................................................................................................................40 para 4.8.................................................................................................................................40–2, 44 para 4.9...........................................................................................................................................48 paras 4.10–4.11 ..............................................................................................................................45 para 4.12.........................................................................................................................................55 paras 4.14–4.15 ..............................................................................................................................57 para 4.19.........................................................................................................................................58 para 4.20.........................................................................................................................................69 para 4.21...................................................................................................................................60, 63 para 4.22...................................................................................................................................64, 66 para 4.23.....................................................................................................................................64–5 paras 4.24–4.25 ..............................................................................................................................65 para 4.27...................................................................................................................................63, 68 para 4.28...................................................................................................................................56, 68 para 4.29.....................................................................................................................................57–8 para 4.30.................................................................................................................................56, 267 paras 4.31–4.32 ..............................................................................................................................79 para 4.33.............................................................................................................................77, 79–80 para 4.34...................................................................................................................................79–80 paras 4.38–4.41 ..............................................................................................................................81 para 4.44.........................................................................................................................................73 para 4.50.......................................................................................................................................101 para 4.51.......................................................................................................................................104 fn 68 .........................................................................................................................................104 para 4.53.........................................................................................................................................86 fn73 ............................................................................................................................................87 para 4.54.........................................................................................................................................86 para 4.55.........................................................................................................................................91 para 4.56...............................................................................................................................86–7, 90 para 4.58.................................................................................................................................99–100 paras 4.59–4.60 ............................................................................................................................100 para 4.62.........................................................................................................................................96
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lxi
para 4.79.........................................................................................................................................33 para 5.53.........................................................................................................................................87 para 6.1.........................................................................................................................................188 para 6.2.........................................................................................................................................188 para 6.7.........................................................................................................................................189 para 6.10.......................................................................................................................................191 para 6.12.......................................................................................................................................191 paras 6.15–6.17 ............................................................................................................................192 para 6.19.......................................................................................................................................192 para 6.21...................................................................................................................................193–4 para 6.27.......................................................................................................................................195 para 6.28...................................................................................................................................195–6 para 6.29.......................................................................................................................................196 para 6.32.......................................................................................................................................196 para 6.33.......................................................................................................................................195 para 6.35.......................................................................................................................................196 para 6.36.......................................................................................................................................198 para 6.37...................................................................................................................................196–7 para 6.38.......................................................................................................................................197 para 6.39.......................................................................................................................................198 para 6.40.......................................................................................................................................199 para 6.43.......................................................................................................................................201 para 6.44.......................................................................................................................................198 para 6.46.......................................................................................................................................199 para 6.48.......................................................................................................................................199 para 6.49...........................................................................................................................201–2, 230 para 6.50.......................................................................................................................................199 para 6.52.......................................................................................................................................204 paras 6.54–6.55 ............................................................................................................................201 para 6.58.......................................................................................................................................202 para 6.59.......................................................................................................................................204 para 6.61...................................................................................................................................205–6 para 6.62.......................................................................................................................................206 paras 6.64–6.65 ............................................................................................................................206 para 6.69.......................................................................................................................................231 para 6.70...................................................................................................................................231–2 para 7.5–7.7..................................................................................................................................220 para 7.11 .......................................................................................................................................221 para 7.18.......................................................................................................................................205 para 7.22.......................................................................................................................................205 para 7.30.......................................................................................................................................208 para 7.34.......................................................................................................................................222 paras 7.36–7.42 ............................................................................................................................224 para 7.45–7.47..............................................................................................................................225 paras 7.48–7.49 ............................................................................................................................226 para 8.3.....................................................................................................................................727–8 para 8.7...................................................................................................................................713–14 fn 158 .......................................................................................................................................714 para 8.9.........................................................................................................................................714 para 8.11 .......................................................................................................................................714
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para 8.13.......................................................................................................................................715 paras 8.18–8.19 ............................................................................................................................715 paras 8.20–8.21 ............................................................................................................................716 paras 8.23–8.24 ............................................................................................................................716 para 8.25...............................................................................................................................717, 721 paras 8.27–8.28 ............................................................................................................................721 para 8.30.......................................................................................................................................721 para 8.31.......................................................................................................................................722 para 8.36.......................................................................................................................................719 para 8.42.......................................................................................................................................722 paras 8.44–8.45 ............................................................................................................................722 para 8.46...............................................................................................................................722, 732 para 8.47.......................................................................................................................................734 para 9.2.........................................................................................................................................226 para 10.4.................................................................................................................................34, 275 para 10.5.......................................................................................................................................275 para 10.6.......................................................................................................................................276 para 10.11 .....................................................................................................................................277 para 11.12 .....................................................................................................................................286 paras 11.17–11.18 ........................................................................................................................287 para 11.21 .................................................................................................................................284–5 para 11.23 .....................................................................................................................................285 paras 11.34–11.39 ........................................................................................................................290 para 12.3...............................................................................................................................292, 295 para 12.4.......................................................................................................................................292 paras 12.5–12.6 ............................................................................................................................293 para 12.13.....................................................................................................................................294 para 12.16.....................................................................................................................................295 paras 12.17–12.19 ........................................................................................................................296 paras 13.6–13.8 ............................................................................................................................298 para 13.9.......................................................................................................................................299 para 13.12.....................................................................................................................................299 para 13.14.....................................................................................................................................299 para 15............................................................................................................................................91 para 16.3.......................................................................................................................................173 para 16.4.......................................................................................................................................176 para 16.7...............................................................................................................................174, 176 para 16.12...............................................................................................................................179–81 paras 16.13–16.14 ........................................................................................................................180 paras 16.18–16.20 ........................................................................................................................185 para 16.23.................................................................................................................................181–2 para 16.24.....................................................................................................................................182 para 16.25.................................................................................................................................182–3 para 18.5.......................................................................................................................................111 para 18.12.....................................................................................................................................111 para 18.18...............................................................................................................................119–20 para 18.19.....................................................................................................................................120 para 18.20.....................................................................................................................................121 para 18.21.....................................................................................................................................122 para 18.22.....................................................................................................................................121
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para 18.26.....................................................................................................................................130 para 18.29.....................................................................................................................................130 para 18.31.....................................................................................................................................131 para 18.42.....................................................................................................................................135 para 18.46.....................................................................................................................................136 para 18.49.....................................................................................................................................140 paras 18.50–18.51 ........................................................................................................................142 para 18.52–18.53..........................................................................................................................140 para 18.57.....................................................................................................................................142 para 18.58.....................................................................................................................................143 para 20.1...................................................................................................................................226–7 para 20.2.......................................................................................................................................227 para 20.7.......................................................................................................................................227 para 58, fn 79 .................................................................................................................................99 Annex B .......................................................................................................................................102 para B.9 ....................................................................................................................................102 para B.10 ..................................................................................................................................103 para B.11 ..........................................................................................................................102, 104 para B.12 ..................................................................................................................................106 para B.14 ..................................................................................................................................106 paras B.15–B.16 .......................................................................................................................103 para B.19 ..................................................................................................................................104 para B.21 ..................................................................................................................................104 para B.22 ..................................................................................................................................106 Annex C para C.7 ..............................................................................................................................209–10 para C.9 ............................................................................................................................208, 281 para C.11 ..................................................................................................................................210 para C.12 ..................................................................................................................................211 para C.13 ..................................................................................................................................208 paras C.14–C.15 .......................................................................................................................210 para C.16 ..................................................................................................................................211 para C.17 ..................................................................................................................................208 para C.18 ..................................................................................................................................211 para C.19 ..................................................................................................................................213 para C.20 ............................................................................................................................213–14 para C.22 ..................................................................................................................................214 para C.23 ............................................................................................................................214–15 para C.24 ..................................................................................................................................214 paras C.25–C.26 .......................................................................................................................212 paras C.27–C.28 .......................................................................................................................215 para C.29 ..........................................................................................................................216, 282 para C.31 ..........................................................................................................................216, 283 para C.32 ............................................................................................................................216–17 paras C.33–C.34 .......................................................................................................................217 para C.36 ..................................................................................................................................217 para C.38 ..................................................................................................................................282 Jurisdictional and Procedural Guidance 2014..............................................................................32, 69 Media Merger Guidance ........................................................................................157–61, 164–5, 169 s5
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para 5.3.................................................................................................................................157–8 paras 5.7–5.8 ............................................................................................................................159 para 5.11 ...................................................................................................................................160 para 5.12...................................................................................................................................161 s 6 .................................................................................................................................................161 paras 6.1–6.3 ............................................................................................................................162 para 6.5.....................................................................................................................................162 para 6.6–6.8..............................................................................................................................163 para 6.10...................................................................................................................................163 s7 paras 7.2–7.3 ............................................................................................................................164 paras 7.4–7.5 ............................................................................................................................165 para 7.7.....................................................................................................................................165 paras 7.9–7.10 ..........................................................................................................................165 para 7.12...................................................................................................................................165 paras 7.18–7.20 ........................................................................................................................169 para 7.22...................................................................................................................................170 paras 7.24–7.25 ........................................................................................................................171 Merger Assessment Guidelines 2010 ................................................32, 212, 243, 273, 343, 385, 414, 425, 434, 447, 453, 469–70, 503, 589, 596–7, 612, 639–40, 643, 646, 649, 653–5, 668, 672, 676, 680–1, 685, 695 paras 2.5–2.7 ................................................................................................................................243 para 2.9.........................................................................................................................................244 para 2.12.......................................................................................................................................273 para 3.3.7........................................................................................................................................96 para 4.1.5......................................................................................................................................647 para 4.3.2......................................................................................................................................307 fn 39 .........................................................................................................................................344 para 4.3.3......................................................................................................................................312 para 4.3.5......................................................................................................................................305 para 4.3.6..........................................................................................................................305–6, 316 para 4.3.8......................................................................................................................................315 para 4.3.9......................................................................................................................................342 para 4.3.10............................................................................................................................315, 343 para 4.3.11 ....................................................................................................................................316 para 4.3.14..............................................................................................................................316–17 para 4.3.15..............................................................................................................................317–18 para 4.3.17................................................................................................................................320–1 para 4.3.19....................................................................................................................................348 para 4.3.20....................................................................................................................................352 paras 4.3.22–4.3.24 ......................................................................................................................353 para 4.3.26....................................................................................................................................354 para 4.3.27....................................................................................................................................356 para 4.3.28....................................................................................................................................357 para 4.3.29....................................................................................................................................358 paras 5.2.1–5.2.2 ......................................................................................................................360–1 para 5.2.3......................................................................................................................................360 para 5.2.4......................................................................................................................................361
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para 5.2.5......................................................................................................................................360 para 5.2.10....................................................................................................................................363 para 5.2.11 ............................................................................................................................363, 366 para 5.2.12................................................................................................................................362–3 para 5.2.15....................................................................................................................................368 (c) .............................................................................................................................................377 para 5.2.17....................................................................................................................................385 para 5.2.20................................................................................................................409–11, 413–14 para 5.2.21....................................................................................................................................388 para 5.2.25................................................................................................................................401–2 paras 5.2.28–5.2.31 ......................................................................................................................376 para 5.3.1......................................................................................................................................427 para 5.3.2..................................................................................................................................434–5 para 5.3.4..............................................................................................................................426, 437 para 5.3.5..............................................................................................................427, 434, 445, 457 para 5.4.4......................................................................................................................................427 para 5.4.5......................................................................................................................................470 para 5.4.6......................................................................................................................................469 para 5.4.9......................................................................................................................................469 para 5.4.9(b) .............................................................................................................................484–5 para 5.4.10....................................................................................................................................470 para 5.4.11 ............................................................................................................................469, 514 para 5.4.12....................................................................................................................................470 para 5.4.14....................................................................................................................................536 para 5.4.16....................................................................................................................................537 para 5.4.17....................................................................................................................................538 paras 5.4.19–5.4.21 ......................................................................................................................536 paras 5.5.1–5.5.2 ..........................................................................................................................590 para 5.5.3......................................................................................................................................593 para 5.5.6......................................................................................................................................615 fn 71 .........................................................................................................................................615 para 5.5.7......................................................................................................................................611 para 5.5.8......................................................................................................................................614 para 5.5.9......................................................................................................................596, 611, 620 para 5.5.9(a) .................................................................................................................................596 para 5.5.10....................................................................................................................................607 para 5.5.11 ........................................................................................................................597–9, 619 para 5.5.12........................................................................................................................597–8, 604 para 5.5.13........................................................................................................................597–8, 601 para 5.5.14................................................................................................................................597–9 para 5.5.15........................................................................................................................600–1, 606 para 5.5.16....................................................................................................................601, 606, 609 para 5.5.17....................................................................................................................................612 para 5.5.18..............................................................................................................................612–13 para 5.5.19..............................................................................................................................619–20 para 5.6.1......................................................................................................................................640 para 5.6.7......................................................................................................................................643 para 5.6.9......................................................................................................................................641 para 5.6.10................................................................................................................................645–6 para 5.6.11 ............................................................................................................................645, 648
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para 5.6.12............................................................................................................................645, 650 para 5.6.13................................................................................................644, 653, 655–6, 668, 681 para 5.6.14....................................................................................................................................651 para 5.7.3......................................................................................................................................700 para 5.7.4......................................................................................................................................705 para 5.7.6......................................................................................................................................701 para 5.7.7..............................................................................................................................650, 701 para 5.7.8..........................................................................................................................650, 701–2 para 5.7.9......................................................................................................................................702 para 5.7.10....................................................................................................................................650 para 5.7.12....................................................................................................................................650 para 5.7.15....................................................................................................................................704 para 5.7.18....................................................................................................................................705 paras 5.8.3–5.8.4 ..........................................................................................................................683 para 5.8.5......................................................................................................................................684 para 5.8.10....................................................................................................................................688 para 5.8.11 ....................................................................................................................................686 para 5.8.12....................................................................................................................................689 para 5.8.15....................................................................................................................................686 para 5.9.1......................................................................................................................................695 para 6.48, fn 63 ............................................................................................................................435 NHS Merger Guidance 2014..............................................................................................32, 201, 264 OFT Calculation of Turnover Guidance Note 2002.........................................................................102 Remedies Guidelines 2008 ........................................................................................32, 743, 754, 762 para 1.8.........................................................................................................................................749 paras 1.9–1.12 ..............................................................................................................................750 para 1.13...................................................................................................................................750–1 para 1.15.......................................................................................................................................751 para 1.17.......................................................................................................................................751 para 1.27...................................................................................................................................744–5 para 2.2.........................................................................................................................................749 paras 2.16–2.17 ............................................................................................................................761 para 3.3.........................................................................................................................................754 paras 3.4–3.8 ................................................................................................................................755 paras 3.9–3.12 ..............................................................................................................................756 para 3.19...................................................................................................................................747–8 paras 3.23–3.24 ............................................................................................................................746 para 3.26.......................................................................................................................................746 paras 3.28–3.30 ............................................................................................................................759 para 3.31.......................................................................................................................................760 para 4.2.........................................................................................................................................761 para 4.13.......................................................................................................................................762 para 4.17.......................................................................................................................................763 para 4.21.......................................................................................................................................763 para 4.31.......................................................................................................................................763 paras 5.1–5.2 ................................................................................................................................747 para 5.3.........................................................................................................................................746 App A ...........................................................................................................................................743 Substantive Assessment Guidance 2003 ........................................................................62, 243, 245–7
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para 3.8.........................................................................................................................................303 para 3.2.........................................................................................................................................236 para 3.23.......................................................................................................................................303 para 3.24.......................................................................................................................................303 para 4.3.........................................................................................................................................457 para 7.5.........................................................................................................................................245 para 8.3.........................................................................................................................................727 Suggested best practice for submissions of technical economic analysis from parties to the Competition Commission 2009 .................................285, 562, 569–71
Statutory Instruments CAT Rules of Procedure 2015 (SI 2015/1648) ................................................................................795 r 9(3).............................................................................................................................................800 (6) .............................................................................................................................................801 (7) .............................................................................................................................................800 r 10 ...............................................................................................................................................802 (1)–(2) ......................................................................................................................................800 r 12(1)–(3) ....................................................................................................................................802 r 13(1)–(3) ....................................................................................................................................802 r 14(3)(f).......................................................................................................................................803 r 15(1)...........................................................................................................................................802 (3) .............................................................................................................................................803 r 16(1)–(2) ....................................................................................................................................803 r 18 ...............................................................................................................................................801 r 21(2)...........................................................................................................................................795 r 24 ...............................................................................................................................................804 r 25(1)...................................................................................................................................780, 800 (3) .............................................................................................................................................781 r 26(2)...........................................................................................................................................802 r 53(1)...........................................................................................................................................804 (2) .............................................................................................................................................804 (l) ..........................................................................................................................................804 r 101 .............................................................................................................................................805 (3) .............................................................................................................................................805 r 104 .............................................................................................................................................805 (2) .............................................................................................................................................805 r 107(1).........................................................................................................................................807 r 112(5) .........................................................................................................................................780 City Code on Takeovers and Mergers (Takeover Code) ....................................................203, 228–30 rr 2.4–2.5 ......................................................................................................................................230 r 2.7 ..............................................................................................................................................230 Note 2 .......................................................................................................................................230 r 12.1(a) ........................................................................................................................................229 (c) .......................................................................................................................................229–30 r 13.1 ............................................................................................................................................230 r 13.3 ............................................................................................................................................230 (a)–(b) ......................................................................................................................................230 A1, para 2(a) ................................................................................................................................228
lxviii
Table of Legislation
A3, para 3(a)(i).............................................................................................................................228 Civil Procedure Rules 1998 (SI 1998/3132) Pt 3 r 3.1(2)(a) .................................................................................................................................781 r 3.9(1)(a) .................................................................................................................................781 Pt 52, r 52.3(6) .............................................................................................................................807 Pt 54 r 54.4 ........................................................................................................................................778 r 54.5 ....................................................................................................................................781–2 r.54.6 ........................................................................................................................................806 PD 54, para 5.6(3) ....................................................................................................................781 Pre-Action Protocol for Judicial Review Claims, Introduction ...................................................781 CMA Rules of Procedure for Mergers rr 6.3–6.4 ......................................................................................................................................275 rr 7.1–7.2 ......................................................................................................................................277 rr 8.2–8.3 ......................................................................................................................................294 rr 11.1–11.2 ..................................................................................................................................295 r 11.4 ............................................................................................................................................295 r 11.5 ....................................................................................................................................296, 744 r 11.6 ............................................................................................................................................296 r 12 ...............................................................................................................................................744 rr 12.1–12.5 ..................................................................................................................................297 r 13.4–13.5 ...................................................................................................................................298 Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980) ..................................................................................................228 Energy (Northern Ireland) Order 2003 (SI 2003/419 (N.I.6)) ...........................................................36 Enterprise Act 2002 (Anticipated Mergers) Order 2003 (SI 2003/1595), Art 3 ...............................................................................................................77, 80 Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003 (SI 2003/1370).................................................................................102–3 Art 4(1).........................................................................................................................................227 Art 7(3).........................................................................................................................................228 Sch Pt 2 ...........................................................................................................................................102 para 3........................................................................................................................................102 paras 4–6 ..................................................................................................................................103 paras 8–9 ..................................................................................................................................104 para 11(3) .................................................................................................................................103 para 13......................................................................................................................................104 Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003 (SI 2003/1592) Art 4 .............................................................................................................................................168 Art 4(2).................................................................................................................................168, 184 (3) .................................................................................................................................168, 184–5 (4) .....................................................................................................................................168, 184 Art 5 .....................................................................................................................................168, 184 (3) .............................................................................................................................................185 Art 6(1)–(3) ..................................................................................................................................185 (4) .............................................................................................................................................186 Art 9(1)–(2) ..................................................................................................................................186
Table of Legislation
lxix
Art 12(2)–(3) ................................................................................................................................186 (5) .............................................................................................................................................186 (7)–(8) ......................................................................................................................................186 Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2008 (SI 2008/2645) ....................................................................151, 171 Enterprise and Regulatory Reform Act 2013 (Commencement No 3, Transitional Provisions and Savings) Order 2013 (SI 2013/2227) ..................................................2 Enterprise and Regulatory Reform Act 2013 (Commencement No 6, Transitional Provisions and Savings) Order 2014 (SI 2014/416) ....................................................2 Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regulations) (SI 2006/246) .....................................................................40, 44, 46–7, 50–1, 53 Water and Sewerage Services (Northern Ireland) Order 2006 (SI 2006/3336 (N.I.21)) .................................................................................................................36 United States of America Bankruptcy Act, Ch 11 .....................................................................................................................315
Guidelines Antitrust Policy Guide to Merger Remedies, s III, A.......................................................................731 Horizontal Merger Guidelines 2010 ........................................................................................331, 363 s 4 .................................................................................................................................................385 s 4.1.1 ...........................................................................................................................................363 s 4.1.2 ...........................................................................................................................................363 s 6.1 ..............................................................................................................................................487 s 11 ...............................................................................................................................................315 International European Convention on Human Rights .........................................................................................784 Art 6 .............................................................................................................................................791 (2)–(3) ......................................................................................................................................791 Protocol 1, Art 1 ...........................................................................................................................784
Chapter 1 OVERVIEW OF THE UK MERGER CONTROL REGIME 1.1 Introduction 1.2 The Fair Trading Act: 1973 to 2003 1.2.1 Enforcement Authorities 1.2.2 Jurisdictional Thresholds 1.2.3 The OFT’s Phase I Investigation 1.2.4 The CC’s Phase II Investigation 1.2.5 The Public Interest Test 1.3 The Enterprise Act: 2003 to 2014 1.3.1 The 1999 Consultation Document (a) The introduction of a competitionbased test (b) Independent competition authorities (c) Public interest cases (d) Special merger regimes (e) Pre-notification of mergers (f) Jurisdictional thresholds 1.3.2 The 2000 Consultation Response (a) The introduction of a competitionbased test (b) Removing ministers from the decisionmaking process (c) Independent competition authorities (d) Public interest cases (e) Process and timetables (f) Jurisdictional thresholds 1.3.3 The Enterprise Act 1.3.4 The Office of Fair Trading 1.3.5 The Competition Commission
1.1
1.4 The Enterprise Act: 2014 to Date 1.4.1 The 2011 Consultation Document 1.4.2 Options for Reform (a) Strengthening the voluntary regime (b) Mandatory notification (c) Jurisdictional thresholds (d) Small merger exemption (e) Streamlining the merger regime (f) Merger fees (g) Statutory objective (h) Constitutional reform (i) Institutional design (j) Decision making 1.5 The Response to the Consultation 1.5.1 The Retention of a Voluntary Regime 1.5.2 Jurisdictional Thresholds 1.5.3 Statutory Time Limits and Information-Gathering Powers 1.5.4 Early Consideration of Remedies and Suspension of Phase II 1.6 Amendments to the Enterprise Act 1.7 The CMA Merger Guidelines 1.8 The Merger Regulation 1.9 The CMA 1.10 The Secretary of State 1.11 The Competition Appeal Tribunal 1.12 Sectoral Regulators
INTRODUCTION
UK merger control first received a statutory footing in 1965 with the Monopolies and Mergers Act. The merger control regime put in place by this Act was essentially carried forward by the Fair Trading Act 1973 (the “Fair Trading Act”). The main provisions of the UK merger control regime are now contained in the Enterprise Act 2002, as amended (the “Enterprise Act”), which received Royal Assent on 7 November 2002. The merger control provisions entered into force on 20 June 2003. The Enterprise Act introduced a new framework for merger control in the UK. In particular, it removed the
2
UK Merger Control
vast majority of decision-making in respect of mergers from the political domain,1 and replaced the public-interest test with a competition-based test as the substantive assessment tool for merger analysis. The Enterprise Act also brought about institutional changes to the UK merger control regime. Such changes included abolishing the position of Director General of Fair Trading (the “DGFT”), transforming the Office of Fair Trading (the “OFT”) into a corporate body, and creating a specialist tribunal, the Competition Appeal Tribunal (the “CAT”), to hear, inter alia, appeals of, at that time, merger decisions of the OFT and the Competition Commission (the “CC”). On 25 April 2013, the Enterprise and Regulatory Reform Act 2013 (the “Enterprise and Regulatory Reform Act”) came into force, heralding significant substantive and institutional changes to the UK merger control regime.2 The main provisions affecting the merger regime came into force on 1 April 2014. The Enterprise and Regulatory Reform Act builds on the amendments made to the UK merger control regime by the Enterprise Act, abolishing the OFT and the CC, and created a unitary UK competition authority known as the Competition and Markets Authority (“CMA”, and together with the OFT and the CC, the “Authorities”). It also streamlined the merger regime, introducing statutory time periods for Phase I merger reviews and for assessing and implementing undertakings in lieu of reference (“undertakings” or “UILs”). The Enterprise and Regulatory Reform Act also introduced new powers allowing, inter alia, the CMA to order the production of documents and information, as well as enhanced initial enforcement order powers. This chapter contains a brief account of the historical development of the UK merger control regime, summarising the regime under the Fair Trading Act and under the Enterprise Act from June 2003 to April 2014, examining the motivations behind, and the proposals for, the Government’s most recent consultation process and the amendments to the Enterprise Act regime, as well as describing the new, merged authority, the CMA, and the CAT, and briefly considering the UK’s concurrent competition authorities, which are responsible for regulated sectors of the UK economy.
1.2
THE FAIR TRADING ACT: 1973 to 2003
Under the Fair Trading Act, as is the case now, the merger control regime was ‘voluntary’ in the sense that merging parties were not obliged to notify their transactions to the OFT even where they met the relevant jurisdictional thresholds. However, the
1
The exception being public interest mergers, which are discussed in Chapter 5. Section 103 sets out the Enterprise and Regulatory Reform Act’s commencement provisions. Various sections came into force on the same day as the Act was passed. Others came into force two months after the Enterprise and Regulatory Reform Act came into force, whilst the remainder came into force by Commencement Order. Sections 25(1), (2) and (4) establishing the CMA were commenced on 1 October 2013 by The Enterprise and Regulatory Reform Act 2013 (Commencement No. 3, Transitional Provisions and Savings) Order 2013. The competition reforms in Part 4 of the Enterprise and Regulatory Reform Act, the CMA’s duty to promote competition, and the abolition of the OFT and the CC were commenced on 1 April 2014 by The Enterprise and Regulatory Reform Act 2013 (Commencement No. 6, Transitional Provisions and Savings) Order 2014. 2
Overview of the UK Merger Control Regime
3
DGFT was under a statutory duty to keep all UK merger activity under review3 and could investigate any merger that fell within his jurisdiction.4 The OFT itself existed on a non-statutory basis to support the work of the DGFT. The key decision-maker was the Secretary of State for Trade and Industry,5 who was advised by the DGFT at Phase I and by the Monopolies and Mergers Commission (the “MMC”) at Phase II.6 The MMC became the CC under the Competition Act 1998 (the “Competition Act”).7 Following an investigation, the DGFT advised the Secretary of State whether to clear the merger unconditionally, to clear the merger subject to undertakings, or to refer the merger to the CC for an in-depth Phase II inquiry. The Secretary of State then took into consideration the DGFT’s advice, but was not obliged to follow it. Similarly, when a reference was made and the CC presented its advice to the Secretary of State, he would take into consideration the CC’s advice but could reach a different conclusion, if he so wished. However, before the Enterprise Act came into force, the Secretary of State had established a practice of following the DGFT’s and/or the CC’s advice in almost all cases, and from October 2000, at the time of the publication of the Government’s proposals for reform, the Secretary of State announced that he would follow the DGFT’s advice in all but exceptional circumstances.
1.2.1
Enforcement Authorities
Under the Fair Trading Act, there were three principal merger control authorities in the UK: (i) the DGFT; (ii) the CC; and (iii) the Secretary of State. The DGFT was the head of the OFT and was appointed by the Secretary of State.8 The OFT carried out preliminary investigations of mergers and the DGFT advised the Secretary of State as to whether a merger should be cleared unconditionally, cleared subject to UILs, or referred to the CC. The CC was an independent body consisting of members appointed by the Secretary of State and drawn from a range of backgrounds including industry, commerce and academic life. The CC’s role in respect of mergers was to conduct indepth reviews of mergers that were referred by the DGFT and to present its conclusions to the Secretary of State. The Secretary of State was the ultimate decision-maker in merger cases and had a wide discretion to accept or reject the advice of the DGFT and/or the CC. In deciding whether or not to make a reference, the Secretary of State took into account the DGFT’s 3
Section 76, Fair Trading Act. This remains the case today as the CMA has the function of obtaining, compiling and keeping under review information about matters relating to the carrying out of its functions (section 5(1), Enterprise Act,). 5 Following the approach adopted in the legislation, and for the sake of simplicity, the Secretary of State is referred to in the masculine gender. References to a particular Secretary of State are accorded their appropriate gender form. 6 For the sake of simplicity, the MMC is referred to as the CC unless a reference is made to a specific MMC report. 4
7 8
Section 45, Competition Act. Section 1(1), Fair Trading Act.
4
UK Merger Control
advice, but was not bound to follow it. However, in practice, it was highly unusual for the Secretary of State not to follow the DGFT’s advice.9 Following an in-depth investigation, if the CC had concluded that a merger might be expected to operate against the public interest, the Secretary of State could decide to clear the merger unconditionally, clear the merger subject to undertakings or prohibit the merger. The Secretary could not, however, prohibit or impose conditions upon a merger in the absence of an adverse finding by the CC.
1.2.2
Jurisdictional Thresholds
The Fair Trading Act provided that, following an OFT investigation, a merger reference could be made to the CC by the Secretary of State where it appeared to him that “it is or may be the fact” that two or more enterprises, at least one of which must have been active in the UK, or by or under the control of a body corporate incorporated in the UK, had ceased to be distinct enterprises,10 or that such a transaction was in progress or in contemplation,11 and that either: (i) the value of the (worldwide) assets being acquired was more than £70 million;12 or (ii) the merger would have resulted in the enterprises ceasing to be distinct having a share of supply in relation to the supply of goods or services of any description in the UK, or a substantial part of the UK, of 25% or more.13
1.2.3
The OFT’s Phase I Investigation
As the merger control regime under the Fair Trading Act was voluntary there was no requirement for merging parties to notify their merger to the OFT before or after completion. However, if merging parties chose not to notify their merger in advance of clearance, they ran the risk that their merger might have to be unwound in the event of a negative finding by the CC and a negative ruling from the Secretary of State. Mergers could be referred to the CC at any time up to four months after completion or, if the transaction had not been made public, four months after it was made public or the DGFT or Secretary of State were informed about the merger.14 Information was regarded as having been made public when it was generally known or readily ascertainable.15 There were two methods by which merging parties could notify a merger to the OFT: (i) the statutory pre-notification procedure; or (ii) the informal submission procedure. Under the statutory pre-notification procedure, the DGFT had a maximum of 35 9 Between 1990 and 2000, out of 2,300 mergers that were reviewed by the OFT, the Secretary of State followed the DGFT’s advice in all but 17 of these cases. 10 Section 64(1), Fair Trading Act. 11
Section 75(1), Fair Trading Act. Section 64(1)(b), Fair Trading Act. As originally enacted, the Fair Trading Act stated that the value of the assets being acquired must be more than £5 million. This was amended several times by statutory instrument to its final value of £70 million. 13 Section 64(2) and (3), Fair Trading Act. 12
14 15
Section 64(4), Fair Trading Act. Section 64(9), Fair Trading Act.
Overview of the UK Merger Control Regime
5
working days to reach a decision (a 20 working day review period16 with a maximum extension of 15 working days,17 which was often used by the OFT in practice). Under the informal submission procedure, there was an administrative target of 45 working days for the OFT to conduct an investigation, for the DGFT to provide his advice and for the Secretary of State to reach a decision18 (in practice, this was split into 39 working days for the DGFT to provide his advice and 6 working days for the Secretary of State to reach a decision).
1.2.4
The CC’s Phase II Investigation
Following a merger reference from the DGFT/Secretary of State, the CC was required to investigate and report on: (i) whether a merger situation qualifying for investigation had been (or would be) created; and (ii) if so, whether the creation of that situation operated, or may have been expected to operate, against the public interest.19 A merger reference was required to specify a period (of no longer than six months beginning with the date of the reference) within which the CC’s report on the reference was to be made.20 An extension of this period for up to three months was permissible if representations were made by the CC and the Secretary of State was satisfied that there were special reasons why the report could not be made within the period specified in the reference.21 In making their report, the CC was required to include “definite conclusions” on the questions comprised in the reference, together with an account of their reasons for those conclusions, and a survey of the general position with respect to the subject-matter of the reference, and of the developments which led to that position, as in their opinion were expedient for facilitating a proper understanding of those questions and of their conclusions.22 Where the CC found that a merger situation operated, or may have been expected to operate, against the public interest, the CC was required to specify in its report the particular effects, adverse to the public interest, that in its opinion the merger had resulted in, or may have been expected to result in, and consider what action, if any, should be taken for the purpose of remedying or preventing those adverse effects, and if it thought fit, include in its report recommendations as to such action.23
1.2.5
The Public Interest Test
Under the Fair Trading Act, mergers were assessed against a public interest test, rather than a competition-based test as is now the case under the Enterprise Act.24 The CC
16
Section 75B(2), Fair Trading Act. Section 75B(3), Fair Trading Act. 18 Section 64(5), Fair Trading Act. 17
19
Section 69(1), Fair Trading Act. Section 70(1), Fair Trading Act. 21 Section 70(2), Fair Trading Act. 22 Section 72(1), Fair Trading Act. 20
23 24
Section 72(2), Fair Trading Act. Section 84, Fair Trading Act.
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UK Merger Control
was required to take into consideration all matters that appeared to it to be relevant in determining whether or not a merger operated against the public interest. These factors included:25 (1)
maintaining and promoting effective competition;26
(2)
promoting the interests of consumers, purchasers and other users of goods and services in the UK with regard to the prices, quality and variety of goods and services;
(3)
promoting through competition the reduction of costs and the development and use of new techniques and new products and facilitating the entry of new competitors into existing markets;
(4)
maintaining and promoting the balanced distribution of industry and employment in the UK; and
(5)
maintaining and promoting competitive activity in overseas markets on the part of UK producers and suppliers.
In practice, from the mid-1980s, the touchstone for the substantive assessment of mergers was the first criterion of the public interest test, namely maintaining and promoting effective competition. In July 1984, the then Secretary of State, Norman Tebbitt, issued his well-known ‘Tebbitt Doctrine’, by stating that it had been, and would continue to be, the Government’s position that references to the CC would primarily be made on competition grounds.
1.3 1.3.1
THE ENTERPRISE ACT: 2003-2014 The 1999 Consultation Document
In August 1999, the then Secretary of State for Trade and Industry, Stephen Byers, published ‘Mergers: a Consultation Document on Proposals for Reform’ (the “Consultation Document”). In this document, he set out the Government’s main proposals for reform of the UK merger control regime. The most significant proposals were two-fold: (i) to replace the public interest test for assessing mergers with a new competition-based test; and (ii) to transfer the ultimate decision-making power from the Secretary of State to non-political, independent competition authorities, other than in cases of exceptional public interest, such as mergers raising national security issues. The Secretary of State stated as follows: “Free and competitive markets drive innovation and growth, deliver optimum value and choice to consumers, and provide the basis for secure employment and wealth creation. The challenge
25
Ibid. The fact that the maintenance and promotion of competition was the first criterion in the public interest test (or, indeed, a criterion at all) can be seen as a major development in the evolution of UK merger control from the time of the Fair Trading Act. 26
Overview of the UK Merger Control Regime
7
for Government is to ensure that competition policy looks forwards and promotes competitiveness in a modern economy, while minimising the regulatory burden on business … I believe that merger cases should be taken out of the political arena. The system would be significantly improved if the vast majority of decisions were taken by independent competition authorities rather than politicians. I also want to clarify the framework for decisions, and to give business more certainty about the timetables for investigations.”27
(a) The introduction of a competition-based test. The Government considered that, whilst the Fair Trading Act had on its list of “certain desirables” the maintenance and promotion of competition, the substantive test was, in principle, very broad and conferred a significant amount of discretion on decision-makers.28 In addition, the Government considered that the assessment of competition should be placed “on a clearer footing at the heart of the merger regime”, and that such a test would improve the clarity of the framework for decisions, thereby increasing the predictability of merger decisions.29 Therefore, the Government’s proposal was that the new assessment standard should enable the competition authorities to assess mergers that were “likely to result in a significant loss of competition”, whilst allowing for the possibility of efficiency gains to outweigh the loss of competition resulting from a merger.30 The Government did not envisage that the new test would depart substantially from the process of assessment that was already undertaken by the OFT. The Government’s intention was to “clarify and focus” the framework, rather than radically to alter the substantive analysis itself.31 From the outset then, the Government’s preference was for an assessment standard that was based on a significant loss of competition (which would become a ‘substantial lessening of competition’ by the time of the Enterprise Act) rather than incorporating the dominance test that was the assessment standard under the Merger Regulation at that time.32 The Consultation Document itself does not provide much insight into why the dominance test was not preferred as the appropriate standard to replace the public interest test. The Government noted that there was some merit in looking at other models that existed and that the regime under the Merger Regulation was an obvious model to consider.33 The Government also noted that a number of EU Member States had incorporated the dominance test into their national merger control regimes, such as Germany, France and Italy, but noted that other jurisdictions outside the EU had chosen not to do so, including Australia, Canada, and the United States.34
27
See the Secretary of State’s foreword to the Consultation Document. Consultation Document, para. 3.1. 29 Ibid., para. 3.2. 28
30
Ibid., para. 3.4. Ibid., para. 3.5. 32 For the sake of simplicity, Council Regulation (EC) No. 4064/89 and Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings are both referred to as the Merger Regulation. 31
33 34
Consultation Document, para. 3.14. Ibid., para. 3.15.
8
UK Merger Control
(b) Independent competition authorities. Under the Government’s proposals, the decision-making responsibility in respect of mergers would be transferred from the Secretary of State to the OFT and the CC. In its Consultation Document, the Government set out two options for a decision-making framework. Under the first option, the OFT would conduct preliminary merger reviews to determine whether an indepth investigation was merited. Following its preliminary investigation, the DGFT, not the Secretary of State, would decide whether to clear the merger unconditionally, to clear the merger subject to UILs, or to refer the merger to the CC. In the event that the merger was referred to the CC, following its in-depth investigation, the CC would decide whether to clear the merger unconditionally, to clear the merger subject to remedies, or to prohibit the merger. Under the second option, the OFT’s role would be expanded to a role similar to that of the European Commission. The OFT would conduct Phase I investigations, at the conclusion of which the DGFT would decide whether to clear the merger unconditionally, to clear the merger subject to conditions, or to initiate a Phase II investigation. The Phase II investigation would be carried out by the OFT, not the CC, and at the conclusion of this investigation, the DGFT would make a final determination. Following the DGFT’s final decision, there would be provision for the merging parties to appeal the decision to an appeal panel established within the CC.35 There would then be provision for a further appeal to the courts on points of law. In respect of these two options, the Government noted that the first option involved the minimum disturbance to the current regime, whereas the second option more closely reflected the institutional structure established under the Competition Act 1998 for enforcing the Chapter I and Chapter II prohibitions.36 (c) Public interest cases. In its Consultation Document, the Government envisaged that the UK competition authorities would take decisions in respect of mergers other than in cases raising exceptional public interest considerations. The Government took the view that these decisions would be most appropriately taken by the Secretary of State, rather than by the competition authorities. The Government’s proposal was that these exceptional circumstances should be limited to mergers raising issues of national security, but that the Secretary of State should have a reserve power to make an order defining additional public interest considerations.37 Any such order would have to be made by Statutory Instrument and would have to be approved by both Houses of Parliament, although the Secretary of State would have the power to make immediate orders pending Parliamentary approval, thus enabling the merger control system to deal with emergency circumstances.38 It was proposed that the OFT would conduct an initial investigation of these mergers as usual, but that the Secretary of State (and not the OFT) would decide whether the 35
Ibid., para. 4.11. Ibid. 37 Ibid., para. 5.4. 38 Such an emergency order was made in respect of Lloyds TSB’s acquisition of HBOS, which is discussed in Chapter 5. 36
Overview of the UK Merger Control Regime
9
merger in question should be cleared unconditionally, cleared subject to undertakings or referred to the CC. The Secretary of State would not be able to prohibit a merger without a full investigation having taken place. At both stages of the investigation, the Secretary of State would be advised by the competition authorities both on the public interest consideration and on the competition-based assessment. The Secretary of State would have discretion in respect of the public interest consideration, but would not be able to dispute the competition authority’s competition-based assessment.39 Ultimately, however, the public interest consideration could ‘trump’ the competition-based assessment, such that a merger raising competition concerns could still be cleared by the Secretary of State on the basis of public interest considerations.40 (d) Special merger regimes. At the time of the Consultation Document, a special merger regime existed for the water industry and for mergers involving the transfer of newspapers. The Government did not propose to make major changes to the way in which water mergers were reviewed in isolation from the general review of competition assessment under the Fair Trading Act.41 Similarly, the Government did not propose to make significant changes to the review of newspaper mergers.42 The assessment of these mergers differed from the review of ordinary mergers in several respects, including that the CC was required to take into consideration the need for accurate presentation of news and free expression of opinion. Moreover, newspaper mergers were unlawful without the prior express consent of the Secretary of State.43 (e) Pre-notification of mergers. The Government considered whether a mandatory pre-notification merger control regime should be introduced in the UK,44 whereby all mergers exceeding certain specified thresholds would be the subject of a mandatory notification in conjunction with which the merger could not be implemented until it had received clearance from the competition authorities. Such a regime exists in the EU and in all EU Member States with merger control rules, as well as in countries such as Canada and the United States. As a corollary to such a mandatory regime, the Government considered whether to introduce a fixed timetable for the assessment of mergers, such as exists under the Merger Regulation. The Government noted that the main rationale for a compulsory pre-notification system is that prior control is typically more effective and more cost-efficient than attempting to unwind a completed merger in which the parties have been integrated.45 Moreover, compulsory pre-notification removes from the competition authorities the burden of keeping all merger control activity under review, where it can often be difficult to assess, on the basis of the information available, whether a merger is likely to give rise to competition concerns. On the other hand, the principal advantage of the voluntary 39
Consultation Document, para. 5.8.
40
Ibid. See the discussion of the Lloyds/HBOS case in Chapter 5. 41 Ibid., para. 5.11. 42 Ibid., para. 5.12. 43 Section 58, Fair Trading Act. 44 45
Consultation Document, para. 6.1. Ibid., para. 6.6.
10
UK Merger Control
regime is flexibility, with companies being able to complete deals quickly if they are prepared to undergo a subsequent investigation, where necessary.46 However, the Government’s perception was that the voluntary regime that existed under the Fair Trading Act worked well and, therefore, the Government proposed retaining the principle of voluntary notification for all mergers.47 As regards the issue of fixed timetables, the Government noted that, whilst there was greater certainty in the timing of a review for merging parties in a regime with fixed timetables, in practice, the duration of merger investigations in the UK was not typically longer than under the Merger Regulation.48 In any event, the merging parties had the choice of a fixed (maximum) 35 working day timetable under the statutory notification procedure or a 45 working day administrative timetable under the informal submission procedure.49 However, on balance, the Government proposed retaining the flexibility of the Fair Trading Act regime with the ability to suspend the timetable, if necessary, in order to negotiate undertakings in lieu.50 (f) Jurisdictional thresholds. Under the Fair Trading Act, mergers fell within the OFT’s jurisdiction where they either resulted in a post-merger share of supply of 25% or more, or where the gross value of the worldwide assets being acquired was more than £70 million. The Government considered that the framework under the Fair Trading Act worked well and was familiar to businesses and practitioners. However, the Government noted that there was a question as to whether an assets-based test was the most appropriate basis for a jurisdictional threshold given the increasing importance of intangible assets in mergers, particularly in knowledge-based sectors.51 The Government considered that merger control thresholds should strike a balance between catching all mergers that might raise competition concerns (in the knowledge that this would also capture a number of mergers that raised no competition concerns) and not placing unnecessary burdens on business.52
1.3.2
The 2000 Consultation Response
In October 2000, the Government published the main conclusions from its consultation in ‘Mergers: The Response to the Consultation on Proposals for Reform’, October 2000 (the “2000 Consultation Response”). This encapsulated the Government’s refined thinking on the appropriate structure for a new merger control regime and invited views on a few remaining issues, including the relevant level for the proposed turnover threshold, the appropriate length of time for an in-depth review by the CC, and whether the share of supply test should be enhanced to give the competition authorities jurisdiction over acquisitions by large companies of smaller companies in separate, but 46
Ibid.
47
Ibid., para. 6.8. Ibid., para. 6.11. 49 Both of these procedures are considered in more detail in Chapter 6. 50 Ibid., para. 6.15. 48
51 52
Ibid., para. 7.9. Ibid., para. 7.10.
Overview of the UK Merger Control Regime
11
linked markets. The main conclusions contained in the 2000 Consultation Response are set out below. (a) The introduction of a competition-based test. The 2000 Consultation Response considered that mergers should no longer be assessed in accordance with a public interest test,53 but should be assessed against a test of whether they would result in a substantial lessening of competition (“SLC”)54 and that these decisions should be taken by independent competition authorities and not by the Secretary of State.55 This proposal was supported by a majority of respondents,56 although a small minority were opposed to such a proposal and considered that wider public interest issues should be taken into consideration and that the Secretary of State should be responsible for such decisions.57 A number of respondents favoured the adoption of the dominance test as applied under the Merger Regulation, in particular to increase consistency with the European Commission’s decisional practice.58 However, the Government considered that an SLC test was a more natural fit with the economic analysis that was carried out in merger assessments and was less legalistic than the dominance test.59 It also noted that there was some uncertainty about the application of the test under the Merger Regulation to situations of collective dominance.60 Overall, the Government saw “no compelling case for alignment with the EU on merger control” and, unlike the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union, which overlap with national competition laws, the clear jurisdictional provisions of the Merger Regulation meant that issues rarely arose as to whether EU or UK merger control laws applied.61 The Government also proposed that in certain circumstances the competition authorities should be able to clear a merger where, overall, it would result in benefits to UK consumers,62 although the Government invited views on this proposal. Respondents were fairly evenly divided on whether the test should expressly provide for such a consideration. Examples of such benefits were lower prices, greater innovation, increased choice or quality of products or services.63 The Government indicated that these benefits would be expected to materialise within a reasonable period and must have been unlikely to occur absent the merger.
53
2000 Consultation Response, para. 2.2.
54
Ibid., para. 2.3. Ibid., para. 2.1. 56 Ibid., para. 2.8. 57 Ibid., para. 2.9. 55
58
Ibid., para. 2.10. Ibid., para. 2.17. 60 Ibid. 61 Ibid., para. 2.16. 59
62 63
Ibid., para. 2.23. Ibid., para. 2.11.
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(b) Removing ministers from the decision-making process. As a corollary to the assessment of mergers under a competition-based test, the 2000 Consultation Response considered that merger decisions were to be taken by the OFT and CC in all but a small minority of cases.64 This proposal was supported by the majority of respondents. The Secretary of State was to take the final decision only in mergers raising exceptional public interest issues, which, at the time of the 2000 Consultation Response, were focused around issues of national security, with provision for the Secretary of State to define further exceptional public interest issues by statutory instrument.65 (c) Independent competition authorities. The Government also considered that a two-stage approach to mergers should be retained, with the OFT carrying out preliminary investigations and the CC carrying out in-depth inquiries.66 More than twice as many respondents expressed a clear preference for retaining the two-stage approach rather than adopting the alternative option set out in the 2000 Consultation Document, whereby the OFT’s role would be expanded to something more akin to the European Commission’s role, with the ability to conduct first phase and in-depth investigations.67 Those respondents who favoured this alternative option tended to do so because of concerns that there would be a duplication of work between the OFT and the CC.68 The Government recognised that some duplication was inevitable but considered that this was outweighed by the benefits of a separate competition authority coming to the merger with fresh eyes and not having any entrenched views.69 (d) Public interest cases. Mergers raising (defined) public interest issues were to be determined by the Secretary of State, rather than by the OFT or the CC.70 The Government proposed that mergers raising issues of national security should be defined in the legislation from the outset and that the Secretary of State should have the power to make an order defining additional public interest issues.71 As a check on this reserve power, any order specifying additional public interest issues would have to be made by statutory instrument and approved by both Houses of Parliament.72 Where necessary, the Secretary of State would have the power to bring the order into force pending Parliamentary approval.73
64
Ibid., para. 3.2. See Chapter 5 for the instances in which the Secretary of State has the power to take the final decision in merger control cases. 66 2000 Consultation Response, para. 3.1. 67 Ibid., para. 3.6. 65
68
Ibid., para. 3.8. Ibid., para. 3.14. 70 Ibid., para. 4.1. 71 Ibid., para. 4.2. 69
72 73
Ibid. Ibid., para. 4.2. See Chapter 5, regarding Lloyds TSB’s acquisition of HBOS.
Overview of the UK Merger Control Regime
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(e) Process and timetables. The Government considered that the notification of mergers should remain voluntary.74 This was strongly supported by a majority of respondents. The voluntary regime was considered to be more flexible and to reduce unnecessary burdens on companies.75 Some respondents did express a preference for a mandatory system, which they perceived as benefitting from increased certainty and reducing the risks associated with unwinding mergers that had been consummated.76 The Government also decided that the current system of both a statutory timetable and a more flexible administrative timetable should be retained.77 The Government’s proposal was that the statutory timetable should be reduced from 35 to 30 working days, with an initial target of 20 working days, and that the administrative timetable should be reduced from 45 to 40 working days.78 In respect of the CC’s timetable, the Government considered fixing the review period to 16 weeks, but invited views on this aspect of the merger process.79 There was strong support from respondents for fixed timetables, both at Phase I and Phase II,80 with several respondents favouring the Merger Regulation’s (then) timetable of one month for a Phase I review (without remedies) and four months for a Phase II review.81 (f) Jurisdictional thresholds. The 2000 Consultation Response considered that mergers would fall within the jurisdiction of the competition authorities if: (i) they created or enhanced a share of supply of 25% or more in the UK or in a substantial part of the UK; or (ii) the total UK turnover of the target company exceeded £45 million, although the Government sought views on the precise level of the turnover threshold.82 The share of supply test would therefore be retained as under the Fair Trading Act, but the assets test would be replaced by a turnover threshold. Most respondents supported replacing the asset test with a turnover threshold, as they felt that it captured mergers in service industries, bore a closer relationship to market power than assets, and ensured greater consistency with the EU merger control regime under the Merger Regulation.83 Some argued in favour of a two-part turnover test as 74
Ibid., para. 5.1.
75
Ibid., para. 5.10. Ibid. 77 Ibid., para. 5.3. 78 Ibid., para. 5.4. 76
79
Ibid., para. 5.5. Ibid., para. 5.11. 81 Ibid., para. 5.12. The length of review under the Merger Regulation changed with the coming into force of Council Regulation (EC) No. 139/2004. 82 Ibid., paras. 6.1 to 6.3. The Government reached the proposed threshold of £45 million by carrying out checks on databases of UK company information. Their objective was that the number of companies that would be caught by the turnover threshold would not be greater that the number caught by the assets test under the Fair Trading Act. The Government did concede that by setting the level at £45 million they might capture fewer companies than under the asset test, but the Government’s stated preference was to “err on the side of catching fewer, rather than more, companies under the new turnover test” (2000 Consultation Response, para. 6.17). 83 2000 Consultation Response, para. 6.8. 80
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UK Merger Control
under the Merger Regulation, with one element focused on the parties’ combined worldwide turnover and the other element focused on the target’s UK turnover.84 On the other hand, other respondents regarded the asset-based test as simpler to apply in practice, and regarded the calculation of turnover to be more problematic, timeconsuming and costly for companies.85 As regards the share of supply test, some respondents argued in favour of converting this into a market share test,86 which had the attraction of having a basis in economic analysis and was also more in line with the jurisdictional test in other EU Member States. However, the Government considered that the purpose of the share of supply test was not one of economic analysis, but rather one of jurisdiction.87 Therefore, it should be capable of rapid application and should not require detailed analysis.
1.3.3
The Enterprise Act
The Enterprise Act was finally enacted in November 2002, with the merger control provisions coming into force on 20 June 2003. A summary of the principal provisions relating to merger control is as follows. (1)
OFT. The OFT was formally established as a body corporate and officially entitled the Office of Fair Trading.
(2)
The duty to refer. The OFT would have a duty to make a reference to the CC where it may be the case that: (i) a relevant merger situation has been created or is in contemplation; and (ii) the merger has resulted, or may be expected to result, in a substantial lessening of competition. By placing the OFT under such a statutory duty, the Secretary of State was removed from the decisionmaking process for the vast majority of mergers. The public interest test was removed and replaced with the SLC test.
(3)
Jurisdictional thresholds. A relevant merger situation has been, or would be, created if: (i) two or more enterprises cease to be distinct;88 and (ii) either the merging parties’ share of supply of goods is 25% or more in the UK or a substantial part of the UK, or the target’s UK turnover exceeds £70 million.89 The turnover test was increased in size from the initial proposal of £45 million as a compromise following a proposal from the House of Lords for the suggested threshold of £45 million to be increased to £100 million.
(4)
Exceptions to the duty to refer. Where the OFT believed that its reference threshold was met, it would consider whether there were any applicable
84
Ibid., para. 6.18. Ibid., para. 6.9. 86 Ibid., para. 6.10. 87 Ibid., para. 6.20. 85
88 89
See Chapter 2. See Chapter 3.
Overview of the UK Merger Control Regime
15
exceptions to the duty to refer. These exceptions include where the market concerned is not of sufficient importance to justify making a reference, where any relevant customer benefits outweigh the substantial lessening of competition and, in relation to anticipated mergers, whether the merger is insufficiently far advanced or insufficiently likely to proceed. The OFT was also able to accept UILs.90 (5)
Phase II. The CC conducted Phase II merger investigations. The CC had a review period of 24 weeks, which could be extended by a maximum of 8 weeks where there were “special reasons” why it could not be completed within 24 weeks.91 Therefore, the two-stage approach to merger investigation was retained and the proposal for expanding the OFT’s role to incorporate both stages of the merger review was not incorporated.
(6)
Intervention notices. The Secretary of State could issue an intervention notice to the OFT if he believed that it is or may be the case that one or more public interest considerations is relevant to the assessment of a merger. The OFT would then, within a period prescribed by the Secretary of State, conduct its preliminary investigation and provide a report to the Secretary of State, advising him on the considerations relevant to the making of a reference to the CC. This report would include advice and recommendations on the public interest considerations mentioned in the intervention notice. The Secretary of State has the power to determine whether to clear the merger unconditionally, to refer the merger to the CC or to accept undertakings in lieu. On its coming into force, the Enterprise Act listed national security as the only public interest consideration.92 Since that time, various media considerations have been added, as well as the consideration of the stability of the UK’s financial system.93
1.3.4
The Office of Fair Trading
Under the Fair Trading Act, the OFT had been established as a non-statutory body to support the work of the DGFT. Under the Enterprise Act, the OFT was formally established as a body corporate and made a non-ministerial government department. Following the abolition of the position of DGFT, the functions of the DGFT were transferred to the OFT and the strategic direction of the OFT was the responsibility of the OFT Board.94 The OFT’s corporate structure consisted of the Board, a Chairman, a Chief Executive, three Executive Directors, and several operational divisions and 90 91
Section 73, Enterprise Act. See Chapter 16. Section 39, Enterprise Act.
92 Section 58, Enterprise Act. Since the Enterprise Act came into force, additional public interest considerations regarding media plurality and the maintenance of the stability of the UK financial system have been added. 93 See Chapter 5. 94 The final holder of the post of DGFT was Sir John Vickers, who was also the first Chairman of the OFT Board, as well as the OFT’s Chief Executive (roles that were split when his term expired).
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UK Merger Control
branches, which were responsible for the day-to-day operation and management of cases. The precise structure of the Mergers Group has varied from time to time. In the last few years prior to changes brought about by the Enterprise and Regulatory Reform Act, the Mergers Group was led by a Director of Mergers,95 who was typically supported by three Deputy Directors,96 an Assistant Director, Economics, and eight case officers, each of whom had responsibility for different sectors of the economy. Under the Enterprise Act, by 1 April 2014, the Mergers Group had published decisions in relation to 1,216 mergers, of which approximately 79% were found to qualify as relevant merger situations. Of the over 950 qualifying mergers, approximately 60% were cleared unconditionally,97 4% were cleared subject to UILs,98 and 10% were referred to the CC for an in-depth investigation.99
1.3.5
The Competition Commission
The CC came into being under the Competition Act, replacing the Mergers and Monopolies Commission.100 The CC had a Reporting Members Panel (the “Panel”) of around 50 members (the “Members”) at any one time, each of whom was appointed by the Secretary of State for an eight-year term. Almost all Panel members were part-time and came from a variety of backgrounds, many of which are unrelated to merger control or competition law. The Panel was led by a Chairman and, usually, three Deputy Chairmen. The Panel was supported by around 150 staff, led by a Chief Executive, who had a senior management team consisting of a Chief Legal Adviser, a Chief Economist, a Chief Business Adviser, a Chief Financial and Accounting Adviser, a Director of Corporate Services and a Director of Policy. The Chief Executive also had a team of Inquiry Directors that coordinated all of the CC’s work on particular inquiries. Management of the CC was overseen by the Council, which comprised the Chairman, the Deputy Chairmen, the non-executive Members, and the Chief Executive.
1.4
THE ENTERPRISE ACT: 2014 TO DATE 1.4.1
The 2011 Consultation Document
In March 2011, the Government published its most recent consultation document relating to the UK merger control regime, ‘A competition regime for growth: a consultation on options for reform’ (the “2011 Consultation Document”), which set out that “the Government’s overarching objective in reforming the regime is to maximise the ability of the competition authorities to secure vibrant, competitive markets that 95
The Mergers Group was previously led by a Senior Director of Mergers from late 2007 to early 2011. 96 Although this had reduced to a single Assistant Director immediately prior to April 2014. 97 734 mergers were cleared unconditionally between June 2003 and 31 March 2014. 98 54 mergers were subject to UILs between June 2003 and 31 March 2014. 99
119 mergers were referred to Phase II between June 2003 and 31 March 2014. Section 45, Competition Act.
100
Overview of the UK Merger Control Regime
17
work in the interests of consumers and to promote productivity, innovation and economic growth.”101 The Government noted that the UK merger regime is highly regarded internationally and that its strengths included its technical competence, independence from the political process, transparency, accountability and the robustness of its decisions,102 and estimated that the direct benefits of the UK merger regime had been £310 million during 2007-2010.103 Noting that the primary objective of its review was to strengthen the competition regime by improving the speed and robustness of decisions, the Government stated that in applying these objectives to the reform of the mergers regime, it was “considering options to improve the authority’s ability to identify potentially problematic mergers and make merger remedies more efficient and effective.”104 In this regard, the Government considered that there were two particular drawbacks to the voluntary notification system in the UK where businesses could either choose to notify their merger to the OFT or the OFT could choose to initiate an investigation. First, the risk that some anti-competitive mergers might escape review. The Government noted that whilst it was difficult to estimate the number of anti-competitive mergers escaping review, a report prepared by Deloitte for the OFT suggested that the ratio of mergers that advisers considered would have been unlikely to obtain unconditional clearance by the OFT, but of which the OFT were not aware, to those that were found to have resulted in an SLC or UILs was approximately one to one.105 Whilst this number is significant, the Government noted that the average size of these mergers is generally smaller and the lack of third party complaints suggests that these ‘under the radar’ mergers did not represent a significant failing in the regime.106 The Government also noted that the OFT had improved its mergers intelligence function, increasing its resources and taking a more targeted approach. Secondly, the fact that the regime results in the investigation of a large proportion of completed mergers, which can make it difficult to apply appropriate remedies in the event that they are found to be anticompetitive. The Government noted that since 2004/5, of the 125 Phase I cases where the duty to refer arose, 60 were completed mergers. At Phase II, 14 of the 25 mergers resulting in a substantial lessening of competition were completed at the time of reference.107 In relation to the establishment of a unitary competition authority, the Government considered that a single CMA was “central to the vision of an improved competition regime” and would provide the impetus to use competition powers and processes in the 101
2011 Consultation Document, page 5. Ibid., para. 4.1. 103 Ibid., para. 1.5. 102
104
Ibid., para. 4.2. Deterrence effect of competition enforcement by the OFT: a report prepared by Deloitte on behalf of the OFT, Deloitte, 2007, page 41. 105
106 107
2011 Consultation Document, para. 4.4. Ibid., para. 4.5.
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UK Merger Control
most flexible and dynamic way. For example, the CMA would have the incentive to reach earlier decisions on whether a market study or investigation was the most appropriate way to address a competition problem. It would also enable more efficient and effective use of scarce public resources and create a single powerful advocate for competition in the UK, in Europe and internationally.108 The Government also considered that a single CMA would enhance predictability and consistency, eliminate overlaps between current processes and provide a strong focus for competition expertise and capability.109
1.4.2
Options for Reform
In order to address these issues, the Government consulted on a range of options, including: (i) strengthening the voluntary notification regime; (ii) adopting a mandatory notification regime; and (iii) a hybrid option, where the regime would be part mandatory and part voluntary, depending on the size of the parties involved. (a) Strengthening the voluntary regime. The Government noted that whilst the notification regime in the UK is voluntary, it is not intended to be risk or cost free for the parties.110 Under this regime, where merging parties could complete their transactions and begin integrating immediately, the risks were borne by the wider economy that a merger might be found to be anti-competitive that could not easily be unwound. In other voluntary notification regimes around the world, such as Australia, New Zealand and Singapore, the risk of completing an anti-competitive merger falls on the merging parties, due to the fact that completing such a merger is prohibited and penalties are attached to mergers that have not been notified, but have been completed and raise competition concerns. In the 2011 Consultation Document, the Government indicated that it was not minded to replicate this type of regime in the UK as it would require a radical change to the nature of the regime and could lead to uncertainty as to the validity and enforceability of transactions, potentially enabling third parties to bring damages actions against mergers.111 However, the Government considered that there were alternatives to placing the risk of completion on the merging parties that could strengthen the voluntary notification regime. One such option was to strengthen the powers available to the CMA to make it easier to stop integration and prevent pre-emptive action that could prejudice its ability to obtain fully effective remedies in completed mergers. The Government noted that the OFT’s powers enabled it to seek initial undertakings to prevent pre-emptive action provided that it had reasonable grounds for suspecting that it is or may be the case that a relevant merger situation has been created, but that the negotiation of these undertakings could take some considerable time and that hold separate orders could only be put in
108 109 110 111
Ibid., para. 1.10. Ibid., para. 1.11. Ibid., para. 4.10. Ibid., para. 4.11.
Overview of the UK Merger Control Regime
19
place if the OFT had reasonable grounds for suspecting that pre-emptive action was in progress or contemplation.112 In this regard, the Government set out two potential options. First, a statutory restriction on further integration that would apply automatically as soon as the CMA commenced an inquiry into a completed merger. The CMA would have the ability to suspend all integration steps pending negotiation of “tailored” hold separate undertakings. This option would have the advantage of preventing the harm caused whilst initial undertakings were negotiated during which time integration might be ongoing and/or key staff might leave. This option might also enhance the CMA’s ability to obtain effective remedies in relation to completed mergers, as less integration would have taken place in the interim period. However, the Government noted that one drawback to this approach could be that merging parties might be discouraged from notifying their transactions until they had already achieved a certain level of integration.113 The second option was to clarify the legislation to make clearer the type and range of measures that the CMA could take in order to prevent pre-emptive action. This could include the ability to require the reversal of action that had already taken place and to prevent further pre-emptive action. In addition, the Government also proposed introducing the power to fine parties where integration has taken place in breach of initial undertakings. In place of having to engage in civil proceedings, which was the only redress under the Enterprise Act, the Government proposed introducing a fine of up to 10% of the aggregate turnover of the enterprises concerned.114 (b) Mandatory notification. An alternative to strengthening the existing regime that was considered by the Government was the introduction of a mandatory notification regime where businesses would be required to notify the CMA of all mergers that satisfied the jurisdictional thresholds, as is the case in most jurisdictions, including the United States, the EU, France and Germany.115 The advantages of such a mandatory regime would be to increase the CMA’s ability to identify problematic mergers and to reduce the proportion of completed mergers that were investigated by the CMA. However, the Government recognised that a mandatory regime would increase the regulatory burden and cost to both business and the CMA, although such costs could potentially be limited through the design of an effective short form notification process.116 (i) Suspensory effect. The Government recognised that there was a range of options in relation to a mandatory notification regime. For example, whilst such regimes are commonly suspensory, in that the merging parties are not permitted to complete their transaction until merger clearance has been obtained, it is possible to design a system where businesses would be required to notify qualifying mergers to the CMA but would then be able to complete their transactions without waiting for 112
Ibid., para. 4.12. Ibid., para. 4.14. 114 Ibid., para. 4.16. 113
115 116
Ibid., para. 4.17. Ibid., para. 4.18.
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UK Merger Control
clearance. It was recognised that this approach would have the benefit of ensuring that potentially anti-competitive mergers did not escape review and would reduce the number of mergers where there had been significant integration between the parties before the CMA’s investigation had begun.117 On the other hand, the Government noted the benefits of a suspensory regime in ensuring that all mergers that met the jurisdictional thresholds would be reviewed, thereby significantly reducing the risk that problematic mergers would be missed, and that the CMA would not need to investigate completed mergers.118 In the event that such a system were introduced, the Government indicated that it would be minded to introduce penalties if businesses failed to notify a merger in addition to where they breached a suspensory obligation and continued with a merger without waiting for clearance.119 However, the Government recognised that there would, in all likelihood, be circumstances in which it would be appropriate to permit derogation from the suspensory obligation, including in circumstances where completion of a merger was urgently required to prevent the imminent collapse of a business. (ii) Options for jurisdictional thresholds. A mandatory merger regime would require jurisdictional thresholds that were sufficiently clear-cut to provide certainty as to which mergers should be notified. Such clarity would be important as penalties would be applied for non-notification. The Government noted the International Competition Network’s recommendation that notification thresholds should usually be based on objectively quantifiable criteria, such as sales and asset thresholds, rather than market share-based thresholds.120 It also recognised that the current jurisdictional thresholds under the Enterprise Act were designed for a voluntary merger regime and would probably not be appropriate for a mandatory regime, although the Government recognised the importance of the share of supply test in capturing problematic mergers, noting that a significant proportion of cases meeting the reference threshold were caught by the share of supply test.121 The Government considered two main options in this regard: (1)
117 118 119
Full mandatory notification. Mandatory notification of all mergers where the acquirer’s worldwide turnover exceeds £10 million and where the target’s UK turnover exceeds £5 million. The Government noted that this option would increase the burden on business and the CMA but was likely to be more
Ibid., para. 4.20. Ibid., para. 4.21.
Ibid., para. 4.22. Ibid., para. 4.23. 121 Ibid., para. 4.24. The Government noted that: “Since 2004-05, 71 (57%) of the 125 cases meeting the ‘realistic prospect of SLC’ test for reference at the OFT stage, qualified on share of supply. This percentage has increased over time, from 43% in 2004-05 to 68% in 2009-10, while the percentage of cases qualifying on turnover has fallen.” 120
Overview of the UK Merger Control Regime
21
effective in decreasing the number of completed mergers that were investigated.122 (2)
Hybrid mandatory notification. Mandatory notification for all mergers where the target’s UK turnover exceeded £70 million, but the CMA would retain the ability to initiate investigations in respect of mergers that met the share of supply test and such transactions could be completed without clearance.123 As an alternative to this, the Government considered that the CMA could have jurisdiction over all mergers except for those qualifying under a small merger exemption, which is somewhat similar to the situation in the United States.
(iii) Acquisition of control in a mandatory regime. The Government noted the three levels of control that are recognised under the Enterprise Act where a purchaser may acquire material influence, ‘de facto’ control (which the Government considered to be broadly comparable to ‘decisive influence’ under the Merger Regulation), or ‘de jure’ (legal) control, which involved the acquisition of a controlling interest in the target.124 In a mandatory regime, the Government considered that mergers should be notified where they result in an acquisition of de facto or de jure control, and that the CMA would continue to have jurisdiction over transactions that gave rise to material influence and such transactions could be voluntarily notified.125 The Government considered that this would provide reasonable certainty as to the type of transaction that would be subject to mandatory notification whilst maintaining the CMA’s ability to have jurisdiction over transactions where the acquisition of material influence would give rise to competition concerns. (c) Jurisdictional thresholds. The Government also sought views on whether there should be changes to the jurisdictional thresholds if the voluntary notification regime were maintained. It recognised that the business community generally preferred a more objective test than the share of supply test, but noted that this jurisdictional test plays an important part in UK merger control. However, the Government suggested the possibility of replacing both the turnover test and the share of supply test with the option, mentioned above in the context of mandatory mergers, of giving the CMA jurisdiction over all mergers except for those falling within a small business exemption, which would replace the de minimis exception to the duty to refer (see below). (d) Small merger exemption. The Government considered introducing a small business exemption for both the mandatory (hybrid) and voluntary regimes. This would reduce the burden on small businesses by giving certainty that the CMA would not have jurisdiction over mergers falling below a specified de minimis threshold. The Government proposed an exemption for transactions where the target’s UK turnover did not exceed £5 million and where the acquirer’s worldwide turnover did not exceed 122 123 124 125
Ibid., para. 4.30. The share of supply test is considered in detail in Chapter 3. See Chapter 2 for more information on these levels of control. 2011 Consultation Document, para. 4.36.
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UK Merger Control
£10 million (i.e., the same threshold as proposed for a mandatory notification regime for all mergers). (e) Streamlining the merger regime. In addition to proposals regarding whether the merger regime should be voluntary or mandatory (and irrespective of the outcome of this part of the consultation), the Government set out proposals for statutory timescales in Phase I and Phase II, information-gathering powers, and for remedies in Phase II. (i) Statutory timescales. The Government considered that statutory timescales could help achieve faster outcomes for business and consumers. It would also give greater certainty as to when decisions would be made by the CMA. The Government noted that timescales could vary depending on whether a mandatory or voluntary notification regime was adopted, with a mandatory regime being likely to require a tighter timescale (30 working days) than a voluntary regime, where an appropriate period might be 40 working days. In relation to Phase II mergers, the Government was not minded to reduce the 24 week statutory time limit (with a possible extension of up to eight weeks), as it considered that this would compromise the quality and robustness of decisions. However, the Government indicated that it was considering introducing a statutory timescale of 12 weeks (with a possible extension of up to six weeks) in relation to Phase II mergers between the publication of the final report and the CMA making an order or accepting final undertakings (which could be extended by up to six weeks).126 The Government noted that any changes to the timescales would need to ensure that the robustness of the regime was upheld and options in this regard could include extensions to the timescales for complex cases, information-gathering powers in Phase I to ensure that evidence could be gathered in a timely fashion, and extending information-gathering powers for main and third parties during the UIL and remedies implementation phases.127 (ii) Information-gathering powers. The Government proposed extending the existing Phase II information-gathering powers to Phase I mergers, irrespective of whether the modified merger regime was voluntary or mandatory. These powers would include specific information-gathering powers (which the OFT did not have at Phase I), as well as the ability to stop the clock and/or impose penalties if main or third parties did not comply. This would enable the CMA to obtain information when main or third parties were not cooperating and could potentially enable the CMA to complete Phase I reviews faster. In some cases, it could also reduce the likelihood of a merger being referred to Phase II. These extended information-gathering powers would need to be complemented with powers to ‘stop the clock’ where the main parties did not comply, and the power to impose penalties if main or third parties did not comply. (iii) ‘Stop the clock’ power in Phase II. The Government proposed introducing a discretionary ‘stop-the-clock’ power to enable the CMA to suspend or extend its statutory timetable for a period of three weeks where it believed that the merging parties
126 127
Ibid., para. 4.46. Ibid., para. 4.47.
Overview of the UK Merger Control Regime
23
were likely to alter or cancel their merger plans.128 This would reduce the regulatory burden on parties at the beginning of Phase II who might otherwise be required to respond to information requests at the same time as they were considering abandoning their merger. (iv) Earlier consideration of remedies in Phase II. The Government considered whether the CMA should be able to consider remedies in Phase II without having to decide whether the merger has resulted or will result in an SLC.129 This power would apply when the merging parties were willing to offer remedies immediately following the initiation of Phase II. The Government recognised that, whilst this would enable cases to be closed earlier, it could have the disadvantage that the remedy might be less targeted at the competition concern because the remedies would be based on the CMA’s understanding of the case at that point in the investigation and that parties might be less incentivised to offer UILs in Phase I. This power would be accompanied by the ability to continue with an investigation in the event that remedies were not forthcoming and the Government considered that there might need to be a limit on the amount of time that parties would have to offer these remedies. (f) Merger fees. The Government consulted on merger fees and cost recovery against the background of attempting to ensure that the costs of merger control investigations are met by the parties rather than by the taxpayer.130 The Government noted that BIS estimates for the total annual cost of the merger control regime were likely to be around £9 million in the coming years (OFT, £3 million and CC, £6 million).131 The Government’s preferred position was for full cost recovery but this was not considered a viable option. The Government also ruled out introducing a flat fee as this might place disproportionate costs on smaller mergers and may discourage some smaller transactions.132 The Government set out two main options in relation to fees: (1)
To increase the level of fees payable in each of the three existing fee bands to achieve full cost recovery. In order to recover the estimated £9 million per year, and to provide an appropriate level of differentiation between smaller and larger mergers, the fees would need to increase to: (i) £65,000 where the UK turnover of the enterprises being acquired was £20 million or less; (ii) £130,000 where the UK turnover of the enterprises being acquired was between £20-£70 million; and (iii) £195,000 where the UK turnover of the enterprises being acquired exceeded £70 million.133
(2)
To increase fees within a four band structure, with a new band being created for mergers involving acquisitions of enterprises with an annual UK turnover
128
Ibid., para. 4.50. Ibid., para. 4.51. 130 Ibid., para. 11.3. 131 Ibid., para. 11.9. 129
132 133
Ibid., para. 11.10. Ibid., para. 11.11.
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UK Merger Control
exceeding £120 million. In this case, the Government set out that the relevant level for the four bands of merger fees would be £60,000, £120,000, £180,000 and £220,000, respectively.134 Under a mandatory notification system, the total number of notified mergers would increase. Equally, the costs to the CMA would also be likely to increase as a result of reviewing a larger number of cases. In relation to merger fees in a mandatory regime, the Government considered two options: (1)
The introduction of a flat fee for each notified merger. This was considered feasible under a mandatory notification regime as the number of notified mergers would probably mean that a relatively low fee could be charged. Based on the Government’s estimate of the number of mergers qualifying to pay a fee under a mandatory notification regime, a flat fee of £7,500 was considered sufficient to achieve the full £9 million cost recovery. Under the hybrid mandatory notification regime, it was estimated that a flat fee of £23,000 would be required for full cost recovery.135
(2)
To retain the current differentiated levels of fees within a three band model. The Government considered that the bands would remain at the same levels, but that the fees would decrease because of the increased number of filings, with fees of £4,000, £8,000 and £12,000 being required for full cost recovery. Under the hybrid model, these fees would need to increase to £9,000, £18,000 and £27,000 charged to mergers with a UK target turnover of less than £25 million, £25-70 million, and more than £70 million, respectively. Alternatively, the Government considered that different fees could be charged to mergers qualifying on the basis of the turnover test and share of supply test. Fees of around £26,000 could be charged to mergers qualifying on the turnover test and fees of around £13,000 could be charged to mergers qualifying on the share of supply test.136
(g) Statutory objective. The Government invited views on appropriate objectives for the CMA and whether these objectives should be included on the face of the legislation, as was the case for the then Financial Services Authority (now the Financial Conduct Authority) and Ofcom. The Government considered that one such duty for the CMA could be a primary duty to promote competition.137 The Government also considered whether the CMA’s objectives should include keeping economically important markets or sectors under review. The Government considered that the advantages of stipulating the CMA’s duties on the face of the legislation included that this provides a strong, clear mandate and purpose for the organisation, provides
134 135 136 137
Ibid., para. 11.12. Ibid., para. 11.14. Ibid., para. 11.15. Ibid., para. 9.3.
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guidance on its role and priorities to its Board, staff, business and other stakeholders, and provides a strong lever for Parliament to hold it to account.138 (h) Constitutional form. Three main options were considered in relation to the constitutional form that the CMA should take: (i) non-ministerial department (such as the OFT); (ii) non-departmental public body (such as the CC); or (iii) public corporation (such as Ofcom). The Government did not express a preference but noted that the form of the CMA would be the one that best promoted the principles of public accountability, independence and transparency, and delivered the Government’s other objectives for competition reform.139 (i) Institutional design. The Government’s proposal for institutional design envisaged that the CMA would have a Supervisory Board, and an Executive Board, with separation of Phase I and Phase II investigations for at least mergers and markets cases.140 The Supervisory Board would have overall responsibility for the CMA, including governance, resourcing, strategy and policy, as well as the development of rules and guidance. The composition of the Supervisory Board could include a combination of Non-Executive Directors and Executive Directors of the CMA, including a Chief Executive, and could be chaired by a Non-Executive Director. Ultimately, the Supervisory Board would be accountable to Parliament, but would not be accountable for individual case decisions of the CMA. The Executive Board would be responsible for the day-to-day running of the CMA and would be able to take some case decisions. (j) Decision making. In considering the decision-making process for the CMA, the Government focused on striking a balance between the robustness of decision-making and speed. The Government was conscious of the fact that the existing regime was one of the leading regimes internationally, but that there had been criticism of the overall time taken to deliver cases and the need for businesses to engage separately with two entirely distinct teams with different processes. The Government recognised that there were several possible options for the decision-making structure and that consideration would need to be given to incorporating the best of the current regimes, whilst maximising efficiencies, having clear accountability in relation to decisions, having appropriate checks and balances, being cohesive and delivering robust decisions using a predictable framework, and commanding the confidence and respect of external stakeholders.141 The Government set out a ‘base case’ decision-making model for each of the competition tools. In relation to mergers, it was envisaged that the decision-making process would be largely unchanged, subject to process improvements. Accordingly, Phase I decisions, would be undertaken by the executive, with one or more senior members of the executive taking the decision-making role (similar to a Senior Director 138 139 140 141
Ibid., para. 9.4. Ibid., para. 9.9. Ibid., para. 9.16. Ibid., para. 10.6.
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taking these decisions at the OFT).142 At Phase II, the decision makers would continue to be the panel, which would be investigatory, made up of part-time members, and working within the guidance set out by the Supervisory Board.143 As an alternative to this ‘base’ model, the Government considered a decision-making model whereby Phase I and Phase II decisions would be taken by different senior members of the executive, with no involvement of a panel.144 In other words, the Phase I decision-making process would remain unchanged, but Phase II decisions would be taken by a senior member of the executive who was not previously involved in the case (and was not the Phase I decision-maker). Alternatively, this senior executive could take decisions in conjunction with a Non-Executive Director from the Supervisory Board or an independent panellist. The Government noted that this model mirrored the decision-making model in other jurisdictions, such as the EU.145 The Government also considered several variations on this theme, including retaining a panel as a final decision-maker, with analysis and case development undertaken solely at the staff level.146 Under this model, once the Phase II team had reached a conclusion, this would be put before a panel that would ‘hear’ the evidence and make a final decision and approve any remedies. This was considered to have the potential advantage of streamlining the analysis stages of the investigation whilst retaining the independence of decision-making. However, a downside might be that the process could be longer or could reduce the robustness of decision-making as the panel would be less familiar with the detail of the case than under the existing system.
1.5
THE RESPONSE TO THE CONSULTATION
The Government published its response to the Consultation Document in March 2012: ‘Growth, Competition, and the Competition Regime’, Government Response to Consultation (the “2012 Consultation Response”). This section sets out the response to the consultation and the Government’s preferred position in relation to each of the areas consulted on.
1.5.1
The Retention of a Voluntary Regime
The majority of respondents were “strongly” against the introduction of a mandatory notification regime and in favour of retaining a voluntary notification regime.147 Respondents argued that there was insufficient evidence to justify a fundamental change to the mergers regime and responses from businesses and lawyers argued that any type of mandatory notification would significantly increase costs to both business and the competition authorities and this would be contrary to the Government’s objectives of 142
Ibid., para. 10.28. Ibid., para. 10.29. 144 Ibid., para. 10.35. 145 Ibid., para. 10.36. 143
146 147
Ibid., para. 10.39. 2012 Consultation Response, para. 5.3.
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promoting growth and reducing regulation. The Government noted that a minority of respondents supported the introduction of mandatory notifications, arguing that it would address the problems identified in the consultation, but that most of these respondents recognised the difficulty of setting an effective jurisdictional threshold and the trade-off involved in setting a pragmatic threshold which would reduce the burden to business but also reduce the CMA’s jurisdiction over mergers.148 In addition, a majority of respondents were in favour of strengthening the voluntary regime through the enhancement of interim measures.149 Of these respondents, the great majority favoured leaving it to the CMA’s discretion to trigger a statutory restriction on further integration steps. They argued that an automatic hold separate power would be too blunt and disproportionate and would impact on mergers which were not likely to be anti-competitive.150 There was less consensus amongst respondents in relation to whether the legislation should clarify the type and range of measures that the CMA could take in respect of pre-emptive action. Similarly, opinions were divided on the issue of whether financial penalties should be introduced and, if so, at what level. Most respondent regarded a maximum of 10% of aggregate turnover as being too high.151 The Government decided to retain and strengthen the voluntary regime, considering this to be the most proportionate response to the problems identified in the consultation and would limit the increased costs to business and the CMA.152 The Government considered that appropriate thresholds would be difficult to set in a mandatory regime as, to have the same scope as a voluntary regime, the thresholds would have to be very low, which would be out of step with other jurisdictions and would increase costs.153 The Government considered that the alternative of the hybrid mandatory regime would only partially solve the problem in relation to completed cases as most of these cases would qualify under the share of supply test and would still be permitted to complete without advance clearance having been sought. The Government also agreed with the majority of respondents that the discretion to suspend all integration steps should rest with the CMA and should not occur automatically.154 In relation to interim measures powers, the Government decided that these should be clarified in legislation and that financial penalties should be introduced up to a maximum of 5% of aggregate worldwide turnover. In this regard, the CMA would be required to publish guidance on when an interim order would be sought and when financial penalties would be imposed and how they would be calculated.155
148 149
Ibid., para. 5.4. Ibid., para. 5.5.
150
Ibid. Ibid., para. 5.6. 152 Ibid., para. 5.7. 153 Ibid., para. 5.8. 151
154 155
Ibid., para. 5.9. Ibid., para. 5.12.
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1.5.2
Jurisdictional Thresholds
In relation to whether the jurisdictional thresholds should be amended, there was no support amongst respondents for the option of replacing the share of supply and turnover tests with a regime in which the CMA had jurisdiction over all transactions except for those falling within a small mergers exemption. Therefore, the Government decided to retain the existing jurisdictional thresholds. In relation to the small business exemption, a majority of respondents were in favour of the proposal but considered that there should be a single £5 million threshold applicable to the target’s turnover. The Government was not persuaded as to the merits of this proposal and did not decide to introduce a small business exemption as it was not considered to be a “high priority” at that time.156
1.5.3
Statutory Time Limits and Information-Gathering Powers
The Government received mixed responses in relation to the proposal for statutory time limits with some respondents arguing that it would shorten Phase I reviews and bring discipline to the review process, whilst others argued that the end to end process would not be shorter and the pre-notification period would be extended. Some respondents were also concerned that it might result in more Phase II cases as the CMA might run out of time in its Phase I investigation.157 Conversely, almost all respondents were “comfortable” with the CMA having enhanced information-gathering powers in Phase I, with complementary powers to ‘stop the clock’ if main parties did not comply with information requests within specified time limits, as well as powers to impose penalties if main parties and third parties did not comply.158 In addition, most respondents were in favour of not reducing the length of Phase II investigations, although some respondents did point to how much longer Phase II investigations are in the UK than in other jurisdictions.159 Respondents were also generally not in favour of statutory time limits in relation to the UIL process. Respondents considered that parties already had sufficient incentives to conclude the process in a timely manner and some considered that time limits might result in more Phase II referrals. The Government recognised that the arguments for introducing statutory time limits in a voluntary regime were “finely balanced” but considered that the advantages outweighed the disadvantages. The Government considered that statutory time limits would “streamline the process and bring certainty and predictability to business”.160 In deciding the length of the Phase I review, the Government was conscious of ensuring that the CMA had sufficient time to ensure that the “quality of decisions was not reduced”,161 and therefore decided on retaining the current timescales for Phase I and Phase II, namely a 40 working day period for Phase I (capable of extension as a result of 156
Ibid., para. 5.17. Ibid., para. 5.18. 158 Ibid., para. 5.19. 159 Ibid., para. 5.20. 157
160 161
Ibid., para. 5.24. Ibid.
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stopping the clock) and 24 weeks for Phase II, with the possibility of an eight week extension. In relation to UILs, the Government decided that an amendment to the current regime was required and that, rather than parties submitting a UIL offer after the Issues Meeting but before the Case Review Meeting, merging parties should be able to review the CMA’s Phase I decision before submitting a UIL offer. This would increase transparency and parties would be able to decide whether to offer UILs based on the concerns actually identified, thereby avoiding the need to make speculative offers in cases where the CMA might not even find a competition concern. In relation to timing, the Government decided on a five working day period for merging parties to offer UILs after being notified of the CMA’s decision, five working days for the CMA to consider these UILs, and a further 40 working days to negotiate, consult and publish the accepted UILs, with a possible extension of up to another 40 working days.162
1.5.4
Early Consideration of Remedies and Suspension of Phase II
The Government received mixed responses in relation to whether it should be possible for the CMA to consider remedies at an early stage and before it has reached a conclusion on whether there is a substantial lessening of competition. Some respondents were in favour of this increased flexibility and considered that it would lead to shorter Phase II investigations in some cases. Other respondents considered that it might increase complexity and reduce the incentives for merging parties to offer UILs in Phase I. In relation to introducing the ability to suspend Phase II for up to three weeks whilst merging parties considered abandoning their transaction, a large majority of respondents were in favour of this proposal, with some respondents commenting that it should not be made public until after the deal had been abandoned or, if it was not, at a sufficiently late stage in the process that it would not create uncertainty in the market. The Government decided against enabling the CMA to consider remedies at an early stage in Phase II on the basis that it would be “difficult to implement in practice.”163 The Government felt that the CMA would not have considerably more information than in Phase I and that it would divert resources from the main investigation.
1.6
AMENDMENTS TO THE ENTERPRISE ACT
The Enterprise and Regulatory Reform Act obtained Royal Assent on 25 April 2013 with the main provisions affecting the merger control regime coming into force on 1 April 2014. A number of important changes were made to the UK competition regime. Amendments effecting institutional and structural changes to the merger control regime were as follows: (1)
The Office of Fair Trading and the Competition Commission were abolished and replaced by a single, unitary authority, the CMA.164
162
Ibid., para. 5.25.
163
Ibid., para. 5.28. Section 26, Enterprise and Regulatory Reform Act.
164
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(2)
The CMA was provided with the statutory objective “to promote competition, both within and outside the United Kingdom, for the benefit of consumers.”165
(3)
Phase I investigations were given a statutory time-limit of 40 working days.166
(4)
The process in relation to undertakings was amended such that merging parties were given a period of five working days from receipt of the Phase I decision to offer undertakings, with the CMA being given a corresponding period of five working days to consider this UIL offer.167
(5)
The distinction between merger notices and informal submissions was abolished and there is no longer a separate, shorter time-period for the consideration of mergers notified by way of a merger notice. All mergers must now be notified in the prescribed form and must contain the prescribed information.168 The CMA has published a merger notice template for merging parties, which is available on its website.
(6)
The merging parties may now request, within three weeks from the beginning of Phase II, that Phase II is suspended for a period of up to three weeks where they are considering abandoning the transaction.169
(7)
In relation to Phase II investigations, the CMA must discharge its duty to remedy any SLC that it has found within 12 weeks,170 with the ability to extend this period by no more than six weeks if there are special reasons for doing so.171
The CMA was also given enhanced powers in a number of areas at Phase I, including the power to:172 (1)
165
make ‘hold separate’ orders to prevent pre-emptive action in relation to both anticipated and completed mergers;173
Ibid., section 25.
166
Enterprise Act, section 34ZA. This time-limit is subject to a possible extension under section 34ZB if a merging party has failed (with or without a reasonable excuse) to comply with a notice under section 109. 167 Ibid., section 73A. See Chapter 16 for further details. 168 Ibid., section 96(2)(aa), added by Enterprise and Regulatory Reform Act, Sch. 8, para. 8(2). See Chapter 6 for more details on notifying mergers to the CMA. 169 Ibid., section 39(8)(A). 170
Ibid., section 41A(1). Ibid., section 41A(2). 172 The CC already had many of these powers in relation to their Phase II investigations and the CMA continues to have these powers in relation to its Phase II investigations. 173 Enterprise Act, section 72(1). 171
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(2)
order merging parties to unwind any pre-emptive action and to restore the position that would have existed absent pre-emptive action and to mitigate its effects;174
(3)
penalise any person who has, without reasonable cause, failed to comply with such an order, up to 5% of the total worldwide turnover of the enterprises owned and controlled by that person;175
(4)
require any person, for the purposes of giving evidence to the CMA, to attend at a time and place specified by the CMA;176
(5)
require any person to produce any documents that are in his custody or control, which are specified or described in a notice, or fall within a category of documents that are specified or described in a notice;177
(6)
require any person who carries on any business to supply to the CMA such estimates, forecasts, returns or other information as may be specified or described in a notice and to supply it at a time and place, and in a form and manner, as specified by the CMA;178
(7)
extend the Phase I review if the CMA considers that a merging party has failed to comply with any requirement of a notice under section 109;179
(8)
fine (up to £30,000 for a fixed penalty or up to £10,000 per day or both) a person who has, without reasonable excuse, failed to comply with any requirement of a notice under section 109;180 and
(9)
take proceedings against a person who has intentionally altered, suppressed or destroyed any document which he has been required to produce and any person committing such an offence will be liable to either a fine (on summary conviction) or to imprisonment for a term not exceeding two years or to a fine or both (on conviction on indictment).
1.7
THE CMA MERGER GUIDELINES
The CMA launched a consultation process in relation to its guidance in July 2013. The consultation consisted of two parts. Part 1 of the consultation ran from 15 July to 6 September 2013 and, from a merger control perspective, included the CMA’s draft
174
Enterprise Act, section 72(3B). The power to accept initial undertakings in relation to anticipated mergers was abolished. 175
Ibid., section 94A. Ibid., section 109(1). 177 Ibid., section 109(2). 178 Ibid., section 109(3). 176
179 180
Ibid., section 34ZB. Ibid., section 110(1) and (3), and section 111(7).
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guidance on jurisdiction and procedure. Part 2 of the consultation ran from 17 September to 11 November 2013. In relation to merger control, the main sets of guidelines that are currently in force, and which are referred to in this book include: (1)
Mergers: Guidance on the CMA’s jurisdiction and procedure (the “Jurisdictional and Procedural Guidance”);181
(2)
Merger assessment guidelines, which were originally published jointly by the OFT and the CC, and have been adopted by the CMA’s Board (the “Merger Assessment Guidelines”);182
(3)
Mergers: Exceptions to the duty to refer and undertakings in lieu of reference guidance, which was originally published by the OFT and has been adopted by the CMA Board (the “Exceptions and Remedies Guidance”); 183
(4)
Commentary on Retail Mergers, which was originally published jointly by the OFT and the CC and has been adopted by the CMA Board;184
(5)
Merger Remedies: Competition Commission Guidelines, which were originally published by the CC and have been adopted by the CMA Board (the “Phase II Remedies Guidelines”);185 and
(6)
CMA guidance on the review of NHS mergers (“NHS Merger Guidance”).186
1.8
THE MERGER REGULATION
The Merger Regulation has primacy over certain mergers that might fall within the Enterprise Act’s jurisdiction. Article 21(3) of the Merger Regulation states that no Member State shall apply its national legislation on competition to any concentration that has an EU dimension.187 Accordingly, where a transaction qualifies both as a
181
Mergers – Guidance on the CMA’s Jurisdictional and Procedure, CMA2, January 2014. Merger Assessment Guidelines, CC2 (Revised), OFT1254, September 2010. 183 Mergers – Exceptions to the duty to refer and undertakings in lieu of reference guidance, OFT1122, December 2010. 184 Commentary on Retail Mergers, OFT1305/CC2com2, March 2011. 185 Merger Remedies: Competition Commission Guidelines, CC8, November 2008. 182
186
CMA guidance on the review of NHS mergers – CMA29, July 2014. A concentration has an EU dimension if: (i) the combined aggregate worldwide turnover of all the undertakings concerned exceeds €5 billion; and (ii) at least two of the undertakings concerned each has aggregate EU-wide turnover exceeding €250 million; unless (iii) each of the undertakings achieves more than two-thirds of its EU-wide turnover within one and the same Member State. Alternatively, a concentration may be considered to have an EU dimension where: (i) the combined aggregate worldwide turnover of all of the undertakings concerned exceeds €2.5 billion; (ii) the aggregate EUwide turnover of at least two undertakings exceeds €100 million; (iii) in each of at least three Member States, the combined aggregate turnover of all the undertakings concerned exceeds €100 million; and (iv) in each of those three Member States, the aggregate turnover of each of at least two undertakings 187
Overview of the UK Merger Control Regime
33
concentration with an EU dimension under the Merger Regulation and a ‘relevant merger situation’ under the Enterprise Act, at least as an initial matter, the transaction will fall within the sole jurisdiction of the Merger Regulation. There are mechanisms by which a concentration with an EU dimension can be transferred to the CMA, in the event that the transaction also falls within the jurisdiction of the Enterprise Act. These mechanisms are considered in Chapter 4. More generally, the evolution of EU merger control has had a significant effect on the development of merger control under the Enterprise Act. Whilst there are a number of material differences between the regimes (e.g., the Enterprise Act applies to completed mergers, and provides for express political involvement in certain circumstances),188 the CMA has explicitly looked for guidance to the EU in a number of areas (e.g., in respect of the calculation of turnover,189 and the treatment of ancillary restraints).190 However, merger control under the Enterprise Act has no corresponding provision to section 60 of the Competition Act in relation to anti-competitive agreements and abuse of dominance, which provides that, so far as possible, questions in relation to Chapter I and Chapter II prohibitions in the Competition Act are dealt with in a manner that is consistent with the treatment of corresponding questions arising under Articles 101 and 102 of the Treaty on the Functioning of the EU. As such, there is no requirement for the CMA to take into consideration EU merger control law or the Commission’s decisional practice when determining whether a merger will result in an SLC in the UK. Nevertheless, the CMA regularly looks at the way in which the European Commission has, for example, approached market definition when assessing mergers in the same sector.
1.9
THE CMA
The CMA is a non-ministerial department that currently comprises around 650 staff. It is accountable to Parliament and its budget is set by HM Treasury. It is governed by a Board that comprises a non-executive Chair, a Chief Executive,191 three Executive Directors, and six non-Executive Directors.192 The CMA’s functions are exercisable by the Board on behalf of the CMA.193 Appointment to the CMA Board is for a term of no more than five years.194 Several Board members are also panel members.195 The Chief
concerned exceeds €25 million; unless (v) each of the undertakings achieves more than two-thirds of its EU-wide turnover within one and the same Member State. 188 See, Chapter 5 for an explanation of the Secretary of State’s role in merger control. 189 Jurisdictional and Procedural Guidance, para. 3.51, footnote 68. 190
Ibid., para. 4.79. Enterprise and Regulatory Reform Act, Schedule 4, para. 9. The Chief Executive may not be a member of the Panel or the Chair. 192 Enterprise and Regulatory Reform Act, Schedule 4, para. 1(3) provides that the CMA Board must consist of at least five members. 191
193 194
Ibid., Schedule 4, para. 28. Enterprise and Regulatory Reform Act, Schedule 4, para. 3(1).
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Economic Adviser and the General Counsel also attend Board meetings and provide advice to the Board. In addition to its Board, the CMA has a Panel comprising a Panel Chair, Inquiry Chairs (of which there are currently seven), and Panel Members (of which there are currently around 25). Members are appointed for an eight-year term196 and usually work on a part-time basis. Panel members come from a variety of backgrounds, including economics, law, accountancy and/or business.197 Panel members are available for selection as members of a group and, in relation to mergers, are responsible for taking decisions at Phase II, and typically sit as an Inquiry Group of four members. At an organisational level, the CMA comprises three directorates: enforcement, markets and mergers, and corporate services, each of which is led by an Executive Director. These directorates are supported by the Legal Service (previously, the Office of the General Counsel), Policy and International, and the Office of the Chief Economic Adviser. The precise structure of the Mergers Group varies from time to time. It is again led by a Senior Director of Mergers,198 with support from (currently) three Directors of Mergers who manage the day-to-day operations of the Mergers Group and are responsible for the Group’s case load. Supporting the Directors are five Assistant Directors of Mergers, three Assistant Directors of Economics, two Assistant Directors, Legal, up to 14 Principal Case Officers, 12 Economic Advisers, as well as Project Officers, Higher Executive Officers and the Mergers Support Team (previously, General Office) providing back office support. In total, the Phase I team consists of around 50 staff. The Phase I team is also supported by other units within the CMA, notably the Remedies, Business and Financial Analysis (“RBFA”) team, which principally provides advice in relation to remedies, the Sector Regulation Unit, which provides support in relation to mergers in regulated sectors, and the Statistics Team, which provides advice in relation to surveys conducted at Phase I.199
1.10
THE SECRETARY OF STATE
A key objective of the Enterprise Act was to remove decision-making from the political arena for the vast majority of mergers. Accordingly, since June 2003, the Secretary of State’s role has been significantly reduced in relation to mergers decision-making.200
195 This was envisaged in the Consultation Response, para. 10.13 and Enterprise and Regulatory Reform Act, Schedule 4, para. 1(4) provides that at least one of the Board members must also be a Panel member. Currently, two Board members are also panel members. 196 Enterprise and Regulatory Reform Act, Schedule 4, para. 3(2). 197 Jurisdictional & Procedural Guidance, para. 10.4. 198 The Mergers Group was previously led by a Senior Director of Mergers from late 2007 to early 2011 but was thereafter led by a Director of Mergers. 199
As the CMA does not conduct its own surveys at Phase I, these will be surveys submitted by merging parties. 200 For the sake of simplicity, the Secretary of State for Business, Innovation and Skills is simply referred to as the Secretary of State.
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The main area in which the Secretary of State continues to play a role in the merger control regime is in respect of public interest cases.201 The Enterprise Act gives the Secretary of State the power to issue a public interest intervention notice (“PIIN”) where the merger in question: (i) meets the jurisdictional thresholds; (ii) raises public interest considerations; and (iii) has not been referred to Phase II.202 Originally, the primary public interest consideration was national security. However, the Enterprise Act now recognises three public interest considerations: national security, media plurality and maintaining the stability of the UK financial system.203 In mergers where such issues are raised and a PIIN has been issued, the CMA will carry out its Phase I investigation and report to the Secretary of State, both on jurisdictional and substantive competition issues as well as on public interest considerations. The Secretary of State will then decide whether or not to clear the merger unconditionally, whether to accept UILs, or to refer the merger for an in-depth investigation.
1.11
THE COMPETITION APPEAL TRIBUNAL
The Competition Appeal Tribunal (the “CAT”) was created by section 12 of the Enterprise Act. The CAT has a range of functions, including hearing appeals under the Competition Act and the Communications Act 2003. In respect of mergers, the CAT hears appeals of decisions of the CMA or the Secretary of State.204 To date, the CAT has heard 22 substantive appeals relating to merger cases under section 120 of the Enterprise Act. For the purposes of proceedings before it, the CAT must consist of three members: a Chairman and two other members.205 The Chairman must either be the President or a member of the panel of chairmen.206 The other members may be chosen from either the panel of chairmen or the panel of members. The panel of chairmen currently comprises 15 High Court judges and five other senior lawyers. The panel of members includes individuals from a number of different backgrounds who have expertise in law, economics, business, accountancy and other related fields. Short biographies of the President and the members of both panels can be found on the CAT’s website.207 The President, Chairmen and the members are supported by the Competition Service, which is an executive non-departmental public body established by the Enterprise Act to provide the administrative staff, finance and accommodation required by the CAT.208
201
Public interest cases are considered in Chapter 5. Section 42, Enterprise Act. 203 Section 58, Enterprise Act. 204 Appeals of merger decisions under section 120 of the Enterprise Act are considered in Chapter 202
18. 205 206 207 208
Section 14(1), Enterprise Act. Section 14(2), Enterprise Act. http://www.catribunal.org.uk/246/Personnel.html Section 13, Enterprise Act.
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1.12
SECTORAL REGULATORS
There are a number of sectoral regulators in the UK. These include: (i) the Office of Communications (“OFCOM”), which regulates the communications sector, including TV, radio, fixed line and mobile telephony in the UK;209 (ii) the Office of Gas and Electricity Markets (“OFGEM”), which regulates the gas and electricity sectors in Great Britain;210 (iii) the Water Services Regulation Authority (“OFWAT”), which regulates the water and sewerage industry in England and Wales;211 (iv) the Office of Rail and Road (“ORR”), which is the safety and economic regulator of the rail industry in Great Britain and the monitor of Highways England;212 (v) the Civil Aviation Authority (“CAA”), which regulates the UK’s aviation sector;213 (vi) Monitor, which regulates health services in England;214 (vii) the Financial Conduct Authority, which regulates UK financial markets;215 (viii) the Payment Systems Regulator, which regulates UK payment systems;216 and (ix) the Utility Regulator, which regulates the gas and electricity sectors, and water and sewerage industries in Northern Ireland.217 The CMA will usually seek the advice of sectoral regulators in relation to mergers affecting their industries and has a dedicated Sectoral Regulation Unit. Whilst the CMA has a statutory duty to determine whether a merger has resulted, or may result, in an SLC, and will not be bound by the views of a regulator, a merger in a regulated sector may give rise to issues falling within the expertise of the sectoral regulator and not the CMA, such as, for example, the need to modify an operating licence. Sectoral regulators may issue a consultation document in relation to a merger and the responses to such a consultation may inform the views of the regulator that are offered to the CMA. As a general rule, the more substantively complicated the regulatory issues affecting the assessment, the more input will be provided by the sectoral regulator and,
209 See http://www.ofcom.org.uk. Communications Act 2003.
The principal statute relating to OFCOM’s duties is the
210 See http://www.ofgem.gov.uk. OFGEM’s powers are provided for under the Gas Act 1986, the Electricity Act 1989, the Utilities Act 2000, the Competition Act 1998 and the Enterprise Act 2002. 211
See http://www.ofwat.gov.uk. The principal statute relating to OFWAT’s duties is the Water Industry Act 1991. 212 See http://orr.gov.uk/. The principal statute relating to the ORR’s duties is the Railways Act 1993 and the Railways Act 2005. 213 See http://www.caa.co.uk. The principal statute relating to the CAA’s duties is the Transport Act 2000. 214 From 1 April 2015, Monitor became part of NHS Improvement. See https://improvement.nhs.uk/. The principal statute relating to Monitor’s activities is the Health and Social Care Act 2012. 215 See http://www.fca.org.uk/. The principal statute relating to the FCA’s activities is the Financial Services and Markets Act 2000, as amended. 216
See https://www.psr.org.uk/. The principal statute relating to the PSR’s activities is the Financial Services (Banking Reform) Act 2013. 217 See http://www.uregni.gov.uk. The Utility Regulator’s powers are provided for under Energy (Northern Ireland) Order 2003 and the Water and Sewerage Services (Northern Ireland) Order 2006.
Overview of the UK Merger Control Regime
37
in merger cases, there is often a secondment from a sectoral regulator to the Mergers Group to assist the case team. Distinct from the other sectoral regulators, OFCOM has a formal role in the merger control process. In respect of mergers in the media sector, OFCOM is required to provide a report to the Secretary of State on whether the merger raises media plurality public interest concerns.218 OFCOM may report on any representations that it has received and may carry out its own investigations in relation to making its report.219 OFCOM’s specific plurality role in relation to media mergers is described in more detail in Chapter 5. Like other sectoral regulators, OFCOM is also a particularly interested third party for the purposes of commenting on the competition issues raised by a merger. Similarly, Monitor will usually advise the CMA in relation to any relevant customer benefits arising from hospital mergers.220
218 219 220
Section 44A(2), Enterprise Act. Section 44A(4), Enterprise Act. Section 79(5), Health and Social Care Act 2012.
Chapter 2 ENTERPRISES CEASING TO BE DISTINCT 2.1 Introduction 2.2 Relevant Merger Situations 2.3 The Definition of an Enterprise 2.3.1 Introduction 2.3.2 The Acquisition of Physical Assets 2.3.3 The Acquisition of Intangible Assets 2.3.4 The Acquisition of a Non-Trading Business 2.3.5 Outsourcing or Management Contracts 2.3.6 The Acquisition of Components of an Enterprise From Different Parties 2.3.7 The Treatment of Leases 2.3.8 The Formation of Joint Ventures 2.3.9 Consideration 2.4 The Concept of Ceasing to be Distinct 2.4.1 Introduction 2.4.2 De Jure Control 2.4.3 De Facto Control (a) Ability to exercise more than 50% of voting shares (b) Ability to influence a majority of votes (c) CMA discretion to treat de facto control as a controlling interest 2.4.4 Material Influence (a) Shareholdings exceeding 25%
2.1
(b) Shareholdings between 15% and 25% (c) Plus factors (d) Shareholdings below 15% (e) Insufficient control 2.5 Time Limits and Prior Notice 2.5.1 The Four-Month Timing Rule 2.5.2 The Starting Point for the FourMonth Period 2.5.3 Facts in the Public Domain Must Be Readily Ascertainable 2.5.4 Extension of the Four-Month Period 2.5.5 Ryanair/Aer Lingus 2.6 Successive Transactions 2.6.1 Aggregating Transactions Within a Two-Year Period 2.6.2 The Time at Which Enterprises Cease to be Distinct 2.6.3 Options 2.6.4 Only Mergers Between the Same Parties may be Aggregated 2.7 Obtaining Control by Stages 2.7.1 Changes in the Level of Control 2.7.2 Acquisitions of Control Within a Two-Year Period 2.7.3 Aggregation of Anticipated Mergers 2.8 Temporary Merger Situations 2.9 Associated Persons
INTRODUCTION
The merger control provisions of the Enterprise Act apply to “relevant merger situations.”1 A relevant merger situation is deemed to occur where two or more enterprises “cease to be distinct” and certain jurisdictional thresholds are exceeded.2 In addition, relevant merger situations must not have an “EU dimension” within the
1 2
Section 23, Enterprise Act. These jurisdictional thresholds are the subject of Chapter 3.
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meaning of Article 1 of Council Regulation (EC) No. 139/2004 (the “Merger Regulation”).3 In relation to enterprises ceasing to be distinct, the principal feature that distinguishes the UK merger control regime from the regime that exists under the Merger Regulation and in most EU Member States is that it does not incorporate a “control” test in the sense of acquiring “decisive influence”4 over the commercial policy of a target.5 The Enterprise Act has a broader remit and envisages three distinct levels of control: (i) de jure control; (ii) de facto control; and (iii) material influence. As a result, the Enterprise Act permits the CMA to investigate transactional structures that could not be investigated under the Merger Regulation or the merger control laws of most EU Member States.6 This chapter considers the following issues: (i) the definition of an enterprise; (ii) the concept of enterprises ceasing to be distinct; (iii) the time-limits within which the CMA is permitted to investigate a transaction at Phase I and to make a Phase II reference; (iv) the treatment of successive transactions that occur within specified time-periods; (v) changes in the level of control held by an acquirer; and (vi) how temporary merger situations are treated under the Enterprise Act.
2.2
RELEVANT MERGER SITUATIONS
A relevant merger situation exists where the following conditions are satisfied:7 (1)
two or more enterprises have ceased to be distinct (in the case of completed mergers) or will cease to be distinct (in the case of anticipated mergers); and
(2)
either:
3
(a)
the value of the target enterprise’s UK turnover exceeded £70 million in its last fiscal year (the turnover test); or
(b)
the enterprises ceasing to be distinct have a share of supply in the UK, or in a substantial part of the UK, of 25% or more in relation to goods or services of any description (the share of supply test);8 and
In accordance with Article 21 of the Merger Regulation, the Merger Regulation alone shall apply to “concentrations” with an “EU dimension” and no Member State shall apply its own national merger control legislation to such a transaction. 4 Article 3(2) of the Merger Regulation states that control must confer the possibility of exercising “decisive influence” on an undertaking, which essentially equates to the ability to determine the budget and business plan of the target and to appoint/dismiss senior management. 5 The UK is not unique in this respect. Other EU Member States, including Austria and Germany, have not incorporated the Merger Regulation’s ‘control’ test into their respective merger control rules and may have jurisdiction over a transaction at a lower level than “decisive influence”. 6 See, in particular, Completed acquisition by Ryanair Holdings plc of a minority interest in Aer Lingus Group plc, OFT decision of 15 June 2012, where the European Commission did not have jurisdiction to require the divestment of the 30% shareholding in Aer Lingus held by Ryanair once its bid for full control had been prohibited and the OFT opened an investigation. 7 Section 23, Enterprise Act.
40
Enterprises ceasing to be distinct
(3)
in relation to completed mergers only, the enterprises must not have ceased to be distinct more than four months before the date of any reference to Phase II.9
The first condition relates to merger mechanics under the Enterprise Act (i.e., what constitutes a merger). Once it is clear that a merger has been, or will be, created, the assessment proceeds to focus on whether the merger has a sufficient UK nexus. The second condition therefore relates to jurisdiction. The third condition relates to timing and is applicable only to completed mergers. Where the first and second conditions are met, the CMA’s power to investigate a merger situation will usually end four months after the merger in question has completed.
2.3
THE DEFINITION OF AN ENTERPRISE 2.3.1
Introduction
The Enterprise Act defines an “enterprise” as “the activities, or part of the activities, of a business”10 and defines “business” as “a professional practice and includes any other undertaking which is carried on for gain or reward or which is an undertaking in the course of which goods or services are supplied otherwise than free of charge.”11 There is no statutory definition of “activities”. In addition to these definitions, the Jurisdictional and Procedural Guidance states that an enterprise does not need to be a separate legal entity,12 it is not necessary for an enterprise to generate a profit or dividend for shareholders, and it may be carried out on a not-for-profit basis.13 In many cases, the acquirer will purchase a stand-alone business with employees, customer records, existing revenue-generating contracts and goodwill. However, this will not always be the case and in making a judgement as to whether or not the assets being acquired constitute an enterprise, the CMA will have regard to the substance of the arrangement under consideration, rather than merely its legal form.14 Accordingly, it may not be one single factor that proves determinative in the CMA’s assessment and it will consider all relevant factors, including whether:15 (i) customer records are being transferred with the acquired business; (ii) employees are being transferred and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (the “TUPE
8
The turnover test and the share of supply test are discussed in more detail in Chapter 3.
9
Section 24(1), Enterprise Act. This four month period starts from the date on which material facts about the transaction have been made public and are generally known or are readily ascertainable. See section 2.5 below for more details. 10 Section 129(1), Enterprise Act. 11 Ibid. 12
Jurisdictional and Procedural Guidance, para. 4.6. Ibid. See, Completed merger of Seniorlink Eldercare and Aid Call resulting from the completed merger between Help the Aged and Age Concern England, OFT decision of 21 July 2009. 13
14 15
Jurisdictional and Procedural Guidance, para. 4.7. Ibid., para 4.8.
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Regulations”) apply to the transaction; and (iii) the payment of a premium in excess of the value of the assets has been made, indicating that goodwill has been transferred. As the CAT put it in Eurotunnel I: “…if a guiding principle is sought, then we consider that it lies in an understanding of what an enterprise – the activities or part of the activities of a business – does. An enterprise takes inputs (assets of all forms) and by combining them transforms those inputs into outputs that are provided for gain or reward. It thereby also may generate intangible but valuable assets such as know-how or goodwill. It is in this combination of assets that the essence of an enterprise lies. In those cases where the acquiring entity takes over the business of the acquired entity, the answer will be self-evident: the same enterprise is simply continuing, albeit under different ownership or control. The difficult case arises where the combination of assets is fractured, such that the assets are no longer, or no longer to the same extent, being used in combination.”16
This fundamental concept of UK merger control has come under considerable scrutiny in recent years, in particular as a result of the Eurotunnel/SeaFrance case and the subsequent litigation. In practice, the large majority of cases considered by the CMA do not raise any difficult questions as to whether the entities involved constitute “enterprises” within the meaning of the Enterprise Act. However, a number of scenarios have arisen in the decisional practice, which have raised the question of whether an “enterprise” is being acquired, including: (i) the acquisition of physical assets alone; (ii) the acquisition of intangible assets alone; (iii) the acquisition of a nontrading business; (iv) outsourcing or management contracts; (v) the acquisition of the components of an enterprise from different parties; (vi) the treatment of leases; (vii) the formation of joint ventures; and (viii) consideration. Each of these is considered below.
2.3.2
The Acquisition of Physical Assets
The transfer of assets alone (i.e., without being accompanied by other components of a stand-alone business such as employees, existing contracts or records, etc) will not normally be considered sufficient to constitute an enterprise.17 This was made clear by the CAT in Eurotunnel I and by the Supreme Court in SCOP v CMA.18
16
Groupe Eurotunnel S.A. v Competition Commission [2013] CAT 30 (“Eurotunnel I”), para. 105. See, e.g., Anticipated acquisition by Tesco plc of a former Safeway site at Coulby Newham from WM Morrison Supermarkets plc, OFT decision of 21 August 2005, where the OFT concluded that Tesco’s proposed acquisition of a former Safeway site was not an enterprise on the basis that a new supermarket was being constructed on the site and Tesco would acquire a petrol filling station, which was closed at the time of the transaction. See also, Completed acquisition by Tesco plc of property in Redruth (Pool) Cornwall, formerly traded by Woolworths Group plc, OFT decision of 17 April 2005, where OFT concluded that Tesco’s acquisition of property in Redruth did not qualify for investigation as Tesco only acquired the real estate and no other assets such as customer lists/records, supply contracts, or goodwill and Tesco had not taken over any employees previously employed by Woolworth and the business previously carried on at the site had been discontinued. This is also implicit in the Jurisdictional and Procedural Guidance, at paragraph 4.8, where the CMA states that “in some cases, the transfer of assets alone may be sufficient to constitute an enterprise…”. 18 Société Coopérative de Production SeaFrance SA v CMA [2015] UKSC 75 (“SCOP v CMA”). 17
42
Enterprises ceasing to be distinct
In Eurotunnel I, the CAT considered the distinction, drawn by the Monopolies and Mergers Commission in AAH Holdings/Medicopharma,19 between “bare assets” – which could not constitute the activities of a business – and something more than bare assets to be useful.20 The CAT indicated that the key to distinguishing between “bare assets” and an “enterprise” lies in: (i) considering exactly what, over and above “bare assets” the acquiring entity has obtained; and (ii) asking whether – and if so how – this placed the acquiring entity in a different position than if it had simply gone out into the market and acquired the assets.21 After having identified these features (if there are any), the question is then whether this difference is capable of constituting what would otherwise be bare assets into something that may properly be described as the activities of a business.22 The CAT considered this to be a question of fact and degree to be assessed in each case. The Supreme Court agreed with this principle in SCOP v CMA, where Lord Sumption stated as follows in relation to the distinction between “bare assets”, whether tangible or intangible, and an “enterprise”: “The phrase “bare assets” does not appear in the Act, and simply as a matter of language may not convey much. But it is a useful concept when it comes to analysing the purpose of this legislation. The object of distinguishing between “bare assets” and assets amounting to an “enterprise” is to prevent the merger control regime from capturing an acquisition of assets which simply serve as factors of production in a new enterprise or as a means of achieving organic growth. It is designed to distinguish a case in which the acquirer acquires a business exploiting a combination of assets and a case where he acquires no more than he might have acquired by going into the market and buying equipment, hiring employees, and so forth separately. In the latter case, the fact that the equipment or the employees were previously employed in the target enterprise is irrelevant. He has got no more than he would have done if they had not been. So if the assets of which he acquires control are to be regarded as constituting an “enterprise”, (i) they must give him more than he might have acquired by going into the market and buying factors of production, and (ii) the extra must be attributable to the fact that the assets were previously employed in combination in the “activities” of the target enterprise… Ultimately the question turns on… “economic continuity”. This is substantially the principle stated at paras 105-6 of the CAT’s judgment in Eurotunnel I, which I have set out above. Put crudely, it depends on whether at the time of the acquisition one can still say that economically the whole is greater than the sum of its parts.”23
Therefore, so long as the principle of economic continuity is satisfied, it will not be necessary for a purchaser to acquire all the components of a stand-alone business (e.g., because it already has sufficient staff to operate the acquired assets). In these cases, the transfer of physical assets alone may be considered to be an enterprise where their transfer enables a particular business activity to be continued.24 The following
19
AAH Holdings plc and Medicopharma NV, a report on the merger situation, May 1992. Eurotunnel I, paras. 104 to 105. 21 Ibid., para. 105. 22 Ibid. 20
23 24
Société Coopérative de Production SeaFrance SA v CMA [2015] UKSC 75, paras. 39 and 40. Jurisdictional and Procedural Guidance, para. 4.8.
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cases are illustrative of the Authorities’ approach in this regard, although it should be noted that these decisions all pre-date the Supreme Court’s judgment in SCOP v CMA. (1)
In Hargreaves/SCCL, Hargreaves Services plc (“Hargreaves”), an energy support services provider active, inter alia, in the supply and distribution of coal products to industrial and domestic consumers, acquired Scottish Coal Company Limited (“SCCL”), which was a subsidiary (in liquidation) of Scottish Resources Group (“SRG”), a producer of coal and renewable energy products in the UK.25 As a result of SCCL’s liquidation, ownership of the Broken Cross, Chalmerston, Damside, House of Water and St Ninians coal sites was transferred to five special purpose vehicles (“SPVs”). These SPVs were wholly-owned subsidiaries of SCCL. The parties, together with SCCL’s liquidators, and Hargreaves Surface Mining Limited (“HSML”) signed Share Sale Agreements relating to the entire issued share capital in each of the five SPVs. In addition, the parties, SCCL’s liquidators and HSML entered into site care and maintenance agreements which granted Hargreaves rights to extract coal and other minerals from the active coal sites in the SPVs and market for sale the coal and other minerals extracted from the sites for its own account. Hargreaves submitted that of the five sites transferred to the SPVs only the Broken Cross, House of Water and St Ninians sites were viable, and that these would have enabled Hargreaves to continue mining and selling coal extracted from these sites. The OFT considered that this was sufficient for Hargreaves to have acquired an enterprise on the basis that the acquisition of these assets would enable a business activity to be continued.
(2)
In Tattersalls/Brightwells, the parties were active in bloodstock auctioneering, and Tattersalls was acquiring the rights to conduct auctions at Ascot and Cheltenham racecourses, as well as certain other assets and some (four) employees were also being transferred.26 The parties argued that as the right to conduct auctions at Ascot racecourse was for only a limited period of time, this should not be considered as part of the merger situation.27 However, the CMA considered that the assets, goodwill and employees being acquired by Tattersalls would enable Brightwells’ business activity to be continued at Cheltenham and Ascot, and that therefore enterprises were ceasing to be distinct.
(3)
In NSMP/Total, North Sea Midstream Partners Limited (“NSMP”), proposed acquiring the St Fergus plant, the FRIGG UK offshore pipeline, and a 67.04% interest in the Shetland Island Regional Gas Export System.28 There was no
25
Completed acquisition by Hargreaves Services PLC of certain assets of Scottish Coal Company Limited, OFT decision of 30 October 2013. 26 Anticipated acquisition by Tattersalls Limited of the bloodstock auctioneering business of Brightwells Limited, CMA decision of 15 September 2015. 27 Ibid., para. 24. 28 Anticipated acquisition by North Sea Midstream Partners Limited of certain assets of Total E&P UK Limited, CMA decision of 12 November 2015.
44
Enterprises ceasing to be distinct
direct transfer of staff, but NSMP entered into an operating and maintenance agreement with px Group Limited to oversee plant operations and maintenance. All staff at the St Fergus plant and a number of Total employees employed in connection with the target business transferred to px Group Limited pursuant to TUPE. The CMA considered that these assets together constituted an enterprise (i.e., the St Fergus plant, the pipeline and the indirect transfer of staff via px Group) as they allowed a business activity to be continued. (4)
In Pearson/Learndirect, Pearson proposed acquiring the computer-based testing (“CBT”) business of Learndirect.29 The key assets being acquired by Pearson were Learndirect’s Government contracts, principally the contract to administer the driving theory test in the UK from 2016 (the “DVSA contract”). In addition to the contracts themselves, and the goodwill associated with them, Pearson proposed purchasing candidate data, test materials, and domain names. However, no staff were transferring as Pearson already had the necessary staff to carry out the acquired contracts (partly because it was the incumbent provider of the DVSA contract). The CMA considered that Pearson was acquiring the activities of a business, which it was able to continue operating without interruption, and that the target was therefore an enterprise.
2.3.3
The Acquisition of Intangible Assets
The acquisition of intangible assets, such as intellectual property rights, on their own, is unlikely to be considered as an enterprise unless it is possible to identify turnover directly related to the transferred intangible assets.30 This is in line with the European Commission’s position in accordance with its Consolidated Jurisdictional Notice, which states that “[a] transaction confined to intangible assets such as brands, patents or copyrights may also be considered to be a concentration if those assets constitute a business with a market turnover.”31 In practice, it is more likely that an intangible asset will be acquired with other associated assets, but the asset of primary value that is being acquired is the intangible asset. This was the case in Reckitt Benckiser/K-Y brand where Reckitt Benckiser Group plc (“RB”) acquired certain rights, liabilities and assets relating to the K-Y brand. These assets included inventories, moulds, toll-free numbers, internet domain names, certain IP rights, technical data, drawings, regulatory information, governmental marketing authorisations, all business records and files, sales and promotional materials, and contracts relating to the K-Y brand. No staff or fixed assets were included in the sale. The CMA concluded, both at Phase I and Phase II, that the K-Y business being acquired constituted an enterprise, with the CMA noting in its 29 Anticipated acquisition by Pearson Professional Assessments Limited of the computer-based testing business of learndirect Limited, CMA decision of 2 December 2015. 30 Jurisdictional and Procedural Guidance, para. 4.8. 31 Consolidated Jurisdictional Notice, para. 24. See, e.g., in Anticipated acquisition by Scottish & Newcastle plc of the Foster’s brand from Foster’s Group Limited, OFT decision of 1 May 2006, the OFT concluded, without explanation, that the Foster’s brand did not fall within the definition of an “enterprise” within the meaning of the Enterprise Act.
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Phase II decision that RB would “acquire the necessary components to carry on the business of supplying K-Y branded personal lubricants to retailers and wholesalers globally (including in the UK), which would amount to an enterprise for the purposes of the Act.”32
2.3.4
The Acquisition of a Non-Trading Business
The fact that a business may no longer be trading at the time that an acquisition takes place does not necessarily prevent the business or assets from being regarded as an “enterprise.”33 This position has now been clarified by the Supreme Court.34 The Enterprise Act stipulates that an “enterprise” must consist of activities that are “carried out for gain or reward”, but does not specify that these activities need to be generating turnover at the time of the acquisition. In addition to the factors that the CMA will normally take into consideration when determining whether a business constitutes an “enterprise”, the CMA will also take into consideration the following factors in respect of non-trading assets: (1)
the period of time that has elapsed since the business ceased trading;
(2)
the extent and the cost of the actions that would be required to reactivate the business as a trading entity;
(3)
the extent to which customers would regard the acquiring business as, in substance, continuing from the acquired business; and
(4)
whether, despite the fact that the business was not trading, goodwill or other benefits beyond the physical assets could be said to be attached to the business and form part of the sale.35
None of these factors is likely to be conclusive by itself,36 and the CMA will assess all of the existing factors on a case-by-case basis to determine whether the business in question is an enterprise within the meaning of the Enterprise Act.37 In practice, cases in which non-trading assets are deemed to constitute an “enterprise” are relatively rare. An example of such a case was HRG/Focus.38 Home Retail Group (“HRG”) acquired 27 properties from Focus (DIY) (“Focus”). HRG argued that the properties did not
32
Reckitt Benckiser and K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015, para. 5.19. 33 Jurisdictional and Procedural Guidance, para. 4.10. This is contrary to the European Commission’s position under the Consolidated Jurisdictional Notice in accordance with which an undertaking must have a market presence to which a market turnover can be clearly attributed. 34 SCOP v CMA, supra, para. 35. 35
Jurisdictional and Procedural Guidance, para. 4.10. Ibid., para. 4.11. 37 Ibid. 38 Completed acquisition by Home Retail Group plc of 27 stores from Focus (DIY) Ltd, OFT decision of 15 April 2008. 36
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Enterprises ceasing to be distinct
amount to an “enterprise” on the grounds that they were 27 “empty shells” that were incapable of being operated for gain or reward without stock, fittings or branding.39 The OFT disagreed with the parties’ analysis and concluded that the properties constituted an enterprise for the following reasons: (1)
“immediately prior” to the merger, the properties had been trading and had generated turnover (£71 million in 2006);40
(2)
the business activities carried out in the properties had been in competition with HRG and therefore the properties may have carried some element of goodwill for DIY products;
(3)
the TUPE Regulations applied to the merger as 750 employees were transferred from Focus to HRG;41 and
(4)
the transfer of the properties and the employees would enable HRG to carry on the same business activities as Focus had carried out from those premises with little interruption.42
More recently, in Eurotunnel/SeaFrance, Eurotunnel successfully bid for certain assets of the former SeaFrance business including, three ferry vessels, SeaFrance logos, brand and the trade name, computer software, websites and domain names, IT systems, customer records and an inventory of technical and spare parts, as well as IT hardware and office equipment (the “Transferred Assets”). At Phase I, Eurotunnel submitted that the Transferred Assets did not constitute an enterprise because, inter alia, they had been inactive for around six months before the Transaction.43 In respect of the continuity of service, the OFT noted that the period of time that had elapsed between SeaFrance
39
Ibid., para. 5. Ibid., para. 6. 41 Ibid. The OFT described this as a strong indicator in favour of finding that an enterprise had been transferred. 42 See also, e.g., Acquisition by Exel Europe Limited of the supply chain functions of the NHS Logistics Authority and the consumables procurement function of the NHS Purchasing and Supply Agency, OFT decision of 19 July 2006, where Exel, a subsidiary of Deutsche Post, took over the supply of logistics and procurement services for consumable products that had previously been provided to the Department of Health by NHS Logistics and the NHS Purchasing and Supply Agency. Excel also acquired some assets (IT and office equipment), some contracts, the right to use certain NHS IP and up to 1,600 employees covered by the TUPE Regulations. The activities being taken over had minimal turnover. However, the open market value attributed to the in-house services being taken over was judged to exceed £70 million, thus providing the OFT with jurisdiction. Also, in Anticipated acquisition by HMV of 15 Zavvi stores, OFT decision of 28 April 2009, para. 19, there had been a temporary intervening party that had operated a business from one of the stores being acquired by HMV. The OFT considered that this store was at the outer edge of what constituted an enterprise and determined that this store qualified for examination only on the basis that it “may be the case” that a relevant merger situation had been created. 43 Completed acquisition by Groupe Eurotunnel S.A. of certain assets of former Seafrance S.A., OFT decision of 29 October 2012. 40
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ceasing to operate and the completion of the transaction was six months but did not consider that the goodwill had dissipated as a result of the cessation of trading (although did not explain in detail why this was the case).44 In addition, the OFT considered that with the SeaFrance vessels and former employees, Eurotunnel was able to offer a ferry service without significant cost expenditure.45 On the basis of these factors, the OFT did not consider that the interruption in the ferry service was sufficient to conclude that the Transferred Assets were not an enterprise.46 The CC and the CMA, following the remittal of the case from the CAT, also agreed with this assessment. In relation to this point, in the Supreme Court’s judgment in SCOP v CMA, Lord Sumption stated as follows: “Whether an enterprise’s “activities” are being carried on at the moment when it ceases to be distinct is likely to depend on adventitious factors, such as the timing of the execution of documents, the rhythm of the business, and so on. It does not necessarily tell us anything about the nature of the business. If the merger control regime is incapable of applying to anticompetitive concentrations where the relevant “activities” are not actually being carried on at the moment when the concentration is achieved, then the result will be a significant limitation of the scope and efficacy of the statutory scheme. That limitation cannot be related to the economic rationale of the legislation, or to any discernible purpose which the legislature can sensibly be thought to have had in mind. The point may be illustrated by considering two situations in addition to the case of the seasonal business which has already been mentioned. One is the familiar situation, one of the commonest occasions for a merger, where a business goes into liquidation and is temporarily mothballed by the liquidator in the hope that a buyer can be found for the whole concern. It would be surprising if the mere fact of the suspension of its business were to remove the possibility of merger control, regardless of the adverse effect of a subsequent purchase on the competitive structure of the relevant market. The other example is the case where the proprietor of a business suspends its activities shortly before selling it to a competitor, in a deliberate attempt to avoid statutory merger control. This is not particularly common, but only because the practice of the competition authorities is to treat a temporary suspension of a firm’s business activities as inconclusive.”47
2.3.5
Outsourcing or Management Contracts
Specific issues arise in relation to outsourcing or management contracts. Such a scenario may arise where a company decides to employ the services of a specialist third party to undertake activities or provide services that may previously have been provided in-house (e.g., IT or management services). In these cases, the CMA, in line with the approach taken by the European Commission, will consider whether the outsourcing arrangements involve the transfer of assets, rights and/or employees to the third-party service supplier and whether the service supplier would be able to use those assets, rights and/or employees to provide services to an enterprise other than the original owner/employer. Where the outsourcing arrangements involve the long-term or permanent transfer of assets, rights and/or employees, and these may be used to service a party other than the original owner/employer, the arrangements might result in 44 45 46 47
Ibid., paras. 14 et seq. Ibid., para. 19. Ibid., para. 20. SCOP v CMA, supra, para. 35.
48
Enterprises ceasing to be distinct
enterprises ceasing to be distinct if the assets/rights/employees transferred to the third party constitute an “enterprise” under the Enterprise Act.48 In keeping with the CMA’s approach of considering the substance and not the form of a transaction, the CMA will consider whether a transaction that appears to be a ‘normal’ share or asset acquisition is in fact more akin to an outsourcing arrangement or management contract and therefore whether, in those circumstances, enterprises cease to be distinct. For example, in Nuclear Management Partners/Sellafield, Nuclear Management Partners Limited (“NMPL”) acquired the entire issued share capital of Sellafield, a publicly-funded company holding the licence for the Sellafield nuclear site. NMPL was a consortium with expertise in the operation of nuclear power stations.49 The economic purpose of the transaction was for NMPL to manage the Sellafield site. This could have been achieved by way of an outsourcing or services contract, but the regulatory requirements relating to decommissioning in the UK meant that the operator of the site had to be the licence holder. Accordingly, NMPL proposed acquiring the site in order that it could perform decommissioning activities on site. The OFT concluded that Sellafield was not an “enterprise” within the meaning of the Enterprise Act for the following reasons: (1)
Whilst the legal form of the transaction was a share acquisition, in substance, the transaction was closer to a management contract as NMPL’s role was limited to ensuring that Sellafield fulfilled its contractual obligations and was remunerated in the form of Sellafield shares.
(2)
The Sellafield site itself was not owned by Sellafield. It was owned by the Nuclear Decommissioning Authority (the “NDA”). All the assets would continue to be the property of the NDA and would not be owned by NMPL.
(3)
The acquisition of Sellafield’s shares by NMPL did not allow the continuation of a business activity from which turnover was being generated.
(4)
NMPL would be subject to a number of ownership restrictions, including being unable to change the nature of the Sellafield business, dispose of any assets or shares, enter into new customers contracts, or appoint or dismiss Sellafield directors, meaning that NMPL would not in fact be able to ‘own’ or ‘control’ a market-facing business.
In Hargreaves/SCCL, described above, Hargreaves submitted that it had not acquired legal ownership of the sites in the SPVs from SRG, but rather it had agreed outsourcing arrangements to mine and market any coal that was produced by the sites owned by the SPVs. The OFT noted that while the ownership of the sites would remain with the SPVs, HSML would be responsible for extracting coal from the three viable sites (Broken Cross, House of Water and St Ninians). Whilst title and risk in the coal would transfer to the SPV pursuant to a lease, HSML would in turn receive title and risk as 48
Jurisdictional and Procedural Guidance, para. 4.9. Anticipated contract award to Nuclear Management Partners Limited as the Parent Body Organisation for Sellafield Limited, OFT decision of 22 October 2008. 49
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soon as it passed to the SPV. The consideration for extracting the coal was that HSML would be entitled to market and sell the coal, including determining the price and deciding to whom it would be sold. HSML would also pay the SPV fixed and variable fees on account for the term of the services agreement. The SPV would not perform any services at the sites or do anything to interfere with HSML’s operation on the sites. The duration of the site services agreement was a maximum of three years from commencement of the agreement and the agreement could be terminated by completion of the acquisition of the shares. The OFT considered that while Hargreaves had not acquired legal ownership of the SPVs that own the viable sites, the arrangement to mine and sell the coal extracted from the sites would last long enough to qualify as a relevant merger situation.50
2.3.6
The Acquisition of Components of an Enterprise From Different Parties
It is not necessary for a purchaser to acquire all the components that collectively constitute an enterprise from a single party. The following cases are illustrative of the Authorities’ approach in this regard: (1)
In CineWorld/Hollywood Green Leisure Park, CineWorld, a cinema group with multiple sites throughout the UK, entered into an agreement for lease with Standard Life Property Income Trust (“Standard Life”) for the cinema premises at the Hollywood Green Leisure Park, Wood Green.51 CineWorld entered into a lease with Standard Life, whilst fixtures and fittings were obtained from Hoyts, who was the current leaseholder of the premises. The OFT considered that “considering the overall substance of this transaction, rather than just its legal form, the OFT has reached a belief that it is or may be the case that the agreement for lease by Standard Life to CineWorld, when taken together with the acquisition of additional assets from Hoyts, via Standard Life, and the transfer of certain staff from Hoyts… will result in two or more enterprises ceasing to be distinct”.52
(2)
In HMV/Zavvi, HMV was assigned a number of leases from several different landlords, as well as acquiring certain of Zavvi’s assets from an administrator. The OFT stated that “the fact that different components that may collectively constitute an enterprise (property, stock, fixtures and fittings, goodwill,
50
Cf. Anticipated award to Odeon Cinema Holdings Limited of a contract in relation to the BFI IMAX Cinema, OFT decision of 16 July 2012 where the OFT concluded that, given the circumstances of the case, Odeon’s three year contract to operate the IMAX cinema was not sufficiently long for enterprises to have ceased to be distinct. 51
Anticipated acquisition by CineWorld Group plc, through its subsidiary Cine-UK Limited, of the cinema business operating at Hollywood Green Leisure Park, Wood Green, OFT decision of 17 March 2008. 52 Ibid., para. 6.
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employees) are acquired from different parties does not negate this conclusion [that the assets being acquired constituted an enterprise].”53 (3)
In Cineworld/O2, where, pre-merger, AEG leased the cinema business at the O2 (which was being operated by Vue Entertainment (“Vue”)) to Ansco Cinema (“Ansco”), the OFT considered that enterprises had ceased to be distinct even though Cineworld had acquired some key components of an enterprise, including a lease of premises, fixtures and fittings, spare parts and stock from Ansco and the staff came from Vue (the employees of the O2 cinema business that were working for Vue were transferred from Vue to Cineworld under TUPE).54
2.3.7
The Treatment of Leases
An agreement for a lease over assets/premises or the assignment of a lease over assets/premises may, under certain circumstances, constitute an enterprise. From a strict analytical perspective, this assessment has tended to conflate two distinct issues: (i) whether the assets/premises in respect of which a lease is being granted/assigned constitute an “enterprise” for the purposes of the Enterprise Act; and (ii) whether an agreement for a lease, or the assignment of a lease, is sufficient for two or more enterprises to cease to be distinct. To avoid unnecessary duplication, and following the Authorities’ historical practice of treating these considerations as pertaining to the issue of whether the assets/premises in question constitute an enterprise, the treatment of both of these issues in respect of leases are considered in this section. The following cases are illustrative of the Authorities’ approach. (1)
53
In CineWorld/Hollywood Green Leisure Park, at the time of the notification of the transaction to the OFT, the Premises were occupied by an Australian cinema company, Hoyts.55 CineWorld argued that enterprises did not cease to be distinct for the following reasons: (i) the contractual arrangements merely consisted of Standard Life granting a new lease to CineWorld for the cinema and the relationship between Standard Life and CineWorld would be that of landlord and tenant; (ii) no goodwill was being transferred from Hoyts to CineWorld, and this was exemplified by the fact that CineWorld would not pay Hoyts any direct premium; (iii) no equipment would pass from Hoyts to CineWorld other than fixtures and fittings; (iv) there would be no continuity of business between the existing Showcase cinema business operated by Hoyts and the new CineWorld business; (v) CineWorld was not bound by its lease to operate a cinema business from the Premises; and (vi) there would be no customer perception of a continuity of business, which would be accentuated by the fact that CineWorld might close the cinema for a number of weeks for refurbishments.
Anticipated acquisition by HMW of 15 Zavvi stores, OFT decision of 28 April 2009, para. 17. Completed acquisition by Cineworld Group plc of the cinema business operating at the O2, London, OFT decision of 20 October 2010. 55 CineWorld/Hollywood Green Leisure Park, supra. 54
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The OFT disagreed with CineWorld’s analysis and concluded that it may be the case that enterprises would cease to be distinct for the following reasons:56 (i) the OFT highlighted the fact that it considers the substance of a transaction over its legal form and, therefore, the mere fact that the parties had entered into a lease agreement did not prevent a finding that enterprises might cease to be distinct; (ii) the premises were being operated as a cinema; (iii) fixtures and fittings at the premises would be passed from Hoyts to CineWorld; (iv) a temporary interruption in the operation of a cinema business at the premises would not be sufficient to alter customers’ perception that the operation of the premises as a cinema would essentially be continuous even in the event of a change of signage; and (v) CineWorld indicated that the TUPE Regulations might apply, which the OFT considered tended to indicate that an on-going business may be transferring.57 (2)
In Nynas/UK Bitumen, Nynas, a producer of speciality oil products, including bitumen and naphthenic speciality oils, entered into an agreement with UK Bitumen Limited (“UK Bitumen”), a wholly-owned subsidiary of Aggregate Industries UK Limited (“AI”), as a result of which Nynas would sub-lease AI’s bitumen storage terminal at Teesside, operated by UK Bitumen.58 In addition to the sub-lease over the storage terminal, Nynas would acquire the assets, certain contracts, would take on one employee of UK Bitumen, and would inherit any goodwill attaching to the UK Bitumen business. Consideration was also paid by Nynas. The OFT stated that it “considered carefully” whether the transfer of the sub-lease, plus a single employee and any goodwill was sufficient to constitute an “enterprise” under the Enterprise Act. The OFT concluded that the transfer of these elements to Nynas equated “in substance” to the transfer of the UK Bitumen business to Nynas and therefore constituted the transfer of an enterprise.59
(3)
In Tesco/FreshXpress, Somerfield transferred to Tesco the lease for a property in St Helens.60 Somerfield was not the freeholder of the property but had the lease to the property and had allowed FreshXpress to operate from the premises.61 As Tesco had signed the lease only two months after FreshXpress had exited the site, the OFT considered whether the lease could constitute an enterprise. It concluded that, on the facts of this case, the lease did not constitute an enterprise as: (i) Tesco had not acquired any tangible or intangible assets; (ii) the TUPE regulations did not apply to the transaction; (iii) no material degree of goodwill had passed to Tesco; and (iv) no consideration had
56 57
Ibid., para. 8.
Ibid. Anticipated acquisition by Nynas UK AB of the business activities of UK Bitumen Limited (and access to Teesside Bitumen storage terminal), OFT decision of 9 October 2009. 59 Ibid., para. 11. 60 The assignment of a lease to Tesco plc for the site of a former FreshXpress store at St Helens, OFT decision of 21 April 2009. 61 It was unclear whether or not FreshXpress itself actually had a lease. 58
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been paid by Tesco for the lease. However, the OFT specifically stated that the assignment of a lease could potentially form “part of the basis for the finding of an enterprise” and that their conclusions in this case were without prejudice to any future transactions.62
2.3.8
The Formation of Joint Ventures
Whilst the Enterprise Act does not specifically consider joint ventures in the context of enterprises ceasing to be distinct, it is clear that the Enterprise Act applies to joint ventures. Unlike under the Merger Regulation, the Enterprise Act does not recognise the concept of a “full-function” joint venture. Consequently, it is not necessary for a joint venture to be an autonomous economic entity in order to fall within the CMA’s jurisdiction.63 The CMA is able to investigate joint venture structures where two or more enterprises cease to be distinct and either the share of supply test or the turnover test is met, irrespective of whether the joint venture’s activities are limited to only one specific function within the parent companies’ businesses (e.g., R&D, production or distribution) or whether the joint venture’s parent companies retain a significant presence in upstream or downstream markets. As a result, it is possible for joint ventures that have an EU dimension, but which are not deemed to be “concentrations” within the meaning of the Merger Regulation (and therefore do not fall within the Commission’s jurisdiction) to be reviewed by the CMA, where they meet the jurisdictional thresholds. In Project Canvas, the BBC, ITV, Channel 4, Channel 5, BT, Talk Talk and Arqiva intended to set up a joint venture company, Canvas Limited.64 The joint venture was intended to develop a common technical standard for a new internet-connected television platform. In terms of their contributions to the joint venture, the parties indicated to the OFT that the BBC and ITV would contribute intellectual property rights (“IPR”) and the other joint venture partners would make financial contributions or contributions ‘in-kind’. The parties did not intend to transfer employees, customer contracts or existing goodwill. On this basis, the parties argued that these contributions were insufficient to constitute an enterprise within the meaning of the Enterprise Act. A number of third parties complained to the OFT specifically in respect of the fact that they considered the parties’ contributions to constitute an enterprise. The OFT considered in detail the BBC’s contributions, focusing, in particular, on: (i) the BBC’s
62 In contrast, in Anticipated acquisition by BOC Limited of the packaged chlorine business and assets carried on by Ineos Chlor Limited, OFT decision of 29 May 2008, the OFT concluded that BOC’s acquisition, which included a 10-year lease of Ineos’ chlorine manufacturing plant, plant and equipment, employees, Ineos’ existing customer contracts, and a 10-year supply agreement between Ineos and the target business being acquired by BOC, constituted an enterprise. 63 Jurisdictional and Procedural Guidance, para. 4.5, footnote 25. 64 Anticipated joint venture between The British Broadcasting Corporation, ITV Broadcasting Limited, Channel Four Television Corporation, Channel 5 Broadcasting Limited, British Telecommunications plc, Talk Talk Telecom Limited and Arqiva Limited – Project Canvas, OFT decision of 19 May 2010.
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contribution of R&D and know-how; (ii) the BBC’s contributions ‘in-kind’; (iii) the provision of staff; and (iv) the aggregation of content. In respect of the BBC’s contribution of R&D and know-how, the BBC intended to transfer some software, designs, specifications (platform compliance definitions for set top boxes) and know-how. The OFT considered that these contributions did not amount to an ‘enterprise’, either separately or in combination because: (i) no direct turnover related to the IPR; (ii) the IPR and technology remained substantially incomplete and considerable work remained to be done; (iii) significant development milestones remained before the project could become operational (e.g., set-top box manufacturers needed to contribute to the development of Canvas and IT consultants needed to be engaged); and (iv) substantial financial contributions were still necessary to fund the development, launch and promotion of the Canvas JV (the JV was not expected to be launched until well into 2011). Regarding the BBC’s contributions ‘in-kind’, these included marketing and customer support services, television commercial airtime, on-line marketing activities and the provision of technical support.65 The OFT concluded that these did not constitute an enterprise on the grounds that these services were being acquired by the Canvas JV at arm’s-length and were more akin to standard commercial arrangements than the structural transfers of staff and assets that are the subject of the Enterprise Act’s merger control provisions.66 As to the provision of staff by the BBC and other parties to the Canvas JV, these constituted: (i) six individuals who had been selected and appointed with the agreement of all the parties, and who would work for the joint venture once it was incorporated; and (ii) secondees, mainly from the BBC, who would eventually return to their employer. The OFT concluded that the provision of these staff, and the work undertaken by these staff, did not constitute an ‘enterprise’ by itself, as was indicated by the requirement for substantial work to be undertaken by external contractors, the fact that the cost of their services would be co-funded by all the parties, and that the benefit of the work would be held on trust for the benefit of the joint venture rather than for the benefit of any of the parties individually.67 In addition, the OFT considered that an enterprise would not be transferred upon the formal constitution of the joint venture as: (i) neither the employment contracts of the six full-time employees, nor any other staff working in the preparatory stages of the project, would be automatically transferred under the TUPE Regulations; (ii) the majority of the secondees would be replaced through an open recruitment process undertaken by the joint venture itself; and (iii) the remaining staffing needs would continue to be covered by contractors.68 The BBC informed the OFT that it did not intend to transfer, aggregate or retail any of its content to the joint venture and that each party would retain control over its archived 65 66 67 68
Ibid., para. 19. Ibid. Ibid., para. 20. Ibid., para. 21.
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content activities and that the joint venture would have no rights over this content. It is considered likely that, had the BBC transferred its content to the joint venture, the OFT would have considered this sufficient to constitute an ‘enterprise’. Having concluded that the BBC’s contribution of R&D, contributions ‘in-kind’, staff and content were not individually sufficient to constitute an ‘enterprise’, the OFT also concluded that the aggregation of the BBC’s contribution was insufficient to constitute an ‘enterprise’. In particular, the OFT pointed to the continuing need for further development of the R&D, the fact that it was estimated that less than one-quarter of the project had been finalised by the BBC, and that external third parties would continue to be contracted indicated that the BBC’s contribution was not sufficient to constitute an “enterprise.”69 The OFT did not consider any other party’s contribution, in isolation or in combination with the other parties’ contributions, to constitute an “enterprise.”70 This conclusion was reached largely on the basis that none of the other parties’ contributions would be more significant than the BBC’s, which the OFT concluded were not sufficient to be considered an “enterprise.” The OFT provided an example of ITV’s contribution ‘inkind’, which was the provision of an (undisclosed) number of man days’ effort of R&D staff who would work on specific projects where ITV had some expertise.
2.3.9
Consideration
A purchaser will typically provide consideration for the acquisition of a business or the assets of a business. However, the payment of consideration is not a necessary factor in the CMA’s consideration of whether an enterprise is being acquired. For example, in HMV/Zavvi, HMV did not provide consideration in respect of all the stores being acquired from Zavvi.71 Nevertheless, this did not prevent the OFT from concluding that, taking into consideration all the factors relevant to its assessment, two or more enterprises might cease to be distinct.
2.4
THE CONCEPT OF CEASING TO BE DISTINCT 2.4.1
Introduction
The Enterprise Act states that enterprises cease to be distinct if they are brought under “common ownership or common control” irrespective of whether the business to which either of the enterprises belonged continues to be carried on under the same or different ownership or control, post-merger.72 Three distinct levels of control are envisaged by the Enterprise Act as constituting “common control”: (i) de jure control; (ii) de facto
69 70
Ibid., para. 23.
Ibid., para. 25. Anticipated acquisition by HMV of 15 Zavvi stores, OFT decision of 28 April 2009, para. 16. Cf. The assignment of a lease to Tesco plc for the site of a former FreshXpress store at St Helens, OFT decision of 21 April 2009, where the OFT noted as a factor in concluding that the assignment of a lease was not an enterprise that Tesco had not paid any consideration for the lease. 72 Section 26(1), Enterprise Act. 71
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control; and (iii) material influence.73 With regard to determining whether a relevant merger situation exists, the precise level of control acquired by a purchaser is not of particular importance.74 It is sufficient, for the application of the Enterprise Act, that the purchaser acquires, at a minimum, the ability to materially influence the target. Once it has been determined that the purchaser has acquired at least material influence, the CMA’s primary consideration is typically to specify whether the purchaser has acquired control or material influence. In many cases, the Authorities have simply concluded that a purchaser has acquired (or will acquire) “control” or a “controlling interest” rather than distinguishing between de jure and de facto control. Indeed, the Authorities have rarely classified cases under the Enterprise Act as specifically giving rise to an acquisition of de facto control. However, this distinction remains of some importance due to the fact that the CMA has the power to investigate a change in the level of control from material influence to de facto control and from de facto to de jure control.75 Under the Enterprise Act, there is no formal distinction between the exercise of control by one party (sole control) and the exercise of control by more than one party (joint control), as there is under the Merger Regulation. Enterprises may acquire rights that in practice confer either sole or joint control, but these rights will be regarded under the Enterprise Act as conferring either de jure control, de facto control or material influence. One difference that results from this distinction is that, under the Merger Regulation, only one merging party can exercise sole control over an undertaking, and it is not possible for sole control and joint control to be held at the same time in the same undertaking by different parties. The existence of sole control precludes the existence of joint control. This is not the case under the Enterprise Act, where it is possible for one enterprise to exercise de jure control over a target and for another enterprise to exercise material influence in the same target.76
2.4.2
De Jure Control
A purchaser obtains de jure control over a target company if it acquires a “controlling interest.”77 The Enterprise Act does not specify the meaning of a controlling interest, 73
Section 26, Enterprise Act. See, Jurisdictional and Procedural Guidance, para. 4.12.
74
This is subject to the caveat that there must be an increase in the level of control for a relevant merger situation to exist. However, in a situation where a purchaser is making an initial acquisition in a target, it is sufficient that the purchaser only acquires material influence for a relevant merger situation to exist. 75
See Section 2.7 below. See, e.g., Proposed joint venture between Alliance Boots Limited and Dolland & Aitchison Limited in relation to their respective optical businesses, OFT decision of 1 May 2009, where Alliance Boots’ 55-65% shareholding was found to constitute de jure control, and Dolland & Aitchison’s 3545% shareholding was found to constitute material influence; Completed joint venture between Tradebe Environmental Services Limited and Sita UK Limited, OFT decision of 29 October 2013, para. 7, where Tradebe’s 75% shareholding was found to constitute de jure control and Sita’s 25% shareholding was found to constitute material influence. 76
77
Section 26(4)(a), Enterprise Act.
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but the Jurisdictional and Procedural Guidance explains that a controlling interest will typically involve the acquisition of a majority of the voting rights in a company.78 To date, there have been no cases under the Enterprise Act in which the Authorities have explicitly deemed an acquisition of a minority interest to constitute de jure control. In the interests of conceptual clarity, it is considered that findings of de jure control should normally be limited to acquisitions of majority shareholdings that result in the purchaser acquiring the ability unilaterally to determine the strategic commercial behaviour of the target.
2.4.3
De Facto Control
The Enterprise Act does not define de facto control. Instead, it refers to situations where a person, or group of persons, is able, directly or indirectly, to control a body corporate without having a controlling interest.79 Whilst there are no precise criteria for determining when an acquirer will gain de facto control, and a view will need to be taken by the CMA on a case-by-case basis, the Jurisdictional and Procedural Guidance explains that the most common circumstances in which de facto control is likely to arise are: (i) where a minority shareholder is likely to hold a majority of the voting rights, or form part of a group that holds a majority of the voting rights, at the company’s annual general meeting; and (ii) where a minority shareholder has industry expertise that the company is likely to follow to a greater extent than its shareholding would seem to warrant.80 These two scenarios are considered below. (a) Ability to exercise more than 50% of voting shares. This is perhaps the most likely scenario for de facto control (and the closest to the concept of de facto sole control under the Merger Regulation).81 Such a scenario arises where a shareholder (usually a significant minority shareholder), although owning less than half of the voting shares in a company, is typically able to determine issues of strategic importance at shareholders’ meetings, due to the fact that other shareholders fail to attend such meetings, thereby increasing its shareholding to more than 50% of the voting shares in attendance. Accordingly, although such a shareholder owns less than 50% of the company’s shares, in practice it is able to act as if it were a majority shareholder. (b) Ability to influence a majority of votes. This scenario is more rarely encountered but envisages a situation whereby a purchaser acquires a minority shareholding but, as a result of its particular experience and expertise, the remaining shareholders (or at least those that represent a majority shareholding) are likely to follow this minority shareholder’s advice. The Jurisdictional and Procedural Guidance recognises that this factor could equally be relevant to a finding of material influence.82 In any event, given that it is sufficient, for the purposes of the Enterprise Act, for a 78 79
Jurisdictional and Procedural Guidance, para. 4.30.
Section 26(3), Enterprise Act. Jurisdictional and Procedural Guidance, para 4.28. 81 See Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings (2008/C 95/01), para. 59. 82 Jurisdictional and Procedural Guidance, para. 4.28. 80
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purchaser to acquire the ability materially to influence the target, as well as the fact that there is no clear dividing line between de facto control and material influence, few mergers are designated as being acquisitions of de facto control.83 (c) CMA discretion to treat de facto control as a controlling interest. Finally, it should be noted that, being less than an acquisition of a controlling interest, the CMA has discretion whether or not to treat an acquisition of de facto control as constituting “control” for the purposes of the Enterprise Act.84 However, the CMA has indicated that it will consider de facto control to constitute “control” for the purposes of the Enterprise Act where the test for reference would be met in the case in question (i.e., if there is a realistic prospect that the merger in question has resulted, or will result, in a substantial lessening of competition, the CMA will consider de facto control to constitute control).85
2.4.4
Material Influence
Material influence is the lowest level of control that may give rise to a relevant merger situation. The concept is intended to give the CMA the ability to assess transactions that fall below de jure or de facto control, but where enterprises nevertheless acquire the ability to influence the commercial policy of the target, including the management of its business, its competitive conduct and the general strategic direction of the company.86 The CMA’s assessment of material influence will normally require a case-by-case analysis of the overall relationship between the purchaser and the target.87 In most cases, a finding of material influence will be based on the purchaser’s ability to influence the target’s policy through exercising voting rights at shareholders’ meetings, together with any additional factors that are likely to increase the purchaser’s influence
83 In Anticipated acquisition by West Midlands Travel Limited of the joint venture shares of Laing Infrastructure Holdings Limited and Ansaldo Transporti Sistemi Ferroviari SpA in Altram LRT Limited, OFT decision of 2 March 2006, West Midlands Travel (“WMT”) increased its shareholding from 33% to 100% by acquiring the shareholdings of its joint venture partners Laing and Ansaldo. The OFT determined that WMT’s 33% shareholding conferred de facto control on WMT despite the fact that its joint venture partners each held 33% shareholdings (and WMT would not represent more than 50% of voting shares at an AGM) because: (i) the day-to-day operation of the business was undertaken by WMT and the other joint venture partners had no involvement; (ii) at the time of the merger, Laing was no longer represented on the board; (iii) Ansaldo had a single board member but had no contact with management; (iv) the Shareholders’ Agreement gave Laing and Ansaldo no input on operational matters, except fares; and (v) Laing and Ansaldo had ceased providing the joint venture with funding over four years prior to the merger. 84 Section 26(3), Enterprise Act, specifies that “a person or group of persons able, directly or indirectly, to control or materially to influence the policy of a body corporate, or the policy of any person in carrying on an enterprise but without having a controlling interest in that body corporate or in that enterprise, may, for the purposes of subsections (1) and (2), be treated as having control of it” (emphasis added). 85 Jurisdictional and Procedural Guidance, para. 4.29. 86 87
Ibid., para. 4.14. Ibid., para. 4.15.
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beyond the level of its shareholding.88 As mentioned above in relation to de facto control, the CMA has a measure of appreciation as to whether or not to treat an acquisition of material influence as constituting “control” for the purposes of the Enterprise Act.89 However, as with de facto control, the CMA has indicated that it will consider material influence to constitute control for the purposes of the Enterprise Act wherever it considers that the test for reference would be met in the case in question.90 (a) Shareholdings exceeding 25%. An acquisition of more than 25% of the voting shares in a target company typically enables the purchaser to block special resolutions, particularly in respect of UK companies.91 Consequently, such an acquisition is likely to be seen as conferring the ability materially to influence policy.92 This may be the case even where all of the remaining shares are held by a single shareholder.93 However, the CMA will assess the likelihood of a shareholding in excess of 25% being able to block special resolutions on a case-by-case basis and there are circumstances in which a shareholding in excess of 25% would not confer this ability. In particular, this may be the case where the target is not a UK company, and where the company laws of the applicable jurisdiction either do not incorporate the equivalent of special resolutions or the relevant shareholding for a special resolution (or equivalent) is higher than 25%. This was the case in Moët Hennessy/Glenmorangie, in which Moët Hennessy (“Moët”) proposed acquiring the entire issued share capital of Glenmorangie, a supplier of Scotch whisky.94 Moët was a joint venture, governed by French law, which was 66% owned by LVMH Moët Hennessy Louis Vuitton (“LVMH”) and 34% owned by Diageo plc (“Diageo”). In addition to its shareholding, Diageo had the right to appoint two
88 89
Ibid., para. 4.16.
Section 26(3), Enterprise Act. Jurisdictional and Procedural Guidance, para. 4.29. 91 In accordance with the Companies Act 2006, section 283, special resolutions require the support of “not less than” 75% of the votes cast at a shareholders’ meeting. 92 Jurisdictional and Procedural Guidance, para. 4.19. The 2010 Jurisdictional and Procedural Guidance, paragraph 3.19, stated that a shareholding of more than 25% was likely to be seen as “presumptively conferring material influence”. The current version of the Jurisdictional and Procedural Guidance removed the word “presumptively”. However, in practice, the acquisition of a shareholding in excess of 25% in a UK company will be seen as presumptively conferring material influence and there has been no case in which the CMA has found that a shareholding in excess of this amount does not result in material influence. See, e.g., Completed acquisition by Creative Broadcast Services Limited of BBC Broadcast Limited, OFT decision of 2 November 2005, the OFT considered that Macquarie’s 34.7% shareholding in CBSL was sufficient to confer material influence; Completed acquisition by Ryanair Holdings plc of a minority interest in Aer Lingus Group plc, OFT decision of 15 June 2012. 93 See, e.g., Completed acquisition by EMAP plc of 27.8% share in Scottish Radio Holdings plc, OFT decision of 13 May 2004, where the OFT concluded that EMAP’s 27.8% shareholding conferred material influence. In this case, Scottish Radio Holdings retained all the remaining shares and its shareholding gave EMAP no right to board representation. 94 See, e.g., Anticipated acquisition by Moët Hennessy S.N.C. of Glenmorangie plc, OFT decision of 17 December 2004. 90
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members of Moët’s six member supervisory council. In concluding that Diageo did not have material influence over Moët, the OFT noted that: (i) LVMH had a majority shareholding and the right to appoint a majority of the supervisory council; (ii) most of the supervisory council’s decisions were taken by simple majority and without Diageo’s consent being necessary; (iii) Moët was run on a day-to-day basis by a manager who was appointed by simple majority and who had the discretion to manage Moët as he saw fit; (iv) residual matters in relation to Moët were reserved to shareholders, but related essentially to minority protection rights rather than Moët’s commercial operation; (v) all members of the supervisory council had expertise in the spirits sector and were therefore unlikely to be influenced by Diageo; and (vi) substantial acquisitions required Diageo’s consent, but the OFT regarded this as simply a minority protection right not giving rise to material influence.95 In Ryanair/Aer Lingus, Ryanair argued that its acquisition of a 29.8% shareholding in Aer Lingus had not resulted in an ability materially to influence Aer Lingus.96 Ryanair argued that in the five years during which it had held its shareholding, its behaviour demonstrated that it had not been able to exercise material influence over Aer Lingus. In this regard, Ryanair pointed to a number of instances in which it had failed to have any effect on the commercial operation of Aer Lingus, including several resolutions put forward without success or that it had unsuccessfully attempted to block, such as a $2.4 billion aircraft order, the appointment of a director, and a reduction in directors’ remuneration.97 The OFT clarified that it is not necessary for there to be actual evidence that material influence has been exercised and that “[t]he key issue is whether Ryanair is able to exercise material influence over Aer Lingus as a result of its minority shareholding.”98 In addition this, the OFT noted that: (i) Ryanair’s shareholding conferred the ability to block special resolutions and that Ryanair had in fact blocked several special resolutions since the acquisition of its stake; (ii) Aer Lingus’ voter turnout had declined in recent years and in the year of its lowest voter turnout, Ryanair would have had an effective voting share of 45.6% and would require only an additional 2.9% of votes cast to be able to determine ordinary resolutions; (iii) it was not inconceivable that Ryanair could seek and obtain board representation (although it had not done so at the time of the investigation); (iv) shareholders representing approximately 4% of Aer Lingus’ total issued share capital were also shareholders in Ryanair and it was considered that the incentives of these shareholders were more aligned with Ryanair than would otherwise be the case, such that they may be more inclined to vote with, or be influenced by, Ryanair; and (v) Ryanair was by far the 95
See also, Anticipated acquisition relating to Compagnie Financière Richemont S.A., YOOX S.p.A and The Net-A-Porter Group Limited, CMA decision of 2 September 2015, para. 22, in which the merging parties argued that, in relation to Richemont’s potential acquisition of material influence of the merged entity, under Italian law two-thirds of attending shareholder votes were required to pass certain resolutions and that Richemont would therefore not be able to block the equivalent of special resolutions under UK law. 96 Completed acquisition by Ryanair Holdings plc of a minority interest in Aer Lingus Group plc, OFT decision of 15 June 2012. 97 98
Ibid., para. 15. Ibid., para. 16.
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largest shareholder who was active in the industry with relevant knowledge and expertise. As a result of these factors, the OFT found that Ryanair had acquired material influence over Aer Lingus. (b) Shareholdings between 15% and 25%. In assessing whether a purchaser has acquired material influence in a target, the CMA will not only consider a shareholder’s right to block special resolutions (i.e., whether it owns more than 25% of a target’s voting shares), but it will also consider its ability to do so (i.e., whether or not in practice a purchaser would be able to exercise more than 25% of a target’s voting shares).99 The Jurisdictional and Procedural Guidance states that this “gives effect to the general principle that the purpose of UK merger control is to enable the CMA to consider the commercial realities and results of transactions and that the focus should be on substance and not legal form.”100 Other factors relevant to the assessment of a particular shareholding may include the following: (1)
the distribution and the identity of the holders of the remaining shares and, in particular, whether the purchaser will be the target’s largest shareholder;
(2)
patterns of attendance and voting at shareholders’ meetings and, in particular, whether the purchaser’s shareholding would in practice be sufficient to block special resolutions;
(3)
the existence of veto rights or special voting arrangements, including any special provisions in the constitution of the company; and
(4)
any other special provisions in the company’s constitution conferring an ability materially to influence its policy.101
(i) Distribution of shares. In Sky/ITV, the OFT noted in its assessment of material influence that Sky was ITV’s largest shareholder and that the remaining shareholdings in ITV were fragmented.102 This was endorsed by the CC, which concluded that although Sky’s shareholding was not a large minority shareholding, as a result of the transaction, Sky had become ITV’s largest shareholder and that its shareholding was
99 Jurisdictional and Procedural Guidance, para. 4.21. In Completed acquisition by Caisse du dépôt et placement du Québec of a 25 per cent stake in Interconnector (UK) Limited, OFT decision of 31 July 2007, the OFT considered that the acquisition of a 25% shareholding by Caisse du dépôt et placement du Québec was sufficient, or at least may have been sufficient, to confer material influence. The OFT reached this conclusion without further consideration of any ‘plus’ factors or any assessment of whether or not Caisse du dépôt et placement du Québec could in practice block a special resolution, which requires a shareholding of 25.1% or more. 100 Ibid., para. 4.21. 101 Jurisdictional and Procedural Guidance, para. 4.21. 102 Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc, OFT decision of 27 April 2007, para. 59.
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twice as large as the next largest shareholder.103 In this regard, the CC also considered the fact that Sky was precluded from owning more than 20% of ITV as a result of the Communications Act 2003. Sky argued that this placed it in a less strong position than a shareholder with a 17.9% interest would normally have been in because it could not buy more shares to increase its leverage over ITV.104 The CC accepted that Sky could not strengthen its position but did not find that this reduced the impact of its existing shareholding.105 In addition, Sky drew the CC’s attention to the fact that there were several other significant shareholders in ITV. Shareholdings at the end of October 2007 indicated that Sky could be outvoted by a coalition of four of these shareholders acting together. The CC nevertheless considered that there would be circumstances in which the other major shareholders would not be able to ensure that the board could secure a special resolution in the face of opposition from Sky.106 (ii) Patterns of attendance and voting at shareholders’ meetings. The leading case on this aspect of the Authorities’ evaluation of whether a purchaser has acquired material influence is Sky/ITV, which merits detailed consideration.107 On 17 November 2006, Sky acquired 696 million shares in ITV, representing 17.9% of ITV’s total issued share capital. The merger was not voluntarily notified to the OFT prior to completion and, following third-party complaints, the OFT opened an own-initiative investigation. In January 2007, the OFT provisionally concluded that Sky’s acquisition qualified as a relevant merger situation and this provisional conclusion was confirmed in the OFT’s decision in April 2007. The merger was referred to the CC, which upheld the OFT’s finding of material influence. The CC’s decision was appealed to the CAT, which concluded, inter alia, that Sky had acquired material influence over ITV.108 The OFT’s decision. The OFT’s finding that Sky had acquired material influence in ITV was based on the following considerations. (1)
At each of the AGMs prior to Sky’s acquisition, voter turnout was between 63% and 70% of total voting shares.109
(2)
On the basis of voter turnover, Sky’s 17.9% shareholding would have given it the ability to exercise more than 25% of the voting shares at each of these AGMs.
103
Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the share in ITV plc, CC report to the Secretary of State of 14 December 2007, para. 3.39. 104 Ibid., para. 3.63. 105
Ibid. Ibid., para. 3.64. 107 OFT decision in Sky/ITV, supra. 108 Sky applied to the CAT for leave to appeal this decision to the Court of Appeal. This application was denied and Sky sought leave to appeal directly with the Court of Appeal, which was granted. However, the Court of Appeal did not specifically consider the issue of whether the CAT had been correct to uphold the material influence findings of the OFT and the CC. 109 Sky/ITV, supra, para. 48. There had been only three AGMs since the creation of ITV and all of these meetings were considered recent by the OFT. 106
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(3)
Sky’s ability to exercise more than 25% of the voting rights at each of these AGMs would have enabled it to block special resolutions of ITV, a conclusion that was endorsed by ITV and had been set out for Sky by its banking advisers prior to the acquisition, in papers that were requested by, and submitted to, the OFT.110
(4)
The OFT rejected Sky’s argument that it is only the right and not merely the ability to block special resolutions that gives rise to a presumption of material influence stating that such an argument ran contrary “both to the wording of the [2003 Substantive Assessment] Guidance and to the general principle that the purpose of UK merger control is to enable the authorities to consider the commercial realities and results of transactions and that the focus should be on substance and not legal form.”111
(5)
In response to Sky’s argument that the OFT should not limit its analysis of attendance at AGMs merely to ITV’s AGMs, but should take account of attendance patterns more generally, the OFT stated that patterns at AGMs of the specific company under consideration were likely to provide a better indicator of whether the purchaser had acquired material influence than assessing patterns of attendance more generally.112
The CC’s decision. The CC concurred with the OFT’s conclusion that Sky had acquired material influence in ITV. In this regard, the CC noted the following factors in its assessment of material influence. (1)
Sky’s shareholding of 17.9% was at the “low end” of the shareholdings that, in the past, had been found to confer material influence. However, Sky’s shareholding made it the largest shareholder in ITV by some margin and was more than twice that of the next largest shareholder.113
(2)
Sky’s shareholding did not give it the automatic ability to block special resolutions but, given the turnout at ITV’s general meetings, Sky would have been able to block a special resolution at all but one of the five general meetings held since the creation of ITV and would have been able to block a special resolution at the remaining meeting with the other shareholders who voted against a special resolution at that meeting.114
(3)
The CC considered that Sky would not necessarily need to defeat a special resolution at a vote in order materially to influence a policy that would require
110 111
Ibid., para. 51.
Ibid., para. 53. Ibid., para. 55. 113 Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the share in ITV plc, CC report to the Secretary of State of 14 December 2007, para. 3.39. 114 Ibid., para. 3.45 and Appendix D. 112
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a special resolution.115 The CC noted that Sky would have the opportunity to shape ITV’s thinking by influencing policy formulation at an earlier stage through, for example, meetings between shareholders and ITV. The CC also noted that ITV’s appetite for pursuing certain strategies at all would be reduced if it was aware that these strategies were likely to cause conflict.116 Therefore, ITV may have taken into consideration any expected opposition from Sky in formulating its policy and in deciding whether to bring it forward. In these circumstances, Sky’s ability materially to influence policy might not have turned on the precise percentage of the vote held.117 (4)
However, the CC also considered the situation in which, of the shareholders from whom Sky had acquired its shares, only the largest had been an active voter and the others had not. On this basis, the CC concluded that Sky would have represented less than 25% of the voting shares at ITV’s 2005 and 2007 general meetings.118
(5)
Furthermore, the CC considered the possibility that, if Sky had been present at the previous shareholder meetings, turnout would have been higher than it actually was (i.e., that Sky’s representation of the vote was overstated by a simple comparison of Sky’s absolute ownership of shares versus the turnout in the general meetings). Applying this methodology, the CC concluded that Sky would have represented more than 25% of the votes only in the 2004 general meeting.119
(iii) Veto rights. The acquisition of a shareholding of less than 25% that confers on the purchaser the ability to veto strategic decisions of the target may be considered to be an acquisition of material influence.120 The Jurisdictional and Procedural Guidance 115
Ibid., para. 3.46. Ibid., para. 3.46. 117 Ibid., para. 3.47. 116
118
Ibid., Appendix D, paras. 14-16. Ibid., Appendix D, paras. 17-19 and Annex 3. 120 Jurisdictional and Procedural Guidance, paras. 4.21 and 4.27. See, e.g., Completed acquisition by VB Autobatterien GmbH of Optima Batteries AB and certain assets and companies constituting Johnson Controls Batterien, OFT decision of 26 September 2006, where VB Autobatterien (“VB”) was a joint venture controlled 80% by Johnson Controls (“JCI”) and 20% by Robert Bosch (“Bosch”). The transaction involved the transfer by JCI of two of its subsidiaries, Johnson Controls Batteries France S.A.S. and Optima Batteries AB, to VB. The parties argued that this represented a change of control over these businesses from sole control by JCI to joint control by JCI and Bosch. The OFT concluded that “Bosch’s existing 20 per cent shareholding in VB, and the fact that Bosch has the ability to veto strategic commercial decisions, is in our view sufficient to confer on Bosch the ability to materially influence VB and thus, as a result of the merger, the business of JCB and Optima”. See also, Anticipated acquisition by Centrica of 20 per cent of Lake Acquisitions, OFT decision of 7 August 2009, in which Centrica acquired a 20% shareholding in a subsidiary of EDF, Lake Acquisitions, which owned British Energy (“BE”). Centrica argued, and the OFT agreed, that it would acquire material influence over Lake Acquisitions on the basis of Centrica’s veto power over various important decisions of Lake Acquisitions, including changes to constitutional documents, winding up, 119
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does not specify the types of strategic decisions that might give rise to a finding of material influence for these purposes. However, it is considered likely that the CMA would, at least to some degree, take into consideration the types of veto rights that would give rise to a finding of “control” for the purposes of the Merger Regulation. The Commission’s Consolidated Jurisdictional Notice states that these veto rights “must be related to strategic decisions on the business policy of the joint venture” and “must go beyond the veto rights normally accorded to minority shareholders in order to protect their financial interests as investors…”121 The veto rights that typically give rise to a finding of “control” relate to decisions on issues such as budget, business plan, major investments, or the appointment of senior management.122 (iv) Other special provisions. There may be other provisions in a company’s constitution that fall short of a veto right over an issue that requires a special resolution, but which may nevertheless confer material influence. This also prevents companies from structuring their agreements in a way that de facto transfers material influence but which are not captured by a standard analysis of material influence based on the acquirer’s specific consent to pass an issue requiring a special resolution. No case has yet turned on this specific issue but an example may include the purchaser being able to provide a short list of candidates for CEO or requiring the purchaser’s input in relation to major acquisitions or the business plan. This level of influence, in combination with a shareholding between 15-25%, might be considered sufficient to confer material influence. (c) ‘Plus’ factors. Where a purchaser’s shareholding does not give it either the right or the ability to block a special resolution, the CMA may nevertheless reach a finding of material influence in the event that there are additional ‘plus’ factors present. Such ‘plus’ factors may include: (1)
any representation that the purchaser will have on the target’s board;123
(2)
the status and experience of the purchaser;124 and
(3)
any additional agreements between the purchaser and the target business.
(i) Board representation. In the event that a purchaser acquires a shareholding of less than 25% that does not confer the ability unilaterally to block a special resolution, but obtains representation on the target’s board, in certain circumstances this may be sufficient for the CMA to establish that a purchaser has acquired material influence over
encumbrances over shares, the incurring of debt or the making of acquisitions over a certain level (as well as Centrica’s representation on Lake Acquisition’s and BE’s board). 121 Consolidated Jurisdictional Notice, para. 66. 122 Ibid., para. 67. 123 124
Jurisdictional and Procedural Guidance, para. 4.23. Ibid., para. 4.22.
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the target.125 In assessing the purchaser’s position, the CMA will review a range of factors in relation to such board representation, including the level of expertise of each board member appointed by the purchaser, as well as their experience and incentives as board members.126 In addition, where the purchaser may not have actually appointed any directors, but its shareholding gives it the right to appoint one or more directors, and the CMA considers that the prospect of those rights being taken up is more than fanciful, the CMA will have regard to this possibility in relation to its jurisdictional assessment, and potentially its substantive assessment.127 The CMA may also, in certain circumstances, regard board representation alone as giving rise to material influence, even in the absence of an acquisition of shares.128 Such transactional structures are rare but one such case arose in 2012 in JCDecaux/Concourse Initiatives. In this case, JCDecaux (“JCD”), which was active in the sale of outdoor advertising space, entered into an agreement with Concourse, which was active in the sale of experiential advertising space to media buyers and advertisers.129 JCDecaux did not acquire any shares or voting rights in Concourse. However, as a result of the agreement, JCDecaux did obtain various rights over Concourse, including the right to appoint two of the three directors to the board of Concourse (which it had exercised). These directors were JCD’s UK Finance Director and UK Management Director, and each director had one vote. The parties stated that the JCD directors were primarily involved in ensuring compliance with JCD’s internal policies and financial reporting. However, the parties also stated that JCD would take a more ‘hands-on’ approach to Concourse’s business practices once the OFT’s review was complete, and that the role of the JCD directors in relation to the commercial strategy of Concourse may be reviewed during the course of 2012 albeit not before the completion of the OFT’s assessment. The agreement also contained various restrictive clauses stating that: (i) Concourse would not enter into any contracts in excess of a certain amount unless approved by the board and signed-off by at least one JCD director; (ii) Concourse was to be managed in a manner consistent with JCD’s policies on ethics and employment; and (iii) Concourse would need the approval of JCD prior to expanding the remit of its business activities beyond those already agreed between the parties. As a result of these factors, the OFT concluded that JCD had obtained material influence over Concourse.
125
Jurisdictional and Procedural Guidance, para. 4.23. See, e.g., Anticipated acquisition by Capital Radio plc of the remaining shares of Tainside Limited, OFT decision of 23 February 2004, where the OFT concluded that Capital’s initial acquisition of a 19% shareholding in Tainside, together with the right to appoint one director to the board, was sufficient for a finding of material influence. See also Completed acquisition by Creative Broadcast Services Limited of BBC Broadcast Limited, OFT decision of 2 November 2005, where the OFT considered that Macquarie Bank Limited’s board representation in addition to its shareholding might give rise to material influence. 126
Jurisdictional and Procedural Guidance, para. 4.24. Ibid., para. 4.25. 128 Ibid., para. 4.23. 129 See, e.g., Completed acquisition by JCDecaux UK Limited of rights in Concourse Initiatives Limited and Media Initiatives Limited, OFT decision of 19 March 2012. 127
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(ii) Purchaser’s status. The CMA may take into consideration the identity of the purchaser in assessing whether a shareholding of less than 25% is capable of conferring the ability materially to influence a policy that would require a special resolution.130 In other words, in circumstances where the acquirer’s shareholding is, by itself, insufficient to confer material influence, the CMA will consider whether the purchaser’s status and industry experience could influence the other shareholders to such an extent that they would be likely to follow the purchaser’s advice. In practice, this ‘plus’ factor is likely to be considered in conjunction with any specific board representation that the acquirer may obtain and, in particular, the proportion of the purchaser’s directors on the target’s board. The following cases are illustrative of the Authorities’ approach in this regard: (1)
In Scottish Radio Holdings/Kingdom FM, the OFT did not state in the decision that Scottish Radio Holding’s (“SRH”) shareholding would be sufficient to represent more than 25% of the voting shares in Kingdom FM.131 Instead, the DGFT noted that SRH was a leading radio operator in Scotland and, as such, “may be well placed through its knowledge and expertise to convince others to follow a certain strategy when voting their shares.”
(2)
In British Airways/Sabena, Sabena, BA and KLM signed a Memorandum of Undertaking as a result of which each of BA and KLM agreed to acquire 20% shareholdings in Sabena.132 The MMC found that BA had acquired material influence over Sabena on the basis that BA would have a role in shaping its business plan, that BA had considerable expertise in operating hub and spoke systems, and that BA would be able to appoint two of Sabena’s 10 board members. Moreover, the two board members would be Lord King, the Chairman of BA and Sir Colin Marshall, BA’s Deputy Chairman and Chief Executive. The MMC noted that Lord King and Sir Colin Marshall were influential figures in the air transport industry and “forceful personalities.”
(3)
In First Milk/Robert Wiseman, First Milk, a farmer-owned dairy cooperative, acquired a 15% shareholding in Robert Wiseman Dairies (“Wiseman”).133 First Milk also acquired the right to nominate a non-executive member of Wiseman’s board. The remaining shares were split between institutional investors, who accounted for around 7.5% of the total shares, and the Wiseman family, which accounted for around 47% of the total shares. As a result, the OFT noted that “[t]he First Milk board appointee will be the director with the most experience of raw milk procurement, and it is expected that particular weight will be accorded to his views in relation to this activity.”134 In addition,
130
Jurisdictional and Procedural Guidance, para. 4.22. Completed acquisition by Scottish Radio Holdings plc 22.5 per cent shareholding in Kingdom FM Radio Limited, DGFT advice of 11 March 2002. 132 British Airways plc and Sabena SA: MMC report on the merger situation, July 1990. 133 Completed acquisition by First Milk Limited of a 15 per cent stake in Robert Wiseman Dairies plc, OFT decision of 7 April 2005. 134 Ibid., para. 5. 131
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First Milk and Wiseman had an on-going commercial relationship with Wiseman accounting for around 10-20% of First Milk’s total raw milk sales. (4)
In Project Canvas, the OFT concluded that a joint venture had been structured so that none of the joint venture partners would have any more influence than its peers.135 Each joint venture partner would have one director on the board and one-seventh of the voting rights, reflecting the proportion of its shareholding in the joint venture. Decisions would be taken by simple majority, whilst more significant decisions (e.g., approval of budgets or spending in excess of the business plan) would be taken by a super majority of all but one of the joint venture partners. In this connection, the OFT considered a complaint by two third parties that the BBC might have material influence over the joint venture on the basis that key roles would be filled by former BBC employees and a large number of BBC R&D staff would be seconded to the project. These complaints also placed reliance on the fact that, as a general matter, the BBC’s participation was of importance to the project due to the commercial significance of its archived catalogue, R&D and knowhow. The OFT rejected these complaints for three reasons. First, internal business documents from the other joint venture partners did not indicate any pressure to align their own commercial interests with those of the BBC, and these joint venture partners had different areas of expertise that were also of importance to the joint venture’s success. Secondly, it was not the case that the BBC would fill a large number of key roles. The joint venture was expected to recruit the majority of its permanent staff in an open recruitment process. Some of these personnel may have been previously employed at the BBC, but they would become the responsibility of the joint venture’s board, where all of the joint venture partners had equal representation and voting powers, and their prior employment could not have any bearing on the issue of material influence. Thirdly, the OFT considered that the BBC would not exert material influence over the joint venture by threatening to exit from it because the joint venture partners were contractually committed to funding the joint venture for a period of four years and the joint venture was intended to function as an independent entity that could continue to operate even without the participation of the BBC.
(5)
In Pork Farms/Kerry, Poppy Acquisitions Limited (“Poppy”), the parent company of Pork Farms, acquired the chilled savoury pastry (“CSP”) business of Kerry Foods Limited (“KFL”) (the “Target”), a subsidiary of Kerry Group plc (“Kerry”).136 Simultaneously, Kerry, through KFL, acquired less than 25% of the ordinary shares in Poppy as well as some preferential shares. This
135
Anticipated joint venture between The British Broadcasting Corporation, ITV Broadcasting Limited, Channel Four Television Corporation, Channel 5 Broadcasting Limited, British Telecommunications plc, Talk Talk Telecom Limited and Arqiva Limited – Project Canvas, OFT decision of 19 May 2010. 136 Completed transaction relating to Pork Farms and Kerry Foods’ chilled savoury pastry business, CMA decision of 17 December 2014.
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shareholding gave Kerry less than 25% of the voting rights in Poppy’s shareholder meetings, the right to appoint two of eight directors to Poppy’s board, and veto rights over various reserve matters, including substantial changes to the business, acquisitions, and contracts outside the ordinary course of business. The CMA considered that, as a result of the transaction, Poppy had acquired full control over the Target, thereby resulting in Pork Farms and the Target ceasing to be distinct. In addition, the CMA considered whether Kerry, through KFL, had acquired material influence over Pork Farms (though Poppy). The CMA noted that: (i) Kerry’s board appointees were nonexecutive directors and were not on the executive committee of the board; (ii) Kerry was unable to block special resolutions relating to Poppy with its less than 25% shareholding; and (iii) Kerry’s experience and expertise in consumer food products beyond CSP may allow Kerry to influence the formulation of Poppy’s commercial policy through board meetings and shareholder meetings. For these reasons, the CMA considered that Kerry might be able to materially influence the policies of Poppy and therefore those of its subsidiary, Pork Farms. (iii) Additional agreements. Another factor considered by the CMA is whether the acquirer, in addition to its shareholding, is a party to any agreements (excluding the purchase agreement) that may enable it to exercise material influence.137 Such contracts may include agreements with other shareholders to vote in a particular manner.138 Such contracts may also include the provision of consultancy services, supply agreements, and, potentially, financial agreements, where one party becomes so dependent on another that the latter could acquire material influence.139 The Jurisdictional and Procedural Guidance provides an example whereby a lender could threaten to withdraw loan facilities if a particular policy were not pursued, or where the loan conditions conferred on the lender an ability to exercise rights over and above those necessary to protect its investment, such as having veto rights over certain strategic decisions.140
137
Jurisdictional and Procedural Guidance, para. 4.27. See, e.g., Completed acquisition by Diageo plc of United Spirits Limited, OFT decision of 25 November 2013, paras. 3-11, where Diageo acquired a 25.02% shareholding in United Spirits but entered into an agreement with United Breweries Holdings (Limited) (“UBHL”) which required UBHL to vote it 11.08% shareholding as directed by Diageo, which effectively gave Diageo a 36.1% shareholding in United Spirits. 139 Jurisdictional and Procedural Guidance, paras. 4.27 and 4.28. 140 Ibid., para. 4.28. See, e.g., Stora Kopparbergs Bergslags AB/Swedish Match NV, and Stora Kopparbergs Bergslags AB/The Gillette Company: a report on the merger situation, March 1991, para. 7.72, in which MMC concluded that Gillette could be treated as having material influence over Swedish Match on the basis that, inter alia, in addition to having a 22% stake in Swedish Match, Lustrasilk, a subsidiary of Gillette Industries, was a major creditor of Swedish Match. It stated that “[w]e consider, however, that a prudent management would be bound, in formulating its policy, constantly to take into account the fact that Gillette was a major shareholder in its parent company, was its parent company’s largest creditor and had important rights in relation to significant decisions relating to the future of the company…” 138
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(d) Shareholdings below 15%. The CMA is not precluded from examining shareholdings of less than 15%.141 However, a finding of material influence at such a level of shareholding would be highly unusual and the CMA would be likely to investigate such low levels of shareholding only in circumstances where other factors indicating the ability to exercise material influence over policy were present.142 Such a circumstance could arise if the target’s shares were widely dispersed and attendance at shareholders’ meetings had historically been very low. In this scenario, it is possible that the acquisition of a shareholding below 15% might de facto confer the ability to block special resolutions and therefore may result in a finding of material influence. Even where these factors alone were unable to confer upon the purchaser the ability to block special resolutions, the CMA may take into consideration the existence of any ‘plus’ factors to assess whether, as a result of viewing these factors in combination, the purchaser should be regarded as being able materially to influence the target’s policy. Whilst it is the case that, under the Enterprise Act, the Authorities have not made a finding of material influence below a shareholding of 15%, in Sky/ITV, the CC considered that, in order to fall below the level of material influence in a remedies context, Sky would need to sell down its shareholding in ITV to below 7.5%.143 In that case, following the CC’s conclusion that Sky’s shareholding of 17.9% was a relevant merger situation and expected to result in an SLC, Sky argued that a reduction in its shareholding from 17.9% to 14.9% would ensure that, based on the historical attendance of shareholders, its shareholding would constitute less than 25% at AGMs and it would therefore be unable to block special resolutions. The CC disagreed. In determining the level of shareholding at which Sky would not have material influence, the CC employed a rather complex line of reasoning. First, the CC considered historical data of the five general meetings since the creation of ITV to inform their view of voting turnout. Secondly, the CC considered that, in addition to looking simply at the level of voter turnout, it should take into account the prospect that a number of shareholders would abstain from voting on a specific resolution, so that the ‘effective turnout’ could be less than the proportion of shareholders represented at any given meeting.144 The CC noted that attendance at the previous five AGMs had been between 63% and 72%, with between 0% and 7% of votes withheld. Sky argued that the CC should not take into consideration effective voter turnout to calculate the potential weight of its stake because the choice to withhold votes by shareholders was a “deliberate expression of the shareholders’ dissatisfaction with ITV management.”145 141
Jurisdictional and Procedural Guidance, para. 4.20. Ibid. Under the Enterprise Act, the OFT has not yet found that any acquisition of less than 15% of a target’s voting shares has conferred material influence. The 2009 Jurisdictional and Procedural Guidance stated that the OFT would be likely to investigate shareholdings below 15% only where they involved the acquisition of a stake in a direct competitor but this was removed from the 2014 Jurisdictional and Procedural Guidance. 143 Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the share in ITV plc, CC report to the Secretary of State of 14 December 2007 142
144 145
Ibid., para. 6.26. Ibid., para. 6.27.
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Whilst the CC recognised that in some cases votes may be withheld deliberately in order to demonstrate dissatisfaction, it did not consider it possible to identify such votes with any degree of certainty. The CC considered effective turnout to be a “suitably cautious” approach to the assessment of voting turnover “in the remedies context.”146 On this basis, the CC considered that the lowest realistic level of effective turnout would be 60%.147 Thirdly, the CC calculated the average percentage of voters who had voted against a motion, and found that up to 6% had done so.148 Sky argued that no allowance should be made for shareholders that might vote against the ITV board, as these shareholders and Sky would not be acting in concert.149 Sky also pointed out that a higher proportion of investors was willing to vote against resolutions relating to governance than those relating to strategy and day-to-day management. It argued that in the previous five AGMs, no more than 3% of shareholders had voted against a resolution concerning strategy and day-to-day management.150 The CC’s view was that, in practice, it was seeking “to ensure that BSkyB would not be in a position to block a special resolution, either by exercising its own voting rights – with or without a certain percentage of the votes being exercised independently in the same way – or by using its industry expertise and status, combined with its shareholding, to influence other shareholders to vote with BskyB.”151 Therefore, the CC considered that it should make a conservative assessment of the number of shareholders who might be expected to vote against ITV. Based on the CC’s previous experience and recognising Sky’s ability to influence other shareholders, the CC considered the highest realistic percentage of votes against a special resolution would be 7.5%. Therefore, taking the lowest effective turnout of 60% and the highest realistic level of votes against at 7.5%, the CC concluded that Sky would only be able to block special resolutions if it were to retain a shareholding of 7.5% or more.152 In Ryanair/Aer Lingus, the CC also assessed what level of shareholding it would be appropriate for Ryanair to sell down to in order to ensure that it could not block a special resolution.153 The CC created a model to explore the relationship between Ryanair’s shareholding and its ability to block a special resolution. Using this model, the CC created six scenarios to assess how far Ryanair’s shareholding would need to fall to reduce its effective voting power below 25%.154 The CC concluded that Ryanair’s stake would need to be reduce to 5% to prevent it from blocking a special resolution (it considered one of its scenarios where Ryanair’s shareholding would need to fall to 4.7%
146
Ibid., para. 6.28.
147
Ibid., para. 6.29. Ibid., para. 6.30. 149 Ibid., para. 6.31. 150 Ibid., para. 6.31. 148
151
Ibid., para. 6.32. Ibid., para. 6.34. 153 Ryanair Holdings plc and Aer Lingus Group plc, a report on the completed acquisition by Ryanair Holdings plc of a minority shareholding in Aer Lingus Group plc, 28 August 2013. 154 Ibid., para. 8.77. 152
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to be sufficiently unlikely to occur in practice for the risk to be “tolerable.”155 The CC also took into account that a shareholding of 5% would remove Ryanair’s ability to block the squeeze-out of a minority shareholding during a public offer for Aer Lingus and would remove any realistic prospect that Ryanair could block an ordinary resolution or the disposal of Heathrow slots.156 The CC also concluded that this reduction in shareholding would need to be accompanied by a behavioural remedy to ensure that Ryanair could not seek or accept board representation or acquire any further shares in Aer Lingus following the divestment. (e) Insufficient control. There have been a small number of decisions in which the Authorities have provided their reasoning as to why a transaction has been found not to qualify on the basis of a lack of material influence. These decisions are of value in indicating where the CMA might draw the line in terms of asserting jurisdiction over certain types of transaction. In SPP Health/Merseyside, SSP Health Ltd (“SSP”), a privately-owned company which supplies primary care services in the North West of England, was awarded a contract by Sefton Primary Care Trust (“PCT”) and Liverpool PCT to supply primary medical and other care services from 22 GP practices.157 The contract was for a three-year period with a possible extension of two years. The OFT assessed whether SSP had acquired material influence over the 22 GP practices. The OFT concluded that SSP had not acquired material influence because NHS England (Merseyside Area Team) would retain control over the operations and management of the GP practices, including determining: (i) the premises from which the medical services should be supplied; (ii) the normal and extended working hours; (iii) the specifications for the delivery of essential and enhanced local services to be provided by SSP from those premises; and (iv) the level of qualification and experience of the staff to deliver the medical services. SSP was also obliged to comply with any direction set or instructions given by the commissioning organisation to SSP relating to its staff appraisal system, and to share extensive information for routine audit of quality indicators. Failure to comply with these obligations could lead to NHS England terminating the contracts. The OFT also noted that the ownership of the properties involved, assets and other rights had not changed as a result of the contracts. SSP would only be entitled to the use of the properties, assets and intellectual property rights for the duration of the contracts and subject to customary tenancy conditions, including strict restrictions on the possible use of the premises, a requirement to obtain consent prior to any work being carried out, the prohibition to transfer, assign, or otherwise part with possession of any lease, licence or other agreement for occupation of the premises. On this basis, the OFT concluded that SSP had not acquired the ability to materially influence the strategic direction of these GP services.
155
Ibid., para. 8.107. Ibid., para. 8.108. 157 Award of contracts to SSP Health Limited to manage and operate 22 General Medical Practices in Merseyside, OFT decision of 8 August 2013. 156
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In Keolis/DLR Franchise, Keolis Amey Docklands Limited (“KADL”), a joint venture established by Keolis UK Limited and Amey Rail Limited, was awarded the Docklands Light Railway (“DLR”) Franchise by Docklands Light Railway Limited (“DLRL”), a subsidiary of Transport for London (“TfL”).158 The Franchise Award entailed the lease by KADL of the DLR rolling stock and infrastructure, as well as the granting of a licence for the use of the DLR brand and related IP rights, for the duration of the DLR Franchise as well as the transfer of the current DLR workforce to KADL under the TUPE regulations. However, the CMA concluded that KADL had not acquired material influence over the DLR Franchise on the basis that all key commercial decisions as to how DLR services are operated were taken by TfL, including: (i) ticket pricing; (ii) timetabling and frequency of trains including maximum intervals between trains, the minimum length of each train, the days on which passenger services must be operated, and the times of the first and last trains on each line; (iii) ancillary services such as customer service activities (including responding to complaints), marketing, advertising and estate management; and (iv) decisions regarding capital investment and the longterm asset management and renewal strategy. In addition, all passenger revenues were recouped by DLRL, and KADL’s fee for operating the DLR was in no way related to passenger numbers or revenues. Accordingly, the Parties considered that, as a result, they would have no commercial incentive to increase ticket revenues. Notwithstanding TfL’s control over various commercial considerations, the CMA considered whether KADL would have the ability to exercise material influence over the DLR Franchise through KADL’s operational control of the assets and employees associated with operating the DLR. The CMA considered that, for example, if KADL had this ability, it may have an incentive to use this operational control to degrade any DLR services that overlap with the Parties’ existing public transport services because they would gain revenues from passengers switching from the DLR to their existing services (since DLRL takes the DLR revenue risk). However, under the franchise agreement for the DLR Franchise, KADL’s fee would be adjusted depending on its performance against key performance indicators (KPIs) set by DLRL, with bonuses for good performance and abatements if KPIs were missed. These related to cancellations and delays (including a specific penalty for delays to passenger journeys of at least 20 minutes), journey times and excess waiting times, short train formations, station closures, station and train cleanliness, and station equipment requirements. Based on the evidence regarding the performance regime that KADL is subject to, the CMA considered that KADL’s ability to degrade DLR services was not at a level that gave it material influence over the DLR Franchise.
2.5
TIME LIMITS AND PRIOR NOTICE 2.5.1
The Four-Month Timing Rule
The CMA is able to investigate a merger, or refer it to Phase II, only where the enterprises in question have not ceased to be distinct more than four months prior to the
158
Acquisition by Keolis Amey Docklands Limited of the Docklands Light Railway Franchise, CMA decision of 14 November 2014.
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date of reference.159 Such a timing rule is important in a voluntary merger control regime in order that merging parties have a deadline by which they can have comfort that their transaction can no longer be investigated by the CMA (or referred to Phase II). Such comfort is often important in the context of transaction timetables where companies will generally wish to prepare for the first day after completion when they can begin to integrate their businesses (something that they are prevented from doing, if they are competitors, by the Chapter I prohibition under section 2 of the Competition Act and/or Article 101 TFEU).
2.5.2
The Starting Point for the Four-Month Period
For the purposes of this timing rule, the four-month period begins on the date when either: (i) “material facts” in respect of the merger have been “made public”; or (ii) from the date that the CMA is provided with “material facts” concerning the merger.160 The Enterprise Act does not define “material facts”, but the CMA interprets these to be the information that is relevant to its determination of jurisdiction.161 This will usually include information regarding the identity of the merging parties, the nature of the transaction, and the date on which the transaction was completed or will complete. For facts to have been “made public”, they must have been “so publicised as to be generally known or readily ascertainable.”162 Therefore, even where a merger has been completed for more than four months, the CMA will be able to investigate the merger (and potentially make a reference to Phase II) if four months have not passed since the merger was made public or the CMA was informed about the merger’s material facts.163
2.5.3
Facts in the Public Domain Must be Readily Ascertainable
Where material facts are made public, the CMA will consider whether such information could readily be ascertained by the CMA acting reasonably and diligently.164 Typically, 159
Section 24, Enterprise Act. Ibid. 161 Jurisdictional and Procedural Guidance, para. 4.44. 162 Section 24(3), Enterprise Act. 160
163
See, e.g., Completed acquisition by Tesco Stores Limited of Brian Ford Discount Store Limited, OFT decision of 22 December 2008, which concerned Tesco’s acquisition of the Brian Ford store in October 2003 through a nominee company, which held the Brian Ford shares in trust on behalf of Tesco until the shares were transferred to Tesco in April 2007. The transaction was made public only in June 2008, when the Daily Telegraph published an article about the acquisition. Tesco argued that an assertion of jurisdiction over the transaction would undermine legal certainty. However, the OFT made clear that if merging parties choose not to publicise their transactions, they effectively delay the time at which the four-month deadline will take effect. The OFT stated that it had no discretion under the Enterprise Act not to notify a transaction to the CC simply on the basis that several years had passed since the completion of the initial acquisition. 164 Jurisdictional and Procedural Guidance, para. 4.44. See, e.g., Completed acquisition by Atos Medical AB of Countrywide Supplies Limited, CMA decision of 7 August 2015, where Atos acquired Countrywide on 31 January 2015. An adviser to the merging parties, Clearwater International, issued a press release on 24 February 2015 noting their involvement in the transaction and communications were sent to Countrywide’s suppliers and various ear, nose and throat nurses following completion.
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merging parties will have chosen to publish these details in a press release, or they may have been published in the national press,165 or in a relevant trade publication. Notification to a merging party’s customers is not typically regarded as being sufficient to meet the standard of the merger’s facts being “generally known or readily ascertainable.”166
2.5.4
Extension of the Four-Month Period
The four-month period may be extended in the following circumstances: (1)
Agreement. The CMA and the merging parties may agree to extend the fourmonth period by up to a maximum of 20 additional working days.167
(2)
Failure to provide information. The CMA may issue a notice extending the four-month period where it considers that the merging parties have failed (with or without a reasonable excuse) to comply with any requirement of a notice under section 109.168 Such an extension will come into force when notice of
However, the CMA did not consider that it had been informed about the transaction until 2 April 2015 following the receipt of a third party complaint. 165 See, e.g., Completed acquisition by Genus plc of Local Breeders Limited, OFT decision of 14 May 2008. The OFT concluded that an article published in the regional Western Telegraph newspaper (for sale in Pembrokeshire, South Ceredigion and West Carmarthenshire) was insufficient to meet the requirement of the merger’s details being “generally known or readily ascertainable”. 166
Ibid., para. 9. Section 25(1), Enterprise Act. See, e.g., Completed acquisition by Vodafone Limited of 140 stores formerly controlled by Phones4U Limited, CMA decision of 4 February 2015; Completed acquisition by GTCR Canyon UK Investments Ltd of Gorkana Group Limited, CMA decision of 27 March 2015. 168 Section 25(2), Enterprise Act. See, e.g., Completed acquisition of Avanta Serviced Office Group plc by Regus plc, CMA decision of 18 November 2015; Completed acquisition by Atos Medical AB of Countrywide Supplies Limited, CMA decision of 7 August 2015; Completed acquisition by BCA Marketplace plc of SMA Vehicle Remarketing Limited, CMA decision of 17 November 2015; Completed acquisition by Atlantic SFDT SA of Woolamai Holdings Jersey Limited, CMA decision of 5 June 2015; Completed acquisition by Allflex of Cox Agri Limited, CMA decision of 7 May 2015; Completed acquisition by Solera Holdings, Inc. of CAP Automotive Limited, CMA decision of 5 May 2015; Completed acquisition by GTCR Canyon UK Investments Ltd of Gorkana Group Limited, CMA decision of 27 March 2015; Completed acquisition by Henry Schein UK Holdings Ltd of the dental consumables business of Plandent Limited, CMA decision of 21 April 2015; Completed acquisition by Ticketmaster Europe Holdco Limited of Seatwave, CMA decision of 26 March 2015; Completed acquisition by Healthcare Environmental Services Limited of G.W. Butler Limited, CMA decision of 18 March 2015; Completed acquisition by Key Publishing Limited of certain assets of Kelsey Publishing Limited, CMA decision of 2 March 2015; Completed acquisition by WD-40 Company Limited of the business and assets of GT 85 Limited, CMA decision of 3 February 2015; Completed acquisition by Didix International B.V. of Taste Marketing Limited, CMA decision of 28 January 2015. 167
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the extension is given and will end when the information or documents are provided to the CMA’s satisfaction.169 (3)
Undertakings in lieu. The CMA may issue a notice extending the four-month period where it is seeking undertakings from one or more of the merging parties.170 The period may be extended until the earliest of the following events:171 (i) the undertakings are given; (ii) the expiry of a 10-day period following the receipt of a notice by the CMA that the merging parties do not intend to give undertakings; or (iii) the cancellation by the CMA of the extension.
(4)
Referral back. The four-month period may be extended if the European Commission is considering a request made by the CMA under Article 22(1) of the Merger Regulation but is not yet proceeding with the matter in pursuance of that request.172 In this case, the extension will continue until the CMA informs the parties that the European Commission has completed its consideration of the CMA’s request.173
2.5.5
Ryanair/Aer Lingus
Article 21(3) of the Merger Regulation prevents the CMA from investigating a transaction over which the European Commission has jurisdiction. Therefore, in relation to mergers where a purchaser initially acquires a minority interest that exceeds the material influence thresholds, the CMA will not be able to investigate this transaction if the purchaser subsequently acquires a controlling interest in the target and the Merger Regulation applies. However, in relation to the four month rule, the Enterprise Act may apply in the event that the Commission prohibits the acquisition of control. These were the facts of Ryanair/Aer Lingus where Ryanair initially acquired a 19.2% shareholding in Aer Lingus, which increased to 25.2% by November 2006 and ultimately to 29.8% by July 2008. Ryanair then announced a public bid for Aer Lingus’ entire share capital on 5 October 2006. This proposed acquisition was reviewed by the European Commission and prohibited on 27 June 2007. Following this decision, in July 2007, Aer Lingus wrote to the Commission, as well as the Irish, UK and Germany competition authorities inviting them to reach a common position on jurisdiction in relation to Ryanair’s minority shareholding. The OFT stated that it was prevented, at that time, by Article 21 of the Merger Regulation from reviewing the minority shareholding,174 and the Bundeskartellamt responded shortly afterwards stating that it 169
Section 25(3), Enterprise Act. Section 25(4), Enterprise Act. 171 Section 25(5), Enterprise Act. 172 Section 25(6), Enterprise Act. 170
173
Section 25(8), Enterprise Act. The OFT’s letter stated: “the OFT considers that it is prevented by Article 21(3) [of the Merger Regulation] from applying national legislation on competition to the 25.22 per cent minority stake held by Ryanair in Aer Lingus. In our view, Article 21(3) [of the Merger Regulation] precludes the OFT’s merger jurisdiction in circumstances where (1) the Commission expressly defined the relevant 174
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was not intending to take any action given the risk of mutually contradictory decisions. In September 2007, Ryanair appealed the Commission’s prohibition decision (the “Ryanair Appeal”) to the Court of First Instance (now the General Court) and in October the Commission adopted a formal decision holding that it did not have the power to order the divestment of Ryanair’s minority shareholding in Aer Lingus. This decision was appealed by Aer Lingus in November 2007 (the “Aer Lingus Appeal”). There was then a lull in proceedings until mid-2010 (although in the interim Aer Lingus applied for, and was denied, interim measures). In July 2010, the General Court dismissed the Ryanair Appeal and the Aer Lingus Appeal. In relation to the latter, the General Court stated that “[t]he concept of concentration cannot be extended to cases in which control has not been obtained… if control has not been acquired, the Commission does not have the power to dissolve the concentration. If the legislature had wished to grant the Commission broader powers than those laid down in the merger regulation, it would have enacted a provision to that effect.”175 It went on to state that “[w]here there is no concentration with a Community dimension, the Member States remain free to apply their national competition law to Ryanair’s shareholding in Aer Lingus in accordance with the rules in place to that effect.”176 Following this judgment, and the expiration of the period for its appeal, the OFT opened an investigation into Ryanair’s minority acquisition in October 2010. Ryanair then wrote to the OFT on 21 October 2010 arguing that it was out of time and invited the OFT to make a formal decision on this point separately from, and in advance of, its consideration of the acquisition itself. The OFT acceded to Ryanair’s request and, on 4 January 2011, sent a letter to Ryanair setting out its conclusion that it was not out of time to refer the minority acquisition to the Competition Commission. Ryanair then appealed this decision to the CAT, which, by judgment of 28 July 2011, found that the OFT was not out of time.177 Ryanair appealed this judgment to the Court of Appeal which upheld the CAT’s judgment in May 2012.178 There were no further appeals on this specific point (although there were numerous other appeals in this case). On 15 June 2012, the OFT referred the case to the CC. Ultimately, Ryanair was ordered by the CC to sell down its shareholding in Aer Lingus to no more than 5%, a decision that was appealed to, and upheld by, both the CAT179 and the Court of Appeal.180
shareholding as part of the concentration with a Community dimension in its Article 6(1)(c) decision and 8(3) decisions; and (2) the Commission reviewed the concentration in its entirety, including the minority stake. This conclusion is underlined by the likelihood that Ryanair will challenge the [Prohibition Decision] before the CFI [now General Court] – and/or… that Aer Lingus will itself seek relief before the CFI [now General Court] – creating a risk of inconsistent outcomes if the OFT were to have parallel jurisdiction at this time.” 175 Case T-411/07, Aer Lingus Group plc v Commission, para. 66. 176 Ibid., para. 91. 177 Ryanair Holdings plc v Office of Fair Trading [2011] CAT 23. 178 179
Ryanair Holdings plc v Office of Fair Trading [2012] EWCA Civ 1579. Ryanair Holdings plc v Competition Commission [2014] CAT 3.
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SUCCESSIVE TRANSACTIONS
Aggregating Transactions Within a Two-Year Period
The CMA may treat multiple transactions that have occurred within a two-year period as having occurred simultaneously on the date of the last transaction.181 This prevents merging parties from being able, inter alia, to structure their transactions so as to avoid the application of the Enterprise Act.182 For example, merging parties could structure an acquisition such that the purchaser acquired the target in several ‘pieces’ in an attempt to ensure that the target’s turnover was below £70 million and/or that the parties’ combined share of supply remained below 25%. Where the last in a series of transactions is an anticipated merger and has not yet completed, the CMA may still aggregate this anticipated merger with prior completed mergers.183 A good example of separate transactions being aggregated arose in Sports Direct/JJB Sports, where Sports Direct International (“Sports Direct”) acquired 31 stores from JJB Sports (“JJB”) between 5 November 2007 and 1 December 2008 in a series of separate transactions.184 Sports Direct argued that the transactions were entirely separate and should not be viewed as a single transaction. However, the OFT considered it appropriate to exercise its “margin of appreciation” and treat the acquisition of all
180
Ryanair Holdings plc v The Competition and Markets Authority [2015] EWCA Civ 83. Section 27(5), Enterprise Act. See, e.g., Completed acquisition of Archant Limited of the London regionals Division of Independent News & Media plc, OFT decision of 29 April 2004 (the OFT treated the acquisition of three local newspaper titles and the exercise of an option to purchase a further two local newspaper titles as occurring simultaneously on the date of the exercise of the option); Completed acquisition by Dairy Crest Group plc of certain assets of Arla Foods UK plc, OFT decision of 26 October 2006 (the OFT treated Dairy Crest’s acquisition of the Express Foodservice business from Arla in October 2005, which did not qualify for investigation, and Dairy Crest’s acquisition of various assets pertaining to Arla’s doorstep business in August 2006 as occurring simultaneously); Completed acquisition by Park Group plc of Home Farm Hampers Limited, OFT decision of 23 August 2007 (the OFT considered simultaneously the two stages of Park’s acquisition of Home Farm Hampers, both of which completed on the same day); Anticipated acquisition by Sociedad Anonima Industrias Celulosa Aragonesa of the conventional corrugated board business of SCA Packaging Limited, OFT decision of 28 August 2008; Acquisition by University College London Hospitals NHS Foundation Trust of Royal Free London NHS Foundation Trust’s neurosurgery services, OFT decision of 21 February 2013. 182 The Authorities have not specifically applied section 27(5) to a transaction where it has expressly stated that the merging parties were attempting to structure their transaction around the Enterprise Act. The OFT did consider this possibility in Completed acquisitions by Tesco plc of Co-operative Group’s stores in Uxbridge Road, Slough as well as Stapleford Lane, Toton, Nottingham and Towers Place, South Shields, OFT decision of 2 February 2004, where the OFT had considered and discounted the possibility that Tesco had structured its acquisitions so as to avoid the application of the Enterprise Act. 181
183
Jurisdictional and Procedural Guidance, para. 4.33. Article 3, Enterprise Act 2002 (Anticipated Mergers) Order 2003, SI 2003/1595. 184 Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc, OFT decision of 1 May 2009.
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31 stores as having occurred simultaneously on the date of the last transaction.185 In doing so, the OFT recognised that it had chosen not to exercise its discretion in other cases where it had considered it inappropriate to do so.186 The OFT stated that “[a]lthough there was no evidence to suggest that the acquisition of the [stores] were [sic] structured so as to avoid scrutiny under the merger control provisions of the Act, the OFT believes that it should take into account in choosing whether to exercise its ability under section 27(5) that such a large number of retail outlet acquisitions may, on a cumulative basis, have a significant effect even if each one might not do so individually.”187
2.6.2
The Time at Which Enterprises Cease to be Distinct
Enterprises will be treated as having ceased to be distinct, for the purpose of the twoyear period, when the parties to the transaction “become bound to such an extent as will result, on effect being given to their obligations, in the enterprises ceasing to be distinct.”188 Neither the Enterprise Act nor the Jurisdictional and Procedural Guidance clarifies when exactly this takes place (e.g., at signing or completion) and to date, this point has not been tested in a merger case before the Authorities.
2.6.3
Options
In determining the extent of the two-year period, no account will be taken of an option or any other conditional right until such time as the option is exercised or the conditional right is satisfied.189 In SAICA/SCA Packaging,190 SAICA proposed acquiring the corrugated board business of SCA in the UK and Ireland, and, additionally, entered into a joint venture agreement with SCA, in accordance with which SCA had the option of purchasing 45% of the JV’s containerboard division and 55% of its corrugated division. The OFT stated that since SCA had not exercised either of its options, it did not consider their existence to constitute a relevant merger situation.191
2.6.4
Only Mergers Between the Same Parties May Be Aggregated
In order to aggregate multiple transactions, these transactions must have taken place between the same “parties or interests.”192 In determining whether it is appropriate to
185
Ibid., para. 9.
186
Ibid. The OFT noted the Completed acquisitions by Tesco plc of Co-operative Group’s stores in Uxbridge Road, Slough as well as Stapleford Lane, Toton, Nottingham and Towers Place, South Shields as a specific example. 187 Ibid. 188 Section 27(3), Enterprise Act. 189
Ibid. Anticipated acquisition by Sociedad Anonima Industrias Celulosa Aragonesa of the conventional corrugated board business of SCA Packaging Limited, OFT decision of 28 August 2008. 190
191 192
Ibid., para. 8. Section 27(6)(a), Enterprise Act.
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treat various transactions as having taken place between the same interests, the CMA may have regard to the persons “substantially concerned” in the transactions.193
2.7
OBTAINING CONTROL BY STAGES 2.7.1
Changes in the Level of Control
In the event that an acquisition results in a purchaser increasing its level of control over a target company, a new relevant merger situation may be created.194 Therefore, an acquisition that results in a change in the level of control from material influence to de facto control, from material influence to de jure control,195 or from de facto to de jure control,196 may be treated by the CMA as resulting in a new relevant merger situation (assuming all other criteria for a relevant merger situation are met).197 Once a purchaser has acquired de jure control, additional share acquisitions in the same enterprise will not result in a new relevant merger situation being created.198 Similarly, reductions in a purchaser’s shareholding that result in a reduced level of control (e.g., a reduction from
193 194
Section 27(8), Enterprise Act. Section 29, Enterprise Act; Jurisdictional and Procedural Guidance, paras. 4.31 to 4.34.
195
See, e.g., Anticipated acquisition by Capital Radio plc of the remaining shares of Tainside Limited, OFT decision of 23 February 2004 (where Capital increased its shareholding from 19% to 100%); Anticipated acquisition by HBOS plc of the remaining 50 per cent shareholding in Lex Vehicle Leasing (Holdings) Limited, OFT decision of 5 January 2006 (where HBOS increased its shareholding from 50% to 100%); Anticipated acquisition by Air Products Group of a controlling interest in CryoService Ltd, OFT decision of 16 June 2008 (where Air Products increased its shareholding from 25% to 72%). 196 See, e.g., Anticipated acquisition by West Midlands Travel Limited of the joint venture shares of Laing Infrastructure Holdings Limited and Ansaldo Transporti Sistemi Ferroviari SpA in Altram LRT Limited, OFT decision of 2 March 2006, where West Midlands Travel increased its shareholding from 33% to 100% and its level of control from de facto to de jure control. 197 See, e.g., Completed acquisition by Travis Perkins plc of a controlling interest in Toolstation Limited, OFT decision of 29 March 2012 where Travis Perkins acquired the remaining 70% shareholding in Toolstation (it already owned a 30% shareholding). The OFT found that Travis Perkins had moved from a position of de facto control to one of de jure control. However, the OFT exercised its discretion not to review this transaction on the basis that the competitive landscape had not changed since the prior transaction four years before, none of Travis Perkins’ other businesses directly overlapped with Toolstation, Travis Perkins had always been transparent about its shareholding in Toolstation, and from a customer/competitive point of view the transaction made no practical difference. cf. Anticipated acquisition by Cavendish Square Partners (General Partner) Limited of a controlling interest in each of Lakeside 1 Limited (Keepmoat) and Apollo Group Holdings Limited (Apollo), OFT decision of 24 November 2011, where the OFT exercised its discretion to review the transaction on the basis that (i) it had not previously had the opportunity to review the transactions and considered it important to review them at that stage; and (ii) the proposed transactions changed the organisational structure of the two companies, consolidating them into a single group and resulting in a material change from the point of view of customers and competitors. The parties themselves said that the companies would compete differently post-merger. 198
Jurisdictional and Procedural Guidance, para. 4.32.
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de jure control to material influence) will not result in a new relevant merger situation being created.199
2.7.2
Acquisitions of Control Within A Two-Year Period
Similar to the CMA’s powers in respect of successive transactions, where a purchaser obtains control of a company by stages within a two-year period, the transactions may, if the CMA considers it appropriate, be treated not as separate transactions giving rise to multiple relevant merger situations, but as having occurred simultaneously on the date on which the last acquisition occurred and as giving rise to only a single relevant merger situation.200
2.7.3
Aggregation of Anticipated Mergers
Where the last of a series of transactions is an anticipated merger and has not yet been completed, the CMA may still take this anticipated merger into consideration even though it may not actually be completed within the two-year period.201 It is not clear from the Jurisdictional and Procedural Guidance how far advanced the anticipated merger leading to an increased level of control would need to be for the CMA to take it into consideration. As noted above, the CMA cannot take into consideration options to acquire additional shares until such options have been exercised.202 It is considered likely that the CMA would require (at a minimum) merging parties to have a good faith intention to reach an agreement and may require the parties to have signed a merger agreement prior to the end of the two-year period. To date, this point has not been tested in a merger case before the Authorities.
2.8
TEMPORARY MERGER SITUATIONS
Mergers need not last for a minimum period of time to be considered a relevant merger situation for the purposes of the Enterprise Act.203 Therefore, in theory, where it is clear from the structure of a transaction or from the parties’ explicit intentions that a merger will result in only a temporary change to the market structure, such a transaction may nevertheless be considered to be a relevant merger situation for the purposes of the 199
Ibid., para. 4.34. Section 29(1) and (4), Enterprise Act. As with successive transactions under section 27, a series of transactions that results in obtaining control by stages is not, as a technical matter, an exception to the four-month timing rule. As with transactions assessed under section 27, the events are treated as having occurred simultaneously on the date of the last transaction and therefore the four-month period runs from the date of completion of the last transaction within the two-year period. See also, Jurisdictional and Procedural Guidance, para. 4.33. 201 Jurisdictional and Procedural Guidance, para. 4.33. Article 3, Enterprise Act 2002 (Anticipated Mergers) Order 2003, SI 2003/1595. 202 Section 27(3), Enterprise Act. See e.g., Anticipated acquisition by Sociedad Anonima Industrias Celulosa Aragonesa of the conventional corrugated board business of SCA Packaging Limited, OFT decision of 28 August 2008, para. 8. 203 In contrast, Article 3(1) of the Merger Regulation states that a concentration only occurs where there is a change of control in the undertakings concerned on a “lasting basis”. 200
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Enterprise Act. Such a situation could occur, for example, in a break-up bid where a purchaser acquires an enterprise (the initial purchase) with the intention of breaking it up to on-sell various pieces of the enterprise to other purchasers (the subsequent transactions). Similarly, such a situation might occur where the acquisition of an entire target company is divided into two or more linked transactions. In practice, however, the CMA would be unlikely to investigate such an interim step, even if the transaction constituted a relevant merger situation, if: (i) it was clear that the transaction was merely an interim step in a series of transactions; and (ii) the subsequent steps would take place within the four-month time period.204 This will, in particular, be the case where the initial acquisition raises no substantive competition concerns.205 In other words, the CMA will not risk losing its ability to refer a merger to Phase II merely on the basis that the merging parties intend that an initial purchase will only be temporary, as the CMA cannot guarantee that this will be the case. Where the initial acquisition raises substantive competition concerns, the merging parties would need to offer UILs that would essentially codify the parties’ intention to break up the target enterprise and sell it to other purchasers.206
2.9
ASSOCIATED PERSONS
For the purpose of identifying the enterprises that cease to be distinct as the result of a transaction, the CMA will consider whether, in addition to the purchaser, the purchaser’s group and the target, there are any “associated persons” that should be taken into consideration.207 This can have important consequences for the jurisdictional assessment of whether a relevant merger situation exists and allows the CMA to take into consideration undertakings that may have no shareholding in the immediate entities that will cease to be distinct as a result of the merger. The CMA considers that situations such as these “will most commonly arise where the acquiring undertakings are related or have signed an agreement to act jointly to make an acquisition” and where not all of the undertakings that are party to the acquisition acquire “control” for the purposes of the Enterprise Act (i.e., at least material influence).208 The CMA also notes that separate groups of enterprises may be associated persons where a single member is common to both groups.209 There are no cases under the Enterprise Act in which an associated person has given rise to a substantive concern. This is most likely to be a result of the fact that without some form of shareholding in the target (or in an
204
Jurisdictional and Procedural Guidance, para. 4.38. See Anticipated award to Odeon Cinema Holdings Limited of a contract in relation to the BFI IMAX Cinema, OFT decision of 16 July 2012, where the OFT concluded that, given the circumstances of the case, Odeon’s three year contract to operate the IMAX cinema was not sufficiently long for enterprises to have ceased to be distinct. 206 Ibid., para. 4.39. 207 Section 127, Enterprise Act. Jurisdictional and Procedural Guidance, para. 4.40. 205
208 209
Jurisdictional and Procedural Guidance, para. 4.41. Ibid.
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acquisition vehicle), the transaction is highly unlikely to raise any substantive issues.210 The following cases are illustrative of the Authorities’ approach to the concept of associated persons. (1)
In Milk Link/First Milk/Dairy Farmers of Britain/Westbury Milk, United Milk, which owned the Westbury milk processing plant, entered receivership.211 Milk Link, First Milk and Dairy Farmers of Britain formed a joint venture, Westbury Dairies, in order to acquire and operate the Westbury plant. The turnover of the Westbury plant was less than £70 million. Therefore, in order to establish jurisdiction, the merger needed to meet the share of supply test. The OFT found that the share of supply test was met on the basis that Milk Link, First Milk and Dairy Farmers of Britain were associated persons and that they overlapped with the Westbury plant in the procurement of raw milk and raw milk processing, and that their combined share of supply exceeded 25%.
(2)
In CdMG/Ferryways/Searoad, two special purpose vehicles, LineCo NV and TerminalCo NV acquired Ferryways and Searoad, which were active in the supply of short-sea unitised freight shipping.212 LineCo NV and TerminalCo NV were wholly-owned subsidiaries of the CdMG group of companies, which was controlled by the Cobelfret group of companies (“Cobelfret”). The OFT treated CdMG and Cobelfret as associated persons for the purposes of their merger assessment.213 Cobelfret was active in the supply of short-sea unitised freight shipping, including new car transportation, on Anglo-Continental routes. Ferryways’ and Searoad’s aggregate UK turnover was significantly below £70 million and therefore the turnover test was not met. However, Cobelfret and Ferryways overlapped in the supply of short-sea unitised freight shipping between ports in the Humber and continental Europe, with a combined share of supply of approximately 30%. The share of supply test was therefore met.
210 It is theoretically possible that an associated person could have sole board representation, that this could give rise to substantive concerns and that the associated persons concept may enable the CMA to obtain jurisdiction over such a merger. 211 Completed acquisition of Milk Link Limited, First Milk Limited and Dairy Farmers of Britain Limited of assets of United Milk Limited, namely the Westbury Milk processing plant, OFT decision of 26 February 2004. It is unclear from the OFT’s decision whether or not Milk Link, First Milk and Dairy Farmers of Britain each had at least material influence over the joint venture, Westbury Dairies. If this had been the case, presumably the OFT would not have needed to rely on the associated persons test to aggregate the shares of supply of these parties. 212 Completed acquisition by the CdMG group of companies of Ferryways NV and Searoad Stevedores NV, OFT decision of 24 January 2008. 213 It is unclear from the OFT’s decision why the OFT considered it necessary to rely on the associated persons test to link CdMG and Cobelfret together. The decision states that Cobelfret “controlled” CdMG (para. 1). This should have been sufficient for the OFT’s purposes and linking CdMG and Cobelfret as associated persons should have been unnecessary.
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(3)
In Pearl Group/Resolution, Pearl Group (“Pearl”) proposed acquiring the entire share capital of Resolution via a subsidiary, Impala.214 The acquisition was partially funded through finance provided by Royal London Mutual Insurance Society (“Royal London”). Pearl and Royal London had agreed that, following Resolution’s acquisition by Pearl, various Resolution businesses and assets would be sold to Royal London. The OFT did not reach a final determination as to whether Pearl and Royal London should have been regarded as associated persons as the OFT considered that, whether they were treated as associated persons or not, the transaction would not raise any substantive concerns.215
(4)
In Project Canvas, which involved the proposed joint venture between the BBC, ITV, Channel Four, Channel 5, BT, Talk Talk, and Arqiva, a third party argued that all of these joint venture partners should be deemed to be associated persons on the grounds that they were acting together and therefore would collectively acquire control over the Canvas joint venture.216 The OFT considered that “the mere fact that the JV Partners are party to a start-up joint venture does not, in itself, make them associated persons. They have not acted together to secure or exercise control over an existing body of persons corporate or to secure control of any existing enterprise or assets. Rather, they have come together as independents to enter into a new joint venture arrangement. No evidence has been provided to indicate why they should be regarded as associated persons beyond the fact that they are JV Partners.”217
(5)
In Eurotunnel/SeaFrance, Groupe Eurotunnel S.A. (“Eurotunnel”) acquired vessels and other assets from SeaFrance S.A. (“SeaFrance”) and hired former SeaFrance employees from a workers’ cooperative known as Société Coopérative de Production SeaFrance S.A. (the “SCOP”).218 Whilst not specifically considered by the OFT, following the transaction’s referral to Phase II, the CC considered whether Eurotunnel and the SCOP should be regarded as acting as associated persons in relation to the acquisition.219 Both Eurotunnel and the SCOP argued that they should not be considered as associated persons for the following reasons: (i) Eurotunnel’s negotiations were independent of its negotiations with the SCOP; (ii) the relationship between Eurotunnel and SCOP was always on an arm’s-length basis; (iii) Eurotunnel made the bid for the ex-SeaFrance assets in its own name; and
214
Anticipated acquisition by Pearl Group Limited of Resolution plc, OFT decision of 28 December
2007. 215
Ibid., para. 4. Anticipated joint venture between The British Broadcasting Corporation, ITV Broadcasting Limited, Channel Four Television Corporation, Channel 5 Broadcasting Limited, British Telecommunications plc, Talk Talk Telecom Limited and Arqiva Limited – Project Canvas, OFT decision of 19 May 2010, para. 39. 217 Ibid., para., 42. 218 Groupe Eurotunnel S.A. and SeaFrance S.A. merger inquiry, a report on the completed acquisition by Groupe Eurotunnel S.A. of certain assets of former SeaFrance S.A., 6 June 2013. 219 Ibid., paras. 4.30 to 4.40. 216
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(iv) there was no agreement for Eurotunnel and the SCOP to act jointly. However, the CC considered that Eurotunnel and the SCOP were acting as associated persons for the following reasons: (i) Eurotunnel and the SCOP were in advanced discussions about SeaFrance for a considerable period of time; (ii) from an early stage, Eurotunnel and the SCOP presented a united front in public and to third parties, and Eurotunnel made several press statements referring to its proposed relationship with the SCOP; (iii) the SCOP’s representative, Mr Giguet, was paid by Eurotunnel for six months in 2012 as Eurotunnel’s project director; (iv) Eurotunnel’s internal considerations of the proposed acquisition were informed by the SCOP’s business plan; (v) in its offer for the ex-SeaFrance assets, Eurotunnel made repeated reference to a partnership with the SCOP; (vi) the French Court order approving Eurotunnel as the acquirer of the ex-SeaFrance assets made reference to the arrangement with the SCOP; and (vii) completion of the acquisition took place on the same day that Eurotunnel and the SCOP signed a memorandum of understanding.
Chapter 3 THE SHARE OF SUPPLY AND TURNOVER TESTS 3.1 Introduction 3.2 The Share of Supply Test 3.2.1 General Principles (a) A share of supply or acquisition (b) An increment is necessary (c) Not a market share test (d) Calculation of the share of supply (e) CMA analysis (f) Timing of the CMA’s assessment 3.2.2 The Supply of Goods or Services (a) Horizontal markets (b) Vertical markets (c) Merchant and captive supply (d) Joint ventures 3.2.3 A Substantial Part of the UK (a) The meaning of “substantial part” (b) Non-contiguous reference areas (c) Geographical nexus between the reference area and the area of potential substantive concern 3.2.4 Geographical Allocation of Supply
3.1
3.3 The Turnover Test 3.3.1 Enterprises to be Included in the Turnover Calculation (a) Transactions where at least one party remains under the same ownership and control (b) Transactions where none of the parties remains under the same ownership and control 3.3.2 The Calculation of Turnover (a) Ordinary activities (b) The relevant time-period (c) Adjustments to turnover in the preceding business year (d) Group turnover (e) Acquisition of part of a company (f) Exclusion of intra-group sales (g) Inclusion of aid (h) Geographic allocation of turnover (i) Successive transactions (j) Treatment of foreign currencies 3.3.3 Rules for Specific Sectors (a) Credit and financial institutions (b) Insurance undertakings
INTRODUCTION
The Enterprise Act only applies to mergers that meet certain jurisdictional thresholds.1 This ensures that mergers assessed by the CMA have a sufficient UK nexus. The Enterprise Act provides for two, alternative, jurisdictional thresholds. For the CMA to have jurisdiction over a merger, it must either result in the enterprises ceasing to be distinct having a combined share of supply of goods or services of any description in the UK, or a substantial part of the UK, of at least 25% (referred to as the share of supply test)2 or the value of the UK turnover of the enterprise being acquired must exceed 1
An exception to this general rule is special public interest mergers, which do not need to meet the jurisdictional thresholds. These mergers are discussed in Chapter 5. 2 Section 23(3) and (4), Enterprise Act.
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£70 million (referred to as the turnover test).3 In addition, relevant merger situations must not have an “EU dimension” within the meaning of Article 1 of the Merger Regulation.4 In the event that two or more enterprises cease to be distinct, but neither of these jurisdictional thresholds is met, the Enterprise Act will not apply.
3.2
THE SHARE OF SUPPLY TEST 3.2.1
General Principles
(a) A share of supply or acquisition. The Enterprise Act provides that a merger meets the share of supply test if, in relation to the supply of goods or services of any description, at least one-quarter of those goods or services are supplied by the enterprises ceasing to be distinct in the UK, or in a substantial part of the UK.5 Whilst the Enterprise Act focuses exclusively on the share of “supply” of goods or services, the Jurisdictional and Procedural Guidance makes clear that the share of supply test will also be met if the merging parties acquire 25% or more of goods or services of any description in the UK, or a substantial part of it.6 (b) An increment is necessary. The enterprises ceasing to be distinct must either create or enhance a share of supply of 25% or more. Accordingly, the share of supply test is met only if there is an increment in the share of supply, regardless of the size of that increment.7 (c) Not a market share test. The share of supply test is not a market share test.8 Accordingly, the CMA does not need to identify an economic market (i.e., a relevant product and geographic market) for the purposes of determining jurisdiction. In NBTY/Julian Graves, the OFT unambiguously stated that “the share of supply test need not relate to an economic market, and the [Enterprise] Act does not require the basis on
3 4
Section 23(1), Enterprise Act.
In accordance with Article 21 of the Merger Regulation, the Merger Regulation alone shall apply to “concentrations” with a “EU dimension” and no Member State shall apply its own national merger control legislation to such a transaction. 5 Section 23(3) and (4), Enterprise Act. 6 Jurisdictional and Procedural Guidance, para. 4.53. The sake of simplicity, and in accordance with general practice, this limb of the jurisdictional thresholds is referred to as the share of supply test throughout. 7 Ibid., para. 4.54. See, Anticipated acquisition by Tesco plc of a Spar grocery store in Wroughton from Capper & Co Limited, OFT decision of 23 July 2009, where the OFT established jurisdiction over Tesco’s acquisition of a single store with turnover of only £1.9 million on the basis that Tesco’s national share of the supply of groceries exceeded 25% and that the store in Wroughton would increase that share of supply, although this increment would have been (in value terms) “very substantially below” 0.1% (para. 16). See also, Completed acquisition by Carpetright plc of four Allied Carpet stores, OFT decision of 13 September 2010, in which the OFT noted that the merger fell within the Enterprise Act’s jurisdiction on the basis that Carpetright’s share of supply in the UK exceeded 25% and that the addition of a single store in Solihull was an increment to that share of supply. 8 Ibid., para. 4.56.
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which jurisdiction is asserted and the substantive competitive assessment to be linked.”9 However, the CMA will have regard to a reasonable description of a set of goods or services to determine whether the share of supply test is met.10 This will often mean that the share of supply used by the CMA for jurisdictional purposes corresponds with a standard recognised by the industry in question, although this need not necessarily be the case.11 (d) Calculation of the share of supply. Rather than focusing merely on the value and/or volume of a party’s sales in determining its share of supply, the Enterprise Act provides that the CMA may take into consideration a number of factors, including the “value, cost, price, quantity, capacity, number of workers employed or some other criterion, of whatever nature”, as the CMA considers appropriate.12 In practice, the CMA typically focuses on the parties’ share of supply in terms of value or volume of goods or services. It would be exceptional (and, for the most part, undesirable) for the CMA to determine that the share of supply test was met on any other basis. (e) CMA analysis. In determining whether the share of supply test is met, the CMA will typically start its analysis by evaluating whether or not the enterprises ceasing to be distinct have a share of supply of any good or service on a relatively wide geographic basis, such as the UK, Great Britain or one of the four countries making up the UK.13 The CMA may establish jurisdiction on this basis even where the competitive effects of the merger will be at a regional or local level.14 This is one of the principal distinctions between the share of supply test as a method of establishing jurisdiction and a market share test, which is a tool for economic analysis. However, if the CMA is unable to establish jurisdiction on this broad basis, it will assess whether or not the share of supply test would be met on a smaller geographic basis.15 (f) Timing of the CMA’s assessment. The CMA will determine whether the share of supply test is met “immediately before the time when the reference has been, or is to be, made.”16 This may have implications for the calculation of the share of supply. The Authorities’ approach is illustrated by the following examples. (1)
In MWUK/Dimensions Clothing/Alexandra, MWUK argued that the share of supply test was not met for the purposes of asserting jurisdiction over the acquisition of Alexandra (Dimensions Clothing exceeded the turnover test) on the grounds that, whilst Dimensions Clothing had overlapping activities with
9
Completed acquisition by NBTY Europe Limited of Julian Graves Limited, OFT decision of 24 March 2009, para. 15. 10 Jurisdictional and Procedural Guidance, para. 4.56. 11 Ibid. 12 Section 23(5), Enterprise Act. 13
Jurisdictional and Procedural Guidance, para. 4.56. Ibid. 15 Ibid. 16 Section 23(9), Enterprise Act. See also Jurisdictional and Procedural Guidance, para. 4.53, footnote 73. 14
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Alexandra, MWUK did not, and the Alexandra acquisition completed first in time (i.e., MWUK did not yet own Dimensions Clothing at the time of its acquisition of Alexandra).17 The OFT dismissed this argument stating that “[t]he fact that there was no overlap between MWUK and Alexandra at the time the enterprises ceased to be distinct from each other is… not conclusive. At the time of the OFT’s decision on reference, MWUK owns Dimensions and therefore there is an overlap between MWUK/Dimensions and Alexandra in the supply of corporate clothing for jurisdictional purposes.”18 (2)
In Harman/Bang & Olufsen, the merging parties overlapped in the supply of amplifiers and other components for premium automotive audio systems to car manufacturers.19 Based on the volume of sales in the last year, the parties had a combined share of supply of premium amplifiers to UK customers of 90100%, with a limited increment. Prior to the merger, Harman lost its only UK customer contract (to JLR). However, Harman’s sales to JLR were to be phased out over a period of time and therefore at the time of the transaction, the parties still had a combined share in excess of 25% (and the CMA noted that Harman had won another UK customer contract although it had not begun supplying that customer at the time of the merger).
3.2.2
The Supply of Goods or Services
The Enterprise Act provides that, in relation to the supply of goods or services “of any description”, the enterprises ceasing to be distinct must supply at least one-quarter of those goods or services in the UK or in a substantial part of the UK.20 The Enterprise Act does not specify what types of goods or services may be taken into consideration by the CMA in determining whether the share of supply test is met. It is clear that the share of supply test is met if the enterprises ceasing to be distinct supply goods or services that are the same or very similar (e.g., the supply of widgets), as well as where they are in the same economic market, but it is less clear how differentiated the goods or services may become before they are no longer capable of being aggregated for the purposes of the share of supply test. This section considers the Authorities’ approach to the supply of goods or services by the merging parties in: (i) different horizontal markets; (ii) vertical markets; (iii) markets where one party has merchant supply and the other party has captive supply; and (iv) joint venture cases. (a) Horizontal markets. In terms of assessing whether the share of supply test is met in respect of goods or services that are supplied at the same level of the supply chain, the CMA may aggregate merging parties’ shares of supply of goods/services that 17
Completed acquisition by MWUK Holding Company Limited of Dimensions Clothing Limited and Completed acquisition by MWUK Holding Company Limited of certain assets of Alexandra plc (in administration), OFT decision of 2 November 2010, para. 16. 18 Ibid., para. 17. 19 Completed acquisition by Harman International Industries Inc. of the Bang & Olufsen A/S automotive audio assets, CMA decision of 4 September 2015. 20 Section 23(3) and (4), Enterprise Act.
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are ultimately found not be on the same antitrust markets and therefore do not compete against each other. This is particularly the case where the CMA is considering a market for the first time. In such cases, the CMA will apply a frame of reference whereby the parties’ products may potentially compete against each other. In cases where the parties’ products clearly do not compete against each other, the CMA arguably has little incentive to aggregate the parties’ shares of supply so as to assert jurisdiction (even though it could do so under the Enterprise Act). The Authorities’ approach is illustrated by the following cases. (1)
In ICAP/EBS, ICAP, the world’s largest ‘voice’ inter-dealer broker (“IDB”) active in the wholesale markets for over-the-counter derivatives, fixed income securities, precious metals, money market products, foreign exchange, energy, credit and equity derivatives, acquired EBS Group (“EBS”) a supplier of electronic IDB services, primarily to the ‘spot’ foreign exchange trading community.21 The OFT determined that the share of supply test was met in relation to the supply of IDB services for ‘spot’ foreign exchange or precious metal. In other words, although the parties neither supplied the same products, nor were they active on the same economic market, they were both active in types of IDB services. Therefore, the OFT aggregated ICAP’s share of voice broking services with EBS’ share of electronic broking services, even though voice and electronic broking were (ultimately) found to constitute separate relevant product markets and neither of the parties was active in the other’s market.
(2)
In General Mills/Saxby, General Mills, a supplier of consumer food products, including the Jus-Rol frozen ingredient pastry range, proposed acquiring Saxby, a supplier of chilled ingredient pastry and unbaked goods.22 Applying the frame of reference of “ingredient pastry”, the OFT determined that the share of supply test was met. The subsequent substantive analysis concluded that whilst demand-side substitution between frozen and chilled ingredient pastry was limited, supply-side switching was straightforward, as was entry and expansion, which offset concerns otherwise arising from high market shares.
(3)
In NYSE/Euronext, NYSE, the operator of the New York Stock Exchange and the US-based securities exchange, NYSE Arca, and Euronext, the operator of stock exchanges in Amsterdam, Brussels, Lisbon, London and Paris, proposed combining their respective companies by way of a full merger.23 The OFT determined that the parties overlapped in the supply of secondary listing services for UK companies, in respect of which the parties’ combined share of
21 22
Completed acquisition by ICAP plc of EBS Group Limited, OFT decision of 20 June 2006.
Anticipated acquisition by General Mills UK Limited of Saxby Bros Limited, OFT decision of 27 November 2006. 23 Anticipated merger between NYSE Group, Inc. and Euronext N.V., OFT decision of 9 October 2006.
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supply exceeded 25%. The OFT’s substantive assessment concluded that the parties were active in different antitrust markets. (b) Vertical markets. The CMA cannot apply the share of supply test to mergers where the relationship between the parties is purely vertical.24 It was also not the Government’s intention prior to the coming into force of the Enterprise Act that the share of supply test should apply to such vertical mergers.25 However, where, in the context of an essentially non-horizontal merger, the Authorities have considered that there is an element of horizontal overlap between the parties, it may find that the share of supply test is met, even where the relationship between the parties is essentially vertical. The following decisions are illustrative of the Authorities’ approach in relation to vertical markets. (1)
In Montauban/Simon, Montauban, a supplier of short-sea unitised freight shipping and the owner of various port facilities, proposed acquiring Simon, an owner and operator of two port facilities in the UK; one at Port Sutton Bridge in the Wash and the other at Humber Sea Terminal in the Humber estuary.26 Montauban argued that the share of supply test was not met as the parties’ activities did not overlap – the merger essentially concerned a port operator (Simon) and one of its customers (Montauban). However, the OFT determined that the share of supply test was met by applying, as the frame of reference, the supply of stevedoring services27 (Simon supplied stevedoring services to third parties and Montauban provided stevedoring services to its own vessels), in relation to which the parties had a combined share of supply of 35-40%. In its substantive analysis, however, the OFT focused purely on vertical issues arising from third party complaints in relation to the vertical integration of Montauban and Simon – it was argued, inter alia, that Montauban would seek to raise rivals’ costs at Humber Sea Terminal and increase its share of the downstream shipping market.28
(2)
In GFI/Trayport, GFI Group (“GFI”), a provider of IDB services for over-thecounter derivative products and related securities acquired Trayport, which licensed a trading software product (known as GlobalVision) to third parties, including GFI, to trade global financial products.29 The parties argued that the share of supply test was not met as their activities could not, on any reasonable basis, be said to overlap. Third parties argued that the merging parties overlapped in the supply of trading services for certain non-oil energy
24
Jurisdictional and Procedural Guidance, para. 4.56. This was clarified by Melanie Johnson, Under Secretary of State for DTI, in a House of Commons debate on 30 October 2002, when she stated that “[t]he share of supply test can be useful in the context of horizontal mergers, but it… cannot be used to bring vertical mergers within the scope of the regime…” 26 Anticipated acquisition by Montauban of Simon Group plc, OFT decision of 2 August 2006. 27 Stevedoring is essentially loading and unloading the cargo of a ship. 25
28 29
Montauban/Simon, supra, para. 24. Completed acquisition by GFI Group Inc of Trayport Limited, OFT decision of 28 May 2008.
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products. The OFT concluded that the share of supply test was not met as the relationship between Trayport and GFI was purely vertical. (3)
In Atos/Countrywide, the merging parties overlapped in the supply of laryngectomy and tracheostomy medical appliances to all end-users, including patients with and without a prescription.30 The parties had an estimated share of supply of 70-80%, which was “almost entirely” derived from Countrywide’s activities (which were sales to patients with prescriptions).31 However, Atos had a small quantity of direct sales to private patients (who did not have a prescription). Despite the limited nature of the overlap, and the fact that it was generated in different sales channels, the CMA considered that the share of supply test was met.
(c) Merchant and captive supply. The CMA may also aggregate merging parties’ activities where one of the parties is not active in the merchant market and only supplies a particular product or service on a captive basis (i.e., within its own group). As described above, in Montauban/Simon, Simon offered stevedoring services at Humber Sea Terminal. Montauban did not offer stevedoring services to third parties, but provided stevedoring services to its own vessels. Therefore, in establishing jurisdiction, the OFT aggregated Simon’s merchant share of supply of stevedoring and Montauban’s captive share of supply of self-stevedoring. This provided the OFT with the required increment in the share of supply, even though Montauban and Simon were not active on the same economic market. (d) Joint ventures. Where the transaction in question is the creation of a joint venture and the UK turnover generated by the assets that will be contributed to the joint venture is less than £70 million, the share of supply of the enterprises ceasing to be distinct is usually calculated by reference to the activities of the joint venture alone (i.e., the parent companies’ shares of supply are not included).32 However, where the joint venture parents will remain active in the same areas as the joint venture, the CMA may determine that the share of supply test is met by aggregating the joint venture parents’ shares of supply in respect of the overlapping activities.33 The following decisions are illustrative of the Authorities’ approach in relation to joint ventures. (1)
In Stena/P&O, Stena and P&O proposed establishing a joint venture that would purchase P&O’s port assets and operations at Cairnryan and then oversee the financing and construction of new berths.34 After completion of the construction phase, it was intended that the JV would be limited to ensuring safe navigation at the port, maintaining the port infrastructure and providing
30 Completed acquisition by Atos Medical AB of Countrywide Supplies Limited, CMA decision of 7 August 2015. 31
Ibid., para. 15. Jurisdictional and Procedural Guidance, para. 4.55. 33 Ibid. 34 Anticipated joint venture between Stena and P&O to acquire Cairnryan Port, OFT decision of 22 August 2003. 32
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security. Stena intended to transfer its existing service to Belfast from its port at Stranraer to Cairnryan in 2005. The OFT found that the share of supply test was met on the basis that Stena and P&O overlapped in the supply of port services for freight in Great Britain for routes from Great Britain to Northern Ireland across the Irish Sea and that their combined share of supply exceeded 25%. (2)
In BBCW/Woolworths, BBC Worldwide (“BBCW”) and Woolworths proposed establishing a joint venture into which BBCW would transfer its video publishing activities (excluding its children’s, music and learning portfolios) and into which Woolworths would transfer the video publishing, music publishing and production activities of its wholly-owned subsidiary, VCI.35 The OFT determined that the share of supply test was met on the basis of the parents’ combined share of supply of TV programmes published on video.
(3)
In Odeon/Cineworld/Carlton Screen Advertising, Odeon and Cineworld, the UK’s top two cinema operators, established a 50/50 joint venture to acquire Carlton Screen Advertising (“CSA”), a provider of UK cinema screen advertising.36 CSA’s UK turnover was below £70 million and the joint venture did not result an increment to the share of supply of either film exhibition services or cinema advertising. Nevertheless, the OFT concluded that the share of supply test was met because the joint venture parents supplied more than 25% of UK cinema advertising screen time.
(4)
In Tradebe/Sita, the parties, which were active in providing services for the integrated collection, treatment and disposal of healthcare risk waste (“HRW”), formed a joint venture entity into which they transferred their HRW businesses in exchange for shares in the joint venture.37 The parties submitted that the OFT had jurisdiction over the transaction on the basis of the parties’ activities in the Birmingham that were transferred to the joint venture, where their combined share of supply exceeded 25%.
3.2.3
A Substantial Part of the UK
(a) The meaning of “substantial part”. As noted above, for a merger to fall within the Enterprise Act’s jurisdiction on the basis of the share of supply test, a merger must result in the enterprises ceasing to be distinct having a share of supply of at least 25% of any goods or services in the UK, or in a substantial part of the UK.38 Therefore, where the merging parties are not active on a national basis, or do not have overlapping
35
Anticipated joint venture between BBC Worldwide Limited and Woolworths Groups plc, OFT decision of 20 September 2004. 36 Anticipated acquisition by Odeon Cinemas Limited and Cineworld Cinemas Limited of Carlton Screen Advertising Limited, OFT decision of 1 July 2008. 37 Completed joint venture between Tradebe Environmental Services Limited and Sita UK Limited, OFT decision of 29 October 2013. 38 Section 23(3) and (4), Enterprise Act.
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activities that achieve a 25% combined share on a national basis, the merging parties must supply goods or services in at least a “substantial” part of the UK. The Enterprise Act provides no definition of a “substantial” part of the UK and in most mergers no difficult questions arise regarding whether the share of supply test is met in relation to a substantial part of the UK. The leading case in this area is the House of Lords’ judgment in South Yorkshire Transport.39 In March 1990, the Secretary of State referred to the MMC the acquisition by South Yorkshire Transport (“SYT”) of a number of companies operating local bus services in South Yorkshire, as well as in parts of Derbyshire and Nottinghamshire. In order to establish whether a relevant merger situation had arisen, the MMC had to determine whether SYT supplied at least 25% of local bus services in a substantial part of the UK (as it clearly did not supply 25% of local bus services on a national basis). The MMC determined that the area in which SYT supplied local bus services was a substantial part of the UK on the basis that it: (i) constituted 1.65% of the total area of the UK, containing 3.2% of the total population and 4.04% of the total vehicle mileage,40 and (ii) included Sheffield, the third largest metropolitan district in England by population, as well as towns such as Barnsley, Doncaster, Rotherham and Chesterfield. It was also noted that in addition to traditional industries such as mining and steel, the area included a range of other manufacturing and service activities, significant academic and sports facilities, and parts of the Peak District.41 Following the MMC’s conclusion that the merger operated against the public interest, SYT appealed the MMC’s finding that the geographic area concerned constituted a substantial part of the UK. At first instance, Otton J. upheld the parties’ application, determining that the geographic area was not a substantial part of the UK and, on the basis that the MMC had acted without jurisdiction, concluded that the recommendations of the MMC were unlawful.42 The MMC appealed this decision to the Court of Appeal, which dismissed the application by a majority.43 On the MMC’s application to the House of Lords, their Lordships allowed the appeal.44 Lord Mustill, rendering judgment for the majority, held that, in attempting to determine the meaning of the word “substantial” in this context, there were three potential methods of approach. First, an arithmetical test, comparing the reference area to the UK as a whole in terms of surface area, population and volume of economic activity. Secondly, an assessment in absolute terms of the size and importance of the area. Thirdly, a combination of these two kinds of criterion. In considering these approaches, Lord Mustill stated that:
39 R. v Monopolies and Mergers Commission Ex p South Yorkshire Transport Limited [1993] 1 W.L.R. 23. 40 South Yorkshire Transport Ltd acquisitions: A report of the merger situation, para. 2.6. 41
Ibid., para. 2.7. R. v Monopolies and Mergers Commission [1992] E.C.C. 1. 43 Lord Donaldson, Butler-Sloss L.J. and Nourse L.J. dissenting. 44 R. v Monopolies and Mergers Commission Ex p South Yorkshire Transport Limited [1993] 1 W.L.R. 23. 42
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“…although I readily accept that the [MMC] can, and indeed should, take into account the relative proportions of the [reference] area by comparison with the United Kingdom as a whole, as regards surface area, population, economic activities and (it may be) in some cases other factors as well, when reaching a conclusion on jurisdiction, neither each of them, nor all of them together, can lead directly to the answer. The parties could reasonably expect that since the test for which the respondents contend has been rejected another would be proposed in its place. I am reluctant to go far in this direction because it would substitute non-statutory words for the words of the [Fair Trading Act] which the [MMC] is obliged to apply and partly because it is impossible to frame a definition which would not unduly fetter the judgment of the [MMC] in some future situation not now foreseen. Nevertheless I believe that, subject to one qualification, it will be helpful to endorse the formulation of Nourse L.J… namely that the reference area must be of such dimensions as to make it worthy of consideration for the purposes of the Act [emphasis added]”.
Therefore, the key for the CMA in terms of determining whether an area is a “substantial part” of the UK is whether the area in question is “worthy of consideration” for the purposes of UK merger control. This provides the CMA with a considerable margin of appreciation on this point. The open question is whether a “substantial part” is determined by reference to the area’s characteristics or whether account should be taken of the goods or services in question. Some goods or services are more significant than others (e.g., grocery retailing is a significant part of household expenditure and local transportation services are significant to an area’s economy). This might suggest that an area such as Slough, for example, might be a substantial part of the UK for mergers in some sectors but not others. Similarly, some areas might be geographically small, but may be of considerable economic importance (e.g., ground-handling services at Heathrow or Gatwick, or perhaps film premieres in Leicester Square). The House of Lords’ decision in South Yorkshire clearly directs primary focus to the geographic area in question, but Lord Mustill also refers to the importance of local bus services themselves implying that the nature of the goods or services in question may be a relevant consideration in the assessment of whether a merger affects a substantial part of the UK. In practice, if a merger raises potential competition concerns, merging parties can take little comfort from the fact that their merger affects only a relatively small geographical area of the UK. The following cases, which involved areas that are substantially smaller than South Yorkshire, an area that was found not to be a substantial part of the UK by the High Court and by the Court of Appeal, illustrate the CMA’s margin of appreciation in this regard. (1)
In Netto/Co-op, the CMA considered that the Doncaster local authority area was a substantial part of the UK, which was the only local area where the parties’ share of supply exceeded 25%.45
(2)
In Co-op/Budgens, the CMA considered that the acquisition by Co-op of a single mid-sized Budgens grocery store in Holbeach, Lincolnshire, met the
45
Anticipated acquisition by Netto Limited of three grocery stores from Co-operative Group Limited, CMA decision of 25 February 2016.
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share of supply test on the basis that Co-op would have a share of at least 25% of mid-sized grocery stores in Lincolnshire.46 (3)
In Tesco/former Co-op store in Slough, Tesco acquired a single Co-op store on the Uxbridge Road in Slough qualified for investigation.47 Without further comment, the OFT stated that the share of supply test was satisfied.48 Following the referral of the transaction to the CC, the CC noted that Tesco’s national share of supply was 31% and that the merger led to an accretion of this share (the CC also noted that Tesco did not challenge the OFT’s finding that the share of supply test was met).49 In addition, the CC stated that Tesco’s share of sales from grocery stores exceeded 25% in the London Borough of Slough and that the merger resulted in an accretion of that share.50 The CC stated that the “Borough of Slough represents a ‘substantial part of the United Kingdom’ for the purposes of section 23(3) of the [Enterprise] Act, having regard to such considerations as population and economic factors.”51
(4)
In CineWorld/Hollywood Green Leisure Park, the OFT followed the CC’s lead in Tesco/former Co-op store in Slough and concluded that if the Borough of Slough was a substantial part of the UK, then so was the London Borough of Haringey.52 The OFT noted that whilst the Boroughs of Haringey and Slough are of a similar geographic size, the population of Haringey is 80% larger than that of Slough. In both cases, the choice of a London Borough as the relevant lens was a pragmatic one based on identifying the local political boundaries within which the direct retail overlap occurred to aid the description of the local area.53
46
Anticipated acquisition by Lincolnshire Co-operative Limited of a Budgens store in Holbeach, Lincolnshire, from Musgrave Retail Partners GB Limited, CMA decision of 18 December 2014. 47 Completed acquisition by Tesco plc of the Co-operative Group (CWS) Ltd store at Uxbridge Road, Slough, OFT decision of 19 April 2007. 48
This was, presumably, a result of the fact that jurisdiction was not contested by the parties as Tesco had a national share of supply exceeding 25%, which would have been increased (if only marginally) by the single store in Slough. 49 Tesco plc and the Co-operative Group (CWS) Limited, a report on the acquisition of the Cooperative Group (CWS) Limited’s store at Uxbridge Road, Slough, by Tesco plc, para. 4.5. 50 Ibid., para. 4.6. 51 Ibid. The CC did not explain why it chose to describe the Borough of Slough as the relevant reference area for determining the issue of whether the share of supply test was met, and it is worth nothing that this was not necessary to assert jurisdiction based on share of supply, nor did the Borough correspond to the geographic scope of the market concerned (which was a 10 minute drive-time isochrone around the former Co-op store). 52 Anticipated acquisition by Cineworld Group plc, through its subsidiary Cine-UK Limited, of the cinema business operating at the Hollywood Green Leisure Park, Wood Green, OFT decision of 17 March 2008, paras. 10-13. 53 This case was abandoned by the merging parties following its referral to the CC. As a result, the CC made no finding as to jurisdiction.
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(5)
In Stagecoach/Eastbourne, Stagecoach acquired the share capital of both Eastbourne Buses Limited, a supplier of local bus services in Eastbourne, Hailsham and East Grinstead, and that of Cavendish Motor Services, which also supplied local bus services in Eastbourne and Hailsham.54 In concluding that Eastbourne was a substantial part of the UK, the OFT noted that: (i) the population of Eastbourne is approximately 95,000 (significantly less than 1% of the total UK population); (ii) Eastbourne has a small geographic area of only 44.2km²; (iii) Eastbourne is not of particular geographic or financial importance; and (iv) the Eastbourne local bus market was worth only £6.22 million. The OFT added that “Eastbourne appears to have a vibrant tourism economy, receiving approximately four million visitors each year.”55
(6)
In Stagecoach/Preston, Stagecoach acquired Preston Bus Limited, which operated from a depot in Preston with 95 buses and 249 staff.56 The Borough of Slough was again the OFT’s population benchmark of choice. On reference, the CC concluded that Preston “covers an area of 142km² and has a population of 132,000. The Great Preston area, including the districts of South Ribble and Chorley covers an area of 458km² and has a population of 340,000. Preston was granted ‘city’ status in 2002 and is the commercial and administrative centre of Lancashire. With over 32,000 students, its university is one of the largest in the UK.”57
(b) Non-contiguous reference areas. The share of supply test may also be applied to non-contiguous geographic locations.58 This is illustrated by the following cases. In Archant/INM, Archant, a publisher of local and regional newspapers and magazines, acquired Independent News & Media (“INM”), an Irish-based international communications group that owned, inter alia, five London local newspaper divisions.59 The turnover of these five London divisions was £16.5 million and, as a result, the turnover test was not met. However, the OFT found that the share of supply test was met on the basis that the parties’ overlapping local newspaper activities exceeded 25% of supply in the contiguous London boroughs of Havering, Barking & Dagenham, and Redbridge.60 Alternatively, the OFT found that the parties’ combined share of supply exceeded 25% of the total circulation of free and paid-for local newspapers in the wider
54
Completed acquisition by Stagecoach Group plc of Eastbourne Buses Limited, and Cavendish Motor Services, OFT decision of 13 May 2009. 55 Ibid., para. 10. 56 Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009, para. 10. 57 A report of the completed acquisition by Stagecoach Group plc of Preston Bus Limited, 11 November 2009, para. 3.13. 58 Jurisdictional and Procedural Guidance, para. 4.62 and Merger Assessment Guidelines, para. 3.3.7. 59 Completed acquisition by Archant Limited of the London Regionals Division of Independent News & Media plc, OFT decision of 29 April 2004. 60 Ibid., para. 5.
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contiguous area of the City, Islington, Haringey, Hackney, Tower Hamlets, Newham, Waltham Forest, as well as Havering, Barking & Dagenham, and Redbridge.61 In respect of this wider area, the OFT noted that it also included both the City and the Docklands area, which have international economic significance, as well as the Stratford area, which represents significant potential growth for local newspaper advertising. The OFT also noted that these areas may be considered to be of social significance due to the distinctive multicultural communities of East London. On this basis, the OFT concluded that “it is reasonable to consider any delineation of a contiguous area – whether restricted to three London boroughs… or broadened to the wider area of north-eastern London… as being of sufficient size, character and importance to be worth consideration for the purposes of UK merger control and, accordingly, a substantial part of the UK.”62 The OFT referred this merger to the CC. In the CC’s consideration of whether the share of supply test was met, it regarded the area of the five London regional divisions in which the newspaper titles that were the subject of the merger were distributed to be a substantial part of the UK, on the basis that the population of over 15 years old (the normal measure of newspaper readership) exceeded 2.5 million, which was 5.2% of the total UK population over 15 years of age.63 The CC regarded this factor, in itself, to be sufficient to for the area to be considered “substantial”. The CC also noted that the distribution area constituted 700km² of Inner and Outer London, or 44.6% of the whole of Inner and Outer London, and that this area’s “gross value added” was £146 billion or 89.9% of the total gross value added of London as a whole.64 In respect of this reference area not being contiguous, the CC stated that: “…the circulation or distribution area of the London Regionals Division as a whole does not constitute an undivided geographic area. The question then arising is whether a divided geographic area could constitute a ‘part’ of the UK. In South Yorkshire Transport, Lord Mustill focused on the meaning of ‘substantial’ rather than on the meaning of ‘part’. Nonetheless, we believe that this approach to construction… is very helpful in addressing the present question. In our view, and in the context of the [Enterprise] Act, no useful purpose would be served by restricting the meaning of ‘part’ to an undivided geographical area. On the contrary, such a restrictive interpretation would be irrational and inimical to the purposes of the [Enterprise] Act.”65
The CC continued: “[f]or example, a merger may well have effects within two or more specific localities. None of the localities, taken alone, could reasonably be regarded as a substantial part of the UK, yet the
61
Ibid. Ibid., para. 7. 63 Archant Limited and the London newspapers of Independent News and Media Limited, a report on the acquisition by Archant Limited of the London newspapers of Independent News and Media Limited, October 2003. 62
64 65
Ibid., Appendix C, para. 26. Ibid., Appendix C, para. 27.
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total geographical area would indisputably be substantial. If the localities happened to be contiguous, and the share of supply test in respect of the undivided geographic area [was met], even if not in respect of each of the localities taken alone, the CC would have jurisdiction under the [Enterprise] Act. However, the economic significance of the merger, in terms of substantial lessening of competition, could well be of the same order, whether or not the localities were separated. If a restrictive interpretation of ‘part’ were adopted, the CC’s jurisdiction would depend upon a fortuitous factor, and mergers of sufficient importance to be worthy of investigation, and which were comparable to those that would be or had been investigated, would escape investigation under the [Enterprise] Act. We do not believe Parliament intended such an outcome.”66
In Lloyds/Independent Pharmacy Care Centres, Lloyds Pharmacy (“Lloyds”), a subsidiary of Celesio AG, which also owned the pharmaceutical wholesaler AAH, acquired Independent Pharmacy Care Centres (“IPCC”), which comprised 34 retail pharmacies and one drug store, principally concentrated in Greater Manchester, Lincolnshire, Cheshire, Derbyshire and the West Midlands.67 The parties submitted that the share of supply test was met in respect of the supply of pharmacy services within five individual Primary Care Trusts (“PCTs”) in which the parties’ combined shares ranged between 25% and 34.3%. These PCTs were Sandwell, South Birmingham, Heywood, Middleton & Rochdale, North East Lincolnshire and North Lincolnshire. The parties submitted that these five PCTs could be considered in aggregate to be a “substantial” part of the UK on the ground that the population of the five PCTs accounted for 2% of the UK population and 2.5% of the population in England, respectively. The total area covered by the PCTs accounted for about 1% of England’s total area. Within each of the PCTs, health services were offered to the population by between 35 and 75 GP surgeries and in four out of the five PCTs there was also a hospital. The OFT could see no reason “to insist upon a principle of geographic contiguity in respect of the five PCT areas in question for purposes of the share of supply test” and therefore considered them, in aggregate, to constitute a substantial part of the UK.68 In Asda/Co-op, the parties submitted, and the CMA accepted, that the acquisition by Asda of five grocery stores and three petrol filling stations from Co-op qualified for investigation on the basis that Asda’s post-merger share of supply would exceed 25% in (i) the North West region for one-stop stores and for one-stop stores and mid-sized stores; (ii) Greater Manchester for one-stop stores and for one-stop stores and mid-sized stores; and (iii) Bridgend local authority area for one-stop stores and for one-stop stores and mid-sized stores.69 The CMA considered that, individually and collectively, these areas accounted for a substantial part of the UK. (c) Geographical nexus between the reference area and the area of potential substantive concern. A question arises as to whether there needs to be a geographical 66
Ibid., Appendix C, para. 28. Anticipated acquisition by Lloyds Pharmacy Limited of Independent Pharmacy Care Centres, OFT decision of 8 June 2007. 68 Ibid., para. 6. 69 Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 28 November 2014, para. 12. 67
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nexus between the reference area and the area in which the CMA believes that there might be potential substantive concerns. This issue was considered in Vue/A3.70 In this case, Vue, a cinema exhibitor with 42 cinemas across the UK, acquired A3, including its subsidiary, Ster Century, which owned and operated cinemas in Basingstoke, Cardiff, Edinburgh, Leeds, Norwich and Romford. Vue argued that the share of supply test was not met on the basis that neither on a national basis, nor in any local area in which the parties had overlapping activities, was the parties’ combined share of supply 25% or more. Nevertheless, the OFT established that the share of supply test was met on the basis that, post-merger, Vue would supply more than 25% of all cinema seats and screens in Edinburgh, which was considered to be a substantial part of the UK. However, the OFT also stated that “the share of supply test is equally met on the basis of aggregating all local areas in which the merger created an overlap.”71 Vue argued that there had to be a nexus between the reference area used for the share of supply test and the area to which any duty to refer related (i.e., an area in which there was found to be a substantial lessening of competition). The OFT stated that the Enterprise Act imposed “no requirement that the market or markets in question [where there might be a substantive concern] should form a substantial part of the UK nor that they should be connected with the area in which the share of supply test is met.”72
3.2.4
Geographical Allocation of Supply
The Enterprise Act provides no specific rules on determining whether, and to what extent, an enterprise’s activities should be deemed to be in the UK for the purposes of the share of supply test. The OFT has indicated that, as a general matter, it will be guided by the European Commission’s Consolidated Jurisdictional Notice.73 Accordingly, the general rule in respect of the geographical allocation of supply is that supply should be allocated to the location of the customer at the time of the transaction.74 Therefore, the supply of goods and services will be allocated to the UK where they are provided to customers located in the UK.75 This general rule should apply equally to the sale of goods and the provision of services. Where the location of the customer at the time of the transaction and the location to which the goods or services are to be provided are not the same, in accordance with the principles set out in the Consolidated Jurisdictional Notice, supply should usually be allocated to the location where competition with alternative suppliers takes place.76 70
Completed acquisition by Vue Entertainment Holdings (UK) Limited of A3 Cinema Limited (including its subsidiary, Ster Century (UK) Limited), OFT decision of 23 September 2005. 71 Ibid., para. 4. 72 Ibid. Note that whilst the share of supply test requires that the enterprises ceasing to be distinct have a combined share of supply of at least one-quarter in at least a substantial part of the UK, section 22 of the Enterprise Act does not impose such a territorial burden on market(s) in which the CMA finds a substantial lessening of competition. 73 Jurisdictional and Procedural Guidance, para. 4.58, footnote 79. 74 Consolidated Jurisdictional Notice, para. 196. 75 76
Jurisdictional and Procedural Guidance, para. 4.58. Consolidated Jurisdictional Notice, para. 197.
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This location will often also be the location where the characteristic action under the contract takes place (i.e., where the service is provided or the good is delivered). Therefore, the fact that a supplier is located in the UK is not conclusive in relation to the question of whether the supplier’s services are provided in the UK. The CMA will apply these rules in a “flexible and purposive” way.77 In cases of sales to multinational companies, the CMA will look to the location of the procurement decision, irrespective of a company’s place of incorporation, domicile or principal place of business.78 Accordingly, supply will be allocated to the UK if the “presumptive location” of the procurement decision was made by a business unit located in the UK. However, the CMA has specified that certain strategic procurement decisions may be made at a multinational company’s headquarters, and therefore this may be taken to be the appropriate location for the allocation of supply, even if the procurement decision was made elsewhere.79 Finally, in cases of services with a foreign component that are supplied to UK consumers, such as package holidays, supply will generally be allocated to the UK if both the procurement action took place in the UK and it is appropriate to deem the UK as the location in which competition took place for that customer.80 The decision on the allocation of supply in these cases will often turn on whether the service in question was primarily directed at UK consumers, as opposed to being a service that is generally available on the internet to customers of many different nationalities.
3.3 3.3.1
THE TURNOVER TEST
Enterprises to be Included in the Turnover Calculation
In determining whether the turnover test is satisfied, the relevant turnover to be considered is that of the “the enterprise being taken over.”81 The value of the UK turnover of the enterprise being taken over is determined by taking the total value of the UK turnover of the enterprises ceasing to be distinct and deducting either: (i) the UK turnover of any enterprise that continues to be carried on under the same ownership and control; or (ii) if no enterprise continues to be carried on under the same ownership and control, the UK turnover of the enterprise with the highest UK turnover.82 In practice, this general rule is applied as follows.
77
Jurisdictional and Procedural Guidance, para. 4.58. Ibid., para. 4.59. See Anticipated merger between NYSE Group, Inc. and Euronext N.V., OFT decision of 9 October 2006, para. 6, where the OFT considered it reasonable to regard secondary listing services as being supplied in the UK where the companies have their head office in the UK since that is where the relevant procurement decision was likely to have been made. 79 Jurisdictional and Procedural Guidance, para. 4.59. 80 Ibid., para. 4.60. 78
81 82
Section 23(1)(b), Enterprise Act. Section 28(1), Enterprise Act.
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(a) Transactions where at least one party remains under the same ownership and control. There are two main scenarios where, post-merger, at least one party remains under the same ownership and control: (i) in the straightforward acquisition structure where enterprise A acquires enterprise B; and (ii) where two or more enterprises form a joint venture to which they contribute certain of their assets or businesses. In the first scenario, enterprise A remains under the same ownership and control as pre-merger. As a result, its UK turnover is deducted and therefore the UK turnover of the target, enterprise B, is the applicable turnover.83 Similarly, if this scenario is extended, such that enterprise A was acquiring more than one target company, enterprises B and C, the same principles would apply. Having identified the appropriate UK turnover of enterprises A, B and C, the UK turnover of enterprise A, as the entity remaining under the same ownership and control post-merger, would be deducted and the applicable turnover would be that of enterprise B plus enterprise C. In the second scenario, where two or more enterprises form a joint venture incorporating certain of their assets or businesses, each parent company ceases to be distinct from the business that it contributes to the joint venture, but both of the parent companies remain under the same ownership and control as prior to the merger. In these circumstances, the applicable turnover is the sum of the turnover of each of the assets or businesses that are contributed by the parent companies.84 (b) Transactions where none of the parties remains under the same ownership and control. In transactional structures where none of the enterprises ceasing to be distinct remains under the same ownership and control post-merger, the applicable turnover is calculated by taking the turnover of each of the parties ceasing to be distinct and deducting the turnover of the enterprise with the highest UK turnover. This may occur in cases such as full mergers, where neither enterprise ceasing to be distinct remains under the same ownership and control, post-merger. In this scenario, if enterprise A and enterprise B both have UK turnover, the applicable turnover would be the UK turnover of enterprise A plus enterprise B minus the enterprise with the highest UK turnover.85 In transactional structures with three or more parties, the same formula is applied. Accordingly, if enterprises A, B and C agree to form a joint venture into which they propose contributing all of their assets such that none of these companies would remain under the same ownership and control post-merger, the applicable turnover would be the sum of the UK turnover of enterprise A plus enterprise B plus enterprise C minus the enterprise with the highest UK turnover.86 So, if enterprise A had the highest UK turnover, the applicable turnover would be the sum of enterprise B’s UK turnover plus enterprise C’s UK turnover.
83 84 85 86
This is illustrated at Figure 1, para. 4.50 of the Jurisdictional and Procedural Guidance. Ibid., Figure 2. Ibid., Figure 3. Ibid., Figure 4.
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3.3.2
Calculation of Turnover
The Enterprise Act itself does not contain details as to how turnover should be calculated or which undertakings should be taken into consideration for the purposes of calculating turnover. These rules are contained in the Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003 (the “Merger Fees and Turnover Order”), which came into force on 20 June 2003. This is now supplemented by guidance set out in Annex B of the Jurisdictional and Procedural Guidance.87 The following principles are relevant to the calculation of turnover. (a) Ordinary activities. The applicable turnover of an enterprise, other than an enterprise that is a credit institution, financial institution or insurance undertaking, shall be limited to the amounts derived from the sale of products and the provision of services, falling within the ordinary activities of the enterprise, to businesses or consumers in the UK, net of any sales rebate, value added tax or any other tax directly related to turnover.88 The calculation of turnover for these purposes should be interpreted in accordance with generally accepted UK accounting principles and practices.89 (b) The relevant time-period. The relevant period for calculating the applicable turnover is the previous “business year” of the enterprise in question.90 For completed mergers, the CMA will take into consideration the turnover for the last financial year prior to the enterprises in question having ceased to be distinct. For anticipated mergers, the CMA will take into consideration the turnover for the financial year prior to the date on which the parties notified the merger to the CMA. Typically, this will be a 12-month period, but it may be any period of more than six months in circumstances where, for example, a business has only been recently formed.91 If the preceding financial year is not a period of 12 months, then the turnover for a full financial year is calculated on a pro rata basis. By way of illustration, the Jurisdictional and Procedural Guidance provides the example of a newly incorporated enterprise that has been in business for nine months and generated turnover of £54 million. The turnover for the full financial year would then be £72 million (i.e., £54 million / 9 x 12).92 (c) Adjustments to turnover in the preceding business year. Once the appropriate amount of turnover for the last full business year has been calculated, 87 This guidance was previously set out in the OFT’s Calculation of Turnover Guidance Note for the purposes of Part 3 of the Enterprise Act 2002. 88 Schedule to the Merger Fees and Turnover Order, para. 3, and Jurisdictional and Procedural Guidance, Annex B, para. B.11. 89 Schedule to the Merger Fees and Turnover Order, para. 2, and Jurisdictional and Procedural Guidance, Annex B, para. B.11. 90 Jurisdictional and Procedural Guidance, Annex B, para. B.11. 91
See Merger Fees and Turnover Order, para. 2(c) where “business year” is defined as “a period of more than six months in respect of which an enterprise or, if applicable, the business of which it forms part, prepares or is required to prepare accounts.” 92 Jurisdictional and Procedural Guidance, Annex B, para. B.9.
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adjustments may be made to this amount to reflect any acquisition or divestment since the end of the last financial year that may have a “significant impact” on the turnover of the enterprise ceasing to be distinct.93 Therefore, where the enterprise in question has acquired an additional business since the end of the last financial year, it will normally be appropriate for the UK turnover attributable to that business to be added to the turnover for the last full business year. Conversely, where the enterprise in question has sold a business since the end of the last financial year, it will normally be appropriate for the UK turnover attributable to that business to be deducted from the base amount. The Merger Fees and Turnover Order does not define “significant impact” on the turnover of the enterprise ceasing to be distinct but, in practice, the CMA would usually only require adjustments to the last business year’s turnover to be made if this would be expected to affect the question of jurisdiction or the level of the merger fee to be paid.94 Therefore, it should not usually be necessary for merging parties to calculate the precise level of their UK turnover where, irrespective of any sales or acquisitions made since the end of the last business year, their turnover was in excess of £70 million. (d) Group turnover. Where an enterprise that ceases to be distinct is part of a group, the turnover of all the enterprises that comprise that group should be aggregated to the extent that the enterprises are under common ownership or control and will all cease to be distinct.95 Enterprises will be treated as being under common ownership or control where they are: (i) enterprises of interconnected bodies corporate; (ii) enterprises carried on by two or more bodies corporate, of which one and the same person or group of persons has control; and (iii) an enterprise carried on by a body corporate and an enterprise carried on by a person or group of persons having control of that body corporate.96 In addition, in the event that the enterprise that is ceasing to be distinct is able materially to influence the policy of another enterprise, even where it does not have a controlling interest in that enterprise, it may be treated as having control over it and its turnover may be aggregated to that of the enterprise ceasing to be distinct.97 The entire turnover of the businesses in which the enterprise that ceases to be distinct has material influence should be included in the calculation of aggregate turnover (i.e., there is no discount because the enterprise has less than a controlling interest).98 (e) Acquisition of part of a company. Where a transaction involves the acquisition of only part of an enterprise, such as certain assets or one of several businesses, only the
93
Merger Fees and Turnover Order, para. 11(3). Jurisdictional and Procedural Guidance, Annex B, para. B.10. 95 Schedule to the Merger Fees and Turnover Order, para. 4. Guidance, Annex B, para. B.15. 96 Schedule to the Merger Fees and Turnover Order, para. 5. Guidance, Annex B, para. B.15. 97 Schedule to the Merger Fees and Turnover Order, para. 6. Guidance, Annex B, para. B.16. 98 Jurisdictional and Procedural Guidance, Annex B, para. B.16. 94
Jurisdictional and Procedural Jurisdictional and Procedural Jurisdictional and Procedural
104
UK Merger Control
UK turnover relating to the parts of the enterprise being acquired should be taken into account for calculating the applicable turnover.99 (f) Exclusion of intra-group sales. Aggregate group turnover does not include amounts that are derived from the sale of goods or the provision of services between enterprises that are under common ownership or control.100 Therefore, only sales to independent third parties need to be taken into account. There is one caveat to this general exclusion. The CMA may take into account sales that were previously internal to a group but where, as a result of the transaction in question, they will become an external transaction.101 In these circumstances, the CMA may treat the previously internal sales as applicable turnover for the purposes of determining jurisdiction. Where such internal sales did not result in any turnover, or if the CMA believes that the turnover attributed to such sales does not reflect open market value, the CMA may attribute an appropriate value to those sales.102 In practice, the CMA is likely to exercise this discretion only where the inclusion of such turnover might determine the issue of jurisdiction or affect the level of the merger fee to be paid.103 (g) Inclusion of aid. Turnover includes any aid granted by a public body to a business that relates to one of the ordinary course of business activities if the business is itself the recipient of the aid and if the aid is directly linked to the sale of products or the provision of services by the business and is therefore reflected in the price.104 (h) Geographic allocation of turnover. Where international companies have generated turnover in multiple jurisdictions from customers located throughout the world, questions arise as to how to determine which turnover should be allocated to the UK. The Jurisdictional and Procedural Guidance states that the CMA will usually follow the principles set out in the Commission’s Consolidated Jurisdictional Notice.105
99 This principle is implicit in the fact that the turnover test applies only to the “enterprises” that cease to be distinct, and as set out above in Chapter 3, an “enterprise” may constitute less than an entire company. It may constitute part of a company or simply certain assets of a company. 100
Schedule to the Merger Fees and Turnover Order, Merger Fees and Turnover Order, para. 8. Jurisdictional and Procedural Guidance, Annex B, para. B.19. 101
Schedule to the Merger Fees and Turnover Order, Merger Fees and Turnover Order, para. 9. Jurisdictional and Procedural Guidance, Annex B, para. B.21. 102 Schedule to the Merger Fees and Turnover Order, Merger Fees and Turnover Order, para. 9. Jurisdictional and Procedural Guidance, Annex B, para. B.21, provides the example of an enterprise that is part of a vertically integrated process such as a mill supplying flour to a downstream baking operation. Pre-merger, raw flour may be supplied by the mill to the baking operation at no cost or at a cost that is less than open market value. In this case, if only the mill were being sold, the turnover attributable to the milling operation may be artificially low. In these circumstances, the CMA might exercise its discretion to take into consideration the pre-merger supplies of flour to the baking operation in calculating the applicable turnover. 103 Jurisdictional and Procedural Guidance, Annex B, para. B.21. 104 Schedule to the Merger Fees and Turnover Order, para. 13. Jurisdictional and Procedural Guidance, Annex B, para. B.11. 105 Jurisdictional and Procedural Guidance, para. 4.51, footnote 68.
The Share of Supply and Turnover Tests
105
Therefore, the general rule is that turnover is to be allocated to the country in which the customer is located at the time of the purchase.106 Often, this will be the country to which the product is delivered or in which the service is carried out. However, issues arise where the country in which the customer is located at the time of the purchase and the country in which the product is delivered or the service is carried out are not the same. In these circumstances, the Consolidated Jurisdictional Notice states that turnover should be allocated to the country in which competition for the product or service takes place. If a purchase is made over the internet, it may be difficult both to determine the location of the customer at the time of the purchase and to determine the country in which competition for the product or service takes place. In these circumstances, the Consolidated Jurisdictional Notice states that turnover should be allocated to the country in which the characteristic action under the contract is carried out. In respect of the sale of goods, delivery is typically the characteristic action under the contract and therefore the place of delivery may prevail over the location of the customer at the time of the purchase, particularly if the place of delivery is regarded as being the location where competition for the product/service takes place.107 In respect of the provision of services, the Consolidated Jurisdictional Notice envisages three principal scenarios:108 (i) where the service provider travels; (ii) where the customer travels; and (iii) where the service is provided without either the service provider or the customer having to travel. In the first two scenarios, turnover is allocated to the destination of the traveller as the location in which service is actually provided. In the third scenario, turnover is allocated to the location of the customer as generally being the location in which the service is provided. (i) Successive transactions. As set out above in Chapter 2, the Enterprise Act provides that where two or more transactions have occurred within a two-year period, the CMA may treat them as having taken place simultaneously on the date of the last transaction.109 This allows the CMA to aggregate multiple transactions so that merging parties are prevented from structuring their transactions so as to avoid the application of the Enterprise Act. This power could be exercised in a number of different scenarios including, for example, where the various businesses of an enterprise are acquired individually in a series of transactions, each of which falls below the turnover test, or where a first transaction falls below the turnover test, but a subsequent transaction does not. In cases where the CMA seeks to aggregate a series of separate transactions, the UK turnover of the businesses being acquired will be added together.
106 107 108 109
Consolidated Jurisdictional Notice, para. 196. Ibid., para. 199. Ibid. Section 27(5), Enterprise Act.
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(j) Treatment of foreign currencies. The turnover test is in pounds sterling. Accordingly, if it is necessary to convert foreign currencies, these should be converted at the exchange rate applicable at the date of the accounts.110
3.3.3.
Rules for Specific Sectors
Specific rules apply to the calculation of turnover for credit and financial institutions, and insurance companies. These rules are summarised below. (a) Credit and financial institutions. The applicable turnover of an enterprise that is a credit or financial institution is the sum of the following specified income by the branch or division of that institution located in the UK, after the deduction of value added tax and other tax directly related to those items: (i) interest income and similar income; (ii) income from securities, such as income from shares and other variable yield securities, from participating interests, and from shares in affiliated undertakings; (iii) commissions receivable; (iv) net profit on financial operations; and (v) other operating income.111 This is in line with the Commission’s method of calculating the turnover of credit and financial institutions112 and Council Directive 86/635/EEC.113 (b) Insurance undertakings. The applicable turnover of an enterprise that is, in whole or in part, an insurance institution is the value of the gross written premiums received from UK residents.114 This includes all amounts received and receivable in respect of insurance contracts issued by or on behalf of the undertaking, including outgoing reinsurance premiums, after the deduction of taxes and parafiscal contributions or levies charged by reference to the amounts of individual premiums or the total volume of premiums. Any income generated by an insurance institution that is not related to insurance is calculated in accordance with the general rules.
110
Jurisdictional and Procedural Guidance, Annex B, para. B.22. Ibid., Annex B, para. B.12. 112 Merger Regulation, Article 5 and Consolidated Jurisdictional Notice, para. 206 et seq. 111
113 114
OJ L372, 31 January 1986, pg 1. Jurisdictional and Procedural Guidance, Annex B, para. B.14.
Chapter 4 RELATIONSHIP WITH THE MERGER REGULATION 4.1 Introduction 4.2 Concentrations With an EU Dimension 4.2.1 Concentration 4.2.2 EU Dimension 4.3 The Commission’s Guiding Principles 4.3.1 Overview 4.3.2 More Appropriate Authority 4.3.3 One-Stop Shop 4.3.4 Legal Certainty 4.4 Referrals From the Commission to the CMA 4.4.1 Pre-Notification Referral Requests Under Article 4(4) (a) General principles (b) Legal requirements (c) Additional factors (d) Multiple referral requests (e) Partial referral requests (f) Factors considered by the CMA (g) Eligible transactions and action before filing Form RS (h) Form RS (i) CMA consideration of an Article 4(4) request (j) Commission decision on referral (k) CMA procedure following a referral back (l) Timing implications (m) Decisional practice (n) Review of the Article 4(4) referral mechanism (o) 2014 White Paper 4.4.2 Post-Notification Referral Requests Under Article 9
(a) (b) (c) (d) (e) (f)
General principles Legal requirements Partial referrals Procedure and timing Decisional practice Review of the Article 9 referral mechanism 4.5 Referrals From the CMA to the Commission 4.5.1 Pre-Notification Requests Under Article 4(5) (a) General principles (b) Legal requirements (c) Procedure and timing (d) The UK veto (e) Review of the Article 4(5) referral mechanism (f) 2014 White Paper 4.5.2 Post-Notification Requests Under Article 22 (a) General principles (b) Legal requirements (c) Other factors (d) Procedure and timing (e) Decisional practice (f) Review of the Article 22 referral mechanism (g) 2014 White Paper 4.6 Protection of Legitimate National Interests 4.6.1 General Principles 4.6.2 Procedure and Practice 4.7 Article 346 TFEU
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4.1
INTRODUCTION
As set out in Chapters 2 and 3, the Enterprise Act does not, as an initial matter, apply to mergers that fall within the jurisdiction of Council Regulation No 139/2004 (the “Merger Regulation”).1 The Merger Regulation applies to “concentrations” with an “EU dimension.”2 In addition, the Merger Regulation provides that no Member State shall apply its national legislation on competition to any concentration with an EU dimension.3 This ensures that mergers resulting in significant structural changes “beyond the national borders of any one Member State” will be reviewed, at least as an initial matter, by the European Commission in accordance with the application of the ‘one-stop shop’ system and in compliance with the principle of subsidiarity.4 Conversely, mergers that do not constitute a concentration with an EU dimension, but which constitute a relevant merger situation within the meaning of the Enterprise Act, initially fall within the CMA’s jurisdiction.5 However, the Merger Regulation includes certain mechanisms which allow for the jurisdiction of a transaction to be transferred from the Commission to the CMA, or vice versa. Such a transfer of jurisdiction may occur either at the pre-notification or the post-notification stage. There are five main situations in which such a transfer of jurisdiction may occur. These situations broadly fall into two categories: (i) transactions whose original jurisdiction is under the Merger Regulation and which the Commission may refer back to the CMA, either at the request of the CMA or the merging parties; and (ii) transactions whose original jurisdiction is under the Enterprise Act and which may be referred to the Commission by the CMA or at the request of the merging parties. These situations may be summarised as follows: (1)
The CMA, either on its own initiative or upon the invitation of the Commission, may request that a concentration with an EU dimension is referred back, in whole or in part, to the UK.6 This may occur if the CMA informs the Commission that a concentration threatens significantly to affect competition in a market in the UK that presents all the characteristics of a distinct market,7 or, whilst not threatening significantly to affect competition in
1
Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings. 2 Article 1(1), Merger Regulation. Whilst the Merger Regulation still refers to a “Community dimension”, since the coming into force of the Treaty on the Functioning of the EU on 1 December 2009, Commission decisions have referred to an “EU dimension” rather than a “Community dimension” and this convention has been followed in this chapter. 3 Article 21(3), Merger Regulation. 4 Recital 8, Merger Regulation. 5 See Chapters 2 and 3. 6 7
Article 9, Merger Regulation. Article 9(2)(a), Merger Regulation.
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that distinct market, affects competition in a market that does not represent a substantial part of the common market.8 (2)
The merging parties may inform the Commission at the pre-notification stage that a concentration with an EU dimension may significantly affect competition in a market within the UK that presents all the characteristics of a distinct market and should therefore be examined, in whole or in part, by the CMA.9 This referral mechanism was introduced on 1 May 2004 by Council Regulation (EC) No 139/2004. As with the referral mechanism under Article 9 of the Merger Regulation, this mechanism effects the transfer of a merger from the Commission to the CMA. However, under Article 4(4) of the Merger Regulation, the initiative for requesting the transfer of jurisdiction lies with the merging parties and not with the CMA. A key distinction between these referral mechanisms is that an Article 9 referral can only take place after a merger has been notified to the Commission whereas an Article 4(4) referral takes place at the pre-notification stage.
(3)
A concentration that does not have an EU dimension, but which falls within the Enterprise Act’s jurisdiction, may be referred to the Commission for consideration if, in addition to the UK, the merger falls to be assessed in at least two other Member States, and none of these Member States objects to jurisdiction being transferred.10 This referral mechanism was also introduced on 1 May 2004 by Council Regulation (EC) No 139/2004. Such a transfer of jurisdiction must be instigated by the merging parties at the pre-notification stage. This mechanism ensures that, in accordance with the ‘one-stop shop’ principle, mergers that affect multiple Member State jurisdictions may be reviewed by the Commission.
(4)
A concentration that does not have an EU dimension, but which affects trade between Member States, and threatens significantly to affect competition within the UK may be referred to the Commission by the CMA and potentially other affected Member States.11 It is not strictly necessary for such a transaction to fall within the Enterprise Act’s jurisdiction for the CMA to make such a referral request.
(5)
Member States are permitted to take appropriate measures in respect of concentrations with an EU dimension to protect “legitimate interests” that are not taken into consideration under the Merger Regulation as long as those interests are compatible with the general principles and other provisions of EU
8 9
Article 9(2)(b), Merger Regulation. Article 4(4), Merger Regulation.
10 11
Article 4(5), Merger Regulation. Article 22, Merger Regulation.
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law.12 Such legitimate interests include public security, plurality of the media and prudential rules.13 This chapter describes the concept of a concentration with an EU dimension, considers the Commission’s guiding principles in relation to referrals, and explains each of the different referral mechanisms, providing relevant examples of cases that have affected the UK.
4.2
CONCENTRATIONS WITH AN EU DIMENSION 4.2.1
Concentration
As an initial matter, the CMA is not permitted to apply the Enterprise Act to a concentration with an EU dimension.14 Accordingly, before notifying a merger to the CMA, the parties should determine whether their transaction falls under the Merger Regulation’s jurisdiction. In this regard, in outline terms, a concentration is deemed to have occurred where two or more undertakings merge, or where one or more undertakings acquires “control” over the whole or parts of one or more other undertakings.15 For these purposes, “control” is defined as the ability to exercise “decisive influence” over one or more undertakings.16
4.2.2
EU Dimension
A concentration has an EU dimension where the following thresholds are met: (1)
the combined aggregate worldwide turnover of all the undertakings concerned exceeds €5 billion;
(2)
each of at least two undertakings concerned has aggregate EU-wide turnover exceeding €250 million; and
(3)
each of the undertakings concerned does not achieve more than two-thirds of its EU-wide turnover within one and the same Member State.17
Alternatively, in order to take account of concentrations where the merging parties’ turnover falls below these levels but where, nevertheless, the concentration has a significant impact across several Member States, a concentration may also be considered to have an EU dimension where:
12 13 14
Article 21(4), Merger Regulation. Ibid.
Article 21(3), Merger Regulation. Article 3(1), Merger Regulation. 16 Article 3(2), Merger Regulation. A discussion of decisive influence is beyond the scope of this chapter but is discussed in detail in the Commission’s Consolidated Jurisdictional Notice. 17 Article 1(2), Merger Regulation. 15
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(1)
the combined aggregate worldwide turnover of all the undertakings concerned exceeds €2.5 billion;
(2)
the aggregate EU-wide turnover of at least two undertakings exceeds €100 million;
(3)
in each of at least three Member States, the combined aggregate turnover of the undertakings concerned exceeds €100 million;
(4)
in each of those three Member States, the aggregate turnover of each of at least two undertakings concerned exceeds €25 million; and
(5)
each undertaking concerned does not achieve more than two-thirds of its EUwide turnover within one and the same Member State.18
Subject to the rules concerning Article 4(4) referrals discussed below, concentrations with an EU dimension must be notified to the Commission on Form CO prior to their implementation.19 This typically occurs following the conclusion of an agreement, the announcement of a public bid or the acquisition of a controlling interest. However, notifications may also be made where the undertakings concerned demonstrate to the Commission’s satisfaction a good faith intention to conclude an agreement that would result in the creation of a concentration with an EU dimension, or, in the case of a public bid, where the acquirer has publicly announced an intention to make such a bid.20 On receipt of Form CO in respect of a particular transaction, the Commission distributes a copy to the relevant national competition authority (“NCA”) in each Member State. In addition to this mandatory notification to the Commission, the CMA prefers that merging parties bring to its attention any concentration with an EU dimension that involves UK companies or has an impact on UK consumers.21 The Jurisdictional and Procedural Guidance provides that the Secretary of State retains responsibility for UK policy on legislative initiatives in relation to the Merger Regulation and has responsibility for taking decisions relating to mergers falling within the Merger Regulation in respect of which the Secretary of State considers that there may be issues of UK national security at stake and other legitimate non-competition related interests under Article 346 of the Treaty on the Functioning of the European Union (“TFEU”).22
18
Article 1(3), Merger Regulation. Article 4(1), Merger Regulation. 20 Ibid. 19
21 22
Jurisdictional and Procedural Guidance, para. 18.12. Ibid., para. 18.5.
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4.3
THE COMMISSION’S GUIDING PRINCIPLES 4.3.1
Overview
The Commission Notice on Case Referral in respect of concentrations (the “Case Referral Notice”) states that the system of merger control established under the Merger Regulation, including the pre- and post-notification referral mechanisms, is consistent with the principles of subsidiarity enshrined in the TFEU.23 In this regard, decisions taken regarding the referral of mergers should take into account three core principles: (i) which is the more appropriate authority for carrying out the investigation; (ii) the benefits of the ‘one-stop shop’ system; and (iii) the importance of legal certainty regarding jurisdiction.24 The Case Referral Notice states that these factors are interlinked and the weight placed on each of them will vary depending on the circumstances of the particular case.
4.3.2
More Appropriate Authority
In principle, jurisdiction should only be transferred to another competition authority, whether that is the Commission or an NCA, where the competition authority to which the transaction is transferred is more appropriate “having regard to the specific characteristics of the case as well as the tools and expertise available to the authority.”25 The Case Referral Notice indicates that particular regard must be had to the locus of any impact on competition likely to result from the transaction, and that regard may also be had to the “administrative effort” that the contemplated transfer of jurisdiction might have (i.e., considerations of cost, time delay, legal uncertainty, and the risk of conflicting assessments should the transaction be reviewed by multiple authorities).26 In addition, the case for transferring jurisdiction is likely to be more compelling in circumstances where it appears that the transaction may result in a significant impact on competition.27
4.3.3
One-Stop Shop
The Case Referral Notice emphasises that regard must be had to the benefits inherent in the ‘one-stop shop’ nature of a review by the Commission as opposed to multiple NCAs, which is at the core of the Merger Regulation.28 The Case Referral Notice indicates that the ‘one-stop shop’ principle typically has the advantages of increasing “administrative efficiency, avoiding duplication and fragmentation of enforcement effort as well as potentially incoherent treatment (regarding investigation, assessment and possible remedies) by multiple authorities.”29 Moreover, it brings advantages to 23
Commission Notice on Case Referral in respect of concentrations, OJ C 56, 5 March 2005.
24
Case Referral Notice, para. 8. Ibid., para. 9. 26 Ibid. 27 Ibid., para. 10. 25
28 29
Ibid., para. 11. Ibid.
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businesses by reducing costs and administrative burdens and by eliminating the risk of conflicting decisions from NCAs operating under their own national merger control rules.30 The Case Referral Notice provides that the fragmentation of cases should be avoided unless it appears that multiple NCAs would be better placed to review the transaction than the Commission and that, in this regard, whilst partial referrals are possible under Article 4(4) and Article 9 (discussed below), it would normally be appropriate for an entire case to be dealt with by a single authority.31
4.3.4
Legal Certainty
The third of the Commission’s guiding principles concerns the importance of legal certainty of jurisdiction over a transaction. Accordingly, a transfer of jurisdiction should only be made where there is a “compelling reason” for departing from the transaction’s “original jurisdiction.”32 In particular, this should be the case in respect of post-notification referrals, where the impact on merging parties is at its greatest.33 The Case Referral Notice also states that where a pre-notification referral has been made (e.g., by way of Article 4(5) where, as discussed below, the transaction would not have an EU dimension but would be notifiable in at least three Member States), a postnotification referral should be avoided to the “greatest extent possible.”34 In respect of pre-notification referrals, the Case Referral Notice states that these should be restricted to cases in which it is relatively straightforward to determine the geographic scope of the market and/or the potential impact of the transaction on competition, so that decisions can be made promptly.35
4.4
REFERRALS FROM THE COMMISSION TO THE CMA 4.4.1
Pre-Notification Referral Requests Under Article 4(4)
(a) General principles. Since 1 May 2004, merging parties have been able to request that the Commission refers the whole or part of a concentration with an EU dimension to one or more Member States.36 Such a pre-notification request may be made only in respect of concentrations “the plans for which are sufficiently concrete” and the merging parties must have at least a “good faith intention” to carry out the transaction or, in the situation of public bids, to make such a bid.37 Following a referral of this kind, the merger in question would be assessed under the national competition laws of the Member State or Member States to which the transaction was referred. This process takes place prior to the notification of a merger to the Commission and the
30 31
Ibid. Ibid., para. 12.
32
Ibid., para. 13. Ibid. 34 Ibid. 35 Ibid., para. 14. 33
36 37
Article 4(4), Merger Regulation. Case Referral Notice, para. 66.
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referral request is made at the instigation of the merging parties (and not a Member State). Such a request must be made by means of a reasoned submission (known as Form RS). Article 4(4) referral requests must be considered from the perspective of both the Commission and the CMA. As explained below, each of the Commission and the CMA has the ability to deny an Article 4(4) request and both authorities must be in agreement for an Article 4(4) request to be effective. (b) Legal requirements. In order for a referral to be made by the Commission to one or more Member States pursuant to Article 4(4), the following two conditions must be fulfilled: (1)
there must be indications that the concentration may significantly affect competition in a market or markets; and
(2)
the market or markets in question must be within a Member State and present all the characteristics of a distinct market.38
In respect of the first requirement, an important factor for merging parties is the extent to which they must demonstrate that their transaction may significantly affect competition as, from a strategic perspective, parties may not wish to indicate to the Commission, prior to a filing having been made, that they believe their transaction may raise significant concerns.39 However, in this regard, the Case Referral Notice provides that the merging parties must demonstrate that the transaction is liable to have a potential impact on competition in a distinct market within a Member State, which may prove to be significant, and therefore justify close scrutiny.40 The Case Referral Notice specifies that merging parties are not required to show that their merger would be likely to result in a significant impediment to effective competition.41 In addition, recital 16 of the Merger Regulation specifies that “the undertakings concerned should not… be required to demonstrate that the effects of the concentration would be detrimental to competition.” Merging parties need only demonstrate that there are preliminary indications that the transaction may significantly affect competition and that any such indications would be without prejudice to the outcome of the Commission’s or the CMA’s investigation.42 However, merging parties should point to indicators that are generally suggestive of the existence of some competitive effects stemming from the transaction.43 In this regard, the existence of ‘affected markets’ within the meaning of Form RS would generally be considered sufficient.44 In respect of the second requirement, merging parties are 38
Ibid., para. 16.
39
As discussed below, this is one of the principal criticisms of the Article 4(4) referral mechanism. Ibid., para. 17. 41 Ibid. 40
42
Ibid. Ibid. 44 Form RS states that affected markets consist of relevant product markets where, in the EEA territory, in the EU, in the territory of the EFTA States, in any Member State or in any EFTA State: 43
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required to demonstrate that the geographic market in which competition may be affected is national or narrower than national.45 (c) Additional factors. In addition to the legal requirements under Article 4(4), merging parties should also consider the appropriateness of a referral request in the light of the Commission’s “guiding principles” for referral. (i) Appropriate authority. The Case Referral Notice emphasises the importance of the principle that mergers should be assessed by the most appropriate authority.46 It notes that transactions affecting a single Member State and affecting markets that are national or sub-national in scope are the most appropriate candidate cases for referral under Article 4(4).47 This is particularly the case where the relevant markets at issue are not a substantial part of the common market.48 In cases where the referral would be made to a single authority, a referral back also preserves the ‘one-stop shop’ principle.49 In respect of transactions that have been referred to the Authorities under Article 4(4), the vast majority have clearly involved markets that were sub-national and many were evidently not a substantial part of the common market. The following examples are illustrative: (1)
Boots/Alliance UniChem, involved the assessment of, inter alia, retail pharmacy markets, the geographic scope of which was considered to be a onemile radius around each pharmacy, and the transaction eventually resulted in Boots agreeing to divest 96 pharmacies in these local areas.50
(2)
Southern Cross/Cannon Capital, involved the assessment of residential and nursing care homes within a geographical radius of 3-10 miles (which corresponded to a 15-20 minute drive-time) and on the basis of local funding authorities.51
(a) two or more of the parties to the concentration are engaged in business activities in the same product market and the concentration will result in a combined market share of 20% or more; or (b) one or more of the parties to the concentration are engaged in business activities in a product market, which is upstream or downstream of a product market in which any other party to the concentration is engaged, and any of their individual or combined market shares at either level is 30% or more, regardless of whether or not there is any existing supplier/customer relationship between the parties to the concentration. 45 Case Referral Notice, para. 18. 46 Ibid., para. 19. 47 Ibid., para. 20. 48
Ibid. Ibid. 50 Anticipated acquisition by Boots plc of Alliance UniChem plc, OFT decision of 6 February 2006. 51 Completed acquisition of Southern Cross Healthcare Group Limited of Cannon Capital Ventures Limited, OFT decision of 16 December 2005. 49
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(3)
London and South Eastern Railway/Kent Rail Franchise,52 Govia/London Rail Concession,53 and Govia/West Midlands54 all involved the consideration of point-to-point passenger transport overlaps.
(4)
O2/The Link, involved the assessment of the sale of mobile connections and handsets on a national and local basis, with an assessment being conducted on a three-mile radius for market and provincial towns, and a one-mile radius for city centres.55
(5)
Dairy Crest/Arla Foods included, inter alia, the doorstep delivery to customers of processed milk and cream, the frame of reference for which was individual milk rounds.56
(6)
Inchcape/European Motor Holdings involved the assessment of local markets for the supply of after-sales servicing and repairs for passenger cars and light commercial vehicles.57
(7)
Odeon/Cineworld/Carlton Screen Advertising included an assessment of film exhibition services on the basis of a drive-time of approximately 20 minutes.58
(8)
Advent/Priory, involved the acquisition of independent hospitals and care homes, which the OFT assessed on the basis of catchment areas for care homes for the elderly of three miles for urban areas, five miles for suburban areas and 10 miles for rural areas (with a wider catchment area for care homes for adults with a learning difficulties).59
(9)
Anglo American/Lafarge, involved the establishment of a joint venture between businesses supplying construction materials, and where the parties principally overlapped in the supply of aggregates, asphalt, ready-mix concrete (“RMX”) and cement. The OFT assessed the supply of each of these materials on a local
52
Anticipated acquisition by London and South Eastern Railway, a wholly owned subsidiary of Govia Limited, of the Integrated Kent Rail Franchise, OFT decision of 28 March 2006. 53 Anticipated acquisition by Govia Limited (through its wholly owned subsidiary, North London Orbital Railway Limited) of the London Rail Concession, OFT decision of 13 December 2006. 54 Completed acquisition by Govia Limited of the West Midlands passenger rail franchise, OFT decision of 29 November 2007. 55 Completed acquisition by O2 UK Limited of the Link Stores Limited, OFT decision of 10 October 2006. 56 Completed acquisition by Dairy Crest Group plc of the doorstep and depot based middle ground milk businesses of Arla Foods UK plc, OFT decision of 26 October 2006. 57 Completed acquisition by Inchcape plc of European Motor Holdings plc, OFT decision of 17 May 2007. 58
Anticipated acquisition by Odeon Cinemas Limited and Cineworld Cinemas Limited of Carlton Screen Advertising Limited, OFT decision of 1 July 2008. 59 Completed acquisition by Advent International Corporation of Priory Investment Holdings Limited, OFT decision of 19 April 2011.
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basis with catchment areas of 30 miles (aggregates and asphalt),60 and 10 miles (RMX), and on a regional (and national) basis for cement. (10)
Carlyle/Palamon involved the acquisition of dental practices and in relation to the supply of dentistry, the OFT primarily reviewed the merger on the basis of local isochrones of 2.5 miles within the M25, five miles for urban conurbations and eight miles for rural conurbations.61
(11)
Shell/Rontec involved the acquisition of petrol stations and the OFT primarily reviewed the merger on a local basis using drive-time isochrones of 10 minutes in urban areas and 20 minutes in rural areas.62
(12)
Jewson/Build Centre involved a merger between general builders merchants and the OFT assessed the merger on the basis of local catchment areas of three miles within the M25 and catchment areas of 10 miles outside the M25.
(13)
Mueller/Dairy Crest involved, inter alia, the supply of fresh milk to national multiples, which was assessed on a national and regional basis, with the CMA finding a realistic prospect of a substantial lessening of competition in the Severnside catchment areas, which included parts of the South West, Wales, the Midlands and the South of England.63
Other cases, however, were less clear-cut. In G4S/Global, for example, the parties overlapped in the supply of care and justice services.64 The OFT considered the markets to be at least as wide as Great Britain and the OFT acknowledged the parties’ arguments that the market may be wider than Great Britain and that suppliers outside Great Britain may be potential entrants, if not part of a wider market. (ii) One-stop shop. Merging parties must consider the impact of a referral request on the ‘one-stop shop’ principle. In cases where a referral under Article 4(4) would involve the transfer of the whole of a transaction to a single Member State, the ‘one-stop shop’ principle would not be lost. On the other hand, there might be cases in which the merging parties are considering the referral back of part of a transaction to a single NCA, whilst leaving the remainder of the transaction to be assessed by the Commission, as well as cases that would involve the referral back to multiple NCAs (with the Commission left without any part of the transaction to assess). These latter types of case are discussed in more detail below. 60 Sites supplying asphalt within the Greater London area where assessed on a narrower, 20 mile catchment area 61 Completed joint venture between the Carlyle Group and Palamon Capital Partners LP for the acquisition of Integrated Dental Holdings Group and Associated Dental Practices, OFT decision of 10 June 2011. 62 Anticipated acquisition by Shell UK Limited of 253 petrol stations from Consortium Rontec Investments LLP, OFT decision of 3 February 2012. 63 Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015. 64 Anticipated acquisition by G4S plc of Global Solutions Limited, OFT decision of 2 May 2008.
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(iii) Legal certainty. The Case Referral Notice states that referrals should normally be made only where there is a compelling reason for departing from the transaction’s “original jurisdiction,”65 and that this is particularly the case at the post-notification stage.66 Therefore, in principle, there should be increased flexibility for a transaction to be transferred to the CMA under Article 4(4) at the pre-notification stage. In addition, the Case Referral Notice states that, given the tight deadlines for referrals at the prenotification stage, such referrals should, in principle, be confined to those cases in which it is relatively straightforward from the outset to determine the scope of the geographic market and/or the possible competitive impact, so that timely decisions can be made.67 Where a transaction has a potentially significant competitive effect on a national market, but these effects also have the potential to affect competition on a cross-border basis (e.g., because the transaction may affect markets in other Member States), it may be the case that both the Commission and a Member State are well placed to assess the merger.68 In these circumstances, the Commission retains a considerable margin of discretion in deciding whether to refer a case to the Member State in question.69 (d) Multiple referral requests. In principle, where a transaction with an EU dimension has the potential to significantly affect competition on national or subnational markets in more than one Member State, the merging parties could decide at the pre-notification stage to request that the Commission partially refer the merger back to multiple Member States (i.e., not leaving part of the transaction to be assessed by the Commission). The Case Referral Notice states that the extent to which such a case might be an appropriate candidate for a referral to multiple Member States would depend on factors specific to each individual case, including: (i) the number of national markets likely to be significantly affected; (ii) the prospect of addressing any possible concerns by way of proportionate, non-conflicting remedies; and (iii) the investigative efforts that the case may require.70 The Case Referral Notice notes that where a transaction may result in competition concerns in multiple Member States, and may require coordinated investigations and remedial action, might militate in favour of the Commission retaining jurisdiction over the entirety of the merger in question.71 However, where coordinated investigations and/or remedial action would not be required and, in particular, where there are significant differences in the various national markets concerned, whilst fragmentation of the merger review deprives the parties of the benefit of a ‘one-stop-shop’ assessment in such cases, the Case Referral Notice states that this consideration is less pertinent at
65
Case Referral Notice, para. 13.
66
Ibid. 67 Ibid., para. 14. 68 Ibid., para. 21. 69 Ibid. 70 71
Ibid., para. 22. Ibid.
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the pre-notification stage, given that the referral is triggered by a voluntary request from the merging parties.72 (e) Partial referral requests. Under Article 4(4), merging parties are able to request the referral back of only part of a wider transaction that has an EU dimension. In such cases, merging parties may request that the CMA reviews the UK aspects of the case, whilst the Commission reviews the remainder. This would deprive the merging parties of the ‘one-stop shop’ benefit but, as with referrals to multiple Member States, as this request is being made by the merging parties and not a Member State, the Commission should, in principle, be less concerned with this issue, particularly as the request is being made at the pre-notification stage. However, to date, there have only been six partial referrals under Article 4(4) since this mechanism came into force on 1 May 2004.73 (f) Factors considered by the CMA. The Jurisdictional and Procedural Guidance, in accordance with the principles of the Case Referral Notice, states that Article 4(4) referral requests are particularly suited to mergers involving local or regional markets,74 and that additional support for a referral to the UK may be afforded by the fact that:75 (1)
the case concerns entirely or largely the UK or a market within the UK;
(2)
the CMA (or its predecessors) has experience in reviewing the market in question;
(3)
any possible competition concerns could feasibly be resolved by way of remedies in the UK, in particular in cases where remedies might not be open to the Commission (e.g., because the market in question is not a substantial part of the EU); and
(4)
the CMA is already reviewing or about to review another transaction in the same sector, including a competing bid for the target business.76
72
Ibid. See http://ec.europa.eu/competition/mergers/statistics.pdf. 74 Jurisdictional and Procedural Guidance, para. 18.18. 75 Ibid. 73
76 In Case IV/M.716, GEHE/Lloyds Chemists, the Commission referred the proposed acquisition back to the OFT on the basis that, inter alia, another bid for Lloyds Chemists had been made, which was being considered by the OFT because its original jurisdiction lay in the UK. Similarly, in Case COMP/M.2044, Interbrew/Bass, the Commission referred the case back to the OFT because, inter alia, the OFT was at the same time assessing Interbrew’s acquisition of another brewer, Whitbread. Conversely, in Case COMP/M.2706, P&O Princess/Carnival, despite the fact that the OFT was already assessing a rival bid by Royal Caribbean, the Commission did not accede to its request for a partial referral. The Commission had identified preliminary competition concerns in other national markets affected by the merger and wanted to avoid fragmenting the assessment (see Commission press release of 11.4.2002, IP/02/552). The Commission also refused the CMA’s request for the referral of Hutchinson 3G UK’s acquisition of Telefonica, despite the fact that the CMA was reviewing, and had
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(g) Eligible transactions and action before filing Form RS. Prior to filing Form RS with the Commission, merging parties are encouraged to informally approach the Commission and the Member State(s) concerned to make them aware of the transaction and the likelihood of the Form RS request.77 By their very nature, Article 4(4) referrals relate to pre-notification requests. Therefore, no Form RS application can be made if the parties have already made a notification to the Commission on Form CO.78 Since the Article 4(4) referral request must be made prior to the notification of a concentration, there are no time limits within which the request must be made, although preparations for the transaction itself must be at a relatively advanced stage and the parties must have a good faith intention to merge.79 (h) Form RS. The application for a referral of a merger from the Commission to the CMA must be made by the merging parties on Form RS. Form RS itself is an extensive submission that requires the provision of significant amounts of information and data relating to the transaction. Form RS states that all information submitted in a reasoned submission must be correct and complete. In the case of referrals under Article 4(4) made on the basis of incorrect or incomplete information, the Commission may: (i) require a notification pursuant to Article 4(1) (i.e., a Form CO notification); (ii) impose fines under Article 14(1)(a) of the Merger Regulation; and/or (iii) consider making a post-notification referral reversing a pre-notification referral based on such incorrect or incomplete information.80 In addition to the information provided in Form RS, the Commission is able to request additional information that is not specifically required by Form RS.81 On receipt of such a request, the Commission will transmit the submission to all Member States “without delay.”82 The Case Referral Notice states that the Commission will endeavour to transmit Form RS on the working day following the day on which it is received or issued.83 (i) CMA consideration of an Article 4(4) request. In the event that merging parties request a referral to the UK, the CMA must express its agreement or disagreement with the request within 15 working days of receiving the submission.84 In the event that the CMA fails to express its agreement or disagreement within this period, it will be deemed to have agreed to the request.85 The Commission refers to this
referred to Phase II, BT’s acquisition of EE (Case No. COMP/M.7612, Hutchinson 3G UK/Telefonica UK). Although each of these mergers involved referral requests under Article 9, the same principles should apply to a referral request under Article 4(4). 77 Case Referral Notice, para. 64. 78 Ibid., para. 68. 79 Ibid., para. 66. 80
Ibid., para. 60. Ibid., para. 63. 82 Article 4(4), Merger Regulation. 83 Case Referral Notice, para. 56. 81
84 85
Article 4(4), Merger Regulation; Jurisdictional and Procedural Guidance, para. 18.19. Article 4(4), Merger Regulation.
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process as ‘positive silence’ or ‘non-opposition’ and regards it as an essential feature of the referral mechanism.86 Normally, the CMA will begin by making an assessment of the Form RS submission to verify that the share of supply test or the turnover test is met.87 The CMA will not agree to a referral request in the event that the Form RS contains any inaccuracies or assumptions (e.g., the market in question is actually wider than the UK).88 (j) Commission decision on referral. Unless the CMA disagrees with the parties’ Article 4(4) request, the Commission may refer the whole or part of a transaction to the CMA if it considers that a distinct market exists and that competition in the relevant market may be significantly affected by the concentration.89 The Commission must decide whether or not to refer the transaction in question to the CMA within 25 working days from receipt of Form RS.90 The Commission must then inform the CMA, any other Member States, and the merging parties of its decision.91 If the Commission does not adopt a decision within this period, it will be deemed to have adopted a decision to refer the transaction to the Member State in question92 (although such a scenario would be highly unusual). k) CMA procedure following a referral back. Once a transaction has been referred to the CMA, the Enterprise Act will apply to the transaction, subject to certain residual EU obligations.93 The ‘repatriation’ of a merger has the benefit that the parties may close the transaction (most likely subject to an initial enforcement order). In terms of timing, the CMA has 45 working days from the date of the referral to inform the merging parties of its preliminary competition assessment and set out what further action, if any, it will take.94 In practice, the CMA will generally try to decide the case within its usual statutory timetable of 40 working days.95 Whilst it is likely that much of the information required for the Merger Notice will have been provided in Form RS, the CMA may require additional information (e.g., specific to the UK markets) before it will deem the submission complete (and therefore satisfactory for the CMA to start its investigation). In most cases, the CMA will require the parties to submit a Merger Notice and parties should aim to provide this in draft to the CMA during the Commission’s 25-working day review period. Importantly, a referral back from the Commission will automatically start the CMA’s 45 working day timetable, which can only be stopped in the event that the parties fail to respond to a section 109 notice
86
Case Referral Notice, para. 49, footnote 39. Jurisdictional and Procedural Guidance, para. 18.20. See Chapter 3 for more details regarding the share of supply and turnover test. 88 Ibid. 89 Article 4(4), Merger Regulation. 87
90
Ibid. Ibid. 92 Ibid. 93 Ibid. These obligations are set out in Articles 9(6) to 9(9) of the Merger Regulation. 91
94 95
Article 9(6), Merger Regulation. See also, section 34A, Enterprise Act. Jurisdictional and Procedural Guidance, para. 18.22.
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within the stipulated deadline.96 Any such extension of the investigation timetable will continue until the parties provide the relevant information or documents to the satisfaction of the CMA. This automatic starting of the investigation timetable has led to the CMA stopping the clock in relation to several recent Article 4(4) referrals to the UK.97 In practice, it is likely that merging parties will have prepared a draft Merger Notice either prior to, or during, the Commission’s 25-working day review period and the merging parties are encouraged to contact the CMA in advance of the Commission’s decision to discuss what further information may be required in the event that jurisdiction is transferred to the CMA.98 Finally, it should be noted that, in terms of the CMA’s assessment, the Merger Regulation states that the CMA may only take the measures that are strictly necessary to safeguard or restore effective competition on the market concerned.99 In practice, this is not expected to affect the CMA’s usual assessment under the Enterprise Act or have any implications for either its duty to refer a merger to Phase II or its ability to accept undertakings in lieu of reference (although it may have done so prior to the introduction of the Enterprise Act when the FTA included a public interest test). (l) Timing implications. As discussed above, the main events that are relevant to an Article 4(4) referral from a timing perspective are as follows:100 (1)
Day 0 – file Form RS with Commission.
(2)
Days 1-2101 – transmission of Form RS to the CMA and any other relevant NCAs.102
(3)
Day 17 – deadline for the CMA to express agreement or disagreement with the request.
(4)
Day 25103 – deadline for Commission to decide whether to accede to the referral request.
96
Section 34A(5), Enterprise Act. Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015; Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015. 98 Ibid., para. 18.24. 97
99
Article 9(6), Merger Regulation; Jurisdictional and Procedural Guidance, para. 18.21. All days are Commission working days. 101 In practice, the Commission will typically send out the Form RS to Member States on the first working day following receipt. The 15-working day period afforded to the CMA to assess the request does not begin until the CMA has received Form RS. Article 4(4) of the Merger Regulation states that “[t]he Member State referred to in the reasoned submission shall, within 15 working days of receiving the submission, express its agreement or disagreement as regards the request to refer the case” (emphasis added). 102 This assumes that the Commission sends the Form RS to the CMA on the first working day after receipt and that the CMA receives it on the following working day. 100
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(5)
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Day 70 – deadline for the CMA to take its decision on referral.
A referral back to the CMA (as opposed to proceeding with an assessment by the Commission) has timing implications for notifying parties, which will often be of importance in determining whether to request a referral back. As noted above, Form RS is an extensive document that requires a substantial amount of preparation, and, in many cases, the information to be provided in Form RS will not be significantly less detailed than that required for Form CO. Once Form RS has been submitted, it may take around 70 working days for the parties to receive a Phase I unconditional clearance decision (i.e., 25 working days for the Commission to decide whether or not to refer the case, plus up to 45 working days for the CMA to conduct its Phase I review), as opposed to 25 working days for a ‘normal’ first-phase review by the Commission (i.e., resulting in unconditional clearance).104 (m) Decisional practice. Since 1 May 2004, to date, 21 cases have been referred back to the Authorities by way of an Article 4(4) referral.105 Of these 21 cases, seven
103 The timing of the Commission’s decision whether to accede to the referral request runs from the first working day after the submission of the Form RS. Article 4(4) of the Merger Regulation states that “[t]he decision whether or not to refer the case in accordance with the third subparagraph shall be taken within 25 working days starting from the receipt of the reasoned submission by the Commission” (emphasis added). 104 The length of time taken for the Commission to determine whether to accede to a referral request was amongst the comments made during the Commission’s consultation on the operation of the Merger Regulation and is noted in the Communication from the Commission to the Council reporting on the functioning of Council Regulation 139/2004, 18 June 2009, para. 19. 105 Anticipated joint venture between the agricultural merchanting activities of ABF plc and Cargill plc, OFT decision of 16 March 2005; Completed acquisition of Southern Cross Healthcare Group Limited of Cannon Capital Ventures Limited, OFT decision of 16 December 2005; Anticipated acquisition by Boots plc of Alliance UniChem plc, OFT decision of 6 February 2006; Anticipated acquisition by London and South Eastern Railway, a wholly owned subsidiary of Govia Limited, of the Integrated Kent Rail Franchise, OFT decision of 28 March 2006; Joint venture between Dairy Crest Group plc and Arla Foods UK plc, OFT decision of 25 July 2006; Completed acquisition by O2 UK Limited of the Link Stores Limited, OFT decision of 10 October 2006; Anticipated acquisition by Govia Limited (through its wholly owned subsidiary, North London Orbital Railway Limited) of the London Rail Concession, OFT decision of 13 December 2006; Completed acquisition by Inchcape plc of European Motor Holdings plc, OFT decision of 17 May 2007; Completed acquisition by Govia Limited of the West Midlands passenger rail franchise, OFT decision of 29 November 2007; Anticipated acquisition by G4S plc of Global Solutions Limited, OFT decision of 2 May 2008; Anticipated acquisition by Odeon Cinemas Limited and Cineworld Cinemas Limited of Carlton Screen Advertising Limited, OFT decision of 1 July 2008; Completed acquisition by Advent International Corporation of Priory Investment Holdings Limited, OFT decision of 19 April 2011; Completed joint venture between the Carlyle Group and Palamon Capital Partners LP for the acquisition of Integrated Dental Holdings Group and Associated Dental Practices, OFT decision of 10 June 2011; Anticipated acquisition by Princes Limited of the canning business of Premier Foods Group Limited, OFT decision of 22 June 2011; Anticipated joint venture between Alpha Flight Group Limited and LSG Lufthansa Service Holding AG, OFT decision of 10 October 2011; Proposed joint venture between Anglo American plc and Lafarge S.A., OFT decision of 2 November 2011; Anticipated acquisition by Shell UK Limited of
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have resulted in undertakings in lieu of reference,106 and three have resulted in a Phase II reference.107 Certain cases raised very few competition concerns at all.108 As set out above, almost all of the Article 4(4) referrals back to the UK concerned sub-national markets, many of which were local (e.g., overlaps on specific point-to-point flows between towns/cities). This is in line with the Commission’s Case Referral Notice, which provides that the “distinct market” in which competition is significantly affected must be national (or narrower) in scope.109 A referral back to the UK results in the disapplication of the suspensory obligation under the Merger Regulation and the merging parties are therefore at liberty to complete their deals. This has occurred in several Article 4(4) referrals back to the UK.110 (n) Review of the Article 4(4) referral mechanism. In 2009, the Commission published a ‘communication’ to the Council of the EU and an accompanying staff working paper,111 which provided a report on, inter alia, the operation of the pre- and post-notification referral mechanisms.112 The Staff Working Paper reported that
253 petrol stations from Consortium Rontec Investments LLP, OFT decision of 3 February 2012; Completed acquisition by Saint Gobain of Build Center, OFT decision of 8 February 2012; Anticipated acquisition by Govia Thameslink Railway Limited of Thameslink, Southern and Great Northern Rail Franchise, CMA decision of 11 September 2014; Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015; Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015. 106
Boots/Alliance UniChem, supra; Inchcape/European Motor Holdings plc, supra; Carlyle and Palamon/Integrated Dental Holdings, supra; Shell/Rontec, supra; Princes/Premier, supra; Saint Gobain/ Build Center, supra; Muller/Dairy Crest, supra. 107 Alpha/Lufthansa, supra; and Anglo American/Lafarge, supra; Celesio/Sainsbury’s, supra. 108 See, e.g., Govia/Integrated Kent Rail Franchise, supra, in which the OFT found that there was no pre-merger competition between Govia’s existing Southern rail franchise and the Integrate Kent Rail franchise for which Govia was bidding, and that there were issues raised by the bus on rail overlaps. In Govia/London Rail Concession, supra, the OFT stated that it did not need to conclude on the substitutability of various types of transport as “no competition concerns arise in this case on any reasonable frame of reference”. In ABF/Cargill, supra, the OFT considered the markets for agricultural merchanting, the supply of agricultural seeds, the sale of fertiliser, and the purchase of grain and pulses. The OFT noted that, although the transaction would result in the largest agricultural merchant in Great Britain, the sector was characterised by low levels of concentration and the parties’ combined share was low. 109 Case Referral Notice, para. 18. 110 Southern Cross/Cannon Capital, supra; O2/The Link, supra; Inchcape/European Motor Holdings, supra; Advent/Priory, supra; Carlyle and Palamon/Integrated Dental Holdings, supra; Saint Gobain/Build Center, supra. 111
Staff working paper accompanying the communication from the commission to the council Report on the functioning of Regulation No 139/2004 (the “Staff Working Paper”). 112
In relation to the pre-notification referral mechanisms, this discharged the obligation set out in Article 4(6) of the Merger Regulation for the Commission to report to the Council on the effectiveness of their operation by 1 July 2009. The report also assesses the effectiveness of the jurisdictional thresholds under Article 1 of the Merger Regulation.
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amongst the NCAs there appeared to be a consensus that the Article 4(4) referral system functioned effectively.113 From a substantive perspective, one NCA considered that there could be some clarification regarding the impact that a merger must have on a market for the conditions of Article 4(4) to be fulfilled (i.e., how significant an impact on competition was required). From a procedural perspective, a few NCAs expressed the view that the 25-working day period that the Commission has to determine whether to accede to a referral request could be shortened, but that the 15 working days afforded to NCAs was necessary for an examination of the submission and for internal consultation.114 As regards the views of respondents to the Commission’s public consultation, which included law firms, companies, industrial organisations and a think tank, whilst almost unanimously considering that the concept of the Article 4(4) mechanism was welcome, they had the following observations. (1)
Self-incrimination of transactions significantly affecting competition. Some respondents considered that the requirement that a concentration “may significantly affect competition in a market within a Member State” acted as a disincentive to merging parties making Article 4(4) requests and that it could be self-incriminating to requesting parties, giving rise to a presumption that the transaction would result in a serious competition concern. It was suggested that this could be a factor contributing to the limited number of such referral requests since 1 May 2004, particularly when compared to the number of referral requests made under Article 4(5) (i.e., transferring mergers from at least three Member States to the Commission).
(2)
Guidance regarding the acceptance and rejection of referral requests. A number of respondents suggested that guidance as to the motives for Member States and/or the Commission accepting or rejecting requests would be valuable, and several respondents commented that the indicative factors for when a referral would be appropriate as set out in the Case Referral Notice were not, in their experience, put into practice.115 Stakeholders felt that this lack of transparency was added to by the fact that the Member States’ decisions to accept or reject a referral request are not published.
(3)
Length of Article 4(4) procedure. Most stakeholders expressed the view that the length of the referral mechanism under Article 4(4) was an important disincentive for merging parties.116 Many respondents considered it “unfortunate” and “unjustified” that it takes as long to decide on a referral request (i.e., 25 working days) as it takes the Commission to determine the substantive assessment of a Phase I merger case. This was identified as a key reason why parties chose to ‘leave’ cases with the Commission even though a
113 114 115 116
Staff Working Paper, para. 93. Ibid., 94. Ibid., 97. Ibid., para. 98.
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Member State may have been considered a better-placed authority. Virtually all respondents were in favour of shortening both the 15 working days for Member States to consider a request and the additional 10 working days available to the Commission.117 (4)
Information required for a Form RS submission. An additional factor in the decision of many merging parties to decide against seeking a referral to a Member State was the scope of information requested for the Form RS submission, which virtually all respondents considered disproportionate for the purposes of a jurisdictional assessment, and some respondents considered the information required for a Form RS equivalent to the volume of information required for a full Form CO notification.118
(o) 2014 White Paper. In July 2014, the Commission published a white paper entitled ‘Towards more effective EU merger control’ (the “2014 White Paper”).119 Amongst other things, this paper set out some proposed modifications to the case referral system in order to make the system more effective and less burdensome for merging parties. These modifications focused on referrals to the Commission under Articles 4(4), 4(5) and 22. In relation to Article 4(4) referrals, the Commission proposed modifying the substantive test so that merging parties are no longer required to claim that the transaction may “significantly affect competition” in order for a case to qualify for a referral. Instead, it would be sufficient to demonstrate that the transaction is likely to have its “main impact” in a distinct market in the Member State in question. The Commission expressed the hope that modifying this threshold would encourage parties to make more use of this referral mechanism.
4.4.2
Post-Notification Referral Requests Under Article 9
(a) General principles. Article 9 of the Merger Regulation states that a Member State, on its own initiative or upon the invitation of the Commission, may inform the Commission that: (1)
a concentration threatens significantly to affect competition in a market within that Member State, which presents all the characteristics of a distinct market; or
(2)
a concentration affects competition in a market within that Member State, which presents all the characteristics of a distinct market and which does not constitute a substantial part of the common market.120
Where the Commission considers that there is a distinct market and that such a threat exists, the Commission may deal with the merger itself or refer the whole or part of the
117 118 119 120
Ibid. Ibid., para. 100. Towards more effective EU merger control, COM(2014) 449 final. Article 9(2), Merger Regulation.
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case to the Member State concerned.121 This provision was included in the Merger Regulation at the request of certain Member States, notably Germany, to ensure that transactions with an EU dimension that had competitive effects at a national or subnational level could be assessed, in accordance with the principle of subsidiarity, at the appropriate level within the EU. This is particularly relevant to transactions that raise potentially serious substantive concerns in markets at the sub-national level, as the Commission cannot prohibit or impose remedies on a transaction that concerns geographic markets that are not a substantial part of the common market.122 Article 9 referrals are the means by which the CMA and the Commission can effect a transfer of jurisdiction from the EU to the UK where an Article 4(4) referral has not been requested by the merging parties. As such, the Case Referral Notice states that the factors taken into consideration for an Article 4(4) referral (set out above) will also apply, mutatis mutandis, to Article 9 referrals. This will include a consideration as to whether: (i) the CMA is the appropriate authority for assessing the transaction; (ii) the ‘one-stop shop’ system might be compromised by the request (e.g., because the transaction results in affected markets in multiple Member States); and (iii) the referral request would not compromise the principle of legal certainty. The application of these principles will be largely the same as for an Article 4(4) referral request. One difference might be the weight placed on the ‘one-stop shop’ principle. The Commission applies less weight to this principle when merging parties are themselves requesting a referral of a merger or part of a merger. Where the CMA is making the referral request, the Commission may place more emphasis on this principle, particularly where the CMA is requesting a partial referral. (b) Legal requirements. follows.
The legal requirements for Article 9 referrals are as
(i) Article 9(2)(a). In order for a referral to be made to the CMA pursuant to Article 9(2)(a), the following legal requirements must be fulfilled: (i) the concentration must threaten to significantly affect competition in a market; and (ii) the market in question must be within the UK, and present all the characteristics of a distinct market. Under the first limb of the test under Article 9, the CMA is required to demonstrate that, based on a preliminary analysis, there is a “real risk” that the transaction may have a significant adverse impact on competition in the UK and therefore deserves close scrutiny by the CMA.123 As with Article 4(4) referral requests, such preliminary indications may be in the nature of prima facie evidence of such a potentially significant
121 122
Article 9(3), Merger Regulation.
Article 2 of the Merger Regulation states that the Commission will appraise concentrations in accordance with various objectives with a view to establishing whether or not they are compatible with the common market. Article 2(3) of the Merger Regulation states that “[a] concentration which would significantly impede effective competition, in the common market or in a substantial part of the common market, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market” (emphasis added). 123 Case Referral Notice, para. 35.
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adverse impact, and would be without prejudice to the outcome of a full investigation.124 The second limb requires the CMA to show that the geographic scope of the markets relevant to the competition assessment of the transaction is national or narrower.125 Where a referral request is made by a Member State under Article 9(2)(a), the Commission retains discretion as to whether to grant the referral. (ii) Article 9(2)(b). In order for a referral to be made to the UK pursuant to Article 9(2)(b), the following legal requirements must be fulfilled: (i) the concentration must affect competition in a market; and (ii) the market in question must be within the requesting Member State, present all the characteristics of a distinct market, and must not constitute a substantial part of the common market.126 As with a request under Article 9(2)(a), under the first limb of this test, the CMA is required to show, based on a preliminary analysis, that the concentration is liable to have an impact on competition in a market. As with all such preliminary analyses, the CMA need only show prima facie evidence of a possible adverse impact, and such evidence would be without prejudice to the outcome of a full investigation.127 The second limb (i.e., that the market must not constitute a substantial part of the common market) concerns the Commission’s competency and the fact that, as a legal matter, the Commission cannot prohibit or accept remedies in respect of transactions that result in significant competition concerns in markets that do not represent a substantial part of the common market. However, in practice, the Commission’s decisional practice indicates that it has been somewhat reluctant to conclude that geographic markets are not a substantial part of the common market. Even in cases where the dimensions of competition have been local, the Commission has tended to find that these local areas of competition overlap, thereby forming a ‘chain of substitution’ that renders the geographic market at issue at least regional in scope.128 124
Case No COMP/M.4721, AIG Capital Partners/Bulgarian Telecommunicatio NS Company, Commission decision of 27 July 2007, where the Commission refused a referral request from the Bulgarian competition authority on the ground that the merging parties had no overlapping activities. 125 Case Referral Notice, para. 36. 126 Ibid., para. 38. 127
Ibid., para. 39. See, e.g., Case No COMP/M.4919, StatoilHydro/ConocoPhillips, Commission decision of 21 October 2008, para. 28 (although the Commission conceded that competition was largely determined by local factors, including that most retail fuel chains regularly monitor neighbouring stations and adjust their prices to a “local” competitive level, it concluded that “[s]ince most clusters [small groups of local stations] are partially overlapping, most service stations in a country are constrained by other stations through a chain-of-substitution effect”); Case No COMP/M.2161, Ahold/Superdiplo, Commission decision of 23 October 2000, para. 16 (the Commission stated, in relation to a merger between supermarket chains, that the geographic scope of the market for groceries was “delineated by the boundaries of a territory where the outlets can be reached easily by the consumer” (which the Commission took to be a drive-time of between 10 and 30 minutes), but that these drive-time isochrones could be accumulated to form a market that was larger than local); Case No COMP/M.3905, Tesco/Carrefour, Commission decision of 22 December 2005, para. 18 (the Commission noted that it had previously regarded the daily consumer goods market to be approximately a 20-30 minute drivetime around the stores in question, but that this territory could be larger if the local drive-time 128
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However, with specific regard to the UK, the Commission has determined – in a case that appeared to raise potential competition concerns – that the Isle of Wight was not a substantial part of the common market.129 Where the legal requirements are met in respect of a referral request under Article 9(2)(b), the Commission must refer the transaction in question to the UK. Therefore, there is no need for the Commission or requesting Member States to consider any additional factors, such as the Commission’s ‘guiding principles’ in relation to referrals. The following cases are illustrative of referral requests under Article 9(2)(b) in relation to the UK. (1)
In Govia/Connex South Central, the Go-Ahead Group and Keolis proposed acquiring joint control over Connex South Central Limited.130 On 10 July 2001, the UK requested a referral back under Article 9(2)(b). The Commission agreed with the OFT’s arguments that the relevant markets at issue were various point-to-point routes (London/Brighton, London/Gatwick, Brighton/Gatwick, Redhill/Gatwick and Sutton/London) that did not constitute a substantial part of the common market and that the transaction affected competition on these routes. Accordingly, the Commission referred the entire transaction to the UK.
(2)
In Blackstone (TBG CareCo)/NHP, TBG CareCo, an affiliate of the Blackstone Group, proposed acquiring NHP, a UK care home operator.131 The OFT requested an Article 9(2)(b) referral on the basis that the markets for care home services were local and that the transaction affected competition in those markets. The OFT submitted that the geographic market for care homes was local and that in previous cases the OFT had found the market to have a fivemile radius, with chains of substitution operating in urban areas.132 The parties
isochrones were overlapping). Cf. Case No COMP/M.5637, Motor Oil (Hellas) Corinth Refineries/Shell Overseas Holdings, Commission decision of 15 March 2010, para. 36 (the Commission heavily caveated the amalgamation of retail fuel stations in Greece by stating that such an argument was “in theory… plausible for at the [sic] least part of the mainland” (thereby implicitly excluding the Greek islands) and stated that its preliminary assessment had shown indications that the retail fuel markets were local). 129 Case No COMP/M.2596, RMC/UMA/JV, Commission decision of 12 March 2003, para. 26 (the Commission concluded that the geographic scope of the relevant marine aggregates markets was not a substantial part of the common market on the basis that: (i) the Isle of Wight is only 38,000 hectares in size; (ii) its population was 132,000, representing only 0.23% of the UK population; and (iii) the Isle of Wight’s GDP represented only around 0.15% of the UK total). See, in respect of other Member States, Case No COMP/M.4522, Carrefour/Ahold Polska, Commission decision of 4 April 2007, paras. 36-42 (the Commission found that markets for daily consumer goods with a drive-time of 20 minutes in Poland were local and did not constitute a substantial part of the common market). 130 Case No COMP/M.2446, Govia/Connex South Central, Commission decision of 20 July 2001. 131 132
Case No COMP/M.3669, Blackstone (TBG CareCo)/NHP, 1 February 2005. Ibid., para. 19.
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argued that the market was national on the basis that the conditions for operating a care home were broadly similar on a national basis and that, on the narrowest possible basis, the markets would have a 15-20 minute drive-time radius with inter-local authority funding widening the market.133 The Commission’s investigation found that the market was local, with a radius of 310 miles at its narrowest, on the basis that this was the average physical distance from their previous place of residence that people were willing to consider when selecting a care home. As a result, the Commission referred the transaction to the UK.134 (c) Partial referrals. Unlike in respect of Article 4(4) partial referrals, the Commission has granted a significant number of partial referrals under Article 9 of the Merger Regulation.135 As noted above, in circumstances where a Member State makes a referral request under Article 9(2)(a), the Commission has discretion whether to accede to the referral request. In this context, the Commission will make an assessment of various factors, including weighing up the possible fragmentation of a case (in mergers involving multiple Member States) against the most appropriate authority to review the case. In cases where a referral request is made under Article 9(2)(b) and meets the relevant criteria, the Commission does not have the discretion to refuse such a request. This may reflect why there have been considerably more referrals under Article 9 than under Article 4 – merging parties may prefer not to fragment the assessment of their transactions and there is no Article 9(2)(b) equivalent under Article 4, removing discretion from merging parties (as to whether to apply for a referral) and from the Commission (as to whether to accede to the referral request). (d) Procedure and timing. The CMA has 15 working days from the date of receipt of its copy of the Form CO notification within which to request that the whole or part of a merger is referred back to the UK.136 To assist in determining whether to make an Article 9 request, the CMA may publish an invitation to comment seeking views from interested third parties.137 Moreover, it is the CMA’s policy to publish (in redacted form) its requests to the Commission for referrals back.138 In the event of such a
133
Ibid., para. 20. There have been no other Article 9(2)(b) referrals to the UK. 135 The Commission’s statistics indicate that it had made 43 partial referrals as of January 2016 (whereas the Commission has made only six partial referrals under Article 4(4)). 136 Article 9(2), Merger Regulation; Jurisdictional and Procedural Guidance, para. 18.26. 134
137 Jurisdictional and Procedural Guidance, para. 18.29. The OFT published such an invitation to comment in respect of Case COMP/M.5650, Orange PCS Limited/T-Mobile UK Limited, Commission decision of 1 March 2010. 138 Jurisdictional and Procedural Guidance, para. 18.29. See the OFT’s referral requests in Orange UK/T-Mobile UK, supra, and Case No COMP/M.5996, Thomas Cook/Travel business of Co-operative Group Limited/Travel business of Midlands Co-operative Society Limited, Commission decision of 6 January 2011, and the CMA’s referral requests in Hutchison 3G UK Investments Limited/Telefonica Europe PLC (the Commission refused the CMA’s request in Case No COMP/M.7612, Hutchison 3G UK/Telefonica UK, Commission decision of 4 December 2015) and in McKesson Deutschland GmbH & Co/UDG Healthcare PLC Wholesale and Associated Businesses (the Commission granted the
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request, the Commission will inform the notifying parties (there is no particular time period within which the Commission must inform the parties) and must usually reach a decision on whether or not to refer within 35 workings days in cases where the Commission has not initiated proceedings.139 If the Commission has initiated proceedings under Article 6(1)(c) of the Merger Regulation and opened an in-depth inquiry, the Commission must reach its decision within 65 workings days.140 If the Commission fails to adopt a decision within the 65-working day period, despite a reminder from the Member State concerned, it is deemed to have adopted a decision to refer the transaction to the Member State requesting referral.141 Where the Commission concludes that the grounds for a referral are not met (i.e., the transaction does not threaten to significantly affect competition in a distinct market or the distinct market constitutes a substantial part of the common market), the Commission will reject the application.142 Member States may appeal such a refusal to refer a transaction to the Court of Justice.143 Once a transaction has been referred back to the CMA, it will review the transaction in accordance with the provisions of the Enterprise Act.144 In doing so, the CMA must only take measures that are strictly necessary to safeguard or restore effective competition on the market concerned.145 It is considered that such a condition will inevitably be met when the CMA reviews a transaction as a result of the competition test incorporated in the Enterprise Act. The CMA must reach a conclusion as to its “preliminary competition assessment” and must inform the notifying parties of this result within 45 working days of the Commission’s referral.146 The CMA must also inform the parties what further action, if any, it proposes to take.147 The principles that apply to the CMA’s assessment of Article 4(4) requests set out above apply, mutatis mutandis, to its consideration of Article 9 requests. For merging parties, the result of an Article 9 referral is a significant extension to the overall deal timetable. Rather than a 25-working day review period by the Commission (or 35 working days if remedies are offered), a Phase I review period if a transaction is
CMA’s request in Case No COMP/M.7818, McKesson/UDG Healthcare (Pharmaceutical Wholesale and Associated Businesses), Commission decision of 3 March 2016. 139 Articles 9(4)(a) and 10(1), Merger Regulation. 140 Article 9(4)(b), Merger Regulation. 141 Article 9(5), Merger Regulation. The Commission did not reject the CMA’s Article 9 request in relation to Hutchison 3G UK/Telefonica until after Phase II had commenced. In this case, the Commission opened its Phase II investigation on 30 October 2015 and rejected the CMA’s Article 9 request only on 4 December 2015. 142
Article 9(3), Merger Regulation. Article 9(9), Merger Regulation. 144 Jurisdictional and Procedural Guidance, para. 18.31. 145 Article 9(8), Merger Regulation. 143
146 147
Article 9(6), Merger Regulation; section 34A, Enterprise Act. Ibid.
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referred back to the CMA could last up to around 80 working days (i.e., 35 working days for the Commission to decide whether or not to grant such a referral, plus up to 45 working days for the CMA’s Phase I review). However, the difference in terms of timing between an Article 9 referral (80 working days) and an Article 4(4) referral (70 working days) is not so significant. This difference in timing results from the fact that a referral request under Article 4(4) does not automatically extend the Commission’s Phase I timetable by 10 working days. (e) Decisional practice. The Authorities have a long history of requesting the referral of transactions back to the UK and is one of the most active Member States in terms of requesting referrals.148 Indeed, the Commission’s first ever referral back to an NCA was to the OFT after the Merger Regulation had been in force for less than six months.149 To date, the Commission has referred back, in whole or in part, 16 transactions to the UK, although only one such case has been referred back in the last five years.150 Of these cases, seven were cleared after a Phase I review, one of which was subject to undertakings in lieu,151 and eight were referred to Phase II.152 One
148
Staff working paper, para. 147. This indicates that, between 2004 and 2008, the most Article 9 requests were made by Germany (8), followed by the UK (4). 149 Case IV/M.180, Tarmac/Steetley, Commission decision of 12 February 1992. 150
Tarmac/Steetley, supra; Case No COMP/M.716, GEHE/Lloyds Chemists, Commission decision of 22 March 1996; Case No COMP/M. 1030, Lafarge/Redland, Commission decision of 16 December 1997; Case No COMP/M.1779, Anglo American/Tarmac, Commission decision of 13 January 2000; Case No COMP/M.1827, Hanson/Pioneer, Commission decision of 24 March 2000; Case No COMP/M.2044, Interbrew/Bass, Commission decision of 22 August 2000; Case No COMP/M.2154, C3D/Rhone/Go-Ahead, Commission decision of 20 October 2000; Case No COMP/M.2446, Govia/South Connex Central, Commission decision of 20 July 2001; Case No COMP/M.2502, Cargill/Cerestar, Commission decision of 18 January 2002; Case No COMP/M.2639, Compass/Restorama/Rail Gourmet/Gourmet Nova, Commission decision of 26 February 2002; Case No COMP/M.3130, Arla Foods/Express Dairies, Commission decision of 10 January 2003; Case No COMP/M.3669, Blackstone (TBG CareCo)/NHP, Commission decision of 1 February 2005; Case No COMP/M.3823, MAG/Ferrovial Aeropuertos/Exeter Airport, Commission decision of 8 August 2005; Case No COMP/M.4298, Aggregate Industries/Foster Yeoman, Commission decision of 6 September 2006; Case No COMP/M.5996, Thomas Cook/travel business of Co-operative Group Limited/Travel business of Midlands Co-operative Society Limited, Commission decision of 6 January 2011; Case No COMP/M.7818, McKesson/UDG Healthcare (Pharmaceutical Wholesale and Associated Businesses), Commission decision of 3 March 2016. 151 Completed acquisition by Aggregate Industries Limited of Foster Yeoman Limited, OFT decision of 20 November 2006. 152 Tarmac/Steetley, 1992 (this merger was abandoned and there is no CC report); UniChem PLC/Lloyds Chemists plc and GEHE AG/Lloyds Chemists plc: a report on the proposed mergers, 1996; Interbrew SA and Bass plc: a report on the acquisition by Interbrew SA of the brewing interests of Bass plc, 2000; Cargill Incorporated and Cerestar SA: a report on the merger, 2002; Compass Group PLC and Rail Gourmet Holding AG, Restorama AG and Gourmet Nova AG: a report on the merger, 2002; Arla Foods amba and Express Dairies plc: a report on the proposed merger, 2003; MAG/Ferrovial Aeropuertos/Exeter Airport (this merger was abandoned and there is no CC report); Anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Cooperative Society Limited, OFT decision of 2 March 2011.
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additional case was ongoing as of 1 January 2016. The Authorities made an additional five requests for a referral back that were rejected by the Commission.153 The CMA and the Commission will liaise and discuss whether the CMA wants, or is likely, to request a referral back of a particular case. Neither the CMA nor the Commission is likely to escalate a debate over jurisdiction to the public domain and therefore, absent exceptional circumstances, it is unlikely that the CMA would request a referral that it knew the Commission was unwilling to accede to. Moreover, the Commission has indicated that, where the referral conditions are met, it will typically accede to the request, absent good reasons for not doing so.154 The cases in which the Authorities have made an Article 9 referral request have predominantly involved local markets: Tarmac/Steetley (bricks – or sub-markets within the brick sector – in local markets in the North-East and South-West of England); GEHE/Lloyds (pharmaceutical retailing); Lafarge/Redland (ready-mixed concrete in Leicester and Norwich); Anglo-American/Tarmac (supply of aggregates, asphalt, readymixed concrete, mortar and concrete blocks); Hanson/Pioneer (supply of aggregates, asphalt, ready-mixed concrete); C3D/Rhone/Go-Ahead (passenger bus transport); Govia/Connex South Central (passenger rail services); Blackstone/NHP (provision of care home services for the elderly); MAG/Ferrovial Aeropuertos/Exeter Airport (the supply of airport infrastructure service in the South West of England); Thomas Cook/Co-op/Midlands Co-op (retail market for travel agency services).155 Other cases involved national markets but the Authorities’ preliminary assessment indicated that they raised potentially significant concerns: Interbrew/Bass (national markets for on- and off-trade sales of beer); Cargill/Cerestar (UK market for glucose syrups and blends); Compass/Restorama/Rail Gourmet/Gourmet Nova (UK market for on-train food concession); Arla Foods/Express Dairies (the procurement of raw milk, the supply of fresh processed milk, and the supply of fresh potted cream); Orange/TMobile (the UK market for mobile retail communications, the UK market for wholesale access and call origination services on mobile networks, and the UK market for wholesale international roaming services); Hutchison 3G/Telefonica (the UK market for mobile retail communications, the UK market for wholesale access and call origination 153
Case No IV/M.1346, EDF/London Electricity, Commission decision of 27 January 1999; Case No IV/M.1383, Exxon/Mobil, Commission decision of 29 September 1999 (there was no separate Commission decision refusing the OFT’s request, but the request is referred to at paragraph 2 of the Article 8(2) decision); Case No COMP/M.1920, Nabisco/United Biscuits, Commission decision of 5 May 2000 (the Commission did not adopt a separate decision refusing the OFT’s request, but the request is mentioned at paragraph 3 of the Article 6(2) decision); Case No COMP/M.2706, Carnival Corporation/P&O Princess, Commission decision of 24 July 2002 (the Commission did not adopt a separate decision refusing the OFT’s request, but the request is mentioned at paragraph 8 of the Article 8(2) decision); and Case No COMP/M.7612, Hutchison 3G UK/Telefonica UK, Commission decision of 4 December 2015. 154 Royal Philips Electronics NV v Commission, Case T-119/02, 2003. 155 The parties argued that the geographic scope for the distribution of holidays was national in scope. However, the OFT considered that the merger could have an impact at the local level and that a binary approach to geographic market definition (i.e., either national or local) may not capture the complexity of competition between the parties.
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services on mobile networks, and the UK market for wholesale international roaming services); McKesson/UDG (distribution of pharmaceuticals and related products in the UK, particularly in Northern Ireland). The CMA may withdraw a referral request and the OFT has previously done so.156 The most likely reason for withdrawing a referral request is in cases where remedies offered by the merging parties to the Commission are sufficient to remove any concerns that the CMA might have. For example, in Veolia/Cleanaway, the Commission noted in its decision that in their comments on the proposed commitments, submitted on 12 September 2006, the OFT had confirmed that it also regarded the proposed divestiture as a sufficiently clear-cut remedy that would remove the competition concerns identified in the high-temperature incinerator market in the UK.157 Therefore, the OFT withdrew its request for a referral in a letter dated 20 September 2006. The OFT also withdrew its referral request in relation to Orange/T-Mobile. In its press release of 1 March 2010, the OFT stated that it had withdrawn its request to the Commission to review the UK aspects of the joint venture between Orange and TMobile after the companies offered remedies that fully addressed the OFT’s outstanding competition concerns.158 The OFT noted that it had had concerns relating to the impact of the joint venture on the retail mobile telephone market, especially on Hutchison 3G, given the infrastructure-sharing agreement that it had with T-Mobile. In addition, the OFT had been concerned that the joint venture could have prevented competition emerging in the fourth generation mobile telephony market given the particular spectrum holdings that the company would enjoy. However, the OFT’s concerns were allayed by the remedies offered by Orange and T-Mobile to the Commission, including an offer to divest certain quantities of their 1800MHz spectrum, and an agreement with Hutchison which ensured that Hutchison’s ability to compete in the retail market going forward was not affected as a result of the transaction. The OFT noted that it had worked closely with the Commission and Ofcom to review the proposed remedies, and was satisfied that the joint venture would not have an adverse impact on competition within the UK. As a result, it withdrew its referral request to the Commission. (f) Review of the Article 9 referral mechanism. The Staff Working Paper reported that NCAs regarded the Article 9 referral mechanism as functioning effectively, although several NCAs expressed reservations about the length of the referral process.159 However, the Commission noted that these were minority views and that the “greater trend of opinion” was that there was no scope for shortening the Member State and Commission assessment periods.160 As with the responses received in relation to the Article 4(4) referral mechanism, stakeholders’ responses were much more critical of the referral mechanism than those of the NCAs. In particular, 156 See, e.g., Case No COMP/M.4318, Veolia/Cleanaway, Commission decision of 21 September 2006 and Case No COMP/M.5650, T-Mobile/Orange, Commission decision of 1 March 2010. 157 Veolia/Cleanaway, supra, para. 3. 158 OFT press release 23/10. 159 160
Staff Working Paper, para. 150. Ibid.
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respondents highlighted the length of time that a referral can take and the accompanying legal uncertainty resulting from a change of jurisdiction.161 As recognised by the Commission, the key tension is between the ‘one-stop shop’ principle and the principle that assessment should be undertaken by the most appropriate authority. Respondents made a number of suggestions for mitigating the effects of the Article 9 mechanism, including: (i) giving parties a right to be heard following a request by a Member State; (ii) increasing transparency by giving parties access to key documents in the Commission’s case file; and (iii) allowing the parties to use the same Form CO to make any subsequent notification to an NCA. In addition, there were suggestions that partial referrals back to multiple Member States should be prohibited so as to prevent parallel proceedings, thereby undermining the ‘one-stop shop’ principle.162
4.5
REFERRALS FROM THE CMA TO THE COMMISSION 4.5.1
Pre-Notification Requests Under Article 4(5)
(a) General Principles. The Article 4(5) referral mechanism concerns transactions that do not have an EU dimension and therefore do not, as an initial matter, fall within the Commission’s jurisdiction. This mechanism allows transactions that are capable of being reviewed under the national competition laws of at least three Member States to be referred to the Commission.163 The specific inclusion of the “capable of being reviewed” language in Article 4(5) allows voluntary merger regimes such as the UK’s to be taken into consideration for the purposes of this provision (indeed, this language was included in the Merger Regulation at the UK’s request). To date, Article 4(5) referrals are the most used of the referral mechanisms, with 303 referrals requests made since 2004 and 291 having been granted. (b) Legal requirements. Under Article 4(5), two legal requirements must be met in order for a transaction to be referred to the Commission: (i) the transaction must be a concentration within the meaning of Article 3 of the Merger Regulation; and (ii) the concentration must be “capable of being reviewed” under the national merger control rules of at least three Member States. Regarding the first requirement, as discussed in Chapter 2, the Enterprise Act applies to a wider variety of transactions than the Merger Regulation. For example, the Merger Regulation does not include a concept of ‘material influence’, and joint ventures that are not full-function can be considered under the Enterprise Act. Therefore, merging parties must ensure that, whilst a transaction is capable of being considered under the Enterprise Act, it also qualifies as a ‘concentration’. Regarding the second requirement, transactions will be considered “capable of being reviewed” by the CMA if they meet the share of supply test and/or the turnover test.164
161 162 163 164
Ibid. para. 152. Ibid. para. 153. Article 4(5), Merger Regulation. Jurisdictional and Procedural Guidance, para. 18.42.
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(c) Procedure and timing. Prior to its notification in any of the jurisdictions in which it is capable of being reviewed, the parties may request, by means of Form RS, that the transaction be examined by the Commission.165 As with an Article 4(4) referral, only transactions that are “sufficiently concrete” are eligible for referral.166 The Commission encourages merging parties to consult informally with it in respect of a potential referral case so that it may provide guidance as to the likelihood of a referral being accepted.167 Once the parties have submitted Form RS to the Commission, the Commission must transmit the submission to all Member States “without delay”,168 which will typically be on the first working day after receipt of a request.169 The CMA and other competent Member States then have 15 working days in which to express their disagreement in respect of such a request.170 In practice, where one of the competent NCAs is the CMA, the Commission and the CMA will typically consult one another informally as to whether or not the CMA is likely to refuse such a request. In the event that the CMA were to express its disagreement, the transaction would not be referred back to any Member State, including Member States that have not expressed any disagreement with the referral request.171 In such a case, the Commission will inform all the Member States concerned. Where no Member State expresses its disagreement within the 15-working day period, the transaction is deemed to have an EU dimension and is referred to the Commission.172 The parties must then make a notification on Form CO.173 (d) The UK veto. The CMA has indicated that it is likely to exercise its veto only in cases where it considers that it would be better placed than the Commission to investigate the transaction.174 To date, the Authorities have exercised their veto only once and have not done so for over 10 years.175 In this case, Bayard Capital Partners Pty Ltd, the parent company of an Australian manufacturer of electricity meters, acquired Landis & Gyr in October 2004. In July 2004, the Commission received a reasoned submission requesting that it take jurisdiction of the transaction on the basis that it was capable of being reviewed in (at least) the UK, Spain and Poland. The OFT’s reasoning for its disagreement with the referral request is brief but the OFT considered that the principal competitive effects of the merger would be felt in the UK as the only overlap of consequence was the parties’ 60-70% combined share of prepayment electricity meters, which are uniquely used, amongst EU Member States, in the 165
Article 4(5), Merger Regulation. Case Referral Notice, para. 66. 167 Ibid., para. 64. 166
168
Article 4(5), Merger Regulation. Case Referral Notice, para. 56. 170 Article 4(5), Merger Regulation; Case Referral Notice, para. 49. 171 Article 4(5), Merger Regulation. 169
172
Article 4(5), Merger Regulation; Case Referral Notice, para. 49. Case Referral Notice, para. 49. 174 Jurisdictional and Procedural Guidance, para. 18.46. 175 Completed acquisition by Bayard Capital Partners Pty Ltd of Landis and Gyr, OFT decision of 15 November 2004. 173
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UK.176 The OFT was unable to dismiss concerns raised by these market share figures at an early stage. The tension in Article 4(5) referral requests is therefore between the principle of subsidiarity and the ‘one-stop shop’ principle (i.e., whether the case is more appropriately reviewed at the Member State level or at the EU level). From an administrative perspective, it may often be more straightforward for merging parties to deal with only one competition authority (i.e., the Commission) rather than multiple NCAs, and this is in line with the principle that the Commission is typically better placed to review mergers that are capable of being reviewed in multiple Member States because of the cross-border nature of the deal. However, as these transactions do not have an EU dimension, and particularly where they raise concerns in a national or subnational market, Member States (including the CMA) may feel that they are better placed than the Commission to conduct such a review. To date, the Commission has refused only seven out of a total of 303 Article 4(5) referral requests. (e) Review of the Article 4(5) referral mechanism. In the Staff Working Paper, the Commission noted that there was a general consensus amongst Member States that the Article 4(5) referral mechanism is working effectively.177 Two NCAs noted that there are still a significant number of mergers resulting in multiple filings despite the availability of this mechanism. A few NCAs suggested shortening the 15-working day review period, but a majority of NCAs considered that this period of time was necessary to carry out the required examination.178 Stakeholders were far more critical of this referral mechanism. Their primary concerns were as follows: (1)
Length of review. Virtually all respondents took issue with the length of time that referrals take.179
(2)
Information required. Many respondents expressed concerns about the amount of information that is required by Form RS and noted that the scope of information required is disproportionate to establishing jurisdiction. They suggested that these requirements should be reduced or that a ‘short form’ RS be introduced so that merging parties need only provide minimal substantive information and that this information be provided only in respect of those Member States where a filing is required. Some respondents expressed concerns that the Commission was, in effect, engaging in a double consultation of mergers, with merging parties having discussions with the Commission in relation to the requirements of both Form RS and Form CO.
(3)
Discretionary refusal powers. Many respondents considered that Member States’ discretionary refusal powers were not exercised in a clear way and that, as Member States do not publish their decisions to reject an Article 4(5)
176 177 178 179
Ibid., para. 5. Staff Working Paper, para. 114. Ibid., para. 115. Ibid., para. 116.
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request, there is a lack of transparency as to the use of this power.180 This led many respondents to express the view that they would often rather file in multiple jurisdictions unless a significant number of filings was required.181 As a result, some respondents suggested an abolition of the Article 4(5) referral system and the introduction of an automatic ‘3+’ jurisdictional threshold, whereby a notification would be made to the Commission in cases where filings were required in at least three jurisdictions.182 A related feature of the discretionary refusal powers that was noted by respondents was that widely diverging national merger control rules meant that certain Member States with low jurisdictional thresholds gave a disproportionate influence to these Member States in the referral process. One suggestion was that the refusal right should be limited not only to those Member States in which a filing would be required, but to those Member States in which the transaction would give rise to an affected market.183 (f) 2014 White Paper. Given the low number of Article 4(5) requests that were vetoed by a Member State since 2004 (only six of 251 such requests at the time of publishing the White Paper and seven of 303 to date),184 the 2014 White Paper proposed abolishing the current two-step procedure of notifying a reasoned submission followed by a notification. The Commission felt that this would make Article 4(5) referrals more efficient whilst maintaining the ability of Member States to veto a request in the rare event that they considered this to be necessary.185 Therefore, in terms of process, merging parties would notify a transaction directly to the Commission and the Commission would then immediately forward the notification to the Member States, giving those Member States that have prima facie competence to review the transaction the opportunity to oppose the referral request within 15 working days. In the absence of a Member State opposing the request, the Commission would have jurisdiction to review the entire transaction. Alternatively, in the event that at least one competent Member State opposed a referral to the Commission, the Commission would adopt a decision stating that it was no longer competent to review the transaction and Member States would retain jurisdiction. It would then be for the merging parties to decide in which Member States to make a notification. In order to facilitate information exchange between the Commission and Member States, the Commission proposed sending the parties’ initial briefing paper or case allocation request to the Member States to alert them to the transaction during the pre-notification stage.
180 181 182
Ibid., para. 118. Ibid., para. 119.
Ibid., para. 120. Ibid., para. 121. 184 In this regard it is worth noting that only two such Article 4(5) referral requests have been refused since 2010. 185 2014 White Paper, para. 65. 183
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139
Post-Notification Requests Under Article 22
(a) General principles. One or more Member States may request that the Commission examines a concentration that does not have an EU dimension but which affects trade between Member States and threatens significantly to affect competition within the territory of the Member State(s) making the request.186 This mechanism was originally included in the Merger Regulation principally at the request of the Netherlands, which did not have merger control rules at the time that the Merger Regulation came into force in September 1990, and was referred to as the “Dutch clause”. It was, therefore, principally intended as a mechanism whereby Member States that did not have merger control rules would not suffer as the result of anti-competitive mergers. Virtually every Member State of the European Union now has merger control rules, with the result that the need for Article 22 referrals has reduced substantially.187 However, whilst individual Member States should (in theory) have considerably less need for Article 22, it is now open to one or more Member States to request that the Commission takes jurisdiction over a transaction that does not have an EU dimension, where the parties have not made a request under Article 4(5), and where the Member States consider that the Commission is better placed to review the transaction. In addition, Article 22 makes provision for the referral of cases where a concentration affects more than one Member State, by allowing other Member States to join a referral request that has already been made.188 To date, Article 22 referral requests have been made in only 32 cases under the Merger Regulation, although there has been a recent increase in such referrals, with 24 since the Merger Regulation was recast with effect from 1 May 2004 (in comparison with eight between 1990 and 2004, inclusive). (b) Legal requirements. In order for a referral to be made by one or more Member States to the Commission pursuant to Article 22, two legal requirements must be fulfilled: (i) the concentration must not have an EU dimension but must affect trade between Member States; and (ii) it must threaten significantly to affect competition within the territory of the Member State or States making the request.189 As regards the first requirement, this will be met if a transaction is liable to have some “discernible influence on the pattern of trade between Member States.”190 As regards the second requirement, a Member State requesting a referral is required to demonstrate that, based on a preliminary analysis, there is a real risk that the transaction may have a significant adverse impact on competition, and therefore that it deserves close scrutiny. Such preliminary indications may be in the nature of prima facie evidence of such a possible significant adverse impact, but, as with other types of referral, would be without prejudice to the outcome of a full investigation.191 In respect of Article 22 referrals, an 186
Article 22(1), Merger Regulation.
187
Luxembourg is the only EU Member States that does not have merger control rules. See, e.g., Case COMP/M.5828, Procter & Gamble/Sara Lee Air Care, Commission decision of 17 June 2010 in which a referral request was made by Belgium, the UK, Germany, Spain, Portugal and Hungary. 189 Article 22(1), Merger Regulation. 188
190 191
Case Referral Notice, para. 43. Ibid., para. 44.
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important consideration is that transactions that are the subject of this type of referral do not necessarily need to fall within the jurisdiction of one or more of the requesting Member States. Therefore, it is not necessary for a transaction to fall within the Enterprise Act’s jurisdiction for the CMA to make an Article 22 request. However, it would be unlikely, absent “unusual circumstances”, for the CMA to make an Article 22 referral request where the transaction did not fall within the Enterprise Act’s jurisdiction.192 (c) Other factors. The Case Referral Notice states that, as an Article 22 referral may entail additional cost and delay for merging parties, such referrals should normally be limited to those cases that appear to present a real risk of negative effects on competition and trade between Member States, and where it appears that these would be best addressed at EU level.193 Accordingly, the Case Referral Notice states that the categories of case that would usually be appropriate for an Article 22 referral are: (i) cases that give rise to serious competition concerns in one or more markets that are wider than national in geographic scope, or where some of the potentially affected markets are wider than national, and where the main economic impact of the concentration is connected to such markets; and (ii) cases that give rise to serious competition concerns in a series of national, or narrower than national, markets located in a number of Member States, in circumstances where coherent treatment of the case is considered desirable (e.g., regarding possible remedies and potentially investigative efforts), and where the main economic impact of the concentration is connected to such markets.194 In this regard, the CMA will consider whether, for the purposes of securing appropriate remedies, relevant assets are located outside the UK, which could make it difficult for the UK authorities to obtain a remedy, should this become necessary.195 (d) Procedure and timing. Such a request must be made within 15 working days of the date on which the concentration was notified or was “made known” to the Member State in question.196 In the case of the UK, as a result of its voluntary regime, it may be that a concentration is not made known to the CMA for some time after it has been notified in other jurisdictions. In this regard, the CMA equates “made known” with the date on which it accepts that the cumulative information supplied by the parties constitutes a satisfactory submission under the Enterprise Act (either in a Merger Notice or in response to an Enquiry Letter).197 For example, in Thrane & Thrane/Nera, the transaction was notified in Norway on 10 August 2006, in Spain on 30 August 2006 and in Greece on 31 August 2006.198 It was subsequently cleared in Norway on 2 October 2006, in Spain on 4 October 2006 and found not to qualify in Greece on 27 October 2006. The OFT received a complaint 192
Jurisdictional and Procedural Guidance, para. 18.49.
193
Case Referral Notice, para. 45. Ibid. 195 Jurisdictional and Procedural Guidance, para. 18.52. 196 Article 22(1), Merger Regulation. 194
197 198
Jurisdictional and Procedural Guidance, para. 18.53. Case No COMP/M.4465, Thrane & Thrane/NERA, Commission decision of 21 March 2007.
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and sent the parties an information request on 29 September 2006, to which it received a response on 10 October 2006. The OFT made an Article 22 referral request on 31 October 2006. The Commission considered that the concentration was made known to the OFT on the date when it had sufficient information to make a preliminary assessment as to the existence of the criteria for making an Article 22 referral request. This date was taken to be 10 October 2006. Following the receipt of an Article 22 referral request, the Commission will inform the competent authorities of the Member States and the merging parties “without delay.”199 Any other Member State will have the right to join the initial request within a period of 15 working days of being informed by the Commission of the initial request.200 The OFT was involved in joining several requests that were initiated by another NCA.201 All national time-limits relating to the concentration in question are suspended until it has been decided where the concentration should be examined.202 The Commission has up to 10 working days after the expiry of the 15-working day period in which Member States have the right to join a referral request (i.e., approximately 25 working days from receipt of the initial request) to decide upon a referral request.203 If the Commission does not take a decision within this period it is deemed to have accepted the referral request and national proceedings in the referring Member States must be terminated.204 Where the Commission accepts a referral request it will typically require a notification. The Commission has the usual Phase I timetable of 25 working days to conduct its preliminary assessment of the case. (e) Decisional practice. To date, the UK has been involved in ten Article 22 referrals.205 Three of these were initiated by the OFT itself206 and, in the remainder, the 199 200
Article 22(2), Merger Regulation. Ibid.
201
See, e.g., Case No COMP/M.4215, Glatfelter/Crompton assets, Commission decision of 15 May 2006 (the Article 22 referral request was made by the Bundeskartellamt in Germany on 4 April 2006, the Commission notified the Member States on 4 April 2006 and the OFT joined the request on 2 May 2006) and Case No COMP/M.5109, Danisco/Abitec, Commission decision of 17 April 2008 (the Article 22 referral request was made by the Bundeskartellamt in Germany on 4 March 2008, the Commission notified the Member States on 6 March 2008, and the OFT joined the request on 1 April 2008). 202 Case Referral Notice, para. 50. 203 This time-period may not exactly equal 25 working days as, in accordance with Article 22(2), Member States have 15 working days from the date on which the Commission informed them of the request within which to join a referral request. If there has been a delay between the Commission receiving the request and transmitting it to the Member States, the overall time-period within which the Commission must reach a decision may be more than 25 working days. 204 Article 22(3), Merger Regulation; Case Referral Notice, para. 50. 205
Case No COMP/M.2698, Promatech/Sulzer, Commission decision of 24 July 2002; Case No COMP/M.2738, GEES/Unison, Commission decision of 17 April 2002; Case No COMP/M.4215, Glatfelter/Crompton assets, Commission decision of 15 May 2006; Case No COMP/M.4465, Thrane & Thrane/NERA, Commission decision of 21 March 2007; Case No COMP/M.4709, Apax Partners/Telenor Satellite Services, Commission decision of 20 June 2007; Case No COMP/M.5109, Danisco/Abitec, Commission decision of 17 April 2008; Case No COMP/M.5020, Lesaffre/GBI UK,
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OFT either joined a referral initially made by another Member State or was a party to a joint referral request.207 The CMA has initiated just one Article 22 referral request.208 As with Article 9 referral requests, in an effort to increase the transparency of such requests and the reasons behind such requests, the OFT published non-confidential versions of its Article 22 requests and the CMA will do likewise. To date, the Authorities have published only two such requests.209 In considering whether to make a referral request, the CMA will assess whether: (i) the transaction is a concentration; (ii) it affects trade between Member States; and (iii) it threatens to significantly affect competition within the UK.210 The CMA will also take into account other considerations in trying to establish whether a merger might be appropriate for an Article 22 referral request. These include whether: (i) a relevant geographic market affected by the concentration is wider than national; (ii) the concentration is subject to filings in several Member States such that parties would benefit from the ‘one-stop shop’ principle; (iii) suitable remedies would lie outside the CMA’s jurisdiction; and (iv) the transaction has already been reviewed by one or more Member States and, if so, whether a further review by the Commission would be useful and proportionate.211 Where the CMA is considering whether or not to make a referral request, it will normally inform the parties as soon as possible and, where possible, will invite the parties to provide their comments, either in writing or at a meeting.212 However, the parties’ agreement is not considered a necessary condition for a referral. In the event that the CMA decides to make a referral request, it will inform the parties one hour in advance of a public announcement.213 The CMA will also discuss a potential referral
Commission decision of 11 July 2008; Case COMP/M.5828, Procter & Gamble/Sara Lee Air Care, Commission decision of 17 June 2010; Case No COMP/M.6191, Birla/Colombian Chemicals, Commission decision of 18 October 2011; Case No COMP/M.7802, Amadeus/Navitaire, Commission decision of 19 January 2016. 206 Lesaffre/GBI UK, supra; Apax Partners/Telenor Satellite Services, supra; Thrane & Thrane/Nera, supra. 207 Danisco/Abitec, supra (the OFT joined a referral request that was initially made by Germany); Glatfelter/Crompton assets, supra (the OFT joined a referral request that was initially made by Germany); Promatech/Sulzer, supra (the concentration was the subject of a joint request for a referral by Spain, the UK, Italy, Germany and France); GEES/Unison, supra (the concentration was the subject of a joint request for a referral by Spain, the UK, Italy, Germany, France and Greece); Procter & Gamble/Sara Lee Air Care, supra (a referral request was made by Belgium, the UK, Germany, Spain, Portugal and Hungary); Birla/Colombian Chemicals, supra (a referral request was made by Germany and joined by the UK, France and Spain). 208
Case No COMP/M.7802, Amadeus/Navitaire, Commission decision of 19 January 2016. Procter & Gamble/Sara Lee Air Care, supra; and Birla/Colombian Chemicals, supra. 210 Jurisdictional and Procedural Guidance, para. 18.50. 211 Ibid., para. 18.51. 209
212 213
Ibid., para. 18.57. Ibid.
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request with the Commission as soon as possible, and the Commission’s consent will be actively sought before a referral request is made.214 A waiver is sought from the parties to enable the CMA to provide the Commission with copies of any documents that it has received during the course of its proceedings, and the CMA recommends that parties prepare a confidentiality waiver in advance if they believe that an Article 22 request might be considered by the CMA.215 Of the ten Article 22 referrals involving the UK, the Commission has published Article 22 decisions in only one of these: Danisco/Abitec.216 In this case, on 4 March 2008, the Bundeskartellamt requested that the Commission accept a referral of the acquisition by Danisco, a manufacturer of food ingredients including emulsifiers, of Abitec, a UKbased manufacturer of emulsifiers. The OFT joined the Bundeskartellamt’s request on 1 April 2008. Regarding the effect on trade between Member States, the Bundeskartellamt and the OFT argued that the relevant geographic markets were at least EEA-wide (if not worldwide), that there were important trade flows between Member States, and that both parties had widespread sales of emulsifiers throughout the EU.217 On this basis, the Commission concluded that the transaction would affect trade between Member States. As to whether the transaction threatened significantly to affect competition in respect of the UK, the Commission noted that the parties’ combined market shares were high for specific emulsifiers (45-55%).218 In addition, the OFT had received comments from customers suggesting that Abitec was the cheapest supplier of emulsifiers and was used as a price benchmark as well as the fact that the UK market was already highly concentrated.219 Therefore, on a prima facie basis, the Commission concluded that the transaction threatened to significantly affect competition in the UK. In terms of the appropriateness of a referral, the Bundeskartellamt and the OFT considered that the Commission was better placed to assess the transaction. As specifically regards the UK, the OFT highlighted that in a case where a Member State has initiated a referral request to the Commission and the OFT considers it likely that the Commission would accept the request, the OFT would join such a request so as to uphold the ‘one-stop shop’ principle and avoid a parallel OFT investigation.220 The Commission accepted the requests of the Bundeskartellamt and the OFT, noting that the relevant markets were likely to be wider than national, the transaction may give rise to competition concerns, and that it could not be excluded that parallel investigations by the Bundeskartellamt and the OFT would lead to divergent results which, in EEA-wide markets, should be avoided.221
214 215
Ibid., para. 18.58. Ibid.
216
Danisco/Abitec, supra. Ibid., para. 13. 218 Ibid., para. 24. 219 Ibid., para. 23. 217
220 221
Ibid., para. 28. Ibid., para. 31.
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(f) Review of the Article 22 referral mechanism. NCAs generally expressed the view that Article 22 functioned effectively. On the issue of whether a Member State should be able to make or join a referral without having jurisdiction, five NCAs considered that this should continue to be possible, whilst nine NCAs thought that it should not.222 All of the NCAs that addressed the issue of whether referrals from a single Member State should be permitted agreed that this should be possible.223 A number of stakeholders considered that Member States without jurisdiction should not be able to make or join a referral request.224 Respondents also questioned the continuing need for the Article 22 referral mechanism at all, as all but one Member State now has merger control rules.225 In this regard, some respondents suggested harmonising the procedural differences between Article 22 and Article 4(5), particularly in respect of the number of Member States in which filings are necessary. Some suggested that, as with an Article 4(5) referral, the Commission should be able to accept Article 22 referrals only when the transaction in question was notifiable in at least three Member States.226 (g) 2014 White Paper. In the 2014 White Paper, the Commission proposed modifying the Article 22 referral process such that one or more Member States that are competent to review a transaction under their national law could request a referral to the Commission within 15 working days of the date that the transaction was notified to them or was made known to them.227 Therefore, Article 22 referral requests could not be made by a Member State that was not competent to review the transaction. The Commission would then decide whether to accept the referral request, but if it accepted the request it would have jurisdiction for the whole of the EEA. However, if one or more competent Member States opposed the referral, and provided reasons for doing so, the Commission would renounce jurisdiction for the whole of the EEA and the Member States would retain jurisdiction. The Commission noted two issues with the proposed modification. First, a timing issue could arise if a competent Member State had already cleared the transaction in its territory. In this case, the Commission would no longer have EEA-wide jurisdiction. Secondly, Member States might not have enough information to determine whether they would have jurisdiction and would therefore have the right to oppose a referral request, or, if they were competent, they may have insufficient information to decide whether to veto a referral request for substantive reasons. The Commission’s proposed solution was for NCAs to circulate early information notices for multi-jurisdictional cases or cases that involve markets that are prima facie wider than national as soon as possible after a Member State receives a notification or otherwise learns of the transaction. The NCA would indicate in this notice if it was considering making a referral request. In 222
Staff Working Paper, para. 138. Ibid., para. 139. 224 Ibid., para. 140. 225 Ibid., para. 141. 223
226 227
Ibid. 2014 White Paper, para. 69.
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that case, the notice would trigger the suspension of the national deadlines of all Member States that were also investigating the transaction. Alternatively, if the Commission considered that it was the more appropriate authority, it would invite the Member State concerned to request a referral under Article 22 and such an invitation would suspend all national deadlines. In the event that a Member State had already adopted a clearance decision before a referral request had occurred, the clearance decision would remain in force and the case would be referred by the remaining Member States only.
4.6
PROTECTION OF LEGITIMATE NATIONAL INTERESTS 4.6.1
General Principles
Notwithstanding the fact that the Commission has sole jurisdiction over mergers under the Merger Regulation, and that Member States are not permitted to apply their own national legislation to concentrations with an EU dimension, Member States may take appropriate measures to protect “legitimate interests” other than those taken into consideration by the Merger Regulation, provided that such interests are compatible with the general principles and other provisions of EU law.228 Legitimate interests include public security, plurality of the media and the protection of prudential rules.229 Any other public interest that a Member State wishes to protect must be communicated to the Commission and will be recognised after an assessment of its compatibility with the general principles and other provisions of EU law has been made.230 The Commission will inform the Member State in question of its decision in respect of these additional public interests within 25 working days of the Member States’ communication.231
4.6.2
Procedure and Practice
The referral mechanism under Article 21(4) of the Merger Regulation is intended to allow Member States to take appropriate measures to protect a limited class of legitimate interests where the Commission has jurisdiction over a transaction and where the conditions of Article 9 are not met (e.g., because the concentration does not threaten to significantly affect competition in a Member State or the market in question constituted a substantial part of the common market). In EDF/London Electricity, for example, the OFT requested that the Commission refer the transaction back to the UK for assessment under Article 9.232 The Commission declined the OFT’s request on the grounds that the transaction did not threaten to significantly affect competition on a market in the UK, and the market concerned was a substantial part of the common 228
Article 21(4), Merger Regulation. Ibid. 230 Ibid. See also, Case No COMP/M.1346, EDF/London Electricity, Commission decision of 21 January 1999, where the OFT requested that the Commission take into consideration certain legitimate interests relating to the UK electricity sector. 229
231 232
Ibid. EDF/London Electricity, supra.
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market. The OFT also requested that the Commission take into consideration certain legitimate interests relating to the UK electricity sector, principally concerning regulatory issues (e.g., licence modifications). The Commission determined that ongoing regulatory activity was not prevented by the Merger Regulation and, therefore, it was not necessary for the Commission to recognise a legitimate interest before the UK authorities took the required regulatory action. The “appropriate measures” that may be taken by Member States are not specified in the Merger Regulation. In practice, where the “legitimate interests” concerned are those set out in Article 21(4) of the Merger Regulation (i.e., public security, plurality of the media or the protection of prudential rules), the CMA is able to take its own decisions insofar as they are compatible with the general principles and other provisions of EU law. For example, in Astrium/EADS, European Aeronautic Defence and Space Company (“EADS”), a company active in the production of a variety of aircraft and military systems, and which was jointly controlled by DaimlerChrysler, Lagardère, and the French State, proposed acquiring Astrium, which was formerly jointly controlled by EADS and BAE Systems and was active in the production of space systems, including satellites and their payloads.233 The concentration had an EU dimension and was notified to the Commission and received unconditional clearance.234 Subsequently, the Ministry of Defence (“MoD”) made representations to the OFT that the merger raised national security concerns, particularly regarding the maintenance of strategic UK capabilities and the protection of classified information. The OFT, having to rely heavily on the representations of the MoD, considered the merger and advised the Secretary of State to accept the draft undertakings, which had been agreed to by EADS, and which provided for a compliance regime and the appointment of a compliance officer who would report to the MoD on compliance with the undertakings.235 Where the “legitimate interests” in question are not those set out in Article 21(4) of the Merger Regulation, the OFT has previously requested that the Commission take these interests into consideration. This was the case in EDF/London Electricity, where the Commission declined to do so. The OFT also requested that the Commission take into consideration certain “legitimate interests” in Lyonnaise des Eaux/Northumbrian
233
Completed acquisition of sole control of Astrium N.V. by European Aeronautic Defence and Space Company, EADS N.V., OFT advice of 15 July 2003. 234
Case No COMP/M.3156, EADS/Astrium (II), Commission decision of 26 May 2003. See also, Proposed Rocket Motors joint venture between MBDA and SNPE, OFT advice of 21 November 2002. In this case, MBDA, which was primarily active in the production of guided weapon systems, proposed creating a joint venture with SNPE, which was owned by the French state and was primarily active in energetic materials and fine chemicals. The proposed joint venture was intended to combine the businesses of a pre-existing joint venture between SNPE and EADS, which specialised in the manufacture of rocket motors for tactical weapons, and a subsidiary of BAES, which was also active in the manufacture of rocket motors. The merger was reviewed by the Commission and cleared unconditionally in October 2002. In addition, the MoD made representations that the merger might adversely affect the public interest on national security grounds. As a result, the Director General of Fair Trade recommended to the Secretary of State that the transaction be subject to UILs, which the parties had agreed to. 235
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Water.236 In this case, Lyonnaise des Eaux (“Lyonnaise”) publicly announced its intention to make a public recommended cash offer for the entire issued share capital of Northumbrian Water (“Northumbrian”) on 6 March 1995. On the same day as this announcement, the OFT made an application for the recognition of “legitimate interests” under the Water Industry Act 1991. In its decision recognising these legitimate interests, the Commission noted that: (i) the purpose of the UK legislation was to safeguard the provision of a vital service and to protect the consumer; (ii) UK water suppliers enjoyed a strong natural monopoly in the provision of services in their designated areas; (iii) the Director General of Water Services (“DGWS”) had a need to maintain an adequate number of comparators (water suppliers that were independently controlled); (iv) the ability of the DGWS to compare the costs and performance of an adequate number of companies was important in setting price parameters; and (v) UK legislation was not incompatible with the general principles and other provisions of EU law, in particular, as it did not form a method of arbitrary discrimination, nor was it a disguised form of restriction between Member States. Following this decision, on the occurrence of a subsequent water merger between Vivendi and First Aqua, the OFT did not make an application for the recognition of the UK’s legitimate interests under the Water Industry Act.237 In its decision, the OFT noted that the UK’s legitimate interests had already been recognised by the Commission. Accordingly, although the Commission unconditionally cleared the merger in August 2002 after a Phase I review,238 the OFT determined that the transaction amounted to a merger between water enterprises and therefore triggered a mandatory reference to the CC. Following its review, the CC concluded that the merger may have been expected to operate against the public interest because it would have prejudiced the DGWS’ ability to make comparisons between different water enterprises pursuant to the Water Industry Act. The CC considered prohibition to be disproportionate to the detriment identified, but recommended that Vivendi divest its 31.4% shareholding in South Staffordshire Group plc, another regulated water company. The Secretary of State may also issue a European Intervention Notice (which is considered in Chapter 5).239 Briefly, where the Secretary of State has reasonable grounds for suspecting that a relevant merger situation has been or will be created and that the merger falls within the Commission’s jurisdiction, he may issue a European intervention notice where he believes that a public interest consideration is relevant to its consideration. Public interest considerations include national security, media
236
Case No IV/M.567, Lyonnaise des Eaux/Northumbrian Water, Commission decision of 21 December 1995. 237 Proposed acquisition by Vivendi Water UK plc of an interest in First Aqua (JVCo) Limited, OFT advice of 28 October 2002. 238 Case No COMP/M.2829, Vivendi Environment/Southern Water, Commission decision of 23 August 2002. 239 Section 67, Enterprise Act.
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plurality and the stability of the UK financial system.240 Several such intervention notices have been issued since the coming into force of the Enterprise Act.241
4.7
ARTICLE 346 TFEU
Article 346 TFEU (formerly Article 296) provides that a Member State is not obliged to supply information if it considers the disclosure to be contrary to the essential interests of its security. A Member State may take such measures as it considers necessary for the protection of these essential interests that are connected with the production of or trade in arms, munitions and war material. Such measures are not permitted to adversely affect the conditions of competition in the common market regarding products that are not intended for military purposes. This Article has been relied upon by the UK to withhold information from notifications to the Commission where it would involve the disclosure of information relevant to national security. For example, in British Aerospace/VSEL, British Aerospace (“BAe”), a UK company principally involved in producing defence equipment and civil aircraft, made a public offer for the entire issued share capital of VSEL, another UK company, active in the production of submarines, surface warships and armaments.242 The UK government instructed BAe not to notify the acquisition of VSEL’s military activities on the grounds that this might compromise national security. In concluding that the UK’s application of Article 296 (now Article 346) was satisfactory, the Commission noted that: (i) the part of the concentration that was not notified related only to the production of or trade in arms, munitions or war material; (ii) the measures taken by the UK were necessary for the protection of the essential interests of its security; (iii) there were no spill-over effects from the military activities of BAe to the non-military activities; and (iv) the merger would have no significant impact on suppliers and sub-contractors of the merging parties and on Ministries of Defence of other Member States, as neither BAe nor VSEL made any significant sales of their products in other Member States.243 Similarly, in British Aerospace/GEC Marconi, which concerned the acquisition by BAe of Marconi Electric Systems, the defence electronics business of General Electric, the UK government instructed BAe not to notify the military aspects of this transaction.244 For essentially the same reasons that were given in British Aerospace/VSEL, the Commission concluded that the measures taken by the UK fell within the scope of Article 296 (now Article 346).
240
Section 58, Enterprise Act. See Chapter 5 for examples of these cases. 242 Case No IV/M.528, British Aerospace/VSEL, Commission decision of 24 November 1994. 241
243 244
Ibid., para. 10. Case No IV/M.1438, British Aerospace/GEC Marconi, Commission decision of 21 May 1999.
Chapter 5 PUBLIC INTEREST MERGERS 5.1 Introduction 5.2 Public Interest Grounds 5.2.1 Public Interest Considerations 5.2.2 National Security 5.2.3 Newspaper Public Interest Considerations (a) Media Merger Guidance (b) Accurate presentation of news (c) Free expression of opinion (d) Plurality of views (e) Policy on intervention 5.2.4 Media and Broadcasting Public Interest Considerations (a) Definition of a media enterprise (b) Consideration of a purchaser’s track record (c) Assessment of media pubic interest considerations (d) Plurality of persons with control of media enterprises (e) Range of broadcasting (f) Commitments to the broadcasting standards objectives 5.2.5 Maintaining the Stability of the UK Financial System 5.3 Public Interest Mergers 5.3.1 General Principles
5.1
5.3.2 5.3.3 5.3.4 5.3.5
Public Interest Intervention Notice Phase I Investigation and Report Report by OFCOM Decision of the Secretary of State on Reference 5.3.6 Phase II Investigation and Report 5.3.7 Final Decision of the Secretary of State 5.3.8 Enforcement 5.4 Special Public Interest Mergers 5.4.1 General Principles 5.4.2 Procedure 5.4.3 Phase I Investigation and Report 5.4.4 Decision of the Secretary of State on Reference 5.4.5 Phase II Investigation and Report 5.4.6 Final Decision of the Secretary of State 5.5 European Mergers and the Protection of Legitimate Interests 5.5.1 General Principles 5.5.2 Phase I Investigation and Report 5.5.3 Decision of the Secretary of State on Reference 5.5.4 Phase II Investigation and Report 5.5.5 Final Decision of the Secretary of State
INTRODUCTION
One of the principal aims of the Enterprise Act was to reduce political involvement in the UK merger control regime. For this reason, the Enterprise Act introduced a system whereby merger decisions were no longer taken by the Secretary of State, on the basis of advice from the Director General of Fair Trading. Instead, the vast majority of these decisions would be taken by the OFT (now the CMA) without political interference. However, the Enterprise Act did not remove the Secretary of State from the merger control regime entirely, and there remain certain circumstances in which the Secretary of State, and not the CMA, remains the ultimate decision-maker. These decisions relate
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to circumstances in which the Secretary of State considers that one or more so-called ‘specified considerations’ is relevant to the merger in question.1 These specified considerations may apply to three types of mergers: (i) public interest mergers; (ii) special public interest mergers; and (iii) European relevant merger situations. Each of these is considered below. As was anticipated at the time of the Enterprise Act coming into force, mergers in which the Secretary of State has intervened on public interest grounds have been relatively rare and there have been only ten such cases to date.2
5.2 5.2.1
PUBLIC INTEREST GROUNDS Public Interest Considerations
Section 58 of the Enterprise Act sets out the public interest considerations in relation to which the Secretary of State may intervene in a merger. These are as follows: (1)
national security, including public security;3
(2)
the need for accurate presentation of news and free expression of opinion in newspapers;4
(3)
the need for, to the extent that it is reasonable and practicable, a sufficient plurality of views in newspapers in each market for newspapers in the UK or a part of the UK;5
1
Section 58, Enterprise Act. Anticipated acquisition by General Dynamics Corporation of Alvis Plc: a report to the Secretary of State for Trade and Industry, 20 May 2004; Anticipated acquisition by Finmeccanica Societa per Azioni of AgustaWestland NV: a report to the Secretary of State for Trade and Industry, 29 September 2004; Anticipated acquisition by Finmeccanica Societa per Azioni of BAE Systems plc’s avionics and communications business: a report to the Secretary of State for Trade and Industry, 14 March 2005; Anticipated acquisition by Lockheed Martin Corporation, through Lockheed Martin UK Holdings Limited, of Insys Group Limited: a report to the Secretary of State for Trade and Industry, 19 September 2005; Anticipated acquisition by General Electric Company of the aerospace business of Smiths Group plc: a report to the Secretary of State for Trade and Industry, 10 April 2007; Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc: Report to the Secretary of State for Trade and Industry, 27 April 2007; Anticipated acquisition by Lloyds TSB plc of HBOS plc: report to the Secretary of State for Business Enterprise and Regulatory Reform, 24 October 2008; Anticipated acquisition by Atlas Elektronik GmbH UK through Atlas Elektronik UK Limited of QinetiQ’s UWs Winfrith Division: a Report to the Secretary of State for Business, Innovation and Skills, 25 June 2009; A report to the Secretary of State for Culture, Olympics, Media and Sport in response to the European intervention notice issued on 4 November 2010 in relation to the anticipated acquisition by News Corporation of British Sky Broadcasting Group plc, 30 December 2010; Completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited, Report to the Secretary of State for Culture, Media and Sport, 28 September 2012. 3 Section 58(2), Enterprise Act. 4 Section 58(2A), Enterprise Act. This section was added by section 375(1) of the Communications Act. 2
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(4)
151
the need:6 (i)
in relation to every different audience in the UK or in a particular area or locality of the UK, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience;
(ii) for the availability throughout the UK of a wide range of broadcasting that (taken as a whole) is both of high quality and calculated to appeal to a wide variety of tastes and interests; and (iii) for persons carrying on media enterprises, and for those with control of such enterprises, to have a genuine commitment to the attainment in relation to broadcasting of the standards objectives set out in section 319 of the Communications Act 2003; and (5)
the interest of maintaining the stability of the UK financial system.7
The Enterprise Act allows for the Secretary of State, by order, to modify section 58 for the purposes of specifying new considerations or removing or amending any consideration.8 In 2008, the Secretary of State modified section 58 to include the consideration of maintaining the stability of the UK financial system. The Secretary of State may also intervene on the basis of a consideration that is not specified in section 58 but which, in the opinion of the Secretary of State, ought to be so specified.9 Where the Secretary of State has given an intervention notice mentioning a public interest consideration which, at that time is not finalised, the Enterprise Act provides that he shall, as soon as practicable, take such action as is within his power to ensure that it is finalised.10 A public interest consideration is deemed to be finalised if it is specified in section 58 of the Enterprise Act11 or is contained in an order that has been laid before both Houses of Parliament and approved within 28 days from the day on which it was made, by a resolution of each House of Parliament.12
5
Section 58(2B), Enterprise Act. This section was added by section 375(1) of the Communications
Act. 6
Section 58(2C), Enterprise Act. This section was added by section 375(1) of the Communications
Act. 7 Section 58(2D), Enterprise Act. This section was added by the Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2008 SI 2008/2645. Section 58(2D) excludes the application of this consideration to European merger situations under section 67 and 68 of the Enterprise Act. 8 Section 58(3), Enterprise Act. 9 Section 42(3), Enterprise Act. 10 Section 42(7), Enterprise Act. 11 12
Section 42(8)(a), Enterprise Act. Sections 42(8)(b) and 124(7), Enterprise Act.
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5.2.2
National Security
The Enterprise Act states that “national security” includes “public security” and that “public security” has the same meaning as under Article 21(4) of the Merger Regulation.13 Whilst national security has its focus on defence, the inclusion of public security clearly widens this public interest consideration beyond issues of national defence and the interpretation of “public security” by the European Commission and the EU Courts is of relevance to the scope of this consideration. As was perhaps envisaged by the fact that the original version of the Enterprise Act included only national security as a public interest consideration, the Secretary of State has intervened in mergers on national security grounds more frequently than on the basis of any other public interest consideration. To date, the Secretary of State has intervened in six mergers on the basis of national security. Strikingly, none of these mergers was referred for a Phase II investigation by the Secretary of State. In each of these cases, the OFT prepared a report for the Secretary of State setting out undertakings in lieu of reference (“UILs”) that were negotiated or suggested by the MoD, as it was better placed than the OFT to assess issues of national security. These cases, which focus, in particular, on issues relating to the maintenance of UK strategic capabilities and the protection of classified information, are summarised below. (1)
13
In General Dynamics/Alvis, General Dynamics, a company headquartered in the United States and active in supplying, amongst other things, combat and defence systems, proposed acquiring Alvis, a UK company active in the supply of armoured fighting vehicles and military land systems.14 The Secretary of State issued a European intervention notice to the OFT on 26 April 2004, stating that he was considering whether to take measures to protect legitimate interests as the national security public interest consideration might be relevant to the assessment of the merger. The OFT delivered its report to the Secretary of State on 20 May 2004, concluding that, although the Commission had sole jurisdiction over the merger, the UK could exercise its residual power to take appropriate measures under Article 21(3) (now Article 21(4)) of the Merger Regulation to protect its legitimate interests. The OFT received representations from a number of parties, including the MoD. The MoD identified two main areas of concern relating to the merger: (i) the maintenance of UK strategic capabilities; and (ii) the protection of classified information.15 Regarding the maintenance of strategic capabilities, the MoD stated that Alvis was the design authority for the majority of the British Army’s armoured fighting vehicle fleet, in relation to which it possessed unique skills and knowledge. The MoD stated that it was essential for the protection of the UK’s national security to ensure that Alvis was able to bid for or perform contracts either on its own or with
Section 58(2), Enterprise Act. Anticipated acquisition by General Dynamics Corporation of Alvis Plc: a report to the Secretary of State for Trade and Industry, 20 May 2004. 15 Ibid., para. 8. 14
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third parties, where required, for the purposes of an MoD programme. Without these capabilities, the MoD considered that it would be unable unilaterally to update equipment so as to maintain the operational advantage that UK armed forces gained from having technologically-advanced and reliable equipment.16 The OFT noted that similar views were also expressed by a number of third parties. In relation to the protection of classified information, the MoD indicated that some of the strategic capabilities provided by Alvis were dependent on access to highly classified technology and information. Some of the information was available only to UK nationals and may therefore have borne a UK ‘Eyes Only’ caveat.17 The MoD prepared undertakings and these were agreed to by General Dynamics. The Secretary of State concluded that the undertakings were an appropriate measure and were compatible with the general principles and other provisions of EU law in accordance with Article 21(4) of the Merger Regulation. Accordingly, the Secretary of State found that a reference to the CC was unnecessary and General Dynamics gave the agreed undertakings. (2)
In Finmeccanica/AgustaWestland, Finmeccanica, an Italian company active principally in the aerospace, defence, communications and energy sectors, announced that it had signed definitive agreements with GKN to acquire its 50% shareholding in AgustaWestland (“Westland”), a company active in the production of civil and military helicopters.18 The Secretary of State issued a European intervention notice to the OFT on 20 August 2004. The OFT received representations about the merger from the MoD, which (as in General Dynamics/Alvis) had concerns in relation to the maintenance of UK strategic capabilities and the protection of classified information. In relation to the maintenance of UK strategic capabilities, the MoD stated that Westland was the design authority for the majority of the UK armed forces helicopter fleet and that the company had unique skills and knowledge relating to them.19 The MoD stated that it was essential for the protection of the UK’s national security that these capabilities were retained within the UK. The MoD stated that without this capability, the UK would be unable unilaterally to update equipment so as to maintain the operational advantage that the UK’s armed forces gained from having technologically-advanced equipment that was capable of performing alongside allies and surpassing potential adversaries.20 Therefore, the MoD considered that it was necessary to obtain an assurance from Finmeccanica that it would continue to make available to the UK the capabilities that Westland possessed in these areas, and that, in the event of any proposed rationalisation by Finmeccanica, such capabilities would be
16
Ibid., para. 9.
17
Ibid., para. 10. Anticipated acquisition by Finmeccanica Società per Azioni of AgustaWestland NV: a report to the Secretary of State for Trade and Industry, 29 September 2004. 18
19 20
Ibid., para. 10. Ibid.
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maintained within the UK and would not be run down or transferred abroad following the transaction, without prior consultation with the MoD.21 In relation to classified information, the MoD indicated that some of Westland’s strategic capabilities were dependent on access to highly classified technology and information. Some of the information was available only to UK nationals and may therefore have been covered by a UK ‘Eyes Only’ caveat. The MoD considered that if Westland, under the control of Finmeccanica, were to continue its involvement in such work, it would be necessary to ensure that such information was retained and protected within the UK. Accordingly, undertakings were agreed to by Finmeccanica, Westland and the MoD. The Secretary of State concluded that the undertakings were an appropriate measure and were compatible with the general principles and other provisions of EU law in accordance with the Merger Regulation. Accordingly, the Secretary of State found that a reference to the CC was unnecessary and Finmeccanica and Westland entered into the agreed undertakings. (3)
In Finmeccanica/BAE Avionics, Finmeccanica proposed acquiring BAE Systems’ (“BAE”) avionics and communications business, a company active in military avionics, and, in particular, airborne radar.22 The Secretary of State issued a European intervention notice to the OFT on 7 February 2005. As with the previous European intervention notice cases, the OFT received representations from the MoD, which had concerns in relation to the maintenance of UK strategic capabilities and the protection of classified information. The MoD stated that BAE was the design authority for the majority of the avionics fitted in UK air platforms and that the company had unique skills and knowledge relating to them.23 The MoD considered it essential to national security that these capabilities were retained within the UK. In relation to the protection of classified information, the MoD indicated that BAE’s avionics business had access to highly classified information bearing a UK ‘Eyes Only’ caveat. The MoD considered it necessary to ensure that such information was retained in the UK. Another third party also made representations relating to the maintenance of strategic capabilities and was concerned that if Finmeccanica were to hinder other contractors’ access to BAE’s avionics products this would have a negative impact on the MOD’s ability to choose between alternative price contractors for UK defence contracts.24 The parties agreed to undertakings aimed at resolving the MoD’s concerns, which included an assurance from Finmeccanica that it would continue to make available to the UK the capabilities that existed within BAE’s avionics and communication businesses and that such capabilities would be maintained in the UK. The undertakings also included assurances relating to a compliance regime that would ensure the protection of classified information.
21
Ibid., para. 11. Anticipated acquisition by Finmeccanica Società per Azioni of BAE Systems plc’s avionics and communications business: a report to the Secretary of State for Trade and Industry, 14 March 2005. 22
23 24
Ibid., para. 12. Ibid., para. 15.
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The Secretary of State concluded that the undertakings were an appropriate measure and that a reference to the CC was unnecessary. (4)
In Lockheed Martin/Insys, Lockheed Martin (“Lockheed”) proposed acquiring Insys Group (“Insys”), which was a specialist defence engineering and R&D contractor, supplying integrated system solutions to the UK and allied armed forces.25 The Secretary of State issued a special intervention notice to the OFT on 17 August 2005. The OFT received submissions on the national security consideration from the MoD, which commented that Insys was still subject to undertakings given under the Fair Trading Act in relation to its acquisition of Hunting Engineering Limited in 2001.26 The MoD stated that Insys had important capabilities in the UK in relation to combat, weapons and communications system integration and research capabilities, and that these capabilities were dependent on highly classified technology and information, much of which was available only to UK nationals.27 The MoD’s concern was that, following the acquisition, Lockheed might seek to rationalise its defence activities with the potential consequence that these essential UK capabilities could be either run down, sold off or transferred abroad to be combined with Lockheed’s other capabilities in these areas.28 In addition, the MoD was concerned that as Insys would be controlled by a US company this might raise issues regarding the US International Traffic in Arms Regulation, which would have profound implications for UK security of supply if UK information and technology were combined with US information and technology without UK knowledge or approval. The parties agreed to undertakings aimed at resolving the MoD’s concerns. The Secretary of State decided not to refer the merger and determined that the proposed undertakings in lieu were appropriate to prevent any adverse public interest effects.
(5)
In General Electric/Smith, General Electric Company (“GE”) proposed acquiring the aerospace division of Smiths Group (“Smiths Aerospace”), which was active in the supply of various types of aerospace systems and equipment.29 The Secretary of State issued a European intervention notice to the OFT on 20 March 2007. The OFT received representations from the MoD, which had three main areas of concern: (i) the transfer of ownership of Smiths Aerospace outside the UK; (ii) the maintenance of UK strategic capabilities; and (iii) the protection of classified information.30 The MoD was concerned that GE might be able to influence Smiths Aerospace in ways that could
25 Anticipated acquisition by Lockheed Martin Corporation, through Lockheed Martin UK Holdings Limited, of Insys Group Limited: a report to the Secretary of State for Trade and Industry, 19 September 2005. 26 Ibid., para. 9. 27
Ibid., para. 10. Ibid., para. 11. 29 Anticipated acquisition by General Electric Company of the aerospace business of Smiths Group plc: a report to the Secretary of State for Trade and Industry, 10 April 2007. 30 Ibid., para. 9. 28
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prejudice national security, that Smiths Aerospace was a key supplier of subsystems for a number of important weapons platforms, including the Typhoon combat aircraft and the future Lynx helicopter, and that Smiths Aerospace’s capabilities were to some extent dependent on classified technology and information that bore a UK ‘Eyes Only’ caveat. Following discussions with MoD and OFT officials, GE and Smiths Aerospace confirmed that they were prepared to accept undertakings. These undertakings were similar in nature to those given in previous European intervention notice cases and included an assurance from GE and Smiths Aerospace that: (i) for as long as Smiths Aerospace was a prime contractor, a sufficient number of the directors would be UK security-cleared British citizens; (ii) they would continue to make available to the UK the capabilities that existed within Smiths Aerospace; and (iii) that such capabilities would be maintained in the UK. The undertakings also included assurances relating to a compliance regime that would ensure the protection of classified information. On this basis, the Secretary of State considered it unnecessary to refer the transaction to the CC. (6)
31
In Atlas/QinetiQ, Atlas Elektronik UK (“Atlas”), a joint venture between EADS and Thyssen-Krupp Marine Systems, proposed acquiring QinetiQ’s underwater systems division, Underwater Systems Winfrith (“UWS Winfrith”).31 On 15 May 2009, the Secretary of State issued a special public interest intervention notice to the OFT stating that he believed that arrangements were in progress or contemplation, which, if carried into effect, could result in a special merger situation due to the fact that QinetiQ’s underwater systems division had UK turnover of only approximately £30 million. As in previous mergers, the OFT’s main concern was that Atlas might choose to rationalise its defence activities with the potential consequence that these essential UK capabilities could either be run down, sold off or transferred abroad to be combined with Atlas’ other foreign-based business activities. In addition, the MoD was concerned that a move to ultimate control by a German parent company raised concerns for the MoD due to the potential for day-today management of programmes in support of the MoD being moved to Germany, and for the application of German export control regulations to UWS Winfrith’s output for the MoD. The MoD considered that this would have had profound implications for the UK’s security of supply, as well as the timely delivery of advice or systems, if UK information and technology were to be combined with foreign information and technology without UK knowledge or approval and/or MoD supply became subject to German export control.32 Regarding the maintenance of strategic UK capabilities, the MoD stated that UWS Winfrith was a key supplier of research, advice, enabling technology, systems and support for a number of important current and future maritime platforms for the UK’s Armed Forces. The MoD stated that it was essential for
Anticipated acquisition by Atlas Elektronik GmbH UK through Atlas Elektronik UK Limited of Qinetiq’s UWs Winfrith Division: a report to the Secretary of State for Business, Innovation and Skills, 25 June 2009. 32 Ibid., para. 9.
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the protection of the UK’s national security that the UK retain the capability to develop, operate and maintain platforms incorporating the underwater warfare technologies that UWS Winfrith provided, independently of other countries. Without retaining such capabilities within the UK, the MoD stated that the UK would be unable to maintain the operational advantage that its Armed Forces gained from having unique, technologically-advanced equipment that was capable of performing alongside its allies but surpassing potential adversaries. UWS Winfrith was also involved in a number of highly sensitive programmes directly and indirectly supporting the defence administrations of close allies. Regarding the protection of classified information, the MoD noted that various aspects of UWS Winfrith’s work involved access to classified information and technology. The MoD regarded the leakage of such information and technology to non-UK owners as potentially prejudicial to the operational security and capability of the UK armed forces. As in all other cases raising issues of national security, the parties agreed to undertakings, which had been prepared by the MoD, and the Secretary of State determined that this was an appropriate course of action and that no referral to the CC was necessary.
5.2.3
Newspaper Public Interest Considerations
The Enterprise Act gives the Secretary of State the power to intervene in a newspaper merger where he has concerns relating to: (i) the accurate presentation of news and free expression of opinion in newspapers;33 and (ii) a sufficient plurality of views in newspapers in each market for newspapers in the UK or a part of the UK.34 For the purposes of interventions by the Secretary of State, the Enterprise Act defines “newspapers” to include “a daily, Sunday or local (other than daily or Sunday) newspaper circulating wholly or mainly in the United Kingdom or in a part of the United Kingdom.”35 To date, no intervention notices have been issued in newspaper mergers under the Enterprise Act. (a) Media Merger Guidance. In May 2004, the then Department of Trade and Industry published a document entitled ‘Guidance on the operation of the public interest provisions relating to newspaper and other media mergers’ (the “Media Merger Guidance”), which remains in force. The Media Merger Guidance states that the newspaper public interest considerations were derived from concerns identified in particular cases examined by the CC and the MMC under the Fair Trading Act newspaper merger regime.36 Under the Fair Trading Act, the CC was required to look at “whether the transfer in question may be expected to operate against the public interest, taking into account all matters which appear in the circumstances to be relevant and, in particular, the need for accurate presentation of the news and free expression of
33 34
Section 58(2A), Enterprise Act. Section 58(2B), Enterprise Act. This section was added by section 375(1) of the Communications
Act. 35 36
Section 44(10), Enterprise Act. Media Merger Guidance, para. 5.3.
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opinion.”37 As a result, at the time of the Media Merger Guidance’s publication, the Secretary of State expected there to be considerable continuity between the analysis of cases under the Fair Trading Act newspaper regime and under the new regime.38 This guidance remains of relevance today. (b) Accurate presentation of news. The Media Merger Guidance states that the impact of a relevant merger situation on accurate presentation of the news is likely to be assessed by reference to evidence of past behaviour by the enterprises in question, or by the persons with control of such enterprises, in relation to that or other enterprises, including, but not limited to, newspapers.39 However, behaviour in sectors more closely related to newspapers, such as magazines, is likely to be more relevant than behaviour in sectors with a less direct connection.40 The Media Merger Guidance notes the 1990 case of David Sullivan and the Bristol Evening Post plc (“BEP”) in which the MMC concluded that evidence of David Sullivan’s connection with the Daily Star (plus his holdings in the Sport and the Sunday Sport) suggested that he would seek to influence editorial policy and the character and content of the newspapers in a manner that would harm both the accurate presentation of news and the free expression of opinion.41 The MMC stated that: “…it is clear that he is an active proprietor of Sport Newspapers Ltd with clear views on the content and promotion of his own publications. These views are communicated to his editors regularly, usually several times a week. A weekly article appears under his name in the Sunday Sport. During his involvement with the Daily Star he was, we were told, in daily communication with the editor. Mr Sullivan himself has indicated to us that, with a 25 per cent holding, he would not envisage any contact with editors of BEP papers but that if he secured management control of BEP, he would expect to have influence and to send suggestions to the editors, perhaps on a daily basis, which the editors would be free to accept or reject as they saw fit. It seems to us that the editors would be bound to give considerable weight to such suggestions from such a shareholder. Moreover, although it may not be Mr Sullivan’s present expectation that a 25 per cent holding would put him in a position to influence editorial policy, it seems likely that his ideas for charge [sic] would over time include ones bearing on the content of the papers. Such suggestions, made by such a substantial shareholder, who might well have acquired a seat on the Board, would also carry weight with editors, particularly if they thought him likely ultimately to achieve effective management control.”42
In concluding that Mr Sullivan might be expected to attempt to influence editorial policy, the MMC considered how Mr Sullivan might use this influence. They noted that all of Mr Sullivan’s experience had been at the “lower end of the market” and that the news content of his newspaper was limited and mainly sex-orientated. Whilst Mr Sullivan argued that he was a businessman who would not seek to interfere with the editorial policy, the MMC noted that this had not prevented Mr Sullivan from being 37 38 39
Section 59(3), Fair Trading Act. Media Merger Guidance, para. 5.3.
Ibid., para. 5.5. Ibid. 41 Mr David Sullivan and the Bristol Evening Post plc: a report of the proposed transfer of a controlling interest as defined in section 57(4) of the Fair Trading Act 1973, May 1990. 42 Ibid., para. 6.9. 40
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associated with changes to the Daily Star, which had resulted in a decline in readership and a withdrawal of advertisers.43 Accordingly, the MMC recommended that the Secretary of State should not consent to a transfer of control to Mr Sullivan. The Secretary of State agreed with the conclusions of the MMC and prohibited the acquisition. (c) Free expression of opinion. A relevant consideration in newspaper mergers is the impact of a merger on changes in editorial decision-making and, in particular, the extent to which the transaction would affect the freedom of editors to operate without interference from the proprietor.44 The Media Merger Guidance notes that the CC typically considered that market forces have tended to ensure a significant degree of independence for local editors to maintain or increase circulation, that regional or local newspapers must reflect the views and concerns of their readers, and that local editors are best placed to judge this.45 However, in some cases, market forces will be insufficient to prevent a new newspaper proprietor from seeking to influence editorial policy (e.g., David Sullivan’s proposed acquisition of the Bristol Evening Post). The Media Merger Guidance also highlights the case of George Outram & Company Ltd/The Observer.46 In this case, the MMC was concerned about the sale of The Observer to George Outram, whose parent company, Lonrho, had wide-ranging commercial interests. In this regard, the MMC stated as follows. “The apprehensions expressed to us were based first on the width and variety of Lonrho’s commercial interest [sic] both in this country and in other parts of the world, and on the controversy which Lonrho’s business has sometimes aroused. It was suggested that, as part of the Lonrho group, The Observer would be under pressure to include some items of news concerning Lonrho’s business and to exclude others, and would also be subject at least to influence in the formation and expression of opinions affecting Lonrho. This suggestion was related particularly to Africa. The reporting of any news or making of any comment unwelcome to the national authorities of certain African countries would, it was said, result in Lonrho being forced to choose between controlling what appeared in The Observer and risking retaliation against its assets and interests in those countries. Secondly, it was suggested that Mr Rowland’s [Lonrho’s Chief Executive] very direct and personal methods of controlling Lonrho’s business made it inevitable that he would himself exert pressure upon the editor and other journalists to put things into the paper or to keep things out as Lonrho’s other interests might require. Thirdly, it was said that the journalists would be conscious of the interest or involvement of Lonrho, or of Mr Rowland, in certain matters, and even in the absence of actual urgings or interference would avoid writing or be influenced in their writing on those subjects.”47
43 44 45
Ibid., para. 6.12. Media Merger Guidance, para. 5.7.
Ibid., para. 5.8. The Observer and George Outram & Company Limited: a report of the proposed transfer of The Observer, a newspaper of which Atlantic Richfield Company is a proprietor, to George Outram & Company Limited, a subsidiary of Scottish and Universal Investments Ltd whose parent company is Lonrho Limited, June 1981. 47 Ibid., para. 8.39. 46
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As a result of these concerns, the MMC recommended that conditions be attached to the Secretary of State’s consent to safeguard The Observer’s editorial independence.48 Similar issues were also examined in Johnston Press plc/Trinity Mirror plc where an allegation of editorial interference was raised part way through the reference and was investigated by the CC.49 The CC described the background to the issue as follows. “On 11 February 2002 an article appeared in the New Statesman magazine under the heading ‘The hero they tried to muzzle’. This concerned Mr Don Hale, editor of Johnston’s paid-for weekly, the Matlock Mercury, who conducted a long and ultimately successful campaign to overturn the conviction for murder of a local man, Mr Stephen Downing. The article alleged, inter alia, that Johnston put pressure on Mr Hale to drop the story. Since this allegation, if true, would have cast doubt on Johnston’s general commitment to editorial freedom, we considered it necessary to investigate the matter. At our request, therefore, both Johnston and Mr Hale provided us with written submissions, together with supporting documentation, and we questioned both parties at separate hearings specially arranged for the purpose.”50
The CC concluded that the merger would not result in a restriction on editorial expression as a result of interference from managers or proprietors. The CC found that Johnston had not specifically interfered in the Downing case, but that Mr Hale’s concerns were more related to ‘general meddling’ in editorial matters. The CC found that even if Mr Hale’s allegations were established to its satisfaction, “they would fall short of casting material doubt on the effective implementation of Johnston’s policy on editorial freedom.”51 (d) Plurality of views. The Media Merger Guidance states that the concept of “a sufficient plurality of views” in the Enterprise Act is intended to encompass the need for a diversity of viewpoints exhibited in the relevant sector of the press and that, in particular, it allows for a consideration of the structural impact on the overall range of views and distribution of voice within the relevant market.52 In respect of this consideration, the Secretary of State may take into account the need for: (i) a sufficient number of views to be expressed; (ii) a variety in the views that are expressed; and (iii) a variety of outlets and publications in which these views can be expressed.53 The Media Merger Guidance also notes that there is a qualitative element to the plurality assessment that requires account to be taken of the context in which titles circulate and the nature of those titles, recognizing that some titles may be of greater significance for plurality purposes than others.54
48
Ibid., para. 8.53.
49
Johnson Press plc and Trinity Mirror plc: a report on the proposed merger, May 2002. Ibid., para. 2.127. 51 Ibid., para. 2.133. 52 Media Merger Guidance, para. 5.11. 50
53 54
Ibid. Ibid.
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The Enterprise Act states that there should be a sufficient plurality of views “to the extent that it is reasonable and practicable.”55 The Media Merger Guidance provides that the inclusion of the “reasonable and practicable” caveat reflects the fact that whilst a plurality of views in each market for newspapers in the UK or a part of the UK is the “ideal goal” of the Enterprise Act, this goal may not be achievable in all markets in the UK (e.g., a plurality of views may be possible in a large metropolitan area but may not be achievable in a small rural community).56 When assessing this consideration in relation to newspaper mergers, the Secretary of State will consider all relevant circumstances, including the size and nature of the area in question and the extent to which other newspapers in that area contribute to a plurality of views.57 Plurality issues of this kind were considered in Century Newspapers/TRN.58 In this case, the merger would have resulted in the News Letter (a Northern Irish newspaper with a largely rural readership expressing strong Unionist views) and the Belfast Telegraph (a newspaper with a much larger readership focused on Greater Belfast offering both Protestant and Roman Catholic views) being owned by the same entity. The Secretary of State concluded that the merger could be expected to operate against the public interest, partly on the basis that it would have resulted in a significant concentration of the regional press in Northern Ireland, and partly on the basis that the MMC had received considerable evidence that if Thompson Regional Newspapers were to acquire the News Letter, it would inevitably join the Belfast Telegraph on more central political ground. The MMC noted that, as a result, “[a] responsible outlet for strong Unionist opinion would be removed and could result in such opinion being expressed through other channels in a more extreme way.”59 (e) Policy on intervention. The Media Merger Guidance sets out the Secretary of State’s policy, at the time of the publication of the guidance, on intervening in newspaper mergers.60 It states that the Secretary of State’s approach will develop in the 55
Section 58(2B), Enterprise Act. Media Merger Guidance, para. 5.12. 57 Ibid. 58 Century Newspapers Ltd and Thompson Regional Newspapers Ltd: a report on the proposed transfer of two newspapers and related newspaper assets owned by Century Newspapers Ltd to Thompson Regional Newspapers Ltd, April 1989. 59 Ibid., para. 6.27. See also the CC’s report on Trinity plc/Mirror Group plc and Regional Independent Media Holdings Ltd/Mirror Group plc (July 1999), in which the CC was concerned that the common ownership by Trinity of News Letter and the Belfast Telegraph would lead to a convergence in the views of the two newspapers leading to the loss of News Letter’s distinctive voice in Northern Ireland. The CC recommended that the two newspapers should remain under separate ownership, so that the existing distinctness of views and opinions would be maintained (and that Trinity should be required to dispose of the News Letter, the Derry Journal, the Belfast News, the North Down News, the Journal Extra, and their related newspaper assets if the proposed transfer of Mirror Group’s titles were to proceed). The Secretary of State accepted this conclusion but also considered that the transfer would damage the ability of the Irish News (a Roman Catholic newspaper) to generate advertising revenue, which would threaten the viability of that title and the expression of a Roman Catholic viewpoint in the press (a conclusion that the CC had rejected). 56
60
Media Merger Guidance, section 6.
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light of his experience of handling newspaper mergers under the Enterprise Act and that whilst this area is not suitable for generalisations and that each case would need to be considered on its individual merits,61 the Secretary of State will take into consideration the following principles. (1)
The initial decision to intervene in a merger will be taken only when basic information about the merger is available. The decision will be informed by general knowledge and experience as to the types of transaction that can raise newspaper public interest concerns and any third party comments that may be available.62 OFCOM will not have an advisory role at this stage, but will be obliged to provide any relevant information that the Secretary of State may need to reach his decision. The Secretary of State will also have regard to the intention that the new regime should be no more burdensome than necessary.63
(2)
The rationale for having a special regime to deal with newspaper mergers is that historically there have been a small number of cases that have raised issues beyond those that would be considered as part of a competition assessment. Such cases have generally been fairly easy to identify from the outset (e.g., David Sullivan’s proposed acquisition of the Bristol Evening Post or the cases involving newspaper titles in Northern Ireland described above).64
(3)
The experience of reviewing newspaper mergers under the Fair Trading Act suggests that mergers raising public interest considerations in relation to newspapers are likely to be small in number and the Secretary of State will rarely find it necessary to intervene.65
(4)
The acquisition of a non-newspaper business by an existing newspaper owner is likely to be rare but there might be circumstances that could lead the Secretary of State to consider intervening. These could include cases in which, for reasons of corporate structuring or tax, the form of the transaction does not reflect the reality of the situation (e.g., the transaction actually results in a change of ownership of a newspaper when, on its face, the merger may not appear to result in such a change) or where the transaction gives rise to unusual plurality issues.66
(5)
The Secretary of State may consider intervening in cases that result in a significant number of complaints from third parties regarding the impact of the transaction on public interest considerations. However, the Secretary of State is less likely to intervene where the complaints are non-specific or not
61
Ibid., para. 6.1. Ibid., para. 6.2. 63 Ibid. 64 Ibid., para. 6.3. 62
65 66
Ibid. Ibid., para. 6.5.
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supported by sufficient evidence. Complaints should be supported by evidence and be specific to a particular newspaper public interest consideration.67 (6)
The Secretary of State may consider intervening in the acquisition of newspapers by current newspaper owners if the merger gives rise to particular issues in relation to newspaper public interest considerations. Mergers that meet the Enterprise Act’s jurisdictional thresholds can be reviewed by the OFT. In mergers involving local newspapers, the Secretary of State is likely to apply a higher intervention threshold than in mergers involving a national newspaper title.68
(7)
In respect of newspaper acquisitions by undertakings with non-newspaper media interests, the Secretary of State may wish to consider whether the transaction gives rise to any potential newspaper public interest considerations.69 This might be the case where there are geographical crossmedia overlaps and the target newspaper has a significant market share. In these cases, it is also possible that the broadcasting and cross media public interest considerations might be relevant (see below).
(8)
The acquisition of newspapers by non-media owning undertakings is unlikely to raise concerns but may do so where, for example, the purchaser is likely to interfere with editorial policy in a manner that might affect a sufficient plurality of views in a market or the accurate presentation of news and the free expression of opinion.70 This was the case in the proposed acquisition by David Sullivan of the Bristol Evening News. In the absence of a significant volume of third party complaints, the Secretary of State would be unlikely to intervene in the acquisition of local newspaper titles by persons with no existing newspaper interests. In the event of an acquisition of a national newspaper, the Secretary of State may intervene, even in the absence of a significant number of third party complaints.
5.2.4
Media and Broadcasting Public Interest Considerations
The Enterprise Act states that there is a need: (1)
67
in relation to every different audience in the UK or in a particular area or locality of the UK, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience;
Ibid., para. 6.6.
68
Ibid., para. 6.7. See, e.g., the acquisition by the Barclays Brothers of the Telegraph in which the Secretary of State did not intervene. The fact that the Telegraph was considered to be a newspaper that represented the political views of the Conservative Party and its supporters may have been a factor in the Labour Government’s decision not to intervene. 69 70
Ibid., para. 6.8. Ibid., para. 6.10.
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(2)
for the availability throughout the UK of a wide range of broadcasting which (taken as a whole) is both of high quality and calculated to appeal to a wide variety of tastes and interests; and
(3)
for persons carrying on media enterprises, and for those with control of such enterprises, to have a genuine commitment in relation to broadcasting to the attainment of the standards objectives set out in section 319 of the Communications Act 2003.71
(a) Definition of a media enterprise. An enterprise is a media enterprise if it “consists in or involves broadcasting.”72 The Enterprise Act defines broadcasting as “the provision of services the provision of which – (a) is required to be licensed under Part 1 or 3 of the Broadcasting Act 1990 or Part 1 or 2 of the Broadcasting Act 1996; or (b) would be required to be so licensed if provided by a person subject to licensing under the Part in question.”73 In addition, where a relevant merger situation in which at least one of the enterprises ceasing to be distinct is a media enterprise, the public interest consideration of sufficient media plurality will apply to newspaper enterprises as well as to media enterprises.74 Therefore, plurality can be considered across a wide range of newspaper and media audiences, which may include readership, and shares held by an enterprise through ownership of broadcasting and newspaper enterprises may be aggregated for the purpose of making the assessment of sufficiency of plurality.75 (b) Consideration of a purchaser’s track record. In considering how a media merger may impact on the range and quality, or the standards, of UK broadcasting, the Media Merger Guidance states that the Secretary of State considers it reasonable to have regard to any relevant information regarding the track record of the purchaser and any entity controlling the purchaser. In particular, where a relevant merger or special merger situation involves a broadcast media enterprise and a newspaper enterprise, the Secretary of State may look at any relevant information relating to the manner in which either the broadcasting or newspaper enterprise has run its affairs in the past.76 (c) Assessment of media public interest considerations. The Media Merger Guidance states that the consideration of media public interest considerations will be separate from the competition assessment of a media merger, although there is an overlap between the competition assessment and at least the first of the media plurality public interest considerations.77 The Secretary of State recognises that, in some cases, it may not be necessary to take any action due to the fact that competition considerations are sufficient to resolve any media public interest concerns. However, this will not always be the case and the media public interest considerations are a safeguard against 71
Section 58(2C), Enterprise Act.
72
Section 58A(1), Enterprise Act. Sections 44(9)(a) and (b), Enterprise Act. 74 Section 58A(2), Enterprise Act. 75 Media Merger Guidance, para. 7.2. 73
76 77
Ibid. Ibid., para. 7.3.
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mergers in which media public interest considerations are not considered in the competition analysis as a result of, for example, the fact that the considerations at issue were not in the same relevant market.78 In these types of cases, the Secretary of State may be more likely to intervene. The extent to which the competition assessment of a media merger will also remove public interest concerns may be unclear at the outset of an investigation and the Secretary of State may err on the side of caution when deciding whether to issue an intervention notice where the definition of the relevant markets is unclear.79 (d) Plurality of persons with control of media enterprises. The first of the media public interest considerations is that there is a need for a sufficient plurality of persons with control of the media enterprises serving that audience. Therefore, this consideration is primarily concerned with the fact that control over media enterprises should not become overly concentrated in the hands of a few owners.80 It is intended to prevent unacceptable levels of media and cross-media control and ensure a minimum level of plurality.81 The Media Merger Guidance states that the Secretary of State may consider a number of factors when assessing the impact of a merger on this consideration, including: (i) the number of persons controlling media enterprises serving the relevant audiences in any given area of the UK;82 and (ii) the combined audience shares of the media enterprises resulting from the transaction.83 For these purposes, the Secretary of State may define an audience in the manner he considers appropriate,84 and an audience could include cross-media coverage and could include newspaper readership.85 The leading case in which media public interest considerations have been considered is Sky/ITV, where the Secretary of State issued an intervention notice in respect of Sky’s proposed acquisition of a 17.9% stake in ITV.86 In this notice, the Secretary of State specified that the media plurality consideration may be relevant to the assessment of the merger. Simultaneously, the Secretary of State issued a request to OFCOM in accordance with section 44A of the Enterprise Act to provide a report on the merger within the same period. OFCOM concluded that, as a result of the merger, there may not be a sufficient plurality of persons with control of the media enterprises serving the UK cross-media audience for national news and the UK TV audience for national
78
Ibid., para. 7.4. Ibid., para. 7.5. 80 Ibid., para. 7.7. 81 Ibid. 79
82
Ibid., para. 7.9. Ibid., para. 7.10. 84 Section 58A(6), Enterprise Act. Ibid., para. 7.12. 85 Section 58A(7), Enterprise Act. Ibid., para. 7.12. 83
86
Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc, OFT decision of 27 April 2007.
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news.87 Accordingly, OFCOM recommended that the merger be referred to the CC. These conclusions were a result of the following considerations: (1)
the merger would result in bringing together the second and third largest providers of TV news, with a combined audience share of 30.6%;
(2)
the merger would create an ownership link between ITV, the second largest provider of TV news, and News International (Sky’s parent company), the UK’s largest supplier of newspapers with a 35.9% share of national newspaper circulation;
(3)
the media plurality concern may have been greater for the C2DE socioeconomic group than the population as a whole, as ITV’s audience share (29.9%) and News International’s readership share (43.6%) was higher for this group;
(4)
OFCOM specifically considered radio stations and internet websites as sources of news, but did not conclude that this removed the media plurality concerns;
(5)
the merger reduced the number of significant providers (those with a share of >1% of the UK TV audience) of national news in the UK from five to four; and
(6)
the merger created an ownership link between Sky and ITN (ITV had a 40% share of ITN), both of which provided news services to TV channels and radio stations. OFCOM considered that ITN and Sky had influence over day-to-day editorial decisions regarding news coverage.
As regards the media plurality consideration, the CC did not agree with OFCOM’s conclusions and found that given the extent of Sky’s influence on ITV as a result of its 17.9% shareholding, in combination with existing regulatory mechanisms and the strong culture of editorial independence within TV news production, the merger was unlikely to have an adverse effect on the plurality of news.88 In terms of its assessment of the media plurality consideration, in the absence of a statutory definition of plurality in the Enterprise Act, the CC took the concept of plurality of persons to refer to both the range and the number of persons with control of media enterprises.89 The CC also drew a distinction between the plurality of persons with control of media enterprises and the implications of that plurality for the range of information and views made available to audiences,90 and between the range of information and views provided across separate independent media groups (which the CC referred to as ‘external plurality’) and the
87
OFCOM, Report for the Secretary of State pursuant to Section 44A of the Enterprise Act 2002 of British Sky Broadcasting plc’s acquisition of 17.9% shareholding in ITV plc, 27 April 2007. 88 Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the share in ITV plc, CC report to the Secretary of State of 14 December 2007. 89 90
Ibid., para. 5.7. Ibid., para. 5.9.
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range of views provided within individual media groups (referred to as ‘internal plurality’).91 The CC did not consider it necessary to take a view on the number of owners of media that would constitute a “sufficient” level of plurality of persons.92 Instead, the CC looked qualitatively at the concept of sufficiency, having regard to any change in the prevailing levels of plurality (both internal and external) as a result of the transaction.93 In this regard, the CC noted as follows: (1)
the five main channels (BBC, ITV, Sky, Channel 4 and Five) accounted for 97.5% of total television news viewing.
(2)
there are three main providers of news programming (BBC, ITN and Sky News) providing news programming to the main five news channels.
(3)
television is likely to be regarded by people as their main source of news, with newspapers and radio as the next most important sources, with the internet growing in importance as a news source.
(4)
content analysis of television news revealed less diversity than the actual number of news providers would suggest (and the top stories were often the same across the main channels, with a limited range of ultimate sources).94
Both ITV and Sky were considered to be significant news providers, with ITV as the most watched alternative to the BBC and Sky as one of three smaller providers (with Channel 4 and Five), and their links to related companies (ITN and News International) increased the potential significance of their contribution to the plurality of news.95 As to the internal plurality of news, the CC found that media owners had limited ability to influence news content and that the editorial staff took day-to-day decisions regarding programme content. The board of a channel provider would only be involved in decisions relating to controversial stories and that it was rarer still for individual shareholders to be involved in relation to the content of news programmes.96 Against this background, the CC noted that the merger created a link between Sky and ITV but that the merger would not bring Sky and ITV under common control and Sky would only be able to exercise material influence over ITV.97 In addition, there were a number of constraints in the production of television news that would have been likely to limit the possibility for Sky to influence ITV’s editorial decisions, including that final decisions on editorial matters were taken by the programme editors at ITN and not ITV 91
Ibid., para. 5.11.
92
Ibid., para. 5.15. Ibid. 94 Ibid., para. 5.45. 95 Ibid., para. 5.52. 93
96 97
Ibid., para. 5.56. Ibid., para. 5.63.
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executives, that ITV is subject to regulation by OFCOM in relation to the impartiality of news, and that there would have been a serious reputational risk to ITV and ITN of compromising this impartiality for a minority shareholder.98 Moreover, the CC considered that Sky had an incentive to favour Sky News over ITN and that this was unlikely to have changed as a result of the acquisition.99 Consequently, the CC concluded that Sky’s acquisition of material influence could not be expected materially to affect the sufficiency of plurality of persons with control of media enterprises serving audiences for news.100 The only other case in which the Secretary of State has intervened on the grounds of media plurality is in relation to News Corporation’s proposed acquisition of Sky.101 This acquisition fell to be assessed by the European Commission as the transaction had an EU dimension and was cleared unconditionally (in relation to the competition assessment) on 21 December 2010. As regards the media plurality assessment, the Secretary of State issued a European intervention notice on 4 November 2010 requesting the OFT to report in accordance with article 4 of the Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003102 and for OFCOM to make a report. The OFT reported on 30 December 2010 confirming that the transaction was a European relevant merger situation and that the Secretary of State had jurisdiction to make a reference to the CC on the grounds of media plurality concerns, if he considered that to be appropriate. OFCOM delivered its report on 31 December 2010 advising that the merger may have been expected to operate against the public interest since there may not have been a sufficient plurality of persons with control of media enterprises providing news and current affairs to UK-wide cross-media audiences and recommending a reference to the CC. However, in lieu of a reference, the Secretary of State announced on 3 March 2011 that he intended to accept undertakings from News Corporation, launching a consultation on the proposed undertakings. These undertakings included the following: (1)
98
the board of the new company would have a majority of independent directors having no other News Corp or News Corp-associated interests;
Ibid., para. 5.69. Ibid., para. 5.73. 100 Ibid., para. 5.75. 101 A report to the Secretary of State for Culture, Olympics, Media and Sport in response to the European intervention notice issued on 4 November 2010 in relation to the anticipated acquisition by News Corporation of British Sky Broadcasting Group plc, a report pursuant to Article 4(2)-(5) of the Enterprise Act 2002 (Protection of legitimate interests) Order 2003, 30 December 2010. News Corporation owned 39.14% of Sky and intended to acquire all the remaining shares in Sky. 102 This states that the OFT’s report “shall contain - (a) advice from the OFT on the considerations relevant to the making of a reference under section 22 or 33 of the Act which are also relevant to the Secretary of State’s decision as to whether to make a reference under article 5; and (b) a summary of any representations about the case which have been received by the OFT and which relate to any public interest consideration mentioned in the European intervention notice concerned and which is or may be relevant to the Secretary of State’s decision as to whether to make a reference under article 5”. 99
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(2)
the board would have the appropriate balance of skills, experience, independence and knowledge, and at least one must have senior editorial and /or journalistic experience;
(3)
the Chairman would be an independent director;
(4)
Sky News’ services would abide by the principle of editorial independence and integrity in news reporting;
(5)
the board would have a Corporate Governance and Editorial Committee to ensure compliance with the principles of editorial independence and integrity in news reporting; and
(6)
the company would have a 10 year carriage contract and seven year brand licensing.
(e) Range of broadcasting. The second of the media public interest considerations is that there is a need for the availability throughout the UK of a wide range of broadcasting which (taken as a whole) is both of high quality and calculated to appeal to a wide variety of tastes and interests. This is concerned with safeguarding the quality and range of broadcasting in order to ensure a diversity of programming.103 In assessing a merger’s impact on this consideration, the Secretary of State may consider: (i) the availability of broadcasting services which secure programmes that deal with a wide range of subject matters; (ii) ensuring the availability of programmes that are likely to meet the needs of as many different audiences as practicable; (iii) that broadcasting is properly balanced; and (iv) the maintenance of high standards, the quality of programme making and editorial integrity.104 The Media Merger Guidance states that the Secretary of State will assess this consideration against the future plans of the purchaser, including proposals for programme orientation, content, genre or style, as well as overall innovation and ambition of the media owner’s plans.105 This assessment may also consider the media owner’s past compliance with requirements on his other broadcasting enterprises to deliver a sufficient range and/or quality of broadcasting services.106 (f) Commitments to the broadcasting standards objectives. The third media public interest consideration refers to the need for persons carrying on media enterprises, and those with control over such enterprises, to have a “genuine commitment” to the broadcasting standards objectives set out in section 319 of the Communications Act. Section 319 of the Communications Act states that it is OFCOM’s duty to set, and from time to time, to review and revise such standards
103 104 105 106
Media Merger Guidance, para. 7.18. Ibid., para. 7.19. Ibid. Ibid., para. 7.20.
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regarding the content of programmes to be included in television and radio services so as to secure the standards’ objectives.107 Currently, these objectives are as follows: (1)
persons under the age of eighteen are protected;
(2)
material likely to encourage or to incite the commission of a crime or to lead to disorder is not included in television and radio services;
(3)
news included in television and radio services is presented with due impartiality and that the impartiality requirements of section 320 of the Communications Act are complied with;
(4)
news included in television and radio services is reported with due accuracy;
(5)
the proper degree of responsibility is exercised with respect to the content of religious programmes;
(6)
generally accepted standards are applied to the contents of television and radio services so as to provide adequate protection for members of the public from the inclusion in such services of offensive and harmful material;
(7)
advertising that contravenes the prohibition on political advertising set out in section 321(2) of the Communications Act is not included in television or radio services;
(8)
the inclusion of advertising that may be misleading, harmful or offensive in television and radio services is prevented;
(9)
the international obligations of the United Kingdom with respect to advertising included in television and radio services are complied with;
(10)
the unsuitable sponsorship of programmes included in television and radio services is prevented;
(11)
there is no undue discrimination between advertisers who seek to have advertisements included in television and radio services; and
(12)
there is no use of techniques that exploit the possibility of conveying a message to viewers or listeners, or of otherwise influencing their minds, without their being aware, or fully aware, of what has occurred.
The Media Merger Guidance states that, in the Secretary of State’s view, the intention behind this consideration is to assess whether persons controlling or carrying on media enterprises are, post-merger, likely to comply with the spirit as well as the letter of the above broadcasting standards.108 In considering the effect of a merger on a person’s commitment to these standards, the Secretary of State may take into account one or more of the following factors: (i) the likelihood that there will be a genuine commitment to broadcasting standards by the person who will control the merger media enterprise; (ii) a qualitative assessment of past compliance of any other broadcasting enterprise controlled by the proposed purchaser with the broadcasting standards; (iii) the 107 108
Section 319(1), Communications Act. Media Merger Guidance, para. 7.22.
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impartiality and accuracy of news offered by the purchaser’s other broadcasting enterprises; (iv) the compliance of any other broadcasting enterprises controlled by the purchaser with broadcasting standards in any other countries; (v) the compliance of any non-broadcasting media enterprises owned by the purchaser with standards applicable to those media enterprises; (vi) any comments, statements and any other plans made by the purchaser in relation to the target media enterprise that may give an indication of the purchaser’s commitment to the UK broadcasting standards; and (vii) any other considerations that the Secretary of State considers relevant.109
5.2.5
Maintaining the Stability of the UK Financial System
This public interest consideration was added to the Enterprise Act by the Enterprise Act (Specification of Additional Section 58 Consideration) Order 2008, which came into force on 24 October 2008.110 The amendment to section 58 states as follows: “…the interest of maintaining the stability of the UK financial system is specified in this section (other than for the purposes of sections 67 and 68 or references made, or deemed to be made, by the European Commission to the OFT under article 4(4) or 9 of the EC Merger Regulation).”
As a result, the interest of maintaining the stability of the UK financial system is a public interest consideration that is relevant to the consideration of public interest mergers and special interest mergers, but is not a consideration that is relevant to European merger situations (discussed below). This amendment to the Enterprise Act was made following the Secretary of State’s intervention in the merger between Lloyds TSB and HBOS on 18 September 2008. To date, this public interest consideration has not been taken into account by the Secretary of State in any other merger. In a document entitled ‘The Creation of a new Public Interest Consideration on Stability of the UK Financial System’, published on 7 October 2008, the Government explained that it had decided to add the maintenance of the UK financial system to the public interest considerations under the Enterprise Act for the following reasons. “…the Secretary of State has had regard to the fact that the Financial Services sector and the banking sector in particular, are vital to the rest of the economy. They match the resources of savers to the needs of borrowers, provide firms and individuals with the means to make and receive payments, and provide channels for the distribution and diversification of risk. Financial instability in the financial services sector can disrupt these functions and have a damaging effect on the wider economy. The failure of a bank, building society or other deposit-taking firm would leave individuals and businesses unable to access savings, raise finance or meet day to day financial obligations. A single bank failure has the potential to spread to other parts of the financial system through its effect on consumer confidence, the inter-bank lending market and through other channels. The
109
Ibid., paras. 7.24 and 7.25. SI 2008/2645. This statutory instrument was laid before Parliament on 7 October 2008. It was subsequently approved by the House of Lords on 16 October and the House of Commons on 22 October. 110
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failure of a single bank can involve greater and more widespread costs to the economy than that of a similar sized business in a different sector. In the light of extraordinary stress in the worldwide financial markets at the time of the proposed Lloyds/HBOS merger, and the systemic importance of HBOS plc to the UK banking system, the Secretary of State considered that there was a need to act quickly and intervene in the proposed merger given the serious threat to the stability of the UK financial system. This enables stability of the UK financial system to be taken into account, along with competition effects, in regulatory decisions relating to the merger.”
In respect of the Lloyds/HBOS merger, the OFT provided its report to the Secretary of State on 24 October 2008 recommending that the merger should be referred to the CC on the grounds that the merger may have been expected to result in a substantial lessening of competition in a market or markets in the UK, including personal current accounts, banking services to small and medium sized enterprises in Scotland, and mortgages.111 However, the Secretary of State stated that: “…[t]aking account only of the substantial lessening of competition and the relevant public interest consideration, the Secretary of State believes that the creation of the relevant merger situation is not expected to operate against the public interest. The OFT has decided that it is or may be the case that the creation of the relevant merger situation may be expected to result in an anti-competitive outcome, in particular in view of its potential to result in a substantial lessening of competition in the market for personal current accounts, for banking services to small and medium sized enterprises (SMEs) in Scotland, and in the supply of mortgages. However, having had regard in particular to the submissions made to the OFT by the tripartite authorities (HM Treasury, the Financial Services Authority and the Bank of England), the Secretary of State considers that the merger will result in significant benefits to the public interest as it relates to ensuring the stability of the UK financial system and that these benefits outweigh the potential for the merger to result in the anti-competitive outcomes identified by the OFT. As a result of this decision, no reference will be made to the CC.”112
5.3
PUBLIC INTEREST MERGERS 5.3.1
General Principles
The Secretary of State may issue an intervention notice to the CMA if he believes that it is or may be the case that one or more public interest considerations is relevant to the assessment of a relevant merger situation.113 The distinguishing feature of public interest mergers vis-à-vis special interest mergers and European mergers, is that public interest mergers involve mergers that qualify as relevant merger situations. Such an intervention notice may be issued only where: (1)
the Secretary of State has reasonable grounds for suspecting that it is or may be the case that a relevant merger situation has been created, or that arrangements
111 Anticipated acquisition by Lloyds TSB plc of HBOS plc, report to the Secretary of State for Business Enterprise and Regulatory Reform, 24 October 2008. 112
Decision by Lord Mandelson, the Secretary of State for Business, not to refer to the Competition Commission the merger between Lloyds TSB plc and HBOS plc under Section 45 of the Enterprise Act 2003, 31 October 2008, para. 12. 113 Section 42(2), Enterprise Act.
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are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; (2)
no Phase II reference has been made in relation to the merger;
(3)
no decision has been made not to make a Phase II reference; and
(4)
no reference is prevented from being made (e.g., where the Commission is considering an Article 22 referral request from the CMA).114
5.3.2
Public Interest Intervention Notice
Where the Secretary of State decides to intervene in a merger on public interest grounds, he will issue an intervention notice. This notice must specify: (i) the relevant merger situation concerned; (ii) the public interest consideration(s) that are, or may be, relevant to the assessment of the merger; and (iii) where any relevant public interest consideration is not finalised, the proposed timetable for finalising it.115 To facilitate the Secretary of State’s role in issuing intervention notices, the CMA has a statutory obligation to inform the Secretary of State when it is investigating a merger that it believes raises material public interest considerations.116 In relation to situations where a relevant public interest consideration is not finalised, this relates to circumstances in which the Secretary of State has issued an intervention notice in respect of a public interest consideration that, at the time of issuing the intervention notice, does not form part of the Enterprise Act. In such circumstances, the Secretary of State must, as soon as practicable, take such action as is within his power to ensure that the public interest consideration is finalised.117 This was the case in relation to the acquisition by Lloyds TSB of HBOS. On 18 September 2008, the Secretary of State issued an intervention notice concerning Lloyds TSB’s proposed acquisition of HBOS on the basis that the stability of the UK financial system ought to be specified as a public interest consideration. In the intervention notice, the Secretary of State indicated that he proposed to finalise the issue of the stability of the UK financial system as a public interest consideration by way of affirmative resolution, and that it would be laid before Parliament in the week beginning 6 October 2008, when Parliament resumed from recess. No more than one intervention notice may be issued by the Secretary of State in relation to the same merger.118 Where the Secretary of State believes that it is or may be the case that two or more public interest considerations are relevant to the assessment of a merger, he may decide not to mention in the intervention notice such of those
114
Section 42(1), Enterprise Act. Section 43(1), Enterprise Act. 116 Section 57, Enterprise Act; Jurisdictional and Procedural Guidance, para. 16.3. 115
117 118
Section 42(7), Enterprise Act. Section 42(4), Enterprise Act.
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considerations as he considers appropriate.119 An intervention notice will come into force on the date that it is issued and will cease to be in force when the matter to which it relates is finally determined.120 This may occur in the following circumstances: (i) if the time within which the CMA is to report to the Secretary of State has expired and no such report has been made; (ii) if the Secretary of State decides to accept undertakings in respect of the merger; (iii) if the Secretary of State decides not to make a reference; (iv) if the CMA cancels such a reference; (v) the time within which the CMA is to report to the Secretary of State has expired and no such report has been made; or (vi) the Secretary of State decides to make no finding at all or decides not to make an adverse finding.121
5.3.3
Phase I Investigation and Report
Where the Secretary of State has issued an intervention notice, the CMA’s Phase I process is as follows.122 (1)
The CMA will publish an invitation to comment seeking third party views on both competition and public interest issues.
(2)
The CMA will actively contact other governmental departments, sectoral regulators, industry associations and consumer bodies for their views on public interest issues, where appropriate.
(3)
The CMA will carry out its review of the jurisdictional and competition issues and will report within the period that is prescribed in the intervention notice.123 Typically, the CMA will have its usual 40 working day period to assess the merger.124 However, this timetable may be adapted and, in Lloyds/HBOS, this review period was truncated substantially given the potential ramifications for the UK financial sector.125
(4)
The CMA will then advise the Secretary of State whether it believes that it is or may be the case that:126 o
a relevant merger situation has been created or arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation;
119
Section 43(2), Enterprise Act. Section 43(3), Enterprise Act. 121 Section 43(4), Enterprise Act. 120
122
Jurisdictional and Procedural Guidance, para. 16.7. Section 44(2), Enterprise Act. 124 For example, in Sky/ITV, the intervention notice was issued on 26 February 2007 and the OFT was given until 27 April 2007 to finalise its report. 125 The intervention notice was issued on 18 September 2008 and the OFT’s review period ended on 24 October 2008. 126 Section 44(4)(a) to (f). 123
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o
the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the UK for goods or services;
o
the market or markets concerned would not be of sufficient importance to justify the making of a reference;
o
in the case of arrangements that are in progress or in contemplation, the arrangements are not sufficiently advanced, or insufficiently likely to proceed, to justify the making of a reference;
o
any relevant customer benefits in relation to the creation of the relevant merger situation concerned outweigh the SLC and any adverse effects of the SLC; or
o
it would be appropriate to deal with the matter (disregarding any public interest considerations) by way of undertakings.
(5)
The CMA must also summarise any representations about the case that have been received by the CMA and which relate to the public interest consideration set out in the intervention notice and which may be relevant to the Secretary of State’s decision whether to make a reference.127
(6)
Where the CMA believes that it is or may be the case that it would be appropriate to deal with the merger by way of undertakings, its report must contain a description of the undertakings that the CMA believes are, or may be, appropriate.128
The CMA’s report is binding on the Secretary of State in respect of the jurisdictional and competition issues listed above.129 However, the report may also include advice and recommendations relating to any public interest consideration.130 This was not the case in either Sky/ITV or Lloyds/HBOS in which the OFT’s reports to the Secretary of State focused on the competition assessment of the mergers and did not provide advice in relation to the public interest considerations. If the CMA concludes that the merger in question is likely to result in a substantial lessening of competition in relation to one or more markets, this will be treated as being adverse to the public interest unless it is justified by one or more public interest considerations.131
127
Section 44(3)(b), Enterprise Act. Section 44(5), Enterprise Act. 129 Section 46(2), Enterprise Act. See also, Decision by Lord Mandelson, the Secretary of State for Business, not to refer to the Competition Commission the merger between Lloyds TSB plc and HBOS plc under Section 45 of the Enterprise Act 2003, 31 October 2008, para. 9. 128
130 131
Section 44(6), Enterprise Act. Section 45(6), Enterprise Act.
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5.3.4
Report by OFCOM
In cases where the Secretary of State has intervened on media public interest grounds, OFCOM will advise the Secretary of State on the public interest aspects of the merger.132 In the absence of an intervention notice, OFCOM has no statutory role in this process. This was the case in Sky/ITV and Global/GMG where, by way of an intervention notice, OFCOM was separately requested to prepare and submit a report to the Secretary of State within the same timescale as the OFT.133
5.3.5
Decision of the Secretary of State on Reference
Following the issuance of the CMA’s report, the Secretary of State will decide whether to clear a merger (with or without UILs), or make a reference to Phase II. In this regard, the Secretary of State may decide to unconditionally clear a merger even where the CMA has either recommended the acceptance of UILs or where it has indicated that the test for reference has been met.134 Accordingly, the Secretary of State has considerable discretion in determining whether or not to accept UILs or to make a reference. The Secretary of State’s decision in this regard may be subject to an appeal.135 The Secretary of State may decide to make a reference if he believes that it is or may be the case that: (i) a relevant merger situation has been, or will be, created; (ii) the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition; (iii) one or more public interest considerations are relevant; and (iv) taking into account the substantial lessening of competition and the relevant public interest consideration(s) concerned, the relevant merger situation may be expected to operate against the public interest.136 Alternatively, the Secretary of State may decide to make a reference if he believes that it is or may be the case that: (i) a relevant merger situation has been, or will be, created; (ii) the creation of that situation has not resulted, and is not expected to result, in a substantial lessening of competition; (iii) one or more public interest considerations are relevant; and (iv) taking into account only the relevant public interest consideration(s)
132
Section 44A, Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.4. Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc: report to the Secretary of State for Trade and Industry, 27 April 2007; and Completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited: report to the Secretary of State for Culture, Media and Sport, 28 September 2012. 134 For example, this was the case in Lloyds/HBOS, where the OFT had concluded that the test for a reference to the CC was met but the Secretary of State did not refer the merger to the CC. 135 Appeals against decisions of the Secretary of State have been brought in Merger Action Group v. Secretary for Business, Enterprise and Regulatory Reform [CAT] 2008 36 and British Sky Broadcasting v Competition Commission and the Secretary of State for Business, Enterprise and Regulatory Reform [2008] CAT 25. 136 Section 45(2) and (4), Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.7. 133
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concerned, the relevant merger situation may be expected to operate against the public interest.137
5.3.6
Phase II Investigation and Report
If a reference is made on public interest grounds, the CMA will conduct a Phase II inquiry and report to the Secretary of State. A Phase II referral must state the subsection of section 45 under which it is made, the date on which it is made, and the relevant public interest considerations.138 Where a decision to make a reference is being taken later than 24 weeks after the intervention notice has been issued, the Secretary of State will disregard any public interest considerations that were mentioned in the intervention notice but which have not been finalised within the 24-week period.139 Where a decision to make a reference is being taken within the 24-week period, the Secretary of State will disregard any public interest consideration that was mentioned in the intervention notice, but which has not been finalised, if its effect would be to prevent, or to help prevent, an anti-competitive outcome from being adverse to the public interest.140 If there is a realistic prospect of a public interest consideration mentioned in the intervention notice being finalised within the 24-week period, the Secretary of State may delay deciding whether to make a reference until the public interest consideration is finalised, or, if earlier, the period expires.141 The Enterprise Act sets out a number of questions that must be answered when a public interest merger is referred. (1)
The CMA must decide whether a relevant merger situation has been created,142 or whether arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.143
(2)
If a relevant merger situation has been or will be created, and has been referred on the basis that the Secretary of State believes that it is or may be the case that the relevant merger situation has resulted or may be expected to result in an substantial lessening of competition, the CMA must decide: (i) whether that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market(s) in the UK; and (ii) whether, taking account only of any substantial lessening of competition and the admissible public interest consideration(s) concerned, the merger operates, or may be expected to operate, against the public interest.144
137 138
Section 45(3) and (5), Enterprise Act. Section 46(6), Enterprise Act.
139
Section 46(3), Enterprise Act. Section 46(4), Enterprise Act. 141 Section 46(5), Enterprise Act. 142 Section 47(1), Enterprise Act. 140
143 144
Section 47(4), Enterprise Act. Sections 47(2) and 47(5), Enterprise Act.
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(3)
If a relevant merger situation has been or will be created, and has been referred on the basis that the Secretary of States believes that it is or may be the case that the relevant merger situation has not resulted or may be expected not to result in a substantial lessening of competition, the CMA must decide whether, taking account only of any substantial lessening of competition and the admissible public interest consideration(s) concerned, the merger operates, or may be expected to operate, against the public interest.145
(4)
Where the CMA has concluded that the merger in question operates or may be expected to operate against the public interest, it must decide whether action should be taken by the Secretary of State, or other persons, for the purpose of remedying, mitigating or preventing any of the effects that are adverse to the public interest, which have resulted, or may be expected to result, from the merger and, if so, what action should be taken.146
(5)
Where the CMA has also concluded that there is or will be a substantial lessening of competition within a market in the UK, it must also decide separately whether action should be taken for the purpose of remedying, mitigating or preventing the substantial lessening of competition and, if so, what action should be taken.147
In answering the questions in relation to remedial action, the CMA will have regard to the need to achieve as comprehensive a solution as is “reasonable and practicable” to remedy the adverse effect to the public interest and/or the substantial lessening of competition.148 The CMA will also have regard to any relevant customer benefits in relation to the creation of the relevant merger situation.149 The CMA will prepare a report on reference and present it to the Secretary of State.150 The report must contain the CMA’s responses to the statutory questions that it is required to answer, its reasoning, and any other information that the CMA considers appropriate for facilitating a proper understanding of its decision.151 This report must be delivered within 24 weeks, beginning on the date upon which the reference was made (i.e., the normal time-frame for conducting a Phase II inquiry).152 This period may be extended by up to eight weeks if there are “special reasons” why the report cannot be prepared within the 24-week period.153 Where a relevant person154 has failed to comply 145
Sections 47(3) and 47(6), Enterprise Act. Section 47(7), Enterprise Act. 147 Section 47(8), Enterprise Act. 148 Section 47(9), Enterprise Act. 146
149
Section 47(10), Enterprise Act. Section 50(1), Enterprise Act. 151 Section 50(2), Enterprise Act. 150
152
Section 51(1), Enterprise Act. Section 51(3), Enterprise Act. 154 Section 51(5) of the Enterprise Act states that a “relevant person” for the purposes of this section is (a) any person carrying on any of the enterprises concerned; (b) any person who (whether alone or as 153
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179
with any requirement of a notice under section 109 of the Enterprise Act to give evidence or produce documents, the CMA may extend the time-frame within which the report must be prepared until such time as the information or documents have been produced to the CMA’s satisfaction.155 The CMA will inform the main parties at least 24 hours before the final report is sent to the Secretary of State that the report is to be despatched imminently.156 The CMA will cancel a reference if: (i) the intervention notice mentions a public interest consideration that has not been finalised; (ii) no other public interest consideration is mentioned in the notice; and (iii) at least 24 weeks have elapsed since the issuance of the notice.157 Where the intervention notice mentions more than one public interest consideration, and one of the public interest considerations mentioned in the intervention notice has not been finalised within the 24 week period, the CMA will disregard that consideration for the purposes of its report.158 However, this will not affect the CMA taking into account public interest considerations that have been finalised.159
5.3.7
Final Decision of the Secretary of State
The Secretary of State must decide whether to make an adverse public interest finding in relation to the relevant merger situation concerned or to make no finding at all.160 He will make an adverse public interest finding if, taking into account the likelihood of a substantial lessening of competition and/or the relevant public interest considerations, the merger operates or may be expected to operate against the public interest.161 The Secretary of State may make no finding at all only if he decides that no public interest consideration is relevant to the merger.162
a member of a group) owns or has control of any such person; or (c) any officer, employee or agent of any such person. Section 51(6) of the Enterprise Act states that a person or group of persons able, directly or indirectly, to control or materially to influence the policy of a body of persons corporate or unincorporate, but without having a controlling interest in that body of persons, may be treated as having control over it. 155 Sections 51(4) and 51(8), Enterprise Act. Section 52(2) of the Enterprise Act states that where the period within which a report must be prepared is determined by the referral back procedure under the Merger Regulation, that period cannot be extended beyond the maximum permitted period under Article 9(6) of the Merger Regulation. 156 Jurisdictional and Procedural Guidance, para. 16.12. 157
Section 53(1), Enterprise Act. Section 53(3) and (4), Enterprise Act. 159 Section 53(5), Enterprise Act. 160 Section 54(2), Enterprise Act. 158
161 162
Section 54(3), Enterprise Act. Section 54(4), Enterprise Act.
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The Secretary of State must publish his decision within 30 days of his receipt of the CMA’s report.163 In deciding whether to make an adverse public interest finding, the Secretary of State will accept the CMA’s conclusions in relation to jurisdiction and competitive effects.164 The Secretary of State must determine whether, taking into account the CMA’s findings on the likely competitive effects of the merger, the relevant public interest considerations outweigh any anti-competitive effects that the merger might have. The Enterprise Act does not provide the Secretary of State with any particular guidance on how such a decision should be made. Ultimately, it is a balancing process with the likely anti-competitive effects weighed against the effect of the merger on relevant public interest considerations. This is illustrated by the decision of Lord Mandelson in Lloyds/HBOS.165 The decision stated that “the judgement that the Secretary of State has to make is whether the anti-competitive outcome that may arise from this merger should be considered justified by the public interest as it relates to ensuring the stability of the UK financial system. On balance, he has concluded that ensuring the stability of the UK financial system justified the anti-competitive outcome which the OFT has identified and that the public interest is best served by clearing the merger.”166 When the Secretary of State has made a decision on whether or not to refer a merger to Phase II, he is required to publish the CMA’s Phase I report.167 The CMA will also make its report available on its website. The parties will be contacted prior to publication to discuss whether the report contains confidential information that should be excised prior to publication.168 The non-confidential version of the CMA’s report must be published no later than the publication of the Secretary of State’s decision (i.e., within 30 days).169
5.3.8
Enforcement
Where the Secretary of State concludes that the merger is likely to act against the public interest, he may take such action as he considers reasonable and practicable to remedy, mitigate or prevent any of the merger’s effects.170 In determining what action to take,
163
Section 54(5), Enterprise Act. Section 54(8) of the Enterprise Act states that, for the purposes of calculating the 30 day period, no account will be taken of weekends, Good Friday, Christmas Day or any Bank Holiday in England and Wales. Jurisdictional and Procedural Guidance, para. 16.12. 164
Section 54(7)(a) and (b), Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.12. This was a decision not to refer a merger to the CC, but the decision-making process was akin to reaching a decision following a CC report. 165
166 Decision by Lord Mandelson, the Secretary of State for Business, not to refer to the Competition Commission the merger between Lloyds TSB plc and HBOS plc under Section 45 of the Enterprise Act 2003, 31 October 2008. 167 Section 107, Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.13. 168 Jurisdictional and Procedural Guidance, para. 16.13. 169 170
Section 107(9)(b), Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.14. Section 55(2), Enterprise Act.
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the Secretary of State will have regard to the CMA’s report171 and, in practice, the Secretary of State often follows the CMA’s advice.
5.4
SPECIAL PUBLIC INTEREST MERGERS 5.4.1
General Principles
The Secretary of State may issue a special public interest intervention notice to the CMA if he believes that it is or may be the case that a special merger situation has been or will be created, and that one or more public interest considerations are relevant to its assessment.172 Unlike public interest mergers, special public interest mergers do not require that a relevant merger situation has been, or will be created. For a special merger situation to exist, the following criteria must be met: (1)
at least one of the enterprises concerned must have been carried on in the UK or under the control of a UK company; and
(2)
a person carrying on one or more of the enterprises concerned must have been a relevant government contractor; or
(3)
in relation to the supply of newspapers of any description, at least 25% of all newspapers of that description that were supplied in the UK, or a substantial part of the UK, were supplied by the person or persons by whom one of the enterprises concerned was carried on; or
(4)
in relation to the provision of broadcasting of any description, at least 25% of all broadcasting provided in the UK, or a substantial part of the UK, was provided by the person or persons by whom one of the enterprises concerned was carried on.173
A relevant government contractor is a company that has been notified by, or on behalf of, the Secretary of State of information, documents or other articles relating to defence that are of a confidential nature that the government contractor or an employee of his may hold or receive in connection with being such a contractor, and whose notification has not been revoked.174 A former government contractor is also a relevant government contractor for the purposes of a special public interest merger if his notification has not been revoked by or on behalf of the Secretary of State.175 Special public interest mergers are rare and have only occurred twice under the Enterprise Act.176
171 172 173
Section 55(3), Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.12. Section 59(1) and (2), Enterprise Act.
Section 59(3), Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.23. Section 59(8)(a), Enterprise Act. 175 Section 59(8)(b), Enterprise Act. 176 Anticipated acquisition by Lockheed Martin Corporation, through Lockheed Martin UK Holdings Limited, of Insys Group Limited: a report to the Secretary of State for Trade and Industry, 19 September 2005 and Anticipated acquisition by Atlas Elektronik GmbH UK through Atlas Elektronik 174
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5.4.2
Procedure
A special public interest intervention notice must state the special merger situation concerned and the public interest consideration that is relevant to the special merger situation.177 The procedural rules in respect of special intervention notices are essentially the same as for public interest intervention notices (see above).
5.4.3
Phase I Investigation and Report
The CMA will investigate the special merger situation and report within the time-period set out in the special intervention notice.178 The CMA’s report will advise on whether a special merger situation has been, or will be, created179 and will contain advice in relation to the considerations relevant to making a reference and a summary of any representations about the case that have been received by the CMA and which relate to any public interest consideration mentioned in the special intervention notice.180 No competition assessment will be carried out in these cases.181 The report may also include advice and recommendations regarding any public interest consideration that may be relevant to the Secretary of State’s decision.182 However, not being an expert in the considerations that are likely to be specified in a special public interest intervention notice, the CMA is likely to confine itself to summarising and commenting on the representations received by relevant third party experts, such as the MoD.183
5.4.4
Decision of the Secretary of State on Reference
Having received the CMA’s report, the Secretary of State may make a reference if he believes that it is or may be the case that: (i) a special merger situation has been (or will be) created; (ii) one or more considerations mentioned in the special intervention notice is relevant to the assessment of the merger; and (iii) taking account only of the relevant consideration, the creation of that situation operates or may be expected to operate against the public interest.184 Therefore, it is not necessary for the special interest merger to raise any competition concerns. In making his decision, as with public interest mergers, the CMA’s conclusions on the existence of a special merger situation are binding.185 The CMA’s Phase I report will be published by the Secretary of State at
UK Limited of Qinetiq's UWs Winfrith Division: a report to the Secretary of State for Business, Innovation and Skills, 25 June 2009. 177 Section 60, Enterprise Act. 178 Section 61(2), Enterprise Act; Jurisdictional and Procedural Guidance, para. 16.24. 179 Section 61(4), Enterprise Act; Jurisdictional and Procedural Guidance, para. 16.24. 180
Section 61(3), Enterprise Act; Jurisdictional and Procedural Guidance, para. 16.24. Jurisdictional and Procedural Guidance, para. 16.23. 182 Section 61(5), Enterprise Act. 183 Jurisdictional and Procedural Guidance, para. 16.24. 181
184 185
Section 62(2) and (3), Enterprise Act. Jurisdictional and Procedural Guidance, para. 16.25. Section 62(5), Enterprise Act.
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the time of the reference decision and will also be made available by the CMA on its website.186 The parties will be contacted prior to publication to discuss whether the report contains confidential information that should be excised before publication.187
5.4.5
Phase II Investigation and Report
In the event of a reference to Phase II, the CMA will decide, within a period of 24 weeks,188 whether a special merger situation has been (or will be) created.189 If the CMA concludes that a special merger situation has been (or will be) created, it will decide whether, taking account only of the consideration(s) mentioned in the reference, the creation of that situation operates, or may be expected to operate, against the public interest.190 Where the CMA concludes that a special merger situation operates, or may be expected to operate, against the public interest, it will decide whether action should be taken by the Secretary of State for the purpose of remedying, mitigating or preventing adverse public interest effects.191
5.4.6
Final Decision of the Secretary of State
The Secretary of State will make and publish his decision within 30 days of receiving a report from the CMA.192 He will accept the CMA’s decisions in respect of whether a special merger situation has been (or will be) created,193 and he will decide whether, taking into account only the relevant public interest consideration(s), the merger operates or may be expected to operate against the public interest.194 If the Secretary of State concludes that the merger operates, or may be expected to operate, against the public interest, he may take such action as he considers reasonable and practicable to remedy, mitigate or prevent any adverse public interest effects.195
5.5
EUROPEAN MERGERS AND THE PROTECTION OF LEGITIMATE INTERESTS 5.5.1
General Principles
The Secretary of State may issue a European intervention notice where the following conditions are met:
186
Jurisdictional and Procedural Guidance, para. 16.25. Ibid. 188 Section 65(1), Enterprise Act. 189 Section 63(1) and (2), Enterprise Act. 187
190
Section 63(3), Enterprise Act. Section 63(4)(a), Enterprise Act. 192 Section 66(3), Enterprise Act. 193 Section 66(4), Enterprise Act. 191
194 195
Section 66(5), Enterprise Act. Section 66(6), Enterprise Act.
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(1)
the Secretary of State has reasonable grounds for suspecting that it is, or may be, the case that a relevant merger situation has been, or will be, created;
(2)
the relevant merger situation has an EU dimension within the meaning of the Merger Regulation; and
(3)
the Secretary of State is considering whether to take appropriate measures to protect legitimate interests within the meaning of Article 21(4) of the Merger Regulation, which includes national security, media plurality and the protection of prudential rules.196
In such cases, a reference to the CMA is not possible due to the fact that the Commission, and not the UK authorities, has jurisdiction.197 It is rare that the Secretary of State issues a European intervention notice and this has only occurred five times under the Enterprise Act.198 A European intervention notice must state: (i) the relevant merger situation concerned; (ii) the public interest consideration(s) that are, or may be, relevant to a consideration of the relevant merger situation; and (iii) where any public interest consideration concerned is not finalised, the proposed timetable for finalising it.199 Where the Secretary of State considers that two or more public interest considerations are relevant he need not specify all of them in the intervention notice200 and no more than one intervention notice may be issued in respect of the same relevant merger situation.201
5.5.2
Phase I Investigation and Report
When a European intervention notice is issued, the CMA is required to investigate and report in accordance with articles 4(2) to (5) of the Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003.202 This requires the CMA to report to the Secretary of State, within a time-period specified by the Secretary of State,203 regarding the
196
Section 67(1), Enterprise Act. Section 67(1)(b), Enterprise Act. 198 Anticipated acquisition by General Dynamics Corporation of Alvis Plc: a report to the Secretary of State for Trade and Industry, 20 May 2004; Anticipated acquisition by Finmeccanica Società per Azioni of AgustaWestland NV: a report to the Secretary of State for Trade and Industry, 29 September 2004; Anticipated acquisition by Finmeccanica Società per Azioni of BAE Systems plc’s avionics and communications business: a report to the Secretary of State for Trade and Industry, 14 March 2005; Anticipated acquisition by General Electric Company of the aerospace business of Smiths Group plc: a report to the Secretary of State for Trade and Industry, 10 April 2007; A report to the Secretary of State for Culture, Olympics, Media and Sport in response to the European intervention notice issued on 4 November 2010 in relation to the anticipated acquisition by News Corporation of British Sky Broadcasting Group plc, 30 December 2010. 199 Section 67(3), Enterprise Act. 200 Section 67(4), Enterprise Act. 201 Section 67(5), Enterprise Act. 197
202 203
SI 2003/1592. Section 4(2), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003.
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185
considerations relevant to the making of a reference under sections 22 or 33 of the Enterprise Act and to provide a summary of representations received from third parties relating to the public interest consideration(s).204 When a European intervention notice has been issued, the CMA will publish an invitation to comment, seeking third parties’ views on the public interest considerations that are relevant to the merger.205 The CMA will not seek views on the likelihood of the merger resulting in a substantial lessening of competition.206 The CMA’s advice to the Secretary of State will not include a competition assessment as this aspect of the merger remains the responsibility of the Commission.207
5.5.3
Decision of the Secretary of State on Reference
The Secretary of State may make a reference for a Phase II investigation if he believes that: (i) arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a European relevant merger situation; (ii) one (or more than one) public interest consideration mentioned in the European intervention notice is relevant to a consideration of the European relevant merger situation concerned; and (iii) taking account only of the relevant public interest consideration or considerations concerned, the creation of that situation operates or may be expected to operate against the public interest.208
5.5.4
Phase II Investigation and Report
Where the Secretary of State refers a European relevant merger situation to Phase II, the CMA must decide whether a European relevant merger situation has been created or whether arrangements are in progress or in contemplation which, if carried into effect, would result in the creation of a European relevant merger situation.209 If the CMA decides that a European relevant merger situation has been created, or that arrangements are in progress or in contemplation which, if carried into effect, would result in the creation of a European relevant merger situation, it must decide whether, taking account only the admissible public interest consideration or considerations concerned, the creation of that situation operates, or may be expected to operate, against the public interest.210 Where the CMA has decided that the creation of a European relevant merger situation operates, or may be expected to operate, against the public interest, it must decide the following additional questions: (i) whether action should be taken by the Secretary of 204 Section 4(3), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003; Jurisdictional and Procedural Guidance, para. 16.18. 205 Jurisdictional and Procedural Guidance, para. 16.19. 206 Ibid. 207
Ibid. Section 5(3), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. Jurisdictional and Procedural Guidance, para. 16.20. 208
209 210
Section 6(1) and (2), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. Section 6(3), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003.
186
UK Merger Control
State for the purpose of remedying, mitigating or preventing any of the effects adverse to the public interest that have resulted from, or may be expected to result from, the creation of the European relevant merger situation concerned; (ii) whether the CMA should recommend the taking of other action by the Secretary of State or action by persons other than itself and the Secretary of State for the purpose of remedying, mitigating or preventing any of the effects adverse to the public interest that have resulted from, or may be expected to result from, the creation of the European relevant merger situation concerned; and (iii) in either case, if action should be taken, what action should be taken and what is to be remedied, mitigated or prevented.211 The CMA must prepare and present such a report within its usual 24-week review period and may extend this period by no more than eight weeks.212
5.5.5
Final Decision of Secretary of State
The Secretary of State must decide the questions upon which the CMA has provided advice in its report213 and publish his decision within 30 days beginning on receipt of the CMA’s report.214 In making his decision, the Secretary of State must accept the CMA’s report in relation to whether a European relevant merger situation has been created or whether arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a European relevant merger situation.215 Where the Secretary of State concludes that a European relevant merger situation operates or may be expected to operate against the public interest, the Secretary of State may take such action as he considers reasonable and practicable to remedy, mitigate or prevent any of the effects adverse to the public interest which have resulted from, or may be expected to result from, the creation of the European relevant merger situation concerned.216 In this respect, the Secretary of State will have regard to the CMA’s recommendations on remedies.217
211
Section 6(4), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003.
212
Section 9(1) and (2), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. Section 12(2), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. 214 Section 12(3), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. 215 Section 12(5), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. 213
216 217
Section 12(7), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003. Section 12(8), Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003.
Chapter 6 THE PHASE I PROCESS 6.1 Introduction 6.2 Mergers Intelligence 6.2.1 The Statutory Duty to Monitor UK Mergers 6.2.2 Mergers Intelligence Team 6.2.3 Complaints 6.3 Enquiry Letters 6.4 The Decision to Notify a Merger 6.4.1 Transactions Raising no Competition Concerns 6.4.2 Transactions Raising Potential Competition Concerns (a) Initial enforcement orders (b) Phase II referral (c) Reduced period for a Phase I review 6.5 Informal Advice 6.5.1 General Principles 6.5.2 Applications for Informal Advice 6.5.3 Timetable 6.6 Pre-Notification Contact 6.6.1 The Purpose of Pre-Notification Contact 6.6.2 The Pre-Notification Process 6.6.3 The Benefits of Pre-Notification Contact 6.7 Notification of Mergers 6.7.1 Mergers Must Not Be Confidential 6.7.2 Good Faith Intention to Proceed 6.7.3 Content and Completeness 6.7.4 Timing 6.7.5 Own-Initiative Investigations 6.7.6 False or Misleading Information 6.7.7 Confidentiality 6.7.8 Fast Track Reference Cases 6.8 Initial Enforcement Orders 6.8.1 Purpose 6.8.2 Timing 6.8.3 Anticipated Mergers
(a)
Interim orders to prevent pre-emptive action (b) Interim orders preventing completion 6.8.4 Completed Mergers 6.8.5 Derogations 6.8.6 Compliance Updates 6.8.7 Publication 6.8.8 Monitoring Trustees and Hold Separate Managers 6.8.9 Unwinding Order 6.9 The CMA’s Information-Gathering Powers 6.10 Discussions With Merging Parties and Third Parties 6.11 The Phase I Process 6.11.1 The Initial Stages (a) Early investigation (b) Internal state of play meeting (c) External state of play call 6.11.2 Non-CRM Cases 6.11.3 CRM Cases (a) Issues letter (b) Issues meeting (c) Case review meeting (d) Decision meeting (e) Draft decision (f) Publication of decisions 6.12 Filing Fees 6.13 Takeover Code 6.13.1 Relevance of the Takeover Code to UK mergers 6.13.2 Conditions to an Offer 6.13.3 Timing Implications (a) Rule 2.4 announcements (b) Rule 2.7 announcements 6.14 Ancillary Restraints 6.14.1 The Principle of Self-Assessment 6.14.2 CMA Assessment
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6.1
INTRODUCTION
The Enterprise Act imposes no obligation on merging parties to notify their transaction to the CMA, even where the transaction qualifies as a relevant merger situation.1 This is quite unlike the merger control regime under the Merger Regulation and all of the other EU Member States with merger control rules, which require merging parties to submit a mandatory notification in the event that their transaction exceeds the relevant EU or national jurisdictional thresholds. By design, the Enterprise Act has taken a different course and recognises that mandatory filing regimes incorporate somewhat arbitrary jurisdictional thresholds that have the potential to require the notification of a large number of mergers that raise no, or insubstantial, competition concerns and, on the other hand, can fail to require the notification of potentially anti-competitive mergers in small markets.2 At least as an initial matter, the Enterprise Act places the burden of determining whether to notify a merger to the CMA on merging parties and their advisers, and recognises that, in cases that raise no competition concerns, it may be disproportionate to make a notification. Accordingly, the CMA will not treat negatively a merger that has not been notified.3 In the event that merging parties conclude that their transaction could raise potential competition concerns (or that the CMA might reach such a conclusion at the end of its investigation), they may choose to submit a notification to the CMA. In this sense, the UK merger control regime is often described as being ‘voluntary’. However, it is better seen as being only ‘quasi-voluntary’, as the CMA is under a statutory duty to monitor merger control activity in the UK,4 and in cases where the CMA discovers a transaction, or receives a third party complaint in respect of a transaction, that raises potential competition concerns in the UK, the CMA may contact the merging parties to establish whether their transaction qualifies as a relevant merger situation or, in relation to completed mergers, it may issue an enquiry letter, which may be accompanied by a statutory notice under section 109 of the Enterprise Act requiring the provision of specified information. Once the CMA has received this information, it will begin an investigation under its 40 working day statutory timetable. Merging parties should be aware that if they choose to complete their transaction without making a notification, the CMA retains the ability to refer the transaction for a Phase II investigation for up to
1
Jurisdictional and Procedural Guidance, para. 6.1. For example, of the 337 cases notified to the European Commission in 2015 (six of which were withdrawn and one of which did not qualify for investigation), 222 were cleared under the simplified procedure, meaning that there were no “affected” markets where, inter alia, either: (i) the combined market share of all the parties to the concentration that are engaged in business activities in the same product and geographic market is less than 20%; or (ii) the individual or combined market shares of all the parties to the concentration that are engaged in business activities in a product market which is upstream or downstream from a product market in which any other party to the concentration is engaged are less than 30%. Therefore, approximately 66% of the Commission’s cases were deemed not to raise any competition concerns but nevertheless fell within the jurisdiction of the Merger Regulation and a mandatory notification was required. 2
3 4
Jurisdictional and Procedural Guidance, para. 6.2. Section 5, Enterprise Act.
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189
four months following its completion (or from the date that material facts about the merger were made public or the CMA was informed about it).5 In April 2014, in an effort to strengthen the UK merger control regime, the Government introduced various changes to the pre-existing Phase I system. The principal changes included: (i) introducing a statutory 40 working day period for Phase I investigations and a fixed period for the consideration and acceptance of undertakings in lieu of reference (“undertakings” or “UILs”); (ii) removing the ability to accept initial undertakings and expanding the scope of initial enforcement orders to cover anticipated as well as completed mergers; (iii) providing the CMA with the power to order merging parties to ‘unwind’ any integration that may have taken place;6 and (iv) providing the CMA with the power to order merging parties, and third parties, to attend interviews and give evidence to the CMA,7 and to produce documents and/or other specified information.8 This chapter explains the CMA’s Phase I process, including the mergers intelligence function, enquiry letters, informal advice, pre-notification contact with the authority, notifying a merger, initial enforcement orders, the administrative process, filing fees and ancillary restraints.
6.2 6.2.1
MERGERS INTELLIGENCE
The Statutory Duty to Monitor UK Mergers
The CMA is responsible for obtaining, compiling and keeping under review information about matters relating to the carrying out of its functions.9 These functions include reviewing UK merger control activity. The CMA pro-actively reviews a wide range of sources to obtain information on such activities, including national and trade press.10 The CMA also maintains an active dialogue with Government departments and other regulatory bodies to obtain intelligence about merger activity. The CMA also considers information received from third parties, such as customers and/or competitors of the merging parties.
6.2.2
Mergers Intelligence Team
To bolster the CMA’s capacity to detect non-notified (but potentially problematic) mergers, the CMA has a dedicated mergers intelligence team responsible for monitoring and prioritising mergers, and, where appropriate, liaising with other national competition authorities and government departments, in relation to mergers that have been announced or have been brought to the CMA’s attention. The mergers intelligence 5
See Chapter 2, section 2.5. Section 72(3B), Enterprise Act. 7 Section 109(1), Enterprise Act. 8 Section 109(2) and (3), Enterprise Act. 6
9
Section 5, Enterprise Act. Jurisdictional and Procedural Guidance, para. 6.7.
10
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team keeps under review a wide range of public sources, including newspapers, online sites such as Reuters and Bloomberg, and trade press. The mergers intelligence team normally attempts to identify from public sources whether the CMA might have jurisdiction over a merger and whether, and to what extent, the parties have overlapping activities. Where the mergers intelligence team is unable to make this assessment on the basis of publicly available information it may contact one or more of the merging parties to informally request the provision of relevant information. This will usually be done using its powers under section 5 of the Enterprise Act. The use of section 5 powers in these circumstances ensures that information requests are more targeted and that non-qualifying transactions are not called in unnecessarily, which would lead to an increased number of cases being found not to qualify. In the CMA financial year of 2015/16, only one case called in by the CMA was found not to qualify. Once the mergers intelligence team has gathered information on jurisdiction, cases are then prioritised for consideration by the Mergers Intelligence Committee, which meets on a weekly basis and is usually chaired by a Director of Mergers. In respect of cases where the CMA considers that it has jurisdiction, the Mergers Intelligence Committee assesses whether an enquiry letter should be issued to the acquirer and the transaction should be ‘called in’ for a Phase I investigation. In 2015/16, the Mergers Intelligence Committee considered nearly 600 transactions, calling in 10 cases, which represented approximately 20% of the Phase I merger team’s total case load for this period.11 Since the mergers intelligence team was created in July 2008, to date, the Authorities have identified non-notified mergers that resulted in an SLC outcome (i.e., were referred to Phase II, were subject to undertakings, or were subject to the de minimis exception) in 23 instances.12 Over 90% of these were completed mergers (at the 11 In 2014/15, the Mergers Intelligence Committee considered over 500 transactions, calling in 21 cases, which represented approximately 25% of the Phase I merger team’s total case load. 12 Completed Acquisition by Capita Group plc of IBS OPENSystems plc, OFT decision of 19 November 2008; Completed acquisition by Nufarm Limited of AH Marks Holdings Limited, OFT decision of 29 August 2008 (this merger was drawn to the attention of the OFT by an overseas competition authority); Completed acquisition by Aggregate Industries UK Limited of Atlantic Aggregates Limited and of Stone Haul Limited, OFT decision of 2 March 2009; Completed acquisition by NBTY Europe Limited of Julian Graves Limited, OFT decision of 24 March 2009; Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc, OFT decision of 1 May 2009; Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009; Completed acquisition by Stagecoach Group plc of Eastbourne Buses Limited, and Cavendish Motor Services, OFT decision of 13 May 2009; Completed acquisition by GP Oils Limited of Brogan Holdings Limited, OFT decision of 20 April 2010; Anticipated acquisition by Getty Images Inc of Rex Features Limited, OFT decision of 8 July 2010; Completed acquisition by Zipcar, Inc of Streetcar Limited, OFT decision of 10 August 2010; Completed acquisition by Sector Treasury Services Limited of ICAP plc's treasury consultancy services business known as Butlers, OFT decision of 31 March 2011; Completed acquisition by Arriva Passenger Services Limited of the remainder of the entire share capital of Centrebus Holdings Limited, CMA decision of 6 May 2014; Completed acquisition by WGSN Inc. of Stylesight Inc., CMA decision of 25 June 2014; Completed acquisition of two Vauxhall dealerships from Riders’ Garages Limited by Eden (GM) Limited, CMA decision of
The Phase I Process
191
conclusion, if not at the start, of the Phase I inquiry). A large proportion of the cases identified and called in by the Mergers Intelligence Committee have resulted in Case Review Meetings (“CRM”) and SLC outcomes. In 2014/15, of the 21 cases called in, nine resulted in a CRM and three resulted in an SLC outcome (two of which were referrals to Phase II).13 In 2015/16, of the 10 cases called in, six resulted in a CRM and three resulted in an SLC outcome (all of which resulted in UILs).14 In addition, four cases in 2014/1515 and one case in 2015/16,16 which were called in by the Mergers Intelligence Committee resulted in the use of the de minimis exception. These cases should also be seen as a form of SLC outcome.
6.2.3
Complaints
The activities of the mergers intelligence team are supplemented by third party complaints. The CMA is under no obligation to follow-up or investigate every complaint in relation to a non-notified merger, even where it is clear that the CMA would have jurisdiction over the transaction in question.17 The CMA will consider each complaint on its merits and determine whether or not a complaint justifies follow-up action. Customer complaints are typically treated as being particularly significant as, all else equal, this class of complainant will often suffer as the result of an anti-competitive merger.18 Conversely, the CMA is aware that competitors and rival bidders will usually have different incentives from customers to complain about a merger and, consequently, such complaints may be attributed less weight.19
24 October 2014; Completed acquisition by Xchanging of Agencyport Software Europe, CMA decision of 2 December 2014; Completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, CMA decision of 13 January 2015; Completed acquisition by Key Publishing Limited of certain assets of Kelsey Publishing Limited, CMA decision of 2 March 2015; Completed acquisition by GTCR Canyon UK Investments Ltd of Gorkana Group Limited, CMA decision of 27 March 2015; Completed Acquisition by Linergy Limited of Ulster Farm By-Products Limited, CMA decision of 17 July 2015; Completed acquisition by Sheffield City Taxis Limited of certain assets and business of Mercury Taxis (Sheffield) Limited, CMA decision of 13 October 2015; Completed acquisition of Avanta Serviced Office Group plc by Regus plc, CMA decision of 18 November 2015; Completed acquisition by BCA Marketplace plc of SMA Vehicle Remarketing Limited, CMA decision of 17 November 2015; Anticipated acquisition by MRH (GB) Limited of 78 service stations from Esso Petroleum Company Limited, CMA decision of 26 November 2015. 13 Xchanging/Agencyport, supra, which was referred to Phase II; Sonoco/Weidenhammer, supra, which was referred to Phase II; GTCR/Gorkana, supra, which resulted in UILs. 14
Regus/Avanta, supra; BCA/SMA, supra; MRH/Esso, supra. Arriva/Centrebus, supra; WGSN/Stylesight, supra; Eden/Rider, supra; Key/Kelsey, supra. 16 Sheffield Taxis/Mercury Taxis, supra. 17 Jurisdictional and Procedural Guidance, para. 6.10. 15
18 19
Ibid., para. 6.12. Ibid.
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6.3
ENQUIRY LETTERS
Where the Mergers Intelligence Committee has decided to undertake an own-initiative investigation, it will send an enquiry letter to the acquiring party (or parties).20 In deciding whether to do so, the CMA will consider whether there is a “reasonable prospect” that its duty to refer will be met,21 and will not issue an enquiry letter simply as a result of having received an unsubstantiated complaint from a third-party or because its jurisdictional thresholds are met.22 The main purpose of an enquiry letter is for the CMA to establish more definitively whether the jurisdictional thresholds under the Enterprise Act are met (where this has not been possible using its section 5 powers) and to obtain the substantive information that it would expect to receive as part of a merger notification. Where a merger has already completed, the CMA’s practice is to require the provision of the information requested in its enquiry letter by way of a statutory notice.23 The CMA will also normally inform the parties to a completed merger that it has made an initial enforcement order under section 72 of the Enterprise Act, preventing the parties from starting, or continuing, any integration of the merged entities.24 If the parties do not respond fully to the CMA’s information requests within the deadline specified in the notice, the CMA may suspend the four-month deadline to refer a completed merger and the 40 working day statutory timetable, if that has been commenced.25 Once the CMA has received all the information that it requires to begin its investigation, it will review the merger as if it had been notified.26 The 40 working day statutory timetable will apply and will begin on the first working day after the CMA has confirmed receipt of all the necessary information by way of a written notice to the parties.27 The CMA is under a statutory duty to publish a decision regarding whether or not to refer a merger to a Phase II investigation.28 This also applies to cases in which the CMA has issued an enquiry letter, where the CMA would normally expect to proceed to a decision.29 Where the CMA concludes that a merger does not in fact qualify for investigation, it will publish a decision to that effect.30 These decisions are typically published in a short, standard format and do not typically provide extensive detail about why the CMA has concluded that the merger in question was found not to qualify.
20
Ibid., para. 6.15. Ibid. 22 Ibid. 21
23
Section 109, Enterprise Act. Initial enforcement orders are discussed below in section 6.8. 25 Jurisdictional and Procedural Guidance, para. 6.17. 26 Ibid., para. 6.16. 24
27
Ibid. Section 107, Enterprise Act. 29 Jurisdictional and Procedural Guidance, para. 6.19. 30 This will happen when the CMA has sent out an enquiry letter but not when it has requested jurisdictional information using its section 5 powers. 28
The Phase I Process
6.4
193
THE DECISION TO NOTIFY A MERGER
As noted above, the Enterprise Act does not oblige merging parties to notify a transaction that qualifies as a ‘relevant merger situation’.31 Therefore, merging parties must determine, usually in conjunction with their external advisers: (i) whether their transaction qualifies as a relevant merger situation; and (ii) whether or not to notify the merger to the CMA. This decision typically involves an assessment of the risk of detection (if a merger is not notified) and the risk of intervention by the CMA (i.e., by sending an enquiry letter).32
6.4.1
Transactions Raising no Competition Concerns
In cases where the transaction qualifies as a relevant merger situation, but does not raise any potential competition concerns, the merging parties may conclude that a notification is unnecessary. The preparation of a merger filing requires time and incurs costs (both internally and in terms of advisers’ fees). In addition, the filing fee for a merger where the target’s UK turnover exceeds £120 million is now £160,000.33 The risk that a filing might become necessary, as a result of an approach by the CMA, in these cases is typically low, although where a notification has not been made and it is unclear to the CMA whether the merger might raise substantive concerns, it may seek further information by way of its section 5 powers or issue an enquiry letter, if it becomes aware of the transaction, either as a result of its mergers intelligence function or as a result of third party complaints.
6.4.2
Transactions Raising Potential Competition Concerns
In cases where the transaction qualifies as a relevant merger situation and raises competition issues that the CMA may wish to investigate, whilst it is not obligatory to notify a qualifying merger, and the CMA will not treat negatively a merger that has not been notified, there are risks attached to not notifying such a transaction, including that the CMA may:34 (i) make an initial enforcement order; (ii) refer the merger for a Phase II investigation, which may result in a disposal of the acquired business;35 and (iii) have limited time to carry out a full Phase I investigation, which may increase the likelihood of a referral to Phase II.36 These issues are considered below.
31
See Chapters 2 and 3 regarding relevant merger situations.
32
Both of these factors must be considered together. There are many cases in which the risk of detection is high, but the intervention risk might be low. In such cases, merging parties may decide not to notify their transaction. 33 Filing fees are discussed below. 34 Jurisdictional and Procedural Guidance, para. 6.21. 35
The CMA does not have the power to order a divestment of a target business at Phase I. Merging parties can mitigate these risks by contacting the Mergers Intelligence Committee to inform them of their merger and set out reasons why the transaction, in their view, ought not to be the subject of an investigation. 36
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(a) Initial enforcement orders. As discussed in Chapter 1, the Enterprise and Regulatory Reform Act 2013 (the “Enterprise and Regulatory Reform Act”) removed the CMA’s ability to accept initial undertakings from the merging parties in relation to completed mergers and replaced this with the power to make initial enforcement orders in relation to both anticipated and completed mergers.37 As set out in more detail in section 6.8, where a merger has not been voluntarily notified and the CMA has reasonable grounds for suspecting that two or more enterprises have ceased to be distinct, it would normally expect to make an initial enforcement order, in circumstances where the CMA wishes to investigate the transaction.38 Such an order is intended to prevent any action that might prejudice a reference and/or impede the taking of any remedial action by the CMA. An initial enforcement order will remain in force until the merger is cleared or remedial action is taken, unless it is varied, revoked or replaced.39 As a result of the reforms introduced by the Enterprise and Regulatory Reform Act, where the CMA has reasonable grounds for suspecting that the parties to a completed merger have already started integrating their businesses, it may require merging parties to unwind any such integration that has already taken place.40 To date, the CMA has not ordered any merged entities to be unwound although it has considered doing so in several cases. (b) Phase II referral. In the event that the CMA concludes that there is a realistic prospect that a merger will result in a substantial lessening of competition, in the absence of undertakings in lieu, the merger will be referred to Phase II, unless an exception to the duty to refer applies.41 Following a reference, the parties may be required to divest some or all of the target enterprise. This is a costly and timeconsuming process. The fact that a merger has been completed does not reduce the likelihood of the CMA referring the merger to Phase II and the CMA will not normally consider the costs of divestment to the parties, as the parties are at liberty to condition their transactions on merger control approval.42 (c) Reduced period for a Phase I review. In the event that merging parties choose to complete their merger without making a voluntary notification to the CMA, if the CMA decides to investigate and as a result of the fact that the CMA must decide whether or not to refer a transaction within the relevant four-month period, it may have significantly less time in which to carry out its investigation.43 In the case of mergers that raise substantive competition concerns, this could increase the likelihood of the CMA making a referral.
37
Section 72, Enterprise Act. Jurisdictional and Procedural Guidance, para. 6.21. 39 Ibid. 38
40
Ibid. Section 72(3B), Enterprise Act. See Chapter 7. 42 Ibid. 43 Note that under section 25(1) of the Enterprise Act, the four-month period may be extended by up to 20 working days with the agreement of the parties. 41
The Phase I Process
6.5 6.5.1
195
INFORMAL ADVICE General Principles
The informal advice process allows merging parties, and their advisers, to discuss certain jurisdictional and substantive issues relevant to their transaction with the CMA and to obtain its non-binding view at the pre-notification stage. Informal advice is only available for anticipated mergers where the parties have a good faith intention to proceed with the transaction and is limited to cases where there is a genuine jurisdictional or substantive issue to be considered. The following general principles apply to the CMA’s provision of informal advice: (1)
Informal advice is only available for anticipated, confidential mergers. The CMA will provide informal advice only in relation to mergers that are not in the public domain.44 Accordingly, informal advice is not available in connection with completed mergers, even where the merging parties anticipate making a filing.
(2)
Good faith intention to proceed with the transaction. Merging parties must have a good faith intention to proceed with their anticipated transaction.45 In order to satisfy the CMA that a good faith intention exists, the merging parties will usually need to show that: (i) they have adequate financing; and (ii) that a heads of agreement, term sheet or similar document has been entered into by the parties; and/or (iii) that the transaction has been given board-level consideration by the purchaser.46 The provision of such evidence not only indicates that the merging parties have a good faith intention to proceed with their transaction, but also provides the CMA with comfort that the transaction is not at too preliminary a stage and that, as a result, the CMA will not expend resources on a transaction that is merely hypothetical.
(3)
Genuine jurisdictional or substantive issue. The CMA will only provide informal advice where its duty to refer is a genuine issue.47 The CMA believes that it can materially assist merging parties or justify the use of its resources only where this is the case. Accordingly, the provision of informal advice is more likely to be relevant to a substantive issue than a jurisdictional issue. However, the CMA has indicated that it will provide informal advice on issues such as material influence, the share of supply test or on questions relating to the allocation of cases between the European Commission and the CMA.48 Clearly, at the pre-notification stage, the strength of potential substantive concerns may be a difficult issue to determine in certain cases. However, the CMA will not consider, as candidates for informal advice, cases in which the
44
Jurisdictional and Procedural Guidance, para. 6.27. Ibid. 46 Ibid. 45
47 48
Ibid., para. 6.28. Ibid., para. 6.33.
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merging parties are seeking the CMA’s endorsement of their legal advisers’ view that the transaction raises no concerns.49 In order for the CMA to consider whether a merger raises a substantive concern, the merging parties will be required to indicate a relevant theory of harm50 that is of sufficient magnitude in the case in question that the CMA considers that the merger is likely to be the subject of a case review meeting.51 The CMA will accept the parties’ articulation of a theory of harm on a ‘without prejudice’ basis and, in practice, numerous mergers have been cleared by the CMA where informal advice was given. Where the CMA is not satisfied that the request for informal advice relates to a transaction that raises a genuine issue as to referral, the request will be rejected save in exceptional circumstances (e.g., pro bono cases where the parties are unable to afford external competition advice). (4)
Informal advice may not provide the merging parties with a definitive answer. Even after merging parties have satisfied the CMA that they have a good faith intention to proceed with their anticipated merger and that they have a genuine jurisdictional or substantive issue to discuss, it is by no means certain that the CMA will provide the parties with a clear-cut answer to their request, and the CMA is under no obligation to do so. This may be the case for two main reasons. First, the CMA may feel that there already exists sufficient guidance on the issue concerned in prior decisions. In these cases, where the CMA considers that it cannot provide any useful additional guidance, and where it does not consider that its resources would be well spent on further consideration of the matter, the CMA will usually advise the merging parties to this effect, usually by telephone.52 Secondly, the CMA may consider that it is unable to give a clear indication to the parties of the likely outcome of its investigation due to the fact that this is likely to turn on the evidence received from third parties. In such cases, the CMA will be unable to give an indication of whether the merger in question is likely to be referred as no market testing will have taken place at the time of the informal advice process.
(5)
Informal advice will be given only once and is non-binding. Merging parties have only one opportunity to obtain informal advice from the CMA.53 Resource considerations, amongst other things, prevent the CMA from engaging in multiple rounds of informal advice with merging parties. The onus is therefore on the parties to present the issues upon which they wish the CMA to provide informal advice in a clear, candid and comprehensive manner. Moreover, any informal advice that the CMA provides to the merging parties is the view of the Phase I mergers team only and will usually be provided by a senior member of the mergers team. It will not be provided by the CMA Chair or any other member of the CMA’s Board or panel. Accordingly, it is non-
49
Ibid., para. 6.28. Ibid., paras. 6.29 and 6.35. 51 See below for a detailed discussion of CMA case review meetings. 50
52 53
Jurisdictional and Procedural Guidance, para. 6.32. Ibid., para. 6.37.
The Phase I Process
197
binding and does not give rise to any expectations regarding the outcome of the CMA’s investigation.54 (6)
(7)
Informal advice is confidential and may not be disclosed to any party. Informal advice is given in strict confidence.55 It is given only to the party (or parties) seeking the advice and their legal advisers. It may not be disclosed to any other party. For example, where the informal advice has been requested by only one party to a transaction, the advice cannot be revealed to any of the other merging parties without the CMA’s consent.56 Moreover, in respect of the party (or parties) to whom the informal advice has been given, the advice may be disclosed only to the Board members, senior executive officers and the general counsel, in additional to their legal/financial advisers.57 Similarly, the CMA will keep confidential the request for informal advice (e.g., it will make no reference in its press release or in its decision to the fact that informal advice was requested).58 Parties must inform the CMA if their transaction proceeds. It is a condition of obtaining informal advice that the merging parties inform the CMA in the event that the proposed transaction proceeds and becomes public knowledge.59 This facilitates the CMA’s monitoring of merger activity and ensures, in effect, that parties in receipt of informal advice notify their merger to the CMA. Failure to notify a merger in respect of which informal advice was given would almost inevitably result in the issuance of an enquiry letter.
6.5.2
Applications for Informal Advice
Parties wishing to make an application for informal advice should complete a case team allocation form and then submit their application to their assigned case team. Such applications should be no more than five pages in length and should cover the following three points: (i) the suitability of the proposed transaction for informal advice by referring to the principles set out above; (ii) the theory of harm that the parties consider is relevant to an assessment of the merger and an explanation of why this would result in the transaction being a credible candidate for reference; and (iii) the key substantive and jurisdictional issues on which the parties are seeking advice.60
6.5.3
Timetable
There is no standard timetable for informal advice, but the CMA aims to provide feedback on whether it will accept or reject an application for informal advice within 54
Ibid.
55
Ibid. Ibid. 57 Ibid. 58 Ibid., para. 6.38. 56
59 60
Ibid. Ibid.
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five working days of receipt of the application.61 Where informal advice is to be given at the end of a meeting with the merging parties, the CMA will aim to schedule that meeting within 10 working days of receipt of the application.62 Urgent cases will be handled more quickly if adequately justified by the merging parties and depending on the availability of staff in the mergers team.
6.6 6.6.1
PRE-NOTIFICATION CONTACT The Purpose of Pre-Notification Contact
In the event that merging parties decide to notify a merger, the CMA “strongly encourages” parties to contact it to engage in pre-notification discussions,63 and since the changes to the merger control regime brought about by the Enterprise and Regulatory Reform Act, pre-notification is now effectively mandatory.64 Such discussions are required in relation to all transactions (although there must be a good faith intention to proceed)65 and the CMA does not make public that it is engaged in pre-notification discussions. Mergers do not need to be public in order to begin prenotification.66 The CMA considers the use of pre-notification to be an important part of the merger review process and that it is in the interests of both the CMA and merging parties that notifications are complete at the time of submission, in particular because the 40 working day statutory timetable does not start until the CMA has confirmed to the parties that it has received a complete merger notice.67 In more straightforward cases, these discussions might begin with the parties providing the CMA with a draft Merger Notice for comment. In more complex cases, pre-notification discussions often take place in advance of the submission of a draft notification. The overall purpose of pre-notification discussions is to ensure that the parties’ submission is complete and that the CMA has the information and evidence that it considers necessary to conduct its investigation.
6.6.2
The Pre-Notification Process
Where merging parties wish to engage in pre-notification discussions, they should complete a case team allocation form.68 The CMA will endeavour to allocate a case 61 62
Ibid., para. 6.36. Ibid.
63
Ibid., para. 6.39. Section 34ZA(3) states that the 40 working day statutory period only starts after the CMA has notified the parties under section 96(2A) that their merger notice is complete. Therefore, the Phase I review period cannot begin until the CMA has reviewed a draft merger notice in relation to which it will usually have comments and questions. 65 Jurisdictional and Procedural Guidance, para. 6.44. The CMA will not consider hypothetical scenarios and generally requires some form of evidence that the transaction is likely to proceed, such as adequate financing, heads of agreements or similar, or evidence of board level consideration. 66 Ibid. 64
67 68
Ibid. A copy of the case team allocation form is available on the CMA’s website.
The Phase I Process
199
team within five working days from receipt of the case team allocation form, although the mergers team will consider requests for the urgent appointment of case teams in exceptional circumstances.69 The appointed case team will include a Principal Case Officer, who will take primary responsibility for handling the case and will be the merging parties’ primary point of contact throughout the investigation.70 Principal Case Officers are supervised by more senior staff in the Mergers Unit, including an Assistant Director and a Director of Mergers.71 An Economic Adviser will also be appointed to the case team, who will be supervised by an Assistant Director of Economics. In the event that the parties have not contacted the CMA in pre-notification and are submitting a Merger Notice in response to an enquiry letter, the parties’ primary contact at the CMA will usually be the Principal Case Officer who was responsible for sending the enquiry letter. The case team will endeavour to review the draft Merger Notice and revert to the parties within 5-10 working days from receipt, although this will largely depend on the complexity and length of submissions made and whether the CMA has reviewed previous drafts of the submissions.72 Where the CMA considers that a pre-notification meeting or call is desirable, the case team will schedule one, but the case team will not be able to meet the merging parties and their advisers in pre-notification in all cases. Otherwise, pre-notification contacts will proceed on the basis of telephone, e-mail or formal written contacts, as appropriate.73 Parties should be aware that if they choose to limit pre-notification discussions – even where they do so for commercial reasons – they may reduce the opportunity to discuss with the CMA a more targeted approach to the information that needs to be included in a Merger Notice. In more difficult cases, this might also limit the time available for the CMA to assess any further information required to decide whether the test for reference is met, thereby not maximising the chances of a Phase I outcome.74 In general, pre-notification should not last for more than approximately four weeks from the submission of a substantially complete Merger Notice in relatively straightforward cases, but much will depend on the quality of the parties’ submissions and the complexity of the case. The CMA recognises that, in more complex cases, merging parties may wish to spend longer in pre-notification to maximise their chances of obtaining a Phase I outcome (e.g., discussing survey design, discussing possible remedies, etc).
6.6.3
The Benefits of Pre-Notification Contact
The CMA considers that the pre-notification process has numerous benefits.75
69
Jurisdictional and Procedural Guidance, para. 6.46.
70
Principal Case Officers may be supported by a case officer in relation to certain transactions. An Assistant Director and Director of Mergers are allocated to every merger case. 72 Jurisdictional and Procedural Guidance, para. 6.48. 73 Ibid. 71
74 75
Ibid., para. 6.50. Ibid., para. 6.40.
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(1)
It allows the CMA’s case team time to educate themselves in relation to the parties, their activities, and the relevant markets affected by the merger, particularly in cases that are complex or where the CMA is unfamiliar with the markets. The CMA can also consider the transaction’s rationale and any efficiencies that may be relevant.
(2)
The case team can review a draft Merger Notice and alert merging parties to any additional information and/or evidence that might be required to start the 40 working day statutory timetable. Conversely, the parties may wish to discuss types of information specified in the Merger Notice that the CMA may not consider necessary for a complete notification.
(3)
Merging parties can provide, and the case team can consider, the parties’ internal board, or other, documents that have been prepared in relation to the transaction.
(4)
The parties and the CMA can discuss the CMA’s likely approach to any novel issues to which the merger gives rise or to certain issues in respect of the CMA’s assessment, including the approach to any local analysis, and any quantitative evidence that may be required to analyse the case in Phase I.76
(5)
In appropriate cases, the parties and the CMA may wish to discuss possible UILs at the pre-notification stage, particularly where they may be complex or give rise to novel issues. This is particularly the case now that the merging parties have only five working days after the SLC decision to make a UIL offer, and the CMA has only five working days to consider whether this offer is in principle capable of remedying the SLC concern.
(6)
The parties and the CMA may wish to discuss the issue of which competition authority is best placed to review the merger. This may, in particular, be the case where the merger does not have an “EU dimension” and the parties wish to seek a referral to the Commission under Article 4(5) of the Merger Regulation. Alternatively, the merger may have an “EU dimension” and the parties may wish to discuss with the CMA whether it would be appropriate for the parties to seek a referral back to the UK under Article 4(4) of the Merger Regulation.77
Pre-notification is particularly important in relation to cases that may give rise to a realistic prospect of a substantial lessening of competition and where the merging parties would like to maximise their chances of obtaining a Phase I outcome. In such cases, merging parties may wish to use the opportunity to engage in more detailed prenotification discussions and to discuss their proposed substantive assessment with the CMA. Pre-notification would also be the best time for the parties and the case team to consider any survey that the merging parties may wish to undertake. Obtaining the CMA’s input in relation to survey methodology is often crucial to the issue of how 76 77
See Chapter 12 for a consideration of the CMA’s approach to these issues. See Chapter 4 for a discussion of these referral mechanisms.
The Phase I Process
201
much weight a Decision Maker is able to place on the survey results when determining the outcome of the Phase I process.78 Merging parties should note that once the 40 working day statutory period has formally commenced, the CMA will not ‘stop the clock’ to allow time for further consideration of complex issues or significant volumes of new information. In cases involving the merger of NHS foundation trusts, parties may wish to engage in pre-notification discussions with Monitor as well as the CMA in order to anticipate the types of evidence that both regulators will require when assessing whether there are relevant customer benefits (“RCBs”) arising from the merger.79 Given the statutory time limits applicable to the CMA’s investigation, parties wishing to rely on RCBs in an attempt to obtain clearance at Phase I may wish to engage in more extensive prenotification discussions with both Monitor and the CMA in order to maximise the opportunity for these issues to be considered fully.80
6.7
NOTIFICATION OF MERGERS
Merging parties wishing to notify a transaction to the CMA should complete a Merger Notice, a template of which is available on the CMA’s website.81 This template sets out the types of information required by the CMA for its investigation together with guidance notes to assist the parties in identifying the nature and extent of information required by the CMA in the case at hand.82 As the CMA wishes to obtain the information necessary to carry out its responsibilities without placing undue burdens on the parties, merging parties are free to supply the requisite information in the format of the Merger Notice or to provide a submission in a written format of their choosing, accompanied by a signed and annotated version of the Merger Notice template indicating where in their submission the information responsive to each question in the Merger Notice can be found.83 In practice, merging parties typically choose to complete a Merger Notice.
6.7.1
Mergers Must Not Be Confidential
The CMA will not accept notifications in respect of mergers that are confidential.84 As part of its investigation, the CMA will seek the views of third parties, including from 78
See, e.g., Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015, paragraphs 85 and 86, where the CMA noted that the merging parties had carried out a 60,000 response survey in respect of which the CMA had “significant concerns”. 79 Relevant customer benefits are considered in more detail in Chapter 15. See also, CMA guidance on the review of NHS mergers – CMA29, July 2014. 80
Jurisdictional and Procedural Guidance, para. 6.43. https://www.gov.uk/government/publications/mergers-forms-and-fee-information. This template is likely to be updated during the course of 2016 to reflect the CMA’s review of the Merger Notice during 2014/15. 82 Jurisdictional and Procedural Guidance, para. 6.54. 81
83 84
Ibid., para. 6.55. Ibid., para. 6.49.
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the merging parties’ customers and competitors. Accordingly, the CMA can only investigate transactions that the merging parties are content for it to discuss with third parties. Typically, this means that the merger in question has been announced (or at least the fact that the parties are engaging in merger discussions), often in the national press or on the merging parties’ websites.
6.7.2
Good Faith Intention to Proceed
Whilst it is most often the case that merging parties have signed an agreement before notifying their merger, the CMA may accept notifications in advance of a merger agreement having been signed.85 In this regard, the CMA will typically expect to be satisfied that there is a good faith intention on the part of the parties to proceed.86 This will usually need to be evidenced by, for example, adequate financing, heads of agreements or similar, or evidence of board level consideration.87 In relation to public bids, the CMA will normally expect there to have been a public announcement of a firm intention to make an offer or the announcement of a possible offer.88
6.7.3
Content and Completeness
The Merger Notice template sets out the information that the parties must provide in order for their notification to be considered complete. The precise information that will be needed to complete a Merger Notice will vary on a case by case basis and in some cases it may not be necessary to provide all of the information set out in the Merger Notice, or not to the full extent indicated. The guidance notes to the Merger Notice template provide some additional assistance to merging parties in determining the type of information that they will need to provide. In all cases, the CMA will provide merging parties with guidance as to the information that is required during the prenotification process. Where a draft Merger Notice is provided in pre-notification, the case team will aim to provide comments within 5-10 working days and where information is missing the case team will inform the merging parties of this fact.89 If any information contained in the Merger Notice is found to be, in any material respect, false or misleading, the CMA may reject a Merger Notice, including where the CMA has previously confirmed that the notification is complete.
85
Ibid. Ibid. 87 Ibid. The CMA’s position in respect of accepting the notification of unsigned transactions reflects the position of the European Commission, as set out in Article 4(1) of the EU Merger Regulation, which states that “[n]otification may also be made where the undertakings concerned demonstrate to the Commission a good faith intention to conclude an agreement or, in the case of a public bid, where they have publicly announced an intention to make such a bid, provided that the intended agreement or bid would result in a concentration with a Community dimension.” 86
88 89
Ibid. Ibid., para. 6.58.
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The use of the Merger Notice came into effect on 1 April 2014 and replaced the use of informal submissions and statutory merger notices. The template of the Merger Notice sets out the information that is required. This includes the following. (1)
Contact details of the notifying party or its legal advisers.
(2)
A description of the relevant merger situation, including the merging parties and their businesses, the transaction, key terms, timing, the strategic and economic rationale for the transaction, the ownership structure pre- and postmerger, details of whether the transaction is being notified in any other jurisdictions, and details of any other transactions undertaken by either of the parties in the last two years in the candidate market or by both of the merging parties (irrespective of the market).
(3)
An explanation of why a relevant merger situation has been created (or will be created), the turnover (UK, EEA and worldwide) in the last financial year of the acquirer and the target, and why the transaction is not subject to the Merger Regulation.
(4)
Supporting documentation, which should include a copy of: (i) a press release and details of any notifications to listing authorities or other documentation evidencing that the merger has been made public; (ii) all documents bringing about the merger situation, including any heads of terms, memorandum of understanding, sale and purchase agreement or equivalent; (iii) where the offer is subject to the City Code, the Offer Document and Listing Particulars; (iv) each party’s most recent annual report and accounts and last set of monthly management accounts; (v) each party’s most recent business plan; and (vi) any documents that have been prepared by or for, or have been received by, any member of the board of directors (or equivalent body) or senior management or shareholders of either party that either set out the rationale for the merger or assess or analyse the merger with respect to competitive conditions, competitors (actual and potential), potential for sales growth or expansion into new product or geographic areas, market conditions, market shares, and/or the price to be paid.
(5)
Copies of: (i) documents in either party’s possession and prepared or published in the last two years which set out the competitive conditions, market conditions, market shares, or competitors in the industry or business areas where the parties have a horizontal overlap; and (ii) any marketing and advertising strategy documents generated by or on behalf of either of the parties in the last year and which relate to the product(s) or service(s) where the parties have a horizontal overlap.
(6)
An assessment of the counterfactual.
(7)
A description of the product(s) or service(s) and geographic area(s) where the parties overlap, where they have a vertical relationship, or where they supply related products/services, as well as a description of the narrowest candidate
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product/service and geographic market where the parties overlap, have a vertical relationship, or where they supply related products/services. (8)
A description of how competition works in each candidate market, an assessment of the closeness of competition between the parties, coordination, and vertical effects, information on barriers to entry, expansion or buyer power, information on any customer benefits resulting from the merger, and information on any efficiencies or customer benefits.
(9)
Contact details for at least the parties’ ten most significant competitors and ten largest customers in each candidate market.
(10)
A description of any countervailing constraints such as entry and expansion, buyer power, or efficiencies and relevant customer benefits.
6.7.4
Timing
The case team will endeavour to provide merging parties with comments on their draft Merger Notice within 10 working days of submission. As noted above, in more complex cases merging parties may have engaged in pre-notification for some period of time prior to notification of a draft Merger Notice. Once the case team is satisfied that a Merger Notice contains all the relevant information, is in the prescribed form and states that the existence of the merger has been made public, it will confirm this in writing to the merging parties by way of a notice under section 96(2A) of the Enterprise Act and the 40 working day statutory timetable will begin on the first working day after this confirmation has been given.90
6.7.5
Own-Initiative Investigations
In own-initiative investigations, many parties simply respond to the enquiry letter rather than submit a completed Merger Notice. Where this is the case, once the requested information has been provided, the CMA may decide to commence its investigation and start the 40 working day statutory timetable.91 Given that the information requested in an enquiry letter is essentially the same as the information requested in a Merger Notice, the parties may wish to submit a completed Merger Notice rather than respond to an enquiry letter, although the parties would need to comply with the deadlines set out in the enquiry letter.
6.7.6
False or Misleading Information
The CMA has the power to impose fines in the event that merging parties or third parties provide false or misleading information to the CMA, OFCOM, or the Secretary of State.92 For an offence to have been committed, the following two conditions must be met: (i) the information must be false or misleading in a material respect; and (ii) the 90
Ibid., para. 6.52.
91
Ibid., para. 6.59. Section 117, Enterprise Act.
92
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party in question must know that it is false or misleading in a material respect, or is reckless as to whether the information is false or misleading in a material respect. The penalty for this offence is either a fine, imprisonment for a term not exceeding two years, or both.93 To date, no penalties have been imposed on merging parties or third parties for providing false or misleading information, although this has been considered in several cases. In addition, as a result of the reforms introduced by the Enterprise and Regulatory Reform Act, the CMA may impose a fine where a person has: (i) without reasonable excuse, failed to comply with any requirement of a statutory notice under section 109 of the Enterprise Act;94 or (ii) intentionally obstructed or delayed a CMA official or another person in the exercise of their powers under section 109(6) of the Enterprise Act to take a copy of information produced pursuant to such a notice.95 Such fines may be of a fixed amount up to £30,000 or calculated by reference to a daily rate with a maximum of £15,000 per day.96 To date, no such fines have been issued, although the CMA has considered issuing fines in several cases.
6.7.7
Confidentiality
The CMA recognises that some of the information provided to it is of a confidential and commercially-sensitive nature. As a result, the CMA will not publicly disclose such information unless permitted to do so by Part 9 of the Enterprise Act. The CMA does publish non-confidential information relevant to merger cases on its website, which includes: (i) any interim orders and associated derogations; (ii) invitations to comment; (iii) decisions as to whether the merger meets the test for reference or has been found not to qualify (with all confidential information redacted); (iv) the decision as to whether any UILs offered by the parties may be suitable to address competition concerns or to make a reference for a Phase II investigation; (v) the statutory deadlines for its decisions and any relevant extensions; and (vi) case lists.97
6.7.8
Fast Track Reference Cases
In cases where there is sufficient evidence that the merger in question meets the CMA’s reference threshold (i.e., there is a realistic prospect of a substantial lessening of competition), the merging parties may request that the CMA ‘fast track’ their Phase I investigation and refer the merger to Phase II.98 For a case to be fast tracked to Phase II, the CMA must have evidence in its possession at an early stage in an investigation that 93 Section 117(3), Enterprise Act, which states that a fine may not exceed the statutory maximum. This has been amended by the Legal Aid, Sentencing and Punishment of Offenders Act 2012. Subsections (1), (2) and (4) of section 85 came into force on 12 March 2015. These sub-sections specify that a fine “of any amount” may now be imposed. 94 Section 110(1), Enterprise Act. 95 Section 110(3), Enterprise Act. Jurisdictional and Procedural Guidance, para. 7.18. 96 Section 111(7), Enterprise Act. 97 98
Jurisdictional and Procedural Guidance, para. 7.22. Ibid., para. 6.61.
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objectively justifies a belief that the test for reference is met and the merging parties must have requested and given consent for the use of the procedure.99 The CMA recognises that such fast track references are only likely to be used “exceptionally”,100 and considers that candidate cases for such references are likely to be those in which a competitive concern would impact the entire merger and not simply one part of the transaction that could potentially be remedied by a structural undertaking in lieu at Phase I or where the size and complexity of a case effectively renders it beyond the scope of a Phase I investigation. To date, only four fast track references have been made, although two have been made during the course of FY2015/16.101 Where cases are fast tracked, the merging parties agree to waive their normal procedural rights during Phase I and the CMA will not be required to undergo all of the normal procedural steps that are involved in a referral decision. Accordingly, where a case is accepted for a fast track reference, the parties would not be able to offer any UILs, and there will be no Issues Letter, Issues Meeting, or CRM.102 The period for third party consultation will also be reduced, recognising that third parties will have considerable opportunities to present their views during a Phase II investigation. As a result, the CMA would expect the Phase I process to last between 10 and 15 working days,103 although this might be slightly longer in cases involving either a Merger Regulation referral process or a public interest intervention notice.104 Parties may inform the CMA that they consider their case meets the criteria for a fast track reference during pre-notification, at the time of notification, or at any point during the course of the CMA’s investigation. However, the greatest benefit to the merging parties in terms of timing would be to inform the CMA during pre-notification. In addition to assessing whether the merger meets the fast track criteria, the CMA will make its decision having regard to administrative resources and the efficient conduct of the case.105
99
Ibid., para. 6.62. Ibid., para. 6.61. 101 Anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Cooperative Society Limited, OFT decision of 2 March 2011; Completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited, OFT decision of 11 October 2012; Anticipated acquisition by BT Group plc of EE Limited, CMA decision of 9 June 2015; Anticipated merger between Ladbrokes plc and certain businesses of Gala Coral Group Limited, CMA decision of 11 January 2016. 102 Jurisdictional and Procedural Guidance, para. 6.64. 100
103 For example, in BT/EE, the CMA commenced its Phase I investigation on 18 May 2015 and announced its decision on 9 June 2015, a period of 16 working days. In Ladbrokes/Coral, the CMA commenced its Phase I investigation on 16 December 2015 and announced its decision on 11 January 2016, a period of 15 working days, which included the Christmas holidays. 104 105
Jurisdictional and Procedural Guidance, para. 6.64. Ibid., para. 6.65.
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6.8
207
INITIAL ENFORCEMENT ORDERS
At Phase I, the CMA may make an initial enforcement order (“IEO”) in relation to anticipated or completed mergers to prevent or unwind ‘pre-emptive’ action (i.e., action that might prejudice a reference or impede the taking of any remedial action that might be required).106 The Enterprise and Regulatory Reform Act brought about a number of changes in relation to initial enforcement orders. (1)
Section 71 of the Enterprise Act was repealed with the effect that initial undertakings were abolished. Therefore, the CMA will not engage in negotiations with merging parties at the outset of an investigation in relation to such undertakings and an IEO can be put into place in short order.
(2)
IEOs have been extended to cover anticipated as well as completed mergers, although, as discussed below, it is expected that such orders will rarely be used in relation to anticipated mergers.
(3)
The CMA now has the power to unwind pre-emptive action (i.e., to restore the situation that would have existed had pre-emptive action not taken place or to mitigate the effects of such integration).
The CMA’s current policy is to issue an IEO in relation to all completed mergers, other than in exceptional circumstances.107 This does not represent a significant shift in policy at Phase I as the OFT agreed initial undertakings with merging parties in relation to almost all completed mergers. The most significant practical change is that IEOs are now made without negotiation and derogation requests can be made once an order is in place. In 2014/15, the total number of IEOs issued by the CMA was 31 (representing 37% of all cases investigated). This fell to 14 in 2015/16 as the number of completed mergers notified to the CMA was considerably reduced.
6.8.1
Purpose
The Enterprise Act provides that, for the purpose of preventing pre-emptive action, the CMA may do the following by way of an IEO:108 (1)
106
prohibit or restrict the doing of things that the CMA considers would constitute pre-emptive action;109
Section 72(8), Enterprise Act. To date, in only one completed case has the CMA not put in place an IEO: Completed acquisition by Atos Medical AB of Countrywide Supplies Limited, CMA decision of 7 August 2015, in which the transaction was called in by the Mergers Intelligence Committee several months after completion by which time essentially all integration steps had already taken place and the CMA did not consider that an unwinding order would have been appropriate. 108 Section 72(2), Enterprise Act. 107
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(2)
impose on any person concerned obligations as to the carrying on of any activities or the safeguarding of any assets;
(3)
provide for the carrying on of any activities or the safeguarding of any assets either by the appointment of a person to conduct or supervise the conduct of any activities (on such terms and with such powers as may be specified or described in the order); or
(4)
do anything that might be done by virtue of paragraph 19 of Schedule 8 of the Enterprise Act.110
6.8.2
Timing
The CMA may make an IEO at Phase I where it is considering whether to make a reference and it has reasonable grounds for suspecting that it is or may be the case that two or more enterprises have ceased to be distinct or that arrangements are in progress or in contemplation which, if carried into effect, will result in two or more enterprises ceasing to be distinct.111 Accordingly, an IEO may be imposed at any time during the CMA’s review. However, the CMA considers that for IEOs to be effective, they should be implemented as soon as possible after completion of the merger in question.112 IEOs will normally have immediate effect to ensure that any pre-emptive action can be halted immediately, thereby reducing the risk of integration occurring.113
6.8.3
Anticipated Mergers
(a) Interim orders to prevent pre-emptive action. The risk of pre-emptive action in an anticipated merger is generally much lower than in a completed merger (not least given the existence of Chapter 1 CA98 and Article 101 TFEU).114 As such, the CMA would expect to use interim orders in anticipated Phase I mergers only in relatively rare cases where there are concerns about pre-emptive action. Such cases could include where:115 (1)
commercially sensitive information is being exchanged between the merging parties, except where such exchange is objectively necessary for the purposes
109 Section 72(8) of the Enterprise Act defines “pre-emptive action” as “action which might prejudice the reference concerned or impede the taking of any action … which may be justified by the CMA’s decision on the reference”. 110 Paragraph 19 of Schedule 8 states that an order may require any person to supply information to the CMA or provide for the publication of that information. 111 Section 72(1), Enterprise Act. 112 Jurisdictional and Procedural Guidance, Annex C, para. C.13. 113 Ibid., para. C.17. 114 115
Jurisdictional and Procedural Guidance, para. 7.30. Ibid., Annex C, para. C.9.
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209
of commercial due diligence and is subject to appropriate limits and confidentiality obligations; (2)
the parties intend to, or are already integrating their businesses;
(3)
the merger parties have begun to jointly conduct commercial negotiations with customers or suppliers; and
(4)
key staff have begun to leave the target business or are likely to do so.
To date, an IEO has only been used once by the CMA in relation to an anticipated merger.116 In this case, Linergy Limited (“Linergy”) and Ulster Farm By-Products Limited (“Ulster Farm”) had previously attempted to merge. This merger had been referred by the OFT to the CC and was then abandoned. At that time, Linergy operated a Category 1 plant for processing animal waste and its Board had approved plans to construct a Category 3 plant.117 Ulster Farm operated a Category 1 plant and a Category 3 plant. Following this abandonment, Linergy and SAPI SpA (“SAPI”), an Italian company active in animal rendering entered into a Memorandum of Understanding (“MOU”), which expressed Linergy’s and SAPI’s intention to merge Linergy and Ulster Farm in the event that SAPI acquired Ulster Farm. In June 2012, three months after the OFT’s referral decision, SAPI acquired Ulster Farm. In October 2012, Ulster Farm closed its Category 1 plant and in December 2012, Linergy’s Board resolved not to construct a Category 3 plant (thereby removing any actual or potential overlap between the parties). In May 2015, Linergy acquired the entire issued share capital of Ulster Farm from SAPI and the CMA opened an own-initiative investigation. Given the background of this case, and to prevent any further integration occurring between the parties, the CMA decided to put in place an interim order. (b) Interim orders preventing completion. An interim order could also be used in relation to anticipated mergers to prevent completion of a transaction.118 However, the CMA would not expect to impose such an interim order unless it had “strong reasons” to believe that completion would occur prior to the end of the Phase I inquiry and that the act of completion itself would constitute pre-emptive action.119 This would be most likely to occur in relation to an asset transaction where the act of completion would automatically lead to the loss of key staff/management (i.e., where a functioning
116 Completed Acquisition by Linergy Limited of Ulster Farm By-Products Limited, CMA decision of 17 July 2015. Note that this transaction began as an anticipated merger and the CMA permitted the acquisition to complete during the course of its investigation. 117 The relevant EU and UK regulations categorise animal by-products according to their risk of transmitting transmissible spongiform encephalopathy and require the different categories to be treated differently. There are two principal categories of animal by-products (Category 1 and Category 3), each requiring a separate licence. Category 1 is the highest risk and Category 3 is the lowest risk material. The regulations allow for Category 3 material to be processed in a Category 1 plant but Category 1 material cannot be processed in a Category 3 plant. 118 119
Jurisdictional and Procedural Guidance, Annex C, para. C.7. Ibid.
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business is not being acquired).120 This would be highly unlikely to be applied to a share acquisition, where the CMA could allow completion and then put an order in place to prevent integration.121 In any event, preventing the completion of any transaction in the context of a voluntary regime would be highly unusual and the CMA has not sought to do so in any case, to date.
6.8.4
Completed Mergers
As the risk of pre-emptive action is generally much higher in completed mergers than in anticipated mergers, particularly where integration has already begun, given the information asymmetries that exist between the merging parties and the CMA, the CMA will make an IEO suspending integration in completed merger cases, other than in exceptional circumstances.122 In the case of completed mergers that are the subject of an enquiry letter, the CMA would normally expect to make an IEO at the same time as sending out the enquiry letter or shortly after being informed about the merger by the parties.123 In the case of completed mergers that are voluntarily notified, any IEO will normally be made shortly after notification and the parties should not expect the CMA to discuss with parties the need for, or the details of, any such order.124 Exceptions to this approach may occur where, for example:125 (1)
contact with the merging parties is essential in order to specify to whom to make the order;126
(2)
there have been some discussions between the CMA and the merging parties prior to completion of the merger that allows a more tailored approach to be taken in the order; and
(3)
where the CMA considers that there is self-evidently no competition concern and no order is needed.
The effect of an IEO is to prevent merging parties from carrying out any further integration beyond that which has already taken place at the time of the order. Consequently, any integration that has occurred prior to the IEO being made will not be
120
Where a functioning business has been acquired, the CMA would be more likely to impose an order preventing further integration rather than seeking to prevent completion. In cases where the acquirer was merely purchasing various assets from the seller (that nevertheless constituted an enterprise), the CMA might seek to keep the business whole during the course of its investigation or until such an order was revoked. 121 Jurisdictional and Procedural Guidance, Annex C, para. C.7, para. 348. 122 Ibid., para. C.11. 123
Ibid., para. C.14. Ibid. 125 Ibid., para. C.15. 126 This information is often obtained through an initial request made to the parties under section 109 of the Enterprise Act thereby avoiding the need to discuss the IEO with the parties. 124
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in breach of the order.127 The extent of integration that has occurred may also be a factor taken into consideration by the CMA when deciding whether to issue an IEO. However, as discussed above, where the CMA considers it necessary, it can order the acquirer to unwind any integration that has taken place prior to an IEO coming into force. The CMA’s IEO template is available on its website.128 Use of this template is intended to reduce uncertainty for parties and to ensure swift implementation of IEOs.129 This template may be supplemented with further provisions where the CMA considers it necessary and/or may be adjusted to account for the factual circumstances of a case,130 although this would be a relatively rare event. Interim orders will usually be addressed to the acquiring party but if necessary may also be addressed to the acquired business.131 In the case of anticipated mergers, interim orders may need to be addressed to both the acquirer and the target in order to preserve the target business.132 Similarly, in relation to joint ventures, interim orders may be made to each of the parties to the joint venture.133 The key provisions of the IEO are as follows: (1)
Hold separate. Except with the prior written consent of the CMA, during the lifetime of the IEO, the acquirer and the target may not take any action that might prejudice a reference or impede any remedial outcome, including: (i) taking any steps that might lead to the (further) integration of their businesses; (ii) transferring the ownership or control of their businesses or subsidiaries; and (iii) impair the ability of their businesses to compete independently in any markets affected by the merger.
(2)
Brands and sales. The target business must be carried on separately and under a separate brand identity from the acquirer and separate sales must be maintained.
(3)
Business maintenance. The acquirer’s and the target’s businesses must be maintained as a going concern and sufficient resources must be made available for the continuance of these businesses on the basis of their respective premerger business plans.
(4)
Key staff and organisation. Except in the ordinary course of business, no substantive changes should be made to key staff (including any transfer between the acquirer and the target), the organisational structure or the
127
Jurisdictional and Procedural Guidance, Annex C, para. C.12.
128
https://www.gov.uk/government/publications/initial-enforcement-order-template Jurisdictional and Procedural Guidance, Annex C, para. C.18. 130 Ibid. 131 Ibid., para. C.16. 129
132 133
Ibid. Ibid.
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management responsibilities of either the acquirer’s or the target’s businesses. All reasonable steps should also be taken to encourage all key staff of the acquirer’s and the target’s businesses to remain within the business by which they were employed pre-merger. (5)
Asset maintenance. The assets of the acquirer’s and the target’s businesses must be maintained, including facilities and goodwill. None of the assets must be disposed of and no interest in the assets must be created or disposed of.
(6)
Goods and services. The nature, description, range and standard of goods and/or services supplied in the UK by the acquirer’s and the target’s businesses must be maintained.
(7)
IT integration. There should be no integration of the IT of the acquirer’s and the target’s businesses, and the respective software and hardware platforms of the target business must remain unchanged, except for routine changes and maintenance.
(8)
Customer and supplier lists. Customer and supplier lists of the acquirer’s and the target’s businesses must be operated and updated separately and any negotiations regarding the target’s businesses must be carried out by the target alone, and the acquirer must not negotiate on behalf of the target or enter into any joint agreements with the target.
(9)
Confidential information. The purchaser and the target must not exchange any information of a confidential or proprietary nature, including business secrets, know-how, commercially-sensitive information, or intellectual property, except where strictly necessary in the ordinary course of business (e.g., for compliance with external regulatory or accounting obligations). In the event that the merger is prohibited, all such information must be returned or destroyed.
The CMA may add additional interim measures beyond those set out in the template order either at the time of making the order or subsequently during the course of the CMA’s investigation,134 although this would be relatively unusual. Any need for additional measures will depend on the circumstances of the case and the CMA will assess whether any such measures will assist in preventing pre-emptive action. The parties may make submissions to the CMA that no additional measures are necessary beyond those in the template order.135 Examples of additional interim measures that have been used in past cases include:136 (1)
the appointment of a monitoring trustee and/or hold separate manager;
134
Ibid., para. C.25.
135
Ibid. Ibid., para. C.26.
136
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213
(2)
agreements to provide further protection against sharing confidential information;
(3)
requiring parties to provide suitable incentives to retain key staff;
(4)
requiring logs to be kept of communications between merging parties; and
(5)
the unwinding of integration.
6.8.5
Derogations
The CMA recognises that certain actions which are prohibited by an IEO may need to take place, for example, to ensure the viability of the target business. Accordingly, merging parties may request a derogation from the prohibitions of the IEO.137 Any consent given by the CMA will be restricted to actions taken after the consent has been given and will not apply retrospectively to any actions that the merging parties may previously have taken that may have been in breach of the IEO.138 Derogation requests are more likely to be granted if the parties are able to demonstrate that allowing the derogation would not create a risk of pre-emptive action that would be costly or difficult to reverse and/or is necessary for the effective continuation of the acquired business.139 Derogations may also be granted where there are self-evidently no competition concerns (e.g., where the parties do not overlap in a particular local area).140 Derogation requests should be fully reasoned and supported by relevant evidence where necessary, and should include: (1)
an explanation of the derogation request and a full description of the action that the party wishes to take;
(2)
why the derogation request is being made;
137 138
Jurisdictional and Procedural Guidance, Annex C, para. C.19. Ibid.
139 Ibid., para. C.20. See, Completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group, CMA decision of 13 January 2015 in which substantial derogations were granted because there was no UK-based management for the UK target, which was being run from Germany, and in Completed acquisition by Harman International Industries Inc. of the Bang & Olufsen A/S automotive audio assets, CMA decision of 4 September 2015, the parties were allowed to engage in joint discussions with an important customer of B&O that was not based in the UK, although the Harman participants were limited to specific individuals who were required to sign non-disclosure agreements. 140 See, e.g., Completed acquisition by Pure Gym of the LA Fitness business, CMA decision of 14 August 2015, in which the parties were granted an early derogation of seven areas where the merging parties did not overlap. See also, Acquisition by Motor Fuel Group Limited of 90 Petrol Stations from Shell Service Station Properties, Shell UK Limited and GOGB Limited and Acquisition by MRH (GB) Limited of 78 service stations from Esso Petroleum Company Limited in which the CMA also granted derogations in relation to non-overlapping sites.
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(3)
why the proposed derogation creates no risk of pre-emptive action that is difficult or costly to reverse;
(4)
whether the derogation request is urgent (and if so, how urgent, and why it is necessary in advance of the CMA’s decision on the merger); and
(5)
any other information that the parties consider may assist the CMA in assessing the request.141
The CMA will consider derogation requests as quickly as possible and will be able to consider fully reasoned requests faster than others. A monitoring trustee may assist the CMA if one is appointed in the case. In the event that a derogation request is denied, merging parties may re-submit such a request if circumstances change such that the proposed action no longer creates a risk of pre-emptive action that is costly or difficult to reverse, or where parties are able to provide better evidence to the CMA that no such risk would be created.142 All derogations that are granted from interim measures will be published on the CMA’s website and the parties will be given a reasonable opportunity to indicate any business secrets that should be redacted from the published version of the document.143 Parties may also apply for a complete revocation of any interim order, setting out for the CMA why there is no longer a risk of pre-emptive action.144 The CMA’s current policy is to revoke IEOs following clearance of a transaction at the Internal State of Play meeting (i.e., where a decision is taken not to send an Issues Letter) unless there are compelling reasons not to do so.145
6.8.6
Compliance Updates
Once an IEO has been made, the acquirer must provide the CMA with a compliance statement every 10 working days. A template of this compliance statement is attached to the IEO template. Usually, this compliance statement must be signed by the Chief Executive Officer of the UK topco of the acquirer. In addition to these compliance statements, the acquirer must keep the CMA informed of any material developments relating to the target, including: (i) details of any key staff who leave or join the target business or the business of the direct acquirer; (ii) any plant breakdowns of the acquirer’s or the target’s businesses that have halted production for more than 24 hours; (iii) all substantial customer volumes won or lost, including any substantial changes in customer demand; and (iv) substantial changes in either the acquirer’s or the target’s contractual arrangements or relationships with key suppliers.
141
Jurisdictional and Procedural Guidance, Annex C, para 20. Ibid., para. C.22. 143 Ibid., para. C.23. 142
144 145
Ibid., para. C.24. This meeting takes place around working day 15 of the CMA’s investigation.
The Phase I Process
6.8.7
215
Publication
Once an IEO has been made, these undertakings will be published on the CMA’s website along with any derogations that have been granted by the CMA. Prior to the publication of the order, the CMA will provide the purchaser with a reasonable opportunity (at least one working day) to revert with any requests for confidential information to be redacted from the published version of the documents.146
6.8.8
Monitoring Trustees and Hold Separate Managers
The CMA may require the appointment of a monitoring trustee to monitor and report on compliance with IEOs.147 A monitoring trustee’s role will usually be to assess in its initial report the extent of any integration that may have taken place and to make recommendations on how to mitigate the risk of pre-emptive action.148 If appointed at Phase II, the monitoring trustee will also be required to report on the extent of compliance with any Phase I interim order and the adequacy of existing interim measures.149 Thereafter, the monitoring trustee will be responsible for monitoring compliance with the interim measures and assisting with the consideration of derogation requests. To date, the CMA has required the appointment of a monitoring trustee in relation to only two cases in Phase I.150 A hold separate manager with executive powers may be required by the CMA to operate the acquired business separately from the acquirer and in accordance with the interim measures for the duration of the investigation.151 The hold separate manager’s role is a day-to-day operational role running the acquired business. This role is quite different from the role of the monitoring trustee who is responsible for assisting the CMA in implementing hold separate arrangements and overseeing compliance with any interim order. To date, the CMA has not required the appointment of a hold separate manager in relation to a Phase I merger. The CMA will normally consider the need for the appointment of a hold separate manager and/or a monitoring trustee both during a Phase I investigation (including following a UIL decision where the CMA needs to oversee a divestment) and, where a
146
Jurisdictional and Procedural Guidance, Annex C, para. C.23.
147
Ibid., Annex C, para. C.27. See also, section 72(2)(c), Enterprise Act. This is not a new power provided to the CMA under the Enterprise and Regulatory Reform Act. This course of action was available to the OFT but was never used by it under the Enterprise Act. 148 Ibid., para. C.27. 149 Ibid. 150
Completed acquisition by Information Resources, Inc of Aztec Group, CMA decision of 20 October 2014 and Completed acquisition by Noble Egg Innovations Unlimited of certain assets of Manton and Manton (2) Limited, CMA decision of 19 August 2014. In both of these completed mergers, the purchaser had already begun integration of the acquired business and the CMA considered it appropriate to require a monitoring trustee to be appointed to supervise the acquired business. 151 Jurisdictional and Procedural Guidance, Annex C, para. C.28. The CMA would order the appointment of a HSM under section 72(2)(c), Enterprise Act.
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case is referred to Phase II, at the outset of the Phase II inquiry.152 It will also review the issue throughout the Phase II inquiry. The appointment of a hold separate manager and/or a monitoring trustee will be at the expense of the acquiring party.153 The CMA may consider it necessary to appoint a monitoring trustee and/or a hold separate manager where at least one of the following risk factors applies and where it is clear from an early stage that the merger gives rise to prima facie competition concerns: (1)
where there has been substantial integration of the two businesses prior to implementation of the interim measures;
(2)
where there have been breaches of the interim measures;
(3)
where there is a need for further or continued integration of the business throughout the CMA’s inquiry subject to the necessary consents from the CMA, for example if the acquired business is not a stand-alone business;
(4)
where there is a risk of deterioration of the business, for example through loss of key customers or members of staff;
(5)
where the pre-merger senior management of the acquired business is absent and/or strong incentives exist for the current senior management of the acquired business to operate the acquired business on behalf of the acquirer.154
Hold separate managers can either be an internal or external appointee.155 Previously, the CC required the appointment of external hold separate managers in several cases.156 In other cases, the CC achieved hold separate arrangements by requiring existing employees of the merged entities to act independently in key managerial roles in the acquired business.157 Typically, if a suitable internal hold separate manager candidate is available, the CMA will seek to appoint an internal hold separate manager before considering external options. The factors that the CMA will consider when deciding 152
Ibid., para. C.29. Ibid. 154 Ibid., paras. C.31. 155 Ibid., para. C.32. 153
156 Stericycle International LLC and Sterile Technologies Group Ltd, a report on the completed acquisition of Sterile Technologies Group Ltd by Stericycle International LLC of 12 December 2006, Clifford Kent Holdings Limited and Deans Food Group Limited, a report on the completed merger of Clifford Kent Holdings Limited, parent company of Stonegate Farmers Limited, and Deans Food Group Limited of 20 April 2007, Stagecoach Group Plc/Preston Bus Limited Merger Inquiry, a report on the completed acquisition by Stagecoach Group plc of Preston Bus Limited of 11 November 2009. 157 Booker Group PLC/Makro Holding Limited, a report on the completed acquisition by Booker Group PLC of Makro Holding Limited of 19 April 2013, Capita and IBS, a report on the completed acquisition by Capita Group plc of IBS OPENSystems plc of 4 June 2009, Stagecoach Group Plc/Eastbourne Buses Limited/ Cavendish Motor Services Limited Merger Inquiry, a report on the completed acquisition by Stagecoach Group PLC of Eastbourne Buses Limited and Cavendish Motor Services Limited of 22 October 2009.
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whether an internal or an external hold separate manager would be appropriate are: (i) the relative experience and suitability of existing employees; (ii) the independence of existing employees; and (iii) the complexity of the hold separate requirements.158 The CMA will usually invite the parties to put forward candidates for the hold separate manager role but may also look for candidates itself.159 The CMA will need to approve any candidate proposed by the parties prior to his/her appointment.160 The CMA will notify the merging parties of its decision to require them to appoint a monitoring trustee by sending a letter containing draft directions.161 The parties will be given a short period of time to comment on the draft directions (typically no more than 24 hours) before they are finalised and published on the CMA’s website. The CMA maintains a roster of monitoring trustees with whom it has either worked in the past or who would be suitable for similar assignments in the future. The roster is supplied to merging parties on request or around the same time as the letter requiring a monitoring trustee to be appointed. However, parties are entitled to nominate a monitoring trustee that is not on the roster.162 Parties are typically given two working days to nominate a suitable monitoring trustee and five working days to appoint a monitoring trustee on terms approved by the CMA, although this time-frame might vary depending on the facts of the case.163 When nominating a monitoring trustee, the parties should provide evidence of the monitoring trustee’s independence from the merging parties as well as their relevant experience and qualifications.164
6.8.9
Unwinding Order
The Enterprise and Regulatory Reform Act amended the Enterprise Act to give the CMA the power to unwind integration that may have taken place prior to the coming into force of an IEO. This removes the incentive for the acquirer to rush to achieve (at least some) integration before an IEO is in force.165 Accordingly, the Enterprise Act provides that the CMA may by order, for the purpose of restoring the position to what it would have been had the pre-emptive action not been taken or otherwise for the purpose of mitigating its effects:166 (i) impose on any person concerned obligations as to the carrying on of any activities or the safeguarding of any assets; (ii) provide for the carrying on of any activities or the safeguarding of any assets either by appointing a person to conduct or supervise the conduct of any activities (on such terms and with such powers as may be set out in the order) or in any other manner; or (iii) do anything
158
Jurisdictional and Procedural Guidance, Annexe C, para. C.32.
159
Ibid., para, C.36. 160 Ibid. 161 Ibid., para. C.33. 162 Ibid. 163
Ibid., para. C.34. Ibid. 165 One criticism of the prior regime was that merging parties could integrate their businesses either before having any contact with the CMA or whilst they were negotiating initial undertakings. 166 Section 72(3B), Enterprise Act. 164
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that may be done by virtue of paragraph 19 of Schedule 8.167 To date, the CMA has not ordered any integration to be unwound.
6.9
THE CMA’S INFORMATION-GATHERING POWERS
One of the most important changes to the Enterprise Act, introduced by the Enterprise and Regulatory Reform Act, relate to the CMA’s enhanced information-gathering powers. This was seen as one of the “weaknesses in the voluntary notification regime” that the Government was keen to bolster.168 The CMA may need additional or more comprehensive information from the merging parties than is required by the Merger Notice to allow it to make a decision on whether its duty to refer is met. In addition, the CMA will require information from third parties, including the merging parties’ customers or competitors. In the first instance, the CMA will typically request such information on an informal basis. However, should it prove necessary, particularly in relation to completed mergers, the CMA has the power to require parties to provide the requested information.169 The CMA’s information-gathering powers are wide-ranging and apply to both merging parties as well as third parties.170 In relation to both anticipated and completed mergers, the CMA may give notice to any person requiring him to: (1)
attend at a time and place specified in the notice and to give evidence to the CMA or a person nominated by the CMA;171
(2)
produce any documents that are specified or described in the notice, or fall within a category of documents that are specified or described in the notice, and are in the person’s custody or under his control, and to produce them at a specified time and place;172 and/or
(3)
supply such estimates, forecasts, returns or other information as may be specified or described in the notice, and to supply it at a time and place, and in a form and manner specified in the notice.173
The CMA may only issue a notice under section 109 for a “permitted purpose”. The definition of “permitted purpose” is broad and includes assisting the CMA in carrying out any functions, including enforcement functions, exercisable by it under or by virtue
167 This provides that an order may require any person to supply information to the relevant authority, or the CMA if it is not the relevant authority, and may provide for the publication of that information. 168 Growth, Competition and the Competition Regime, Government Response to Consultation, March 2012, para. 5.1. 169 Section 109, Enterprise Act. 170 Section 109 refers to “any person” in relation to the exercise of the CMA’s powers. 171 Section 109(1), Enterprise Act. 172 173
Section 109(2), Enterprise Act. Section 109(3), Enterprise Act.
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of Part 3 of the Enterprise Act in connection with a matter that is or has been the subject of a reference or possible reference.174 Any section 109 notice issued by the CMA must specify the “permitted purpose” for which the notice is given and include information about the possible consequences of not complying with the notice.175 The CMA, or any person nominated by it, may also take evidence on oath (which it rarely does),176 and may take a copy of any document produced to the CMA.177 No person will be required to give any evidence or produce any documents that they could not be compelled to give or provide in civil proceedings before a court (e.g., documents that are covered by legal professional privilege). Whilst the Enterprise and Regulatory Reform Act has provided the CMA with enhanced information-gathering powers in Phase I, it is still the CMA’s practice to request information informally in the first instance, particularly in relation to third parties.178 However, the CMA is likely to use the section 109 power where: (1)
it considers that there is a risk that it will not receive the information sufficiently in advance of its statutory deadline for the information to be analysed and taken into account in its decision;
(2)
it has doubts that the recipient will comply with an informal request and/or the recipient has previously failed to comply with an informal request; or
(3)
it believes that there is a risk that relevant evidence may be destroyed.179
There are a number of important practical consequences to not complying with a section 109 notice. These include the following: (1)
the CMA may suspend the 40 working day statutory timetable where merging parties have failed to comply with a section 109 notice and, in addition, may suspend the 4 month statutory timetable in relation to completed mergers;180
(2)
where the section 109 request is sent to merging parties who have notified their transaction by way of a Merger Notice (as opposed to responding to an enquiry letter), the CMA may reject the entire Merger Notice;181 and
(3)
failure to comply with a section 109 notice without reasonable excuse may lead to the imposition of a fine,182 although, to date, no such fines have been issued.
174 175
Section 109(A1), Enterprise Act. Section 109(4), Enterprise Act.
176
Section 109(5), Enterprise Act. Section 109(6), Enterprise Act. 178 Jurisdictional and Procedural Guidance, para. 7.3. Sections 34ZB and 25(2), Enterprise Act. 179 Ibid. 177
180 181
Ibid. Ibid. Section 99(5)(c), Enterprise Act.
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Therefore, recipients should, as soon as possible after receiving a request for information, inform the CMA of any difficulties that they may have in meeting the deadline for providing the requested information.183 In the event that parties are able to provide a credible explanation as to why they cannot respond to the section 109 notice by the stipulated deadline, the CMA may be able to vary its request or extend the deadline.184
6.10
DISCUSSIONS WITH MERGING PARTIES AND THIRD PARTIES
The CMA encourages merging parties and their advisers to liaise closely with it during the course of its investigation.185 Following notification, the level of interaction between merging parties, their advisers, and the case team depends on the complexity of the case. In cases that raise no material concerns, it is possible that the parties may not have any interaction with the case team until the state of play call (discussed below). However, more frequently, parties engage with the case team during its investigation to, for example, provide additional information, clarify or rebut issues that may have been raised by third parties during the invitation to comment (“ITC”) period, or address new lines of enquiry that may not have been addressed in the submission but which the CMA feels must be addressed to rule out any competition concerns. In cases that raise material issues, merging parties and their advisers will be in regular contact with the case team in the early stages of the investigation.186 There is no set timetable for such discussions and they may be initiated either by the merging parties or the CMA.187 The CMA invites third parties to comment on a notified merger by issuing an ITC on the Regulatory News Service and by publishing the ITC on its website. The ITC period usually begins on the first working day following a notification188 and typically lasts for 10 working days. However, the CMA will normally take into consideration comments provided by third parties following the end of the ITC period. The CMA may also require third parties to provide information in response to a section 109 notice and this has occurred in relation to numerous cases since April 2014. As described above, as part of the Merger Notice, the CMA requires merging parties to provide contact details for their main customers189 and competitors. The CMA will
182 183
Ibid. Section 110(1), Enterprise Act. Ibid., para. 7.5.
184
Ibid. Ibid., para. 7.6. 186 Ibid., para. 7.7. 187 Ibid. 185
188
The date on which the ITC is published is not fixed and it may be published on the day of notification itself if the CMA is aware (as it usually will be) of the date on which the parties plan to make their merger submission. In rarer cases, the ITC may be published during pre-notification. 189 Depending on the industry in question, it may not be possible to provide contact details for customers (e.g., retail sectors where customers would be individual shoppers).
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usually contact all of these parties. It may send these parties a questionnaire190 and may also call the most important of these contacts to discuss certain issues in more detail. The CMA tends to place substantially more weight on customers’ responses, particularly where they express concerns about a merger, although the CMA will always have regard to the creditability of such opinions and whether they are supported by evidence or are otherwise verifiable. The CMA will set out, either in its questionnaire or in the covering e-mail, the deadline by which competitors and customers should respond to their questionnaires. This is typically one week from the date of the questionnaire. Where adverse third party views raise significant competition issues, and where the CMA wishes to rely on this evidence in its decision, the merger parties are informed of the nature of the concerns in sufficient detail to enable them to respond to them, although it is not usually possible given the time constraints of Phase I to provide the parties with a non-confidential version of third party submissions.191 In such circumstances, the CMA will not reveal the identity of the third party but where useful may give the merging parties an indication of the generic position or role of the third party supplying the information where this would not enable them to identify the persons involved.192
6.11
THE PHASE I PROCESS 6.11.1 The Initial Stages
The CMA’s Phase I investigation and decision-making process differs depending on whether the merger under review raises a material prospect of the CMA’s duty to refer being met. In cases that do not raise any prospect of a substantial lessening of competition, the CMA’s decision-making process is quite straightforward. In cases raising competition concerns, the decision-making process is more complex and involves various stages, including an Issues Letter, an Issues Meeting, a Case Review Meeting (“CRM”) and a Decision Meeting. These decision-making processes are considered below. (a) Early investigation. All cases follow the same process in the initial stages of the CMA’s investigation. On Day 0, the merging parties will be notified by way of a written notice under section 96(2A) of the Enterprise Act that their Merger Notice is complete and that the 40 working day statutory timetable will start on the first working day after the issuance of the notice. This notice will also set out the deadline by which the CMA must have announced its decision whether to refer the merger for a Phase II
190 Competitor questionnaires will usually vary on a case-by-case basis. The CMA may ask competitors to provide or confirm data regarding sales volumes or value, or they may ask questions in relation to the relevant definition of a market, particularly where that market has not been investigated previously by the Authorities. These questionnaires will usually ask competitors for their views regarding the merger and whether they believe that it will have a negative impact on competition. 191 192
Jurisdictional and Procedural Guidance, para. 7.11. Ibid.
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inquiry (assuming that the 40 working day statutory timetable is not suspended). On Day 1, a webpage for the merger will appear on the CMA’s website,193 questionnaires will be sent out to third parties, and the CMA will start the invitation to comment (“ITC”) period, so that any third party who wishes to do so may inform the CMA of its views in relation to the merger. The ITC period usually lasts for 10 working days, although the CMA will normally take into consideration third party views that are expressed after Day 10. During the first three weeks of an investigation, the case team will liaise with third parties, and particularly those who have been sent a questionnaire (i.e., the customers and competitors identified by the parties in their Merger Notice). The case team may also contact additional third parties, including the appropriate regulator if the merger concerns a regulated sector (e.g., Ofcom, FCA, Monitor, etc). (b) Internal state of play meeting. An Internal State of Play (“ISOP”) meeting will take place around Day 15 of the investigation and is usually attended by the Principal Case Officer, the Economic Adviser, an Assistant Director of Economics, an Assistant Director of Mergers, an Assistant Director (Legal), as well as the Director responsible for the case, who acts as chair of the meeting. There is no set format for these meetings but the Principal Case Officer typically presents some background to the case (e.g., the parties, their activities, the structure of the transaction and its rationale), the relevant product and geographic frame of reference, and the theories of harm that have been investigated by the case team. The case team will also set out a summary of the evidence received to date, including responses from competitors and customers of the merging parties and their recommendation as to whether the case should proceed to a CRM. The Director responsible for the case under consideration is the Decision Maker for the purposes of the ISOP meeting and a decision may be taken to proceed to a CRM even where this was not the recommendation of the case team. The question to be answered by the Director is whether, based on the evidence available at the time of the meeting, it is fanciful that the merger being investigated by the case team could result in a substantial lessening of competition on the relevant markets. In relation to completed mergers that are cleared at the ISOP meeting, any IEO that is in place will be discussed and the Director will decide whether this order should be revoked at this stage. A timetable for completion of the investigation and announcement of the decision will be agreed. (c) External state of play call. Following the ISOP meeting, the case team will have a ‘state of play’ call with the merging parties, which will usually be attended by the Principal Case Officer, the Economic Adviser and the Assistant Director of Mergers.194 In more complex cases, the Director of Mergers responsible for the case may also attend. All external state of play calls are now recorded by the CMA. This call normally takes place between working days 15 and 20 of the statutory timetable,195 but the case team will typically try to have the state of play call as soon as possible after the ISOP meeting and such calls may even occur on the same day as the ISOP, depending on case team availability. During this call, the CMA will explain to the 193
In some cases, a webpage will have been put up on the CMA’s website in pre-notification.
194
Jurisdictional and Procedural Guidance, para. 7.34. Ibid.
195
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parties the results of its investigation to date and inform the parties whether the Director has decided that the case should proceed to CRM. In the event that the CMA intends to proceed to a CRM, the case team will outline the case for reference during the call and will discuss the likely timing of the Issues Meeting.
6.11.2 Non-CRM Cases In non-CRM cases, which represent around two-thirds of all merger investigations, the focus of the remaining Phase I period will be on drafting and finalising an unconditional clearance decision. In such cases, the CMA aims to announce its clearance decisions in 35 working days or less.196 The decision is drafted by the Principal Case Officer, typically with input from the Economic Adviser, and is reviewed by the Assistant Director of Economics, Assistant Director of Mergers, and Assistant Director (Legal) before being approved by the Director of Mergers responsible for the case. Once the Director has signed the decision, it can be announced to the parties. The merging parties’ legal advisers will be contacted by the Principal Case Officer one hour before announcement to inform them of the nature of the CMA’s decision and to obtain the parties’ agreement not to disclose any price sensitive information prior to publication by the CMA. Once this confirmation has been received, the CMA will send the parties a confidential version of the decision just prior to announcement along with a letter regarding the redaction of commercially-sensitive information.
6.11.3 CRM Cases (a) Issues letter. Following the state of play call for cases that are going to CRM, the case team will prepare an ‘Issues Letter’ based on the decision that was taken at the ISOP meeting. This letter will be reviewed by the Assistant Director of Economics, Assistant Director of Mergers, and Assistant Director (Legal) before being approved by the Director of Mergers responsible for the case and sent to the parties. The case team will aim to send the Issues Letter to the parties no later than two working days prior to the Issues Meeting and usually around Day 22/23. This letter is not a provisional decision or a statement of objections. It is not intended to present a balanced view of the evidence received to date in the investigation, but instead sets out the core arguments in favour of a reference, as well as hypotheses that the CMA is considering 196 The CMA has published clearance decisions that have not gone to CRM in considerably less than 35 working days in several cases, including: Anticipated acquisition by Nikkei Inc. of The Financial Times Group, CMA decision of 15 October 2015 (10 working days); Anticipated acquisition by Heineken N.V. of Diageo plc assets, CMA decision of 18 December 2015 (20 working days); Anticipated acquisition by North Sea Midstream Partners Limited of certain assets of Total E&P UK Limited, CMA decision of 12 November 2015 (22 working days); Completed acquisition by Aviator LGW Limited of the assets of Swissport Limited’s ground handling business at London Gatwick, CMA decision of 5 February 2016 (22 working days); Anticipated acquisition by Netto Limited of three grocery stores from Co-operative Group Limited, CMA decision of 25 February 2016 (23 working days); Anticipated acquisition by STERIS Corporation of Synergy Health Plc, CMA decision of 9 February 2015 (25 working days); Anticipated acquisition by Bako North Western (Group) Limited of Bako Northern (Holdings) Limited, Bako Scotland Limited and Bakers (Area 1) Limited, CMA decision of 15 July 2015 (26 working days).
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and may not necessarily reflect the views of the case team. It will not discuss in detail, if at all, the arguments for clearance. The CMA seeks to limit the content of the Issues Letter and to include only the theories of harm that are “genuinely of concern or of potential concern.”197 Some of these issues may have originated from third parties and the fact that they are included in the Issues Letter does not necessarily mean that they are fully endorsed by the case team.198 Where there are multiple issues raised in the Issues Letter, the CMA is likely to indicate to the parties which issues are most/least likely to meet the reference test.199 Once the CMA has sent out an Issues Letter, it will complete the remainder of the CRM process even if it subsequently receives additional information suggesting that a CRM is no longer required,200 to give both the merging parties and the CMA certainty regarding the decision-making process.201 In terms of providing a response to the Issues Letter, the parties may respond in writing or orally at the Issues Meeting, or both.202 Given the time constraints, it may well be the case that merging parties provide the CMA with a slide presentation, a paper or possibly an oral reaction to the Issues Letter at the Issues Meeting and follow this up with a written response after the Issues Meeting has taken place. The CMA does not disclose the Issues Letter to third parties, in particular due to the time constraints and confidentiality issues, and it does not normally inform third parties whether an Issues Letter has been sent in a particular case (and this information does not appear on the case page for the merger in question).203 (b) Issues meeting. The Issues Meeting will take place no sooner than two working days after the parties have received the Issues Letter and usually around Day 24/25 of the Phase I process. Although the period between receipt of the Issues Letter and the Issues Meeting is often very short, the topics to be discussed at the Issues Meeting will have been covered on the state of play call and therefore there should not be much, if anything, that is new to the parties.204 The Issues Meeting is normally chaired by the Director of Mergers responsible for the case and will be attended by (at least) the Principal Case Officer, the Economic Adviser, the Assistant Director of Economics, the Assistant Director of Mergers, the Assistant Director (Legal) and the Decision Maker.205 An official from outside the Mergers Group will play the role of ‘devil’s advocate’ to challenge the case for reference set out in the Issues Letter,206 and, in more complex cases, a member of the CMA’s Remedies, Business and Financial Analysis team may
197 198
Jurisdictional and Procedural Guidance, para. 7.36. Ibid.
199
Ibid. Ibid., para. 7.37. 201 Ibid. 202 Ibid., para. 7.39. 200
203 Ibid., para. 7.40. It is possible, however, to deduce this information from the CMA’s published decision. 204 Jurisdictional and Procedural Guidance, para. 7.38. 205 206
Ibid., para. 7.41. Ibid., para. 7.42.
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also attend to discuss any undertakings. In cases that raise particular issues relating to a survey, a member of the CMA’s statistics team will also usually attend. The parties will be given an opportunity to make their presentation and to address the issues set out in the Issues Letter. Typically, the case team and the Decision Maker will have questions for the parties, either on aspects of their submissions or on the presentation that the parties have made. At the end of the meeting, the Decision Maker will leave the room to allow the parties and the case team the opportunity to discuss any undertakings that the parties may wish to discuss. There is no requirement for parties to discuss undertakings at this stage, even if they ultimately make a UIL offer following announcement of the CMA’s Phase I decision. However, in some cases, it can be of assistance to merging parties to begin discussions on undertakings early, particularly as the period for making a formal UIL offer following the CMA’s decision is only five working days. (c) Case review meeting. Following the Issues Meeting, the CMA will have an internal meeting (the CRM) to finalise its position in respect of the merger. This usually takes place by around Day 28 of the Phase I timetable. This meeting will be chaired by the Director of Mergers and will be attended by all the CMA staff who were present at the Issues Meeting, including the Devil’s Advocate, except for the Decision Maker who does not attend the CRM. At this meeting, the case team and other members of the CMA will discuss the arguments put forward by the parties during the Issues Meeting, and any written response to the Issues Letter that has been received from the parties. The overall purpose of the meeting is to determine the case team’s recommendation to the Decision Maker as to whether the merger should be referred to Phase II. (d) Decision meeting. The decision meeting is chaired by the Decision Maker for the case in question and usually takes place by Day 30.207 This meeting will be attended by those officials who attended the CRM. The case team will typically deliver a report on the discussions at the CRM and its overall recommendation. The Decision Maker will then consider all of the evidence that has been put forward and there is typically a lengthy discussion of the evidence in favour of the recommendation with the Devil’s Advocate putting forward the opposing views before the Decision Maker takes his decision. In a minority of cases, the Decision Maker may decide to adjourn the meeting to reflect on the case further before reaching a final view, evaluate the robustness of the provisional decision by way of a draft decision, or have the case team verify a particular factual or evidential point.208 The main purpose of the Decision Meeting is for the Decision Maker to determine whether the reference threshold has been met (i.e., whether it is or may be the case that a relevant merger situation has been created and whether the creation of that situation has resulted, or might be expected to result, in a substantial lessening of competition in a market in the UK) without being informed whether the parties have offered any undertakings.209 Where the Decision Maker determines that the reference threshold has 207
Ibid., para. 7.45.
208
Ibid., para. 7.47. Ibid., para. 7.46.
209
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been met, he will consider whether the merger qualifies for any exception to the duty to refer (most commonly, the de minimis exception).210 (e) Draft decision. Following the Decision Meeting, the case team will prepare a draft decision in line with the Decision Maker’s reasoning as expressed at the Decision Meeting. This process usually takes one to two weeks and the draft decision is reviewed by the Assistant Director of Economics, Assistant Director of Mergers, Assistant Director (Legal) and the Director before being presented to the Decision Maker. The draft decision only becomes final once it has been signed by the Decision Maker.211 The merging parties or, more often, their advisers, are usually informed of the CMA’s decision and provided with a copy of the CMA’s press release around one hour before announcement. The parties or their advisers are also required to accept the terms of the CMA’s price sensitive information letter. Once this confirmation has been received the parties’ advisers will receive a confidential version of the decision at around the time of announcement and a letter relating to the redaction of confidential information. Announcement of the decision is then made through the Regulatory News Service and placed on the CMA’s website.212 (f) Publication of decisions. The CMA is required to provide merging parties with the reasons for its decision as to whether its duty to refer applies.213 The CMA is also obliged to publish its merger decisions,214 including where it has concluded that the merger does not qualify for investigation. As described above, the CMA will first announce its decision in respect of a merger. The CMA will then provide the acquirer with a confidential version of the decision so that the parties can identify any business secrets that should be removed from the published version of the decision. The CMA tries to strike a balance between removing information that is confidential to the merging parties and including its key reasoning in the public version of the decision. Therefore, the parties will be asked to justify any requests for excisions and the CMA will not accept blanket claims that certain classes of information are confidential. After the announcement of its decision, the CMA will publish the full text of its decision on its website.
6.12
FILING FEES
Transactions that qualify as a relevant merger situation and in which the CMA (or the Secretary of State in public interest cases) reaches a decision on whether or not to refer the merger to Phase II are subject to a filing fee irrespective of whether a reference is made.215 This fee is collected by the CMA on behalf of HM Treasury and is payable by the company or companies on whose behalf the merger is being notified.216 The main 210
Ibid., para. 7.48.
211
Ibid., para. 7.49. Ibid., para. 9.2. 213 Section 34ZA(1)(b), Enterprise Act. 214 Section 107, Enterprise Act. 212
215 216
Jurisdictional and Procedural Guidance, para. 20.1. Ibid. Section 121, Enterprise Act.
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exception to this general rule is where the interest being acquired is less than a controlling interest and a merger notice has not been submitted in relation to that acquisition.217 Therefore, acquisitions of material influence that have not been voluntarily notified, but have been called in by the CMA, will not be liable for a filing fee. In addition, mergers that have been found not to qualify do not attract a filing fee, even where they were notified to the CMA by the merging parties.218 Such fees are not contingent on a reference being made to Phase II. A filing fee is also payable where a water merger is referred to Phase II under the Water Industries Act 1991. In such mergers, the level of the filing fee is determined by the turnover of the water enterprise being acquired in England and Wales.219 The filing fee becomes payable from the date of publication of the CMA’s decision either to clear a merger or to refer it to Phase II,220 and an invoice for the filing fee will be sent by the CMA to the acquiring party. Where the CMA clears a merger subject to UILs, the filing fee becomes payable when the CMA loses its duty to refer as a result of its acceptance of the proposed undertakings.221 In public interest cases, the fee becomes payable when the Secretary of State publishes a reference decision or publishes a decision not to make a reference.222 In all cases, an invoice will be issued by the CMA, which must be paid within 30 days of the date of the invoice.223 The level of the filing fee varies according to the size of the merger. The relevant filing fees are currently as follows: (1)
£40,000, where the value of the UK turnover of the enterprises being acquired is £20 million or less;
(2)
£80,000, where the value of the UK turnover of the enterprises being acquired is between £20 million and £70 million;
(3)
£120,000, where the value of the UK turnover of the enterprises being acquired exceeds £70 million, but does not exceed £120 million; and
(4)
£160,000, where the value of the UK turnover of the enterprises being acquired exceeds £120 million.
An exemption to the filing fee requirement exists for small or medium-sized enterprises (“SME”). An acquiring enterprise qualifies for the SME exemption if, immediately
217
Jurisdictional and Procedural Guidance, para. 20.1. Article 4(1), Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003. 218
Jurisdictional and Procedural Guidance, para. 20.2. Ibid., para. 20.7. 220 Ibid., para. 20.2. 221 Ibid. 219
222 223
Ibid. Ibid.
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before the time at which the filing fee would otherwise have been payable, it meets two or more of the following criteria for a medium-sized enterprise:224 (1)
it has turnover of not more than £25.9 million;
(2)
it’s balance sheet total is not more than £12.9 million; and
(3)
the number of employees is not more than 250.225
These thresholds have been amended by the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015, which came into force in April 2015. However, the revised thresholds for a medium-sized enterprise come into force in relation to enterprises whose most recent financial year begins no earlier than 1 January 2016. Therefore, in practice, this is unlikely to affect filing fees until at least 1 January 2017 when an acquiring enterprise’s most recent financial year began no earlier than 1 January 2016.226 Under the revised thresholds, an enterprise qualifies as a mediumsized enterprise if it meets two or more of the following criteria: (1)
it has turnover of not more than £36 million;
(2)
it’s balance sheet total is not more than £18 million; and
(3)
the number of employees is not more than 250.
6.13
TAKEOVER CODE
The City Code on Takeovers and Mergers (the “Takeover Code”) is a set of rules that applies to all offers (with certain, limited, exceptions) for companies that have their registered offices in the UK, the Channel Islands or the Isle of Man in the event that any of their securities are admitted to trading on a regulated market in the UK or on any stock exchange in the Channel Islands or the Isle of Man.227 The Takeover Code is not concerned with competition policy, but is designed to ensure that shareholders are treated fairly and that takeovers are conducted within an “orderly framework”.228 The Takeover Code is administered by the Panel on Takeovers and Mergers, which is an 224 In practice, as long as the acquirer meets the criteria of a medium-sized enterprise it will be exempt from a filing fee. Therefore, the small enterprise criteria are not relevant to the assessment of whether an enterprise is exempt from a filing fee. For the sake of completeness, enterprises are deemed to be small when: (i) they have turnover of not more than £6.5 million; (ii) they have a balance sheet of not more than £3.26 million; and (iii) the number of employees is not more than 50 (section 382, Companies Act). 225 Section 465, Companies Act 2006. 226 Article 7(3) of the Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003 provides that an enterprise qualifies as an SME if, immediately before the time at which the filing fee would otherwise have been payable, it satisfies the requirements of being an SME in its most recent financial year. 227 228
Takeover Code, A3, para. 3(a)(i). Ibid., A1, para. 2(a).
The Phase I Process
229
independent body, established in 1968, that has been designated as a supervisory body and whose statutory functions are set out in the Companies Act 2006.229
6.13.1 Relevance of the Takeover Code to UK Mergers The Takeover Code is relevant to UK merger control in two principal ways. First, the Takeover Code requires that offers include a term that such an offer will lapse in the event that the CMA makes a reference to Phase II (or if the European Commission initiates proceedings under Article 6(1)(c) of the Merger Regulation). Secondly, the Takeover Code, and its rules regarding the announcement of offers, has various timing implications for the merger process. Each of these issues is considered below.
6.13.2 Conditions to an Offer Rule 12.1(a) states that: “Where an offer comes within the statutory provisions for a possible Phase 2 CMA reference, it must be a term of the offer that:(i)
in the case of a contractual offer, the offer will lapse if there is a Phase 2 CMA reference before the first closing date or the date when the offer becomes or is declared unconditional as to acceptances, whichever is the later; or
(ii)
in the case of an offer being implemented by way of a scheme of arrangement, the offer will lapse and the scheme will not become effective if there is a Phase 2 CMA reference before the shareholder meetings.”
Rule 12.1(c) further provides that: “Except in the case of an offer under Rule 9, the offeror may, in addition, make the offer conditional on a decision being made that there will be no Phase 2 CMA reference, initiation of Phase 2 European Commission proceedings or referral by the European Commission under Article 9(1) of Council Regulation 139/2004/EC. In such a case, the condition may state that the decision must be on terms satisfactory to the offeror.”
It follows from Rule 12.1(a) that its provisions will apply where a takeover falls within the “statutory provisions for a possible Phase 2 CMA reference.” Therefore, where a takeover qualifies as a relevant merger situation, Rule 12.1(a) will apply and a term in accordance with its provisions must be included in the offer. There is no requirement for an offer to include such a term where the takeover is not a relevant merger situation. As discussed in Chapters 2 and 3, whether a merger qualifies as a relevant merger situation can frequently be unclear, particularly where the turnover test is not met and therefore jurisdiction rests on whether the share of supply test is met. In these circumstances, the offeror may prefer to include, as a term of the offer, that the offer will lapse if the takeover is referred to Phase II. Rule 12.1(c) is an optional provision that allows the offeror to add a condition to the offer that the CMA (or the European Commission) has issued a clearance decision in 229
Companies Act 2006, Chapter 1 of Part 28.
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respect of the proposed takeover. This Rule also permits the CMA’s clearance decision to be on terms satisfactory to the offeror. This is a subjective element that is not permitted for other conditions.230 It is customary for offers to include regulatory conditions permitted by Rule 12.1(c) as well as the mandatory condition in relation to a referral to Phase II (or European Commission).
6.13.3 Timing Implications There are two main types of announcement under the Takeover Code: (i) the announcement of a possible offer under Rule 2.4; and (ii) the announcement of a firm offer under Rule 2.5. (a) Rule 2.4 announcements. Rule 2.4 announcements allow the offeror (or the offeree company if the parties wish to withhold the offeror’s identity) to make a brief announcement that talks are taking place or that a potential offeror is considering making an offer. This form of announcement does not amount to a firm intention to make an offer and has the advantage that the potential acquirer may begin the merger control process with the CMA, which generally requires at least the announcement of a possible offer before it will accept a notification.231 Rule 2.4 announcements may be pre-conditional (i.e., the announcement is made subject to certain pre-conditions), with the consent of the Panel. Such pre-conditions may include merger control clearance. (b) Rule 2.7 announcements. Announcements under Rule 2.7 relate only to firm intentions to make an offer, which should be made only after “the most careful and responsible consideration” and “only when an offeror has every reason to believe that it can and will continue to be able to implement the offer”.232 This form of offer must include, inter alia, the terms of the offer, the identity of the offeror and all conditions of the offer. The Panel must be consulted in advance if the offeror intends to make the offer pre-conditional233 and such pre-conditions must not normally be subjective.234 Rule 13.3 states that pre-conditions relating to decisions that there will be no reference to Phase II (or that the European Commission will initiate proceedings) or preconditions that if there is such a reference to the relevant authority it will allow the offer to proceed, will be considered as acceptable pre-conditions to the announcement of a firm intention to make an offer.235
6.14
ANCILLARY RESTRAINTS
Merger agreements will often include terms that are ancillary to the main purpose of the agreement and are related to, for example, on-going competition between the buyer and the seller, or the hiring of employees from the seller. These conditions typically place 230
See Rule 13.1, Takeover Code. Jurisdictional and Procedural Guidance, para. 6.49. 232 Rule 2.7, Takeover Code. 233 See Note 2 of Rule 2.7, Takeover Code. 231
234 235
Rule 13.1, Takeover Code. Rule 13.3(a) and (b), Takeover Code.
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231
some form of restraint on the seller not to, for example, compete against the purchaser and the acquired entity for a specified period of time. The CMA’s analytical approach to these ‘ancillary restraints’ is generally in line with the approach of the European Commission as set out in the ‘Commission Notice on restrictions directly related and necessary to concentrations’ (the “Ancillary Restraints Notice”).236
6.14.1 The Principle of Self-Assessment The Ancillary Restraints Notice contains a principle of self-assessment. Merging parties must therefore determine for themselves whether any ancillary restraints fall within the guidelines set out in the Ancillary Restraints Notice. The touchstone of the Ancillary Restraints Notice is that the European Commission’s (and by extension, in this context, the CMA’s) clearance decisions will be deemed only to cover restrictions that are “directly related and necessary” to the implementation of the transaction.237 In line with the Ancillary Restraints Notice, the CMA considers that “in principle” it is no better placed than the merging parties and their advisers in most cases to determine whether the contractual arrangements in question fall within the principles of the Ancillary Restraints Notice.238 As a result, the CMA will not, “as a normal rule”, give the parties guidance on any ancillary restraint and will not include any reference to any ancillary restraints in its published decision.239
6.14.2 CMA Assessment In exceptional cases, the CMA may, at the request of the merging parties, assess the ancillary character of restrictions if a case presents “novel or unresolved questions giving rise to genuine uncertainty as to whether a restriction is directly related and necessary in the context of a merger situation”.240 Questions will usually be regarded as “novel or unresolved” where they are not covered by the Ancillary Restraints Notice or a published decision.241 In these cases, the CMA may ask for additional information from the parties and may seek the views of third parties. In this regard, the parties will need expressly to indicate in their submission which information relating to the restrictions under consideration is confidential. The CMA may not be able to express an opinion on the restrictions if it is unable to seek the views of third parties.242 In providing its opinion, the CMA will indicate why it considers a restriction to be “directly related and necessary” to the merger in question and why it considers it appropriate to provide guidance in its published decision.243 As the CMA is now required to reach a Phase I decision within 40 working days, given the additional time
236 237
OJ 2005/C 56/03. See Jurisdictional and Procedural Guidance, para. 6.69. Ancillary Restraints Notice, para. 1.
238
Jurisdictional and Procedural Guidance, para. 6.69. Ibid. See Ancillary Restraints Notice, para. 2. 240 Ibid., para. 6.70. See also Ancillary Restraints Notice, para. 3. 241 Ancillary Restraints Notice, para. 3. 239
242 243
Jurisdictional and Procedural Guidance, para. 6.70. Ibid.
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and resources required to assess ancillary restraints, the CMA will not usually agree to a request to provide guidance on ancillary restraints unless it has sufficient opportunity to have an informed discussion with the parties during pre-notification.244 Although the Jurisdictional and Procedural Guidance does not expressly endorse the following general principles set out in the Ancillary Restraints Notice, it is considered likely that they will be taken into consideration by the CMA: (1)
“Directly related” restrictions. For restrictions to be considered “directly related” to the merger, they must be closely related economically and intended to allow a smooth transition of the business that is being acquired. It is not sufficient simply for these restrictions to have been agreed in the same context or at the same time as the merger agreement.245
(2)
“Necessary” restrictions. For a restriction to be considered “necessary”, it must be the case that, in the absence of the restrictions in question, the merger could not be implemented or could only be implemented under considerably more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably greater difficulty.246 Such “necessary” restrictions are usually aimed at protecting the value of the business transferred, maintaining the continuity of supply after the break-up of a business, or enabling the start-up of a new entity.247 In determining whether a restriction is “necessary”, consideration will also be given to whether its duration, subject matter, and geographical field do not exceed what is reasonably required.248
(3)
Non-compete clauses. The Ancillary Restraints Notice states that “[i]n order to obtain the full value of the assets transferred, the purchaser must be able to benefit from some protection against competition from the vendor in order to gain the loyalty of customers and to assimilate and exploit the know-how.”249 In this regard, the following principles apply to non-compete clauses:250
244 245
Ibid. Ancillary Restraints Notice, para. 12.
246
Ibid., para. 13. Ibid. 248 Ibid. 249 Ibid., para. 18. 247
250
In Completed acquisition by O2 UK Limited of the Link Stores Limited, OFT decision of 10 October 2006, the merger agreement restricted DSG, which was owned 60% by The Link Stores, from operating dedicated mobile retail outlets in the UK for two years from the date of the transaction’s completion. The OFT concluded that this restraint was ancillary to the merger agreement as it was limited to the UK and to a duration of two years.
The Phase I Process
(a)
Non-compete clauses are justified for a period of up to three years when the transfer of the enterprises in question includes the transfer of customer loyalty in the form of both goodwill and know-how.251
(b)
Where only goodwill is transferred (and not know-how), non-compete clauses are justified for up to two years.252
(c)
Where the transfer involves only physical assets (e.g., land, buildings, machinery) or to exclusive industrial or commercial property rights, noncompete restrictions cannot be considered necessary.253
(d)
The geographical scope of the non-compete clause must be limited to the area covered by the enterprise being transferred.254 Therefore, the noncompete provision should not include areas in which the target business does not sell goods or services. However, the geographical scope may include areas in which the vendor was planning to enter at the time of the transaction provided that he had already invested in preparing this move.
(e)
Non-compete clauses must be limited to products (including any updates to these products) or services that form the economic activity of the business being acquired.255
251
Ancillary Restraints Notice, para. 20. Ibid. 253 Ibid., para. 21. 252
254 255
233
Ibid., para. 22. Ibid., para. 23.
Chapter 7 THE DUTY TO REFER AND EXCEPTIONS 7.1 Introduction 7.1.1 Statutory Discretionary Exceptions 7.1.2 No Discretion to Refer 7.2 The CMA’s Standard of Proof 7.2.1 The OFT’s Original Interpretation of its Standard of Proof 7.2.2 iSOFT/Torex 7.2.3 IBA Health v. OFT 7.2.4 OFT v. IBA Health 7.2.5 The Amended Reference Threshold 7.3 Exceptions to the Duty to Refer 7.4 Markets of Insufficient Importance 7.4.1 2003 Substantive Assessment Guidance 7.4.2 2007 De Minimis Guidance (a) Increase in the threshold (b) Calculation of the market size (c) Mergers likely to have a significant impact on competition (d) The three key variables (e) Introduction of the fourth and fifth variables 7.4.3 The Exception and Remedies Guidance (a) Introduction
7.1
(b) (c) (d) (e) (f) (g) (h) (i)
Application of the exception Assessment Framework Size of the Markets Strength of the CMA’s concerns Magnitude of the competition lost Durability Replicability Consideration of the wider implications 7.4.4 Availability of Undertakings in Lieu 7.5 Relevant Customer Benefits 7.5.1 Introduction 7.5.2 Relevant Customer Benefits Versus Merger-Specific Efficiencies 7.5.3 Relevant Customer Benefits and Undertakings 7.5.4 Evidential Requirements 7.5.5 Relevant Customer Benefits in Hospital Mergers 7.5.6 The Authorities’ Decisional Practice 7.6 Mergers Insufficiently Advanced or Unlikely to Proceed 7.7 No Duty to Refer
INTRODUCTION
The CMA is under a duty to refer a merger to Phase II if it believes that it is or may be the case that: (i) a relevant merger situation has been or will be created; and (ii) the creation of that situation may be expected to result in a substantial lessening of competition within a market or markets in the UK.1 As a result, from a substantive perspective, both anticipated and completed mergers are subject to the so-called ‘double may’ test (i.e., it may be the case that the merger may result in a substantial lessening of
1
Sections 22 and 33, Enterprise Act.
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235
competition).2 This test begs the question as to how this statutory language translates into a standard of proof that the CMA can apply to its decision-making process. The Enterprise Act is silent on this issue. However, shortly after the Enterprise Act came into force, the OFT’s initial interpretation of the standard of proof to be applied in merger investigations was challenged in IBA Health v OFT3 and the OFT’s subsequent appeal of this decision in OFT v IBA Health.4 The standard of proof to be applied by the CMA – whether there is a realistic prospect of a substantial lessening of competition – is now long established and this issue has not been the subject of further litigation.
7.1.1
Statutory Discretionary Exceptions
The Enterprise Act sets out several discretionary exceptions to the CMA’s duty to refer.5 In these cases, the CMA may decide not to refer a merger to Phase II, even where it considers that a relevant merger situation has been or will be created and that there is a realistic prospect of a substantial lessening of competition. The three circumstances in which the CMA may decide not to refer a merger are where: (1)
the market concerned is not of sufficient importance to justify making a reference (the so-called ‘de minimis’ exception);
(2)
there are relevant customer benefits in relation to the merger that outweigh the substantial lessening of competition; or
(3)
in relation to anticipated mergers only, the transaction is insufficiently advanced, or is insufficiently likely to proceed, to justify a reference.
7.1.2
No Discretion to Refer
There are also a number of circumstances in which the CMA may not make a reference. These include where: (1)
the period within which the CMA is required to decide whether the duty to make a reference applies has expired without such a reference having been made;6
(2)
the CMA has accepted,7 or is considering accepting,8 undertakings in lieu of reference (“undertakings” or “UILs”);
2 It is arguable that the question as to whether a relevant merger situation has been created is subject only to a single “may” and that the reference threshold is correspondingly higher in relation to that part of the test. 3 IBA Health v OFT [2003] CAT 27. 4
OFT v IBA Health Limited [2004] EWCA Civ 142. Sections 22(2) and 33(2), Enterprise Act. 6 Sections 22(3) and 33(3)(za), Enterprise Act. This circumstance was added by the Enterprise and Regulatory Reform Act and came into effect on 1 April 2014. The period within which the CMA is required to decide whether the duty to refer applies is set out in section 34ZA of the Enterprise Act. It is 40 working days, subject to any applicable extension. 5
236
The Duty to Refer and Exceptions
(3)
the Secretary of State has given an intervention notice to the CMA indicating that one or more public interest considerations is relevant to the merger;9
(4)
the European Commission is considering a request made by the UK under Article 22(1) of the Merger Regulation; or
(5)
a reasoned submission has been made requesting the referral of a merger to the European Commission under Article 4(5) of the Merger Regulation.10
7.2
THE CMA’S STANDARD OF PROOF
The Enterprise Act states that the CMA shall make a reference to its chair for the constitution of a group if it believes that it is or may be the case that: (1)
a relevant merger situation has been or will be created; and
(2)
the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the UK for goods or services.11
7.2.1
The OFT’s Original Interpretation of its Standard of Proof
The Enterprise Act does not specify a particular reference threshold. As set out above, the Enterprise Act simply states that the CMA must refer a merger for a Phase II investigation if it believes that it is or may be the case that a merger may be expected to result in a substantial lessening of competition. On the coming into force of the merger provisions of the Enterprise Act, the OFT interpreted the standard of proof imposed by the Enterprise Act as follows: “The test for reference will be met if the OFT has a reasonably held belief that, on the basis of the evidence available to it, there is at least a significant prospect that a merger may be expected to lessen competition substantially. The OFT considers that this threshold is the same as that against which [Fair Trading Act] reference advices were prepared. It differs from that used by the CC in its merger enquiries, reflecting the fact that the OFT is a first-phase screen while the CC is determinative: hence, the test for making a merger reference is lower than the CC’s test for deciding that a merger may be expected to substantially lessen competition (emphasis added).”12
7 Sections 22 and 33(3)(a), Enterprise Act. This relates to section 74(1) of the Enterprise Act which prevents a reference when UILs have already been accepted. 8 Sections 22 and 33(3)(b), Enterprise Act. 9
Sections 22 and 33(3)(d), Enterprise Act. Sections 22(3) and 33(3), Enterprise Act. 11 Sections 22 and 33, Enterprise Act. 12 Mergers – Substantive Assessment Guidance, OFT516, May 2003 (the “2003 Substantive Assessment Guidance”), para. 3.2. 10
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237
This interpretation of the duty to refer was tested very shortly after the Enterprise Act came into force in relation to the OFT’s assessment of the iSOFT/Torex merger in which a third party complainant, IBA Health, argued that the OFT had failed to comply with its statutory duty in not referring this completed merger to the CC.13
7.2.2
iSOFT/Torex
iSOFT Group (“iSOFT”), a company specialising in healthcare technology, proposed acquiring Torex, a supplier of healthcare technology to GPs, laboratories, hospitals and community care. Prior to this agreement, Torex had acquired the secondary healthcare business of InHealth Group, which also included the exclusive right to sell certain software products of IBA Health, an Australian company active in IT solutions for the healthcare industry.14 The parties overlapped in the supply of IT software systems for use in hospitals and, in particular, were key suppliers of electronic patient records (“EPRs”) and laboratory information management systems (“LIMS”). At the time of the merger, there were four main suppliers of secondary healthcare software in the UK: iSOFT, Torex, McKesson and Siemens. The parties’ combined share of installed (legacy) systems was 44% of EPR and 56% of LIMS. In each of Scotland and Wales, the parties’ combined share of legacy systems was 100%. However, the OFT considered that, given the pace of innovation in healthcare IT systems, the parties’ share of legacy systems was not the best guide to market power. As most public sector contracts were awarded on the basis of competitive tenders, the OFT considered that a better measure of market power was the parties’ success in winning such tenders. In terms of the tenders for local service provider (“LSP”) contracts to the five NHS regions, iSOFT had won five tenders and Torex had won none, and the parties considered that Torex was no longer a viable competitor. The OFT’s investigation concluded that barriers to entry were likely to be high due to the cost of developing systems and bidding for contracts. However, the OFT noted that there was some scope for smaller companies to enter the market and that international EPR suppliers were also keen to win contracts. Nevertheless, the OFT received several complaints from third parties, including from IBA Health, which submitted a written complaint on 15 August 2003 and attended meetings with the OFT on 29 August and 19 September 2003. In particular, LIMS suppliers were concerned that EPR suppliers would be able to specify or bundle their products to the detriment of independent suppliers. Several hospitals also complained that the merger would result in the parties abandoning some of their systems, increasing hospital costs in migrating to new systems. This led the OFT to put additional questions to the parties on 27 August, to hold a meeting with the parties on 28 August, and to send an Issues Letter to the parties on 30 September. Despite the various concerns expressed, the OFT concluded that, although the parties’ share of legacy systems was high, in a bidding market, “competition is for the market rather than in the market so that the competitive 13 14
IBA Health v OFT [2003] CAT 27. Anticipated acquisition by iSOFT Group plc of Torex plc, OFT decision of 6 November 2003.
238
The Duty to Refer and Exceptions
advantage acquired from the legacy base is unlikely to be strong, especially where a procurement strategy is being introduced.” Accordingly, the OFT did not refer the merger to the CC.
7.2.3
IBA Health v OFT
On 21 November 2003, IBA Health appealed the OFT’s decision to the CAT.15 It sought to overturn the OFT’s decision on the grounds that: (i) the OFT had made material errors of law and fact in concluding that there was an insufficient likelihood of a substantial lessening of competition and therefore that the OFT had no duty to refer; and (ii) the OFT had made material procedural errors by failing to conduct an adequate investigation.16 In respect of the first ground of review, IBA Health submitted the following arguments. First, the OFT had failed to apply its own substantive guidance which, if it had done so correctly, would have led to a finding of unilateral effects.17 This was based on a number of factors, including that: (i) the merger would have resulted in a substantial increase in market concentration, with a post-merger HHI of 2,400 and a delta of 1,000;18 (ii) the parties would have had a share of around 45% and the next closest competitor, McKesson, would have had a share of only 14.5%;19 (iii) the merger would have eliminated the long-standing rivalry between iSOFT and Torex;20 (iv) IBA’s ability to compete with the merged firm would have been restrained due to the fact that Torex held the exclusive right to distribute its competing products in the UK;21 and (v) entry barriers in the market were high, as recognised by the OFT.22 Secondly, IBA Health submitted that the OFT had incorrectly concluded that the merger would not result in a substantial lessening of competition due to the fact that major contracts were the subject of bids.23 This was the case because: (i) the U.S. suppliers that the OFT referred to in its decision had attempted to enter the UK market for the preceding 10 years with little success;24 (ii) the OFT had failed to identify the smaller companies that it claimed were capable of providing some measure of competition; and (iii) no explanation was given of how the smaller competitors were to overcome the merged entity’s reputational and/or informational advantages in bidding for new contracts, or how they would overcome such high entry barriers.25
15
IBA Health v OFT [2003] CAT 27.
16
Ibid., para. 97. Ibid., para. 98. 18 Ibid., para. 100. 19 Ibid., para. 101. 17
20
Ibid., para. 102. Ibid., para. 103. 22 Ibid., para. 105. 21
23
Ibid., para. 108. Ibid., para. 109. 25 Ibid. 24
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In respect of the second ground of review, IBA Health claimed that the OFT had failed to examine: (i) the link between IBA and Torex; (ii) the reasons why Torex did not win bids; (iii) the nature of the non-national programme for IT (“NPfIT”) market; (iv) the planned development of NPfIT; and (v) evidence regarding the likely obstacles to the full development of NPfIT.26 In addition, IBA Health argued that the decision was vitiated by factual errors, such as the acceptance that Torex was not an effective competitor.27 The OFT argued that IBA Health’s case was essentially an attempt to appeal against the OFT’s assessment of the merger, which was not permissible under the Enterprise Act.28 The OFT argued that IBA Health could not simply challenge the OFT’s assessment of the evidence. Whilst there was room for a difference of opinion as to whether the merger would have resulted in a substantial lessening of competition, the OFT argued that IBA Health had to show, in line with accepted principles of judicial review, that the decision reached by the OFT was not one that it could have reached.29 The OFT argued that the grounds of appeal open to IBA Health were that the decision was taken on the basis of: (i) a misunderstanding of the law; (ii) a material procedural error; (iii) a material error of fact that was “beyond the bounds of rationality”; or (iv) was “unreasonable” in the sense that it was “so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.”30 In relation to the construction of section 33(1) of the Enterprise Act and the use of the “double may” test, the OFT argued that this did not lower the threshold of expectation that must be attained by the OFT before it was under a duty to make a reference to the CC.31 The OFT considered that the use of the “double may” was simply a grammatical requirement flowing from the way in which the draftsman had chosen to structure the section.32 On a purposive interpretation, the OFT argued that section 33(1) should not be read as requiring the OFT to make references to the CC where there was only a “fanciful” prospect of a substantial lessening of competition. The OFT submitted that this was reflected in its guidance, which required a “significant prospect” of a substantial lessening of competition before a reference would be made.33 Although the OFT accepted that there was room for differences of opinion on the question of whether or not it should have referred the case to the CC, it was not a sufficient basis by itself on which to impugn its decision. The OFT argued that only if the conclusion not to make a
26
Ibid., para. 112. Ibid., para. 114. 28 Ibid., para. 126. 29 Ibid., para. 127. 27
30 Ibid., para. 129, citing Council of Civil Service Unions v Minister for the Civil Service (1985), per Lord Diplock. 31 Ibid., para. 135. 32 33
Ibid. Ibid., para. 136.
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The Duty to Refer and Exceptions
reference was unreasonable (in a public law sense) or flawed on the basis of some other established principle of judicial review could it be impugned.34 The CAT’s view as to the proper interpretation of the OFT’s burden of proof was as follows: “The use of the word “may” in the second line of section 33(1) seems to us to signify that, even if those responsible at the OFT are themselves of the view that a merger may not be expected to result in a substantial lessening of competition, it still “may be the case”, within the meaning of section 33(1), that the merger may be expected to lead to a substantial lessening of competition, if there is, in fact, an alternative credible view that cannot be reasonably rejected by the OFT on the basis of a “first screen”. In other words, putting the matter less technically, if there is genuinely “room for two views” on the question whether there is at least a significant prospect that the merger may be expected to lead to a substantial lessening of competition, then in our opinion the requirement in section 33(1) that “it may be the case” that …[the merger] may be expected to lead to a substantial lessening of competition, is satisfied. In our opinion, in such circumstances, the statutory duty of the OFT under section 33(1) is not to decide, definitively, which of those two views, it, the OFT, prefers. Under the scheme of the [Enterprise] Act, the definitive decision maker, in a case where there is room for two views, is not the OFT but the [Competition] Commission, whose duty is to decide on the question whether the merger may be expected to lead to a substantial lessening of competition, as section 36(1) expressly provides. Where we refer to the possibility of there being “room for two views” in a given case, we do not envisage a case in which the alternative view is merely fanciful, or far fetched. We envisage a case in which the alternative view is credible. It must be a view which cannot be confidently dismissed on the basis of a “first screen” investigation.”35
The CAT also noted that there is a certain asymmetry under section 33(1) between the situation that arises when the OFT makes a reference and the situation that arises when the OFT decides not to do so.36 In the former situation, the OFT does not decide that a substantial lessening of competition may be expected, it simply “believes” that it “may be the case” that the merger may result in a substantial lessening of competition. In the latter situation, the OFT definitively decides not to make a reference, thereby concluding that the merger does not even reach the threshold of “it may be the case” and decides that there is not even room for two views.37 Where there is room for more than one view, the CAT stated that the use of the words “it may be the case” implied a two-part test. First, the OFT must satisfy itself that there is no “significant prospect” of a substantial lessening of competition. Secondly, it must satisfy itself that there is no “significant prospect” of an alternative view being taken in the context of a fuller investigation by the CC.38 The CAT also stated that, where the 34
Ibid., para. 137. Ibid., paras. 190 to 193. 36 Ibid., para. 194. 35
37 38
Ibid., para. 195. Ibid., para. 197.
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OFT has concluded that an alternative view could be taken, the OFT should attempt to resolve the matter only in exceptional circumstances.39 Applying the principles of judicial review to this test, the CAT found that the OFT’s decision was erroneous in law and/or was not a decision that it was reasonably open to the OFT to take on a proper construction of the Enterprise Act.40 The CAT found that the OFT was faced with a real issue as to whether there was a substantial lessening of competition as a result of the merger and that, accordingly, the onus was on the OFT to satisfy the CAT that it had applied the right test and had “solid, sufficiently certain, and properly reasoned grounds” for deciding that the “relatively low threshold” of the reference test was not met.41 Consequently, the OFT’s decision was quashed and the merger was referred back to the OFT for reconsideration.
7.2.4
OFT v IBA Health
The OFT, iSOFT and Torex (together, the “Appellants”) applied for permission to appeal the CAT’s judgment to the Court of Appeal (the “Court”), which was granted on 18 December 2003. The OFT argued that the CAT’s formulation of the reference test was wrong. The OFT submitted that it was inconsistent with the wording of section 33(1) both when read alone and, in the context of other parts of the Enterprise Act, it was impracticable and contrary to the evident intention of Parliament. The Appellants also contended that the CAT’s formulation was wrong, but they did not support the test set out by the OFT in its guidance. iSOFT and Torex considered, in particular, that too low a degree of likelihood had been placed on the word “may” by reformulating it as “a significant prospect”. They preferred the formulation of “knows or suspects”42 as set out by Sir John Donaldson MR in R v Monopolies and Mergers Commission.43 The Court issued its judgment on 19 February 2004, handed down by the Vice Chancellor Lord Mance, dismissing the appeal.44 The Court had “no hesitation” in preferring the submissions of the Appellants over the CAT’s two-part formulation of the reference threshold.45 The Court considered that the Enterprise Act required the OFT to believe that a merger may be expected to result in a substantial lessening of competition, and that it was not for the OFT to consider whether in due course the CC may decide that the merger may be expected to result in a substantial lessening of competition.46 However, the Court did not agree with the Appellants’ interpretations of the reference test either.
39 40
Ibid., para. 199. Ibid., para. 226.
41
Ibid., para. 230. Ibid., para. 36. 43 R v Monopolies and Mergers Commission [1986] 1 WLR 763, 769. 44 OFT v IBA Health Limited [2004] EWCA Civ 142. 42
45 46
Ibid., para. 38. Ibid.
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The Court held as follows. First, the OFT must believe that it is or may be the case that a relevant merger situation may be expected to result in a substantial lessening of competition. The Court stated that, as a result, “some form of mental assent is required as opposed to the less positive frame of mind connoted by a suspicion.”47 Accordingly, the Court did not agree with iSOFT’s and Torex’s arguments that “may” should be given the formulation of “knows or suspects”. The Court noted that the dictionary definition of “suspicion” was merely a “slight belief” and that was too low a degree of likelihood for the OFT to be under a duty to make a reference.48 Secondly, the belief must be “reasonable and objectively justified by relevant facts.”49 Thirdly, the Court held that, by themselves, the words “may be expected to result” involve a degree of likelihood amounting to an expectation.50 The Court noted that the CAT had expressed the view that these words connoted more than a possibility and expressed an expectation of more than a 50% chance.51 The Court considered that this was probably right when applied only to the single question that the CC is required to ask itself at Phase II under section 36(1)(b) (i.e., whether the creation of a relevant merger situation may be expected to result in a substantial lessening of competition within any market or markets in the UK for goods or services). However, the Court considered that the belief that must be held by the OFT at Phase I was “that it is or may be the case that”. The Court stated that this introduced two alternatives. The certainty posed by the word “is” and the possibility envisaged by the words “may be.”52 The Court held that the inclusion of the word “may” imported a lower degree of likelihood than section 36(1) permitted for CC’s decisions, reflecting the different functions of the OFT and the CC, with the former being a “first screen” and the latter deciding the matter.53 The Court considered that this lower degree of likelihood might exist in circumstances where the work done by the OFT did not justify any positive view but left some uncertainty, and where the OFT believed that a substantial lessening of competition might prove to be likely on further and fuller examination. Lord Mance went on to state that: “At the other end of the scale it is clear that the words “may be the case” exclude the purely fanciful because OFT acting reasonably is not going to believe that the fanciful may be the case. In between the fanciful and a degree of likelihood less than 50% there is a wide margin in which OFT is required to exercise its judgment. I do not consider that it is possible or appropriate to attempt any more exact mathematical formulation of the degree of likelihood which OFT acting reasonably must require. As Lord Mustill observed in R v Monopolies Commission, ex p S. Yorks Ltd [1993] 1 WLR 23, 29 “The courts have repeatedly warned against the dangers of taking an inherently imprecise word, and by redefining it thrusting on it a spurious degree of precision.
47
Ibid., para. 44.
48
Ibid. Ibid., para. 45. 50 Ibid., para. 46. 51 Ibid. 49
52 53
Ibid., para. 47. Ibid.
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In paragraph 3.2 of OFT’s published advice the requisite likelihood is described as “a significant prospect that a merger may be expected to lessen competition substantially”. This substitutes “significant prospect” for “may” and is open to criticism on that account. Further I consider that the word “significant” tends to put the requisite likelihood too far up the scale of probability.”54
7.2.5
The Amended Reference Threshold
Following the Court’s judgment, the OFT amended its 2003 Substantive Assessment Guidance to reflect the Court’s formulation of the reference test.55 The guidance note stated that the reference test would be met if the OFT had “a reasonable belief, objectively justified by relevant facts, that there is a realistic prospect that the merger will lessen competition substantially.” The guidance note stated that “realistic prospect” meant “a prospect that is not fanciful but has less than a 50 per cent chance of occurring.” The OFT noted that there was “no exact mathematical formula of the degree of likelihood which the OFT acting reasonably must require in order to make a merger reference. Between fanciful and a degree of likelihood less than 50 per cent there is a wide margin in which the OFT must exercise its judgement as to whether it may be the case that the merger may be expected to result in a substantial lessening of competition.” Both the OFT’s 2003 Substantive Assessment Guidance and the guidance note have been superseded by the Merger Assessment Guidelines, which has been adopted by the CMA and states as follows: “In considering whether to refer a merger to the CC, the OFT must form a reasonable belief, objectively justified by relevant facts, as to whether or not it is or may be the case that the merger has resulted, or may be expected to result, in an SLC. The OFT must make a reference to the CC when it believes that the merger is more likely than not to result in an SLC. The Act also contemplates reference at lower ranges of probability. If the OFT believes that the relevant likelihood is greater than fanciful, but below 50 per cent, it has a wide margin of appreciation in exercising its judgement. In such cases, it has a duty to refer when it believes there to be a realistic prospect that the merger will result in an SLC. The realistic prospect threshold is intentionally a lower and more cautious threshold for an SLC finding than that applied by the CC after more extensive investigation... The OFT’s judgement on whether there is a realistic prospect of an SLC will take due account of the extent of the evidence available to it at the time of its decision.”56
7.3
EXCEPTIONS TO THE DUTY TO REFER
There are three discretionary exceptions to the CMA’s statutory duty to refer.57 The CMA may decide not to refer a merger if it believes that:
54 55 56 57
Ibid. para. 48 and 49. Guidance note revising ‘Mergers – substantive assessment guidance’, OFT 516b, October 2004. Merger Assessment Guidelines, para. 2.5 to 2.7. Sections 22(2) and 33(2), Enterprise Act.
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(1)
the markets concerned are of insufficient importance to justify making a reference to Phase II (known as the ‘de minimis’ exception);
(2)
any relevant customer benefits in relation to the relevant merger situation outweigh the substantial lessening of competition concerned; or
(3)
in relation to anticipated mergers only, the arrangements concerned are insufficiently far advanced, or are insufficiently likely to proceed, to justify a reference.
The application of either of the first two exceptions has the same effect as the unconditional clearance of a merger; the CMA is unable to investigate a merger at Phase II in either case.58 By far the most common of these exceptions to the duty to refer is the de minimis exception. As of 1 January 2016, the de minimis exception has been utilised by the Authorities 35 times. In relation to the second statutory exception, no merger has yet avoided a reference on the grounds of relevant customer benefits, although in Global/GCap, the OFT concluded that relevant customer benefits outweighed the substantial lessening of competition in one of the markets under review.59
7.4
MARKETS OF INSUFFICIENT IMPORTANCE
The Enterprise Act does not define the concept of a merger not being of “sufficient importance” to justify making a reference. The meaning and the application of this exception to the duty to refer has evolved during the lifetime of the Enterprise Act and has been refined by the Authorities’ experience of utilising this concept in a greater number of cases. There have been three key stages in the development of this concept: (i) the period between 2003 and 2007, where the application of the de minimis exception was governed by the guidelines set out in the 2003 Substantive Assessment Guidance and this exception was rarely used; (ii) the period between 2007 and December 2010, where the OFT published its first stand-alone set of de minimis guidelines and this exception began to be used much more frequently;60 and (iii) the period between December 2010 and today, where the OFT published a revised version of its 2007 De Minimis Guidance, which was adopted by the CMA and is currently in force.61 In its 2015/16 Annual Plan, the CMA stated that “[t]he CMA will review its policies relating to exceptions to the duty to refer and its ability to accept undertakings in lieu of making a reference for a phase 2 investigation. If there is a case for change, it proposes to consult on revised guidance, including on its approach to the exception relating to
58
Merger Assessment Guidelines, para. 2.9. Completed acquisition by Global Radio UK Limited of GCap Media plc, OFT decision of 8 August 2008. This merger ultimately resulted in the parties agreeing undertakings in lieu of reference with the OFT to avoid a reference. 59
60
Exceptions to the duty to refer: markets of insufficient importance, OFT 516b (the “2007 De Minimis Guidance”). 61 Mergers – Exceptions to the duty to refer and undertakings in lieu of reference guidance, OFT1122, December 2010 (the “Exceptions and Remedies Guidance”).
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‘markets of insufficient importance.”62 To date, the CMA has not published any consultation in relation to proposed changes to the Exceptions and Remedies Guidance.
7.4.1
2003 Substantive Assessment Guidance
In its 2003 Substantive Assessment Guidance, the OFT stated that it could exercise its discretion not to make a reference “where the costs involved would be disproportionate to the size of the markets concerned”63 and indicated that the typical cost of a CC inquiry (to the taxpayer) was around £400,000.64 The 2003 Substantive Assessment Guidance did not specify that, because the typical cost of a CC inquiry was around £400,000, the threshold for considering markets to be of insufficient importance would also be set at £400,000, but this was implied.65 Moreover, the cases (prior to November 2007) that discuss the de minimis exception avoided direct reference to any particular threshold.66 The 2003 Substantive Assessment Guidance anticipated that the de minimis exception would be applied to mergers “only very rarely since in the majority of cases where a substantial lessening of competition is identified, it will be appropriate for the [CC] to investigate.”67 In keeping with the OFT’s expectations, prior to the publication of its revised guidance in November 2007, the OFT had exercised its discretion not to refer a merger under the de minimis exception only once, in Stagecoach/Traction.68 In this case, the merging parties overlapped in the provision of bus services in a number of areas and on a number of point-to-point journeys (known as ‘flows’). The OFT concluded that, in general terms, the merger did not give rise to a realistic prospect of a substantial lessening of competition. The only possible exceptions to this conclusion were five overlapping flows in the Grimsby area, where the OFT considered that there was some evidence to suggest that the merger might result in a lessening of competition (although not necessarily a substantial one). However, in addition to the fact that the parties imposed very limited competitive constraints on each other pre-merger, the OFT decided to exercise its discretion under the de minimis exception as the particular route that was the focus of the OFT’s analysis (the Wybers Wood to Grimsby town centre route) generated annual revenue of only between £300,000 and £400,000. 62 63
Competition and Markets Authority Annual Plan 2015/16, CMA34, March 2015, para. 4.10. 2003 Substantive Assessment Guidance, para. 7.5.
64
The 2003 Substantive Assessment Guidance notes that the cost of a CC inquiry was £400,000 “at the time of writing” (i.e., May 2003). 65
This ambiguity appears to have been laid to rest (and is certainly no longer of importance) in the 2007 De Minimis Guidance which specifically referred to the amount of £400,000 as a “threshold”. 66 The cases typically refer to whether a market or sector is sufficiently important to justify a reference, without referring to any particular threshold. In Anticipated acquisition by Sibelco Minerals & Chemicals Limited of the minerals and materials business of Tarmac Central Limited, 14 August 2003, the OFT referred to a market of approximately £400,000 as being too small to justify a reference, but did not state that the relevant threshold was £400,000. 67 2003 Substantive Assessment Guidance, para. 7.5. 68 Completed acquisition by Stagecoach Group plc of Traction Group Limited, OFT decision of 12 April 2006.
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7.4.2
2007 De Minimis Guidance
In November 2007, the OFT published its revised de minimis guidance. The 2007 De Minimis Guidance set out a number of changes to the OFT’s approach to this statutory exception. These included significantly increasing the threshold for determining whether a market was de minimis, introducing guidance in relation to the calculation of the market size and providing criteria for assisting the OFT (and, by extension, the merging parties and their advisers) to determine whether the de minimis exception should apply to mergers falling within the new threshold. Each of these issues is considered below. (a) Increase in the threshold. The threshold for determining whether a market was of sufficient importance was increased from £400,000 to £10 million and the threshold was de-linked from the likely cost of a CC reference (to the taxpayer), which the OFT estimated to be typically between £300,000 and £750,000. The new threshold was not a safe harbour.69 A merger was not automatically exempt from a reference to the CC merely because the markets affected by the merger had an aggregate annual value of £10 million or less – the Enterprise Act provides for an exception, not an exemption.70 The revised guidance stated that “[b]elow the £10 million market size threshold, the OFT would generally consider the market to be of insufficient importance to justify a reference” (emphasis added), subject to several caveats regarding the impact of the merger on competition, discussed below. In relation to the £10 million threshold, the OFT noted that no respondent considered the increase of the threshold to £10 million to be too high. Indeed, some respondents to the OFT’s public consultation suggested thresholds of £20 million and even up to £100 million, taking into account factors such as costs to the merging parties of a reference to the CC and the turnover of the merging parties. However, the OFT felt that it was not appropriate, at that stage, to raise the applicable threshold to more than 25 times its previous level. The OFT considered that the £10 million threshold appropriately balanced costs and benefits, and noted that it would keep the new threshold under review and adjust it periodically as appropriate. (b) Calculation of the market size. As the primary criterion for determining whether a merger was likely to qualify for the de minimis exception was the size of the markets in question, the basis on which the OFT calculated the size of the markets under the 2007 De Minimis Guidance was of considerable importance. This was an issue on which the 2003 Substantive Assessment Guidance had been silent and which the public consultation had identified as an area requiring clarification, particularly in respect of the OFT’s approach where the merger affected multiple markets. The 2007 De Minimis Guidance set out the following principles:
69
The revised guidance indicated that some third party respondents to the OFT’s public consultation suggested that the OFT should adopt a safe harbour. 70 The OFT did not rule out the application of the exception where the value of the markets exceeded £10 million, but did not apply the exception in such a case.
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(1)
Only markets in which the OFT considered that there was a realistic prospect of a substantial lessening of competition (referred to by the OFT as “affected markets”) would be taken into consideration for the purposes of the £10 million threshold.
(2)
The total size of the market was the sum of all the suppliers’ annual turnover in the UK in the affected markets.
(3)
If the geographic scope of the affected market was wider than the UK, turnover generated outside the UK would not be taken into account.
(4)
Where a merger resulted in several affected markets, the OFT would aggregate the turnover realised on all of those markets.
(5)
Rapid growth or decline in the size of a market would be taken into consideration when calculating the size of the affected markets.
(c) Mergers likely to have a significant impact on competition. The 2007 De Minimis Guidance stated that where mergers fell below the £10 million threshold, the de minimis exception was unlikely to be appropriate where “the impact of the merger is likely to be particularly significant”. The OFT identified two situations in which this was most likely to occur: (i) where mergers took place in highly concentrated markets where the prospect of entry was low (e.g., mergers resulting in a reduction of competitors from three to two, or from two to one); and (ii) where mergers took place in markets where there was evidence of coordination between competitors and the merger would worsen such coordination.71 The OFT also noted that the exception may also be less appropriate where a reference to the CC would be of precedential value (e.g., where the merger raised novel issues)72 or where a substantial proportion of the likely detriment was suffered by vulnerable consumers.73 (d) The three key variables. The 2007 De Minimis Guidance set out that in determining whether a merger qualified for the de minimis exception, the OFT would pay close attention to the interaction of the following three key variables: (i) the size of the market(s) concerned; (ii) the magnitude of the competition lost by the merger; and 71 The 2007 De Minimis Guidance noted that as, under the Enterprise Act, mergers must give rise to a realistic prospect of a substantial lessening of competition (i.e., there must be a causal link between the merger and the negative effect on competition) the merger situation must not be used as a pretext to punish pre-existing anti-competitive conduct that exists on the market and does not result from the merger. 72 The OFT noted in the 2007 De Minimis Guidance that a few respondents considered this caveat to be unfair on the companies involved in the first merger in the industry. It was said that this was inconsistent with an approach based on balancing costs/benefits and made self-assessment more difficult. 73 A number of respondents to the OFT’s draft guidance queried the economic justification for this caveat. Others requested clarification on the concept of vulnerable customers. It was also said that this caveat could in practice rule out the application of the markets of insufficient importance exclusion to many consumer-facing markets.
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(iii) the durability of the merger’s impact. In this regard, the guidance stated that “all else equal, the smaller the market, the greater the likelihood the exclusion will be used. The same is true of the magnitude of lost competition. Finally, and again all else equal, the more obviously finite and circumscribed the period of any merger effects, the greater the likelihood the OFT will consider that the merger has a limited impact.” (e) Introduction of the fourth and fifth variables. Following the 2007 De Minimis Guidance, the OFT continued the development of its de minimis criteria in subsequent cases. For example, in BOC/Ineos, the OFT found that the total size of the market for the distribution of packaged chlorine was approximately £5.5 million, the magnitude of the competition lost by the merger would be significant as it would result in the removal of the most important competitive dynamic in the market, and that adverse merger effects could endure for as long as is foreseeable.74 In addition to these factors, the OFT also considered two further factors to be relevant to its assessment: (i) the strength of its competitive concerns; and (ii) the transaction’s rationale and the value of deterrence.75 In respect of the strength of its concerns, the OFT considered that it was “significantly more likely than not” that the merger would result in a substantial lessening of competition, principally as a result of unilateral effects, but also because of the potential for coordinated effects.76 As regards the rationale for the transaction, the OFT considered that “there is a good argument in this case that [the] acquisition of market power is an important driver of the transaction, if not the principal one.”77 Moreover, in respect of deterrence, the OFT stated that “in situations where the evidence allows for a more balanced argument to be had about whether efficiencies or market power are driving a horizontal merger between competitors, the analysis of motivation for a deal and the weight given to deterrence may be different. As that is not the case here, the issue of deterrence is significant, because there is benefit in the merger regime deterring transactions whose rationale, and expected effect, is indeed (enhanced) market power.”78 As a result of these factors, the OFT concluded that the application of the de minimis exception would not be appropriate.
7.4.3
The Exceptions and Remedies Guidance
(a) Introduction. In October 2009, the OFT published a draft consultation document in relation to exceptions to the duty to refer and undertakings in lieu.79 The OFT stated that the new guidance would update its existing guidance in the light of: (i) six years of practical experience gained through the application of the Enterprise Act; (ii) judicial guidance; and (iii) the OFT’s decisional practice since November 2007 in the application of the 2007 De Minimis Guidance. The OFT noted that, despite the 74 Anticipated acquisition by BOC Limited of the packaged chlorine business and assets carried on by Ineos Chlor Limited, OFT decision of 29 May 2008. 75 Ibid., para. 125. 76
Ibid. Ibid. 78 Ibid. 79 Mergers – Exceptions to the duty to refer and undertakings in lieu: Draft guidance consultation document, October 2009, OFT1122con. 77
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relatively short period of time that had elapsed between the publication of the 2007 De Minimis Guidance and the publication of the draft consultation paper, the OFT had considered the exception in around 20 cases and had applied it in 10 cases. Following a consultation period, the OFT published its finalised guidance in December 2010.80 This was adopted by the CMA in April 2014. (b) Application of the exception. The CMA may consider the applicability of the de minimis exception at various stages in a merger investigation.81 (1)
Enquiry letter. The CMA, via its Mergers Intelligence Committee, will consider the potential application of the de minimis exception when deciding whether to send an enquiry letter in relation to a non-notified merger.82 The CMA may decide not to send an enquiry letter on the basis of the de minimis exception where: (i) it is “very clear” that the annual value of the relevant markets is below £3 million; and (ii) there would be no clear-cut UILs available if the duty to refer were met.83
(2)
Informal advice. The CMA will offer informal advice on the potential application of the de minimis exception, subject to the caveats that usually apply to such advice.84 However, merging parties must bear in mind that in order to provide meaningful guidance in relation to whether the de minimis exception could be used in a particular case, the CMA will need to be wellinformed as to the substance of the case and, inevitably, any such guidance is likely to be appropriately caveated. Of particular relevance in the context of the de minimis exception is that the CMA relaxes its normal requirement that the request for informal advice relates to a transaction that raises a genuine substantive issue where the party seeking informal advice is a private enterprise that is unable to afford external competition law advice.85
(3)
Phase I. The CMA will consider at an early stage whether a notified transaction is a candidate for the de minimis exception and may engage with the merging parties during pre-notification on this topic.86 The Exceptions and Remedies Guidance states that where it becomes clear to the CMA that the relevant markets are of insufficient importance to justify a reference and that clear-cut UILs are not available, it is likely to move towards a decision not to make a reference on the basis of the de minimis exception.87 In such cases, the Director of Mergers responsible for the case would usually take a decision at
80 Mergers – Exceptions to the duty to refer and undertakings in lieu of reference guidance, OFT1122, December 2010 (the “Exceptions and Remedies Guidance”). 81 Ibid., para. 2.45. 82
Ibid., para. 2.46. Ibid., para. 2.47. 84 Ibid., para. 2.49. See Chapter 6 for a discussion of the CMA’s informal advice procedure. 85 Ibid., para. 2.50. 83
86 87
Ibid., para. 2.51. Ibid., para. 2.52.
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The Duty to Refer and Exceptions
the Internal State of Play Meeting that it was appropriate to apply the de minimis exception and the CMA will discuss with the parties whether they would be willing to waive their procedural rights to a full investigation (including an Issues Letter and Issues Meeting) in order to facilitate an expeditious outcome on the basis of the de minimis exception.88 Where this is the case, in its decision, the CMA will usually leave open the question of whether the duty to refer is met and will normally conclude that the merger should not be referred to Phase II, either because the duty to refer is not met or, if it is met, the markets in question are of insufficient importance.89 To date, the Authorities have utilised this procedure in 11 cases.90 (c) Assessment framework. In assessing whether a merger qualifies for the de minimis exception, the CMA will consider the following factors, each of which is considered below: (1)
the size of the markets at issue;
(2)
the strength of the CMA’s concerns;
(3)
the magnitude of competition lost by the merger;
(4)
the durability of the merger’s impact;
(5)
the replicability of the merger’s impact; and
(6)
whether clear-cut undertakings are available.91
(d) Size of the markets. The CMA considers that markets will generally be of sufficient importance to justify a reference where their aggregate annual value in the UK 88 89
Ibid., para. 2.53. Ibid.
90 Completed acquisition by Rentokil Initial plc of the pest control, fire and water businesses of Connaught plc (Santia branded businesses), OFT decision of 13 June 2011; Completed acquisition by Midland General Omnibus Limited of the commercial bus services of Felix Bus Services Limited, OFT decision of 30 May 2012; Completed acquisition by Arriva Midlands North Limited of the business and assets of Liyell Limited trading as Midland, OFT decision of 21 January 2013; Completed acquisition by Ridgeway Garages (Newbury) Limited of Parkview Skoda, OFT decision of 21 March 2014; Completed acquisition by Arriva Passenger Services Limited of the remainder of the entire share capital of Centrebus Holdings Limited, CMA decision of 6 May 2014; Anticipated acquisition by Phonak AG of Comfort Audio I Halmstad AB, CMA decision of 17 September 2014; Anticipated acquisition by Vitec Investments Limited of Autocue Group Limited, CMA decision of 30 September 2014; Completed acquisition of two Vauxhall dealerships from Riders’ Garages Limited by Eden (GM) Limited, CMA decision of 24 October 2014; Completed acquisition by Key Publishing Limited of certain assets of Kelsey Publishing Limited, CMA decision of 2 March 2015; Anticipated acquisition by Tattersalls Limited of the bloodstock auctioneering business of Brightwells Limited, CMA decision of 15 September 2015; Anticipated acquisition by Kaplan International Holdings Limited of Osborne Books Limited, CMA decision of 9 February 2016. 91 Exceptions and Remedies Guidance, para. 2.28.
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is more than £10 million.92 This is a result of the fact that the benefits of a reference would be expected to outweigh the public costs where the markets in question are valued at more than £10 million.93 Conversely, the CMA considers that markets will not generally be of sufficient importance to justify a reference where their aggregate annual value in the UK is less than £3 million (subject to the caveat that there must not be clearcut UILs available – see below).94 Indeed, in the majority of cases in which the Authorities have applied the de minimis exception, the markets at issue were valued at less than £3 million.95 Accordingly, the CMA would expect to refer a merger where the relevant markets are valued at less than £3 million only “exceptionally” and “where the direct impact of the merger in terms of customer harm was particularly significant and/or where that merger was highly replicable in the relevant sector.”96 As of 1 January 2016, the largest market size in respect of which the CMA has accepted the de minimis exception is £8.59.5 million.97 The CMA will apply the following general principles in identifying the markets that should be taken into consideration for the purpose of this limb of the test:98 (1)
identify the relevant market in relation to which the CMA has concluded that there is a realistic prospect of a substantial lessening of competition;
(2)
consider whether the merger affects only a sub-set of this market (referred to as the “affected market”) such that a proportion of the market value might be deducted from the total size of the market;99
92
Exceptions and Remedies Guidance, para. 2.14. In Anticipated acquisition by Cineworld Group plc, through its subsidiary Cine-UK Limited, of the cinema business operating at the Hollywood Green Leisure Park, OFT decision of 17 March 2008, para. 62, the OFT rejected the application of the de minimis exception in relation to a market that was valued at over £15 million. 93 Ibid. 94 Ibid., para. 2.15. 95 To date, the Authorities have applied the de minimis exception in 26 cases in which the size of the markets was less than £3 million. 96 Exceptions and Remedies Guidance, para. 2.15. 97 Completed acquisition by WGSN Inc. of Stylesight Inc., CMA decision of 25 June 2014, para. 111. This case concerned the market for the supply of online subscription trend forecasting services to fashion and non-fashion customers (operating in design-led industries) in the UK. 98 Exceptions and Remedies Guidance, para. 2.30. 99 See, e.g., National Express/Intercity East Coast franchise, supra, in which National Express, a major UK public transport operator with existing rail, bus and coach operations, acquired the Inter City East Coast franchise. The OFT determined that the relevant market affected by the merger was the provision of passenger transport services on certain point-to-point ‘flows’ and that the parties overlapped on 50 such ‘flows’ where National Express provided coach services that overlapped with rail services operated under the franchise. After applying a range of filters and carrying out an in-depth analysis of the remaining 13 flows that could have been of potential concern, the OFT identified three flows where there was a realistic prospect of a substantial lessening of competition: (i) London – York;
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(3)
calculate the sum of all suppliers’ annual UK turnover in this market;100
(4)
consider whether there are any reliable indications that the market size is likely to expand or contract significantly in the near future;101 and
(ii) London – Doncaster; and (iii) London – Durham. The aggregate coach revenues from these three routes was less than £1 million. The rail revenues were “in the tens of millions.” Although the merging parties had not requested that the OFT apply the de minimis exception, the OFT considered that although the affected markets were the three flows on which there was a reasonable prospect of a substantial lessening of competition, and that the rail revenues on these flows were significantly in excess of £10 million, the merger could nevertheless fall within the de minimis exception. The OFT reasoned that, as the theory of harm in this merger was that National Express might have an incentive to increase fares or reduce frequencies, services or service quality in relation to its coach services in an effort to divert passengers onto its rail franchise, the revenue resulting from rail services could be deducted from the aggregate annual value of the affected market, thereby resulting in a market with an aggregate annual value of less than £1 million. See also Anticipated acquisition by FMC corporation of the alginates business of ISP holdings (U.K.) Limited, OFT decision of 30 July 2008, in which the OFT found that the relevant market was the supply of alginates (a natural product derived from seaweed used to promote thickening, gelling, texture stabilisation and film formation) for a variety of applications including anti-reflux products – a market on which it found that there was a realistic prospect that the merger would result in a substantial lessening of competition. The value of the market for the supply of alginates for anti-reflux applications was less than £10 million. In addition, the vast majority of this market was accounted for by sales to one customer, Reckitt Benckiser, for its Gaviscon product. The OFT considered that the size of Reckitt Benckiser’s alginate purchases, and its ability to sponsor new entry or expansion by existing suppliers meant that Reckitt Benckiser was able to exercise substantial countervailing buyer power of a wholly different nature and magnitude to that of other customers in the market. Accordingly, the OFT considered that the “exceptionally differentiated position” of Reckitt Benckiser on this market meant that its purchases should not be considered together with those of other customers in calculating the affected market size for the purposes of the de minimis exception. On this basis, the OFT found the relevant sub-set of the market that was affected to be worth less than £2 million. See also Anticipated acquisition by Orbital Marketing Services Group Ltd of Ocean Park Ltd, OFT decision of 14 November 2008 (excluding the revenue of the two largest travel operator customers from the affected market on the basis of countervailing buyer power). 100 This may be different from the suppliers’ total UK turnover if they are active in several UK markets. It should also not include turnover generated outside the UK. 101 In Anticipated acquisition by Spectris plc of Lochard Ltd, OFT decision of 29 January 2009, the OFT considered the size of the market for airport noise management systems and maintenance services, and whether it was likely to expand in the near future to include operational services. The OFT received conflicting views during its market investigation and, on a cautious basis, included the value of the operations that were outsourced. However, this increased the total value of the future potential market to less than £2 million, even accounting for a 10% growth rate. In Anticipated acquisition by Prince Minerals Limited of Castle Colours Limited, OFT decision of 6 May 2009, the value of the market for the supply of non-calcined clay stains used to pigment the visible facing surfaces of bricks and tiles was less than £4 million based on 2007 sales, but customer demand was driven by demand for bricks and tiles, which, in turn, derived from demand for new buildings. The OFT received evidence that the demand for bricks and tiles was falling and that the value of the non-calcined clay stains market
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consider whether the size of the market in question fluctuates significantly as the value of contracts differs from year-to-year (the CMA will err on the side of caution when considering such markets and may consider the size of the market over several years).102
(e) Strength of the CMA’s concerns. The CMA will take into consideration the strength of its belief that the merger will result in a substantial lessening of competition in the market in question.103 In this regard, the CMA emphasises that, at its weakest, it may be under a duty to make a reference where the likelihood of a substantial lessening of competition resulting from the merger is ‘more than fanciful’ and may in some cases be significantly higher (i.e., the CMA may consider that the merger is likely to result in a substantial lessening of competition on the balance of probabilities).104 The CMA considers the strength of its concerns to be a relevant factor as there is no prevention of consumer detriment (a public benefit of a reference) if a benign merger is referred to Phase II.105 In practice, the CMA tends to conclude that the merger in question results in a substantial lessening of competition either on the basis of a likelihood that is below 50% but is above fanciful (i.e., the ‘may be the case’ standard) or, less frequently, on the balance of probabilities (i.e., more than 50% likely or at the ‘is the case’ standard of the Enterprise Act). The fact that the CMA considers that a merger is, on the balance of probabilities, likely to result in a substantial lessening of competition is a factor tending to point away from the use of the de minimis exception.106 However, by itself, this factor
was likely to fall to less than £2.5 million in 2009. The OFT considered this factor to be supportive of the application of the de minimis exception. 102 Exceptions and Remedies Guidance, para. 2.30. In Completed acquisition by Capita Group plc of IBS OPENSystems, OFT decision of 19 November 2008, Capita informed the OFT that the total size of the relevant market was £15-25 million, but argued that the OFT should apply the de minimis exception on the basis that the value of contracts expected to come up for renewal (which the OFT was concerned about) was only £1-2 million. The OFT stated that “as a general statement, in lumpy markets, the OFT considers it artificial to consider the value of contracts for one particular year only as the appropriate figure, as this may grossly inflate or underestimate the true value of the overall market” (para. 119). The OFT noted that although some customers were subject to a fixed-term contract, many others were “rolled over” and, as such, were potentially available for retender. However, the OFT stated that it was not in possession of data to quantify this value and could not rule out that higher levels of tendering could occur in the future. Therefore, the OFT referred the merger to the CC for a Phase II investigation. 103
Ibid., para. 2.31. Ibid. The CMA now tends to simply indicate that the merger gives rise to a realistic prospect of a substantial lessening of competition. 104
105
Ibid., para. 2.32. See, e.g., Anticipated acquisition by Orbital Marketing Services Group Ltd of Ocean Park Ltd, OFT decision of 14 November 2008, para. 79; Spectris/Lochard, supra, para. 127; Seniorlink Eldercare/Aid Call, supra, para. 101; Completed acquisition by Govia Limited of South Central Passenger Rail Franchise, OFT decision of 6 August 2009, para. 69; and Go North East/Arriva Northumbria, supra, para. 82. 106
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is not conclusive and the Authorities have applied the de minimis exception in several cases in which it concluded that the merger was ‘more likely than not’ to result in a substantial lessening of competition.107 Nevertheless, the size of the market in these cases has tended to be small, and typically below the £3 million indicative threshold.108 As of 1 January 2016, the largest market in respect of which the Authorities have applied the de minimis exception, despite a finding that the merger was ‘more likely than not’ to result in a substantial lessening of competition is £4 million (therefore, not significantly in excess of the £3 million indicative threshold).109 (f) Magnitude of the competition lost. In addition to the likelihood that a merger will result in a substantial lessening of competition, the CMA will consider how ‘substantial’ the lessening of competition is likely to be.110 The CMA’s assessment of the magnitude of competition that could be lost by a merger essentially acts as a proxy for the extent of the price effect (e.g., a 5% or 10% price increase) or the non-price effect that is likely to result from the merger in question.111 In this regard, even where the CMA has concluded that there is a realistic prospect that the merger will result in a substantial lessening of competition, it will take into consideration any evidence that competition between the parties was “more limited”112 or that there are factors that would be likely to constrain a price increase.113
107
See, e.g., FMC Corporation/ISP Holdings, supra; Orbital Marketing/Ocean Park, supra; Spectris/Lochard, supra; Seniorlink Eldercare/Aid Call, supra. Note that the Authorities have tended not to undertake this level of analysis where the relevant markets in question had a value of less than £3 million. 108 In FMC Corporation/ISP Holdings, supra, the market size was considered to be less than £2 million once the OFT had removed sales to Reckitt Benckiser, which the OFT considered to have countervailing buyer power (para. 71); in Spectris/Lochard, supra, the market size was less than £1 million, and even on a more conservative basis adding in the value of operational services was still below £2 million (para. 126); in Seniorlink Eldercare/Aid Call, the market size was between £2 million and £3 million (para. 100); in Govia/South Central Passenger Rail Franchise, supra, the market size was £3.7 million (para. 68); in Go North East/Arriva Northumbria, supra, the market size was £1.7 million (para. 81). 109 Orbital Marketing/Ocean Park, supra, para. 78. 110 Exceptions and Remedies Guidance, para. 2.34. In Anticipated acquisition by BOC Limited of the packaged chlorine business and assets carried on by Ineos Chlor Limited, OFT decision of 29 May 2008, the OFT considered that the merger would result in the removal of the most important competitive dynamic in the market (the competition between BOC and Ineos) and arguably the maverick force in the market whose presence may have prevented pre-merger coordination. The OFT also considered that the merger may create the conditions for coordinated effects. The OFT, therefore, considered that the impact of the merger would be “particularly significant” (para. 126). 111 Ibid., para. 2.35. 112
Ibid., footnote 22. In Orbital Marketing/Ocean Park, supra, the OFT noted that the merger would result in a reduction in the number of suppliers of bulk travel brochure distribution from two to one. However, the OFT also noted that actual and potential competition between the parties had been limited and that there had been only a small number of instances of switching between the parties in the few years prior to the merger. As a result, the OFT stated that despite the potential for competition, customers were not in fact using competition to obtain better prices. As such, the magnitude of
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The magnitude of competition lost as the result of a merger is a key factor in its analysis and the CMA has rarely applied the de minimis exception where it has found that the merger effects are likely to be significant. However, in certain cases where the merger effects were expected to be significant, the CMA has utilised the de minimis exception on the basis that the duration of the anti-competitive merger effects would be limited.114 The Exceptions and Remedies Guidance provides the example of mergers between the only significant competitors in a market (reducing the number of competitors from two to one) and mergers reducing the number of competitors from three to two, as examples of transactions that would, absent countervailing competitive constraints, typically be expected to lead to large price increases/non-price effects.115 This Guidance also highlights that the CMA will take into consideration evidence of coordination between competitors (including breaches of the Chapter I prohibition under the Competition Act 1998) and whether the merger may increase the impact of any coordination, including
competition lost as a result of the merger was not what would normally be expected from a two to one merger and was more likely to be in the “lower to mid range”, weighing in favour of exercising the de minimis exception (paras. 80-82). 113
Ibid., para. 2.35. In Govia/South Central Passenger Rail Franchise, supra, the OFT applied the de minimis exception for a market valued at £3.7 million and in respect of which the OFT considered that the merger would result in a substantial lessening of competition on the balance of probabilities. In doing so, it emphasised that rail franchise awards effectively amounted to a medium-term outsourcing agreement by the government, which was subject to regulation. The OFT stated that whilst this was “by no means sufficient to remove any competition concerns in principle, the degree of regulation and other generic features of rail franchise awards relative to general private mergers and acquisitions activity do place limits on the scale and durability of merger effects on overlap flows” (para. 70). In Completed acquisition by Idox plc of Grantfinder Limited, OFT decision of 2 September 2010, the OFT concluded that, for certain activities, the merger resulted in a reduction in the number of suppliers of various paid-for grants trust funding information services from three to two and that the parties were each other’s closest competitor. However, the OFT found that there was more of a constraint from providers in other service areas and there was an expectation that some degree of constraint would be exercised by free providers, at least for certain customers. In addition, there was relatively little evidence of direct competitive interaction (e.g., switching) between the parties. On this basis, the OFT considered that the merger would not be expected to result in as significant a loss of competition as other three to two mergers. In Seniorlink Eldercare/Aid Call, supra, the OFT considered that the merger would result in a reduction from two to one in the number of major suppliers of pendant alarms in Northern Ireland. The OFT recognised that this would normally present a “real possibility” of a significant price increase or worsening of product offering. However, the OFT’s concerns were “somewhat lessened” by the fact that competition between the parties pre-merger was muted and the existence of a “reputational constraint” may have acted to inhibit the parties from increasing their prices or worsening other aspects of their service. For these reasons, the OFT concluded that the magnitude of competition lost as a result of the merger would be significantly less than might normally be expected in a two to one merger. 114 See, e.g., Spectris/Lochard, supra; FMC Corporation/ISP Holdings, supra. Both of these mergers are considered in more detail below in relation to the durability of competition concerns. 115 Exceptions and Remedies Guidance, para. 2.36.
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whether a substantial proportion of the likely detriment would be suffered by vulnerable customers.116 (g) Durability. Having considered how likely it is that the merger will result in a substantial lessening of competition (strength of concerns) and how significant the impact on competition is likely to be (magnitude of lost competition), the CMA will consider how long the merger effect is likely to last on the market in question.117 In this respect, the CMA may consider the extent of barriers to entry into the market and how durable those are likely to be.118 In cases where the CMA may not be sufficiently confident that entry would be timely, likely and sufficient so as to prevent the merger resulting in a substantial lessening of competition, it may nevertheless consider that the barriers to entry are such that entry will eventually occur (e.g., after a two year period),119 which could reduce the overall impact of the substantial lessening of competition that has been identified.
116 117 118
Ibid., para. 2.37. Ibid., para. 2.38.
Ibid., para. 2.39. Ibid. See, e.g., Completed acquisition by WGSN Inc. of Stylesight Inc., CMA decision of 25 June 2014, paras. 121 and 122 (the parties pointed to examples of recent entry and planned expansion of competitors, whilst the CMA noted the “increasingly dynamic” nature of the market); Anticipated acquisition by Tattersalls Limited of the bloodstock auctioneering business of Brightwells Limited, CMA decision of 15 September 2015, para. 210 (the CMA noted that the barriers to expansion were lower than the barriers to entry as a factor pointing away from durability being a concern); Anticipated acquisition by Xchanging Holdings Limited of Total Objects Limited, CMA decision of 9 December 2014, para. 210 (the CMA noted that there were other constraints in the market and that this indicated that the harm may be of short duration); Anticipated acquisition by Intercontinental Exchange Inc of a majority stake in the gas, derivatives and biomass operations of APX-ENDEX Holding B.V., OFT decision of 28 February 2013, para. 170 (the OFT noted that since the notification of the merger a competitor had entered the market and another was planning to do so, which indicated that the duration of the harm was likely to be less than two years); Completed acquisition by Sports Universal Process S.A.S. of Prozone Group Limited, OFT decision of 4 October 2011, para. 78 (the OFT although the merger resulted in a reduction of competitors from two to one, one of the factors in favour of exercising the de minimis exception was that contracts in the industry were typically for three years so customers would have the opportunity to find alternative suppliers and that it was an industry in which there was technological change and so advances could be expected); Anticipated acquisition by Spectris plc of Lochard Ltd, OFT decision of 29 January 2009, para. 129 (the OFT considered it more likely than not that the merger would result in a substantial lessening of competition, and that the magnitude of lost competition would be significant. There were also barriers to entering the market in terms of material costs, particularly in relation to the size of the market. However, the OFT considered that there was likely to be some entry in the next three years and therefore that the duration of harm arising from the transaction would be limited). Cf Completed acquisition by Nufarm Limited of AH Marks Holdings Limited, OFT decision of 29 August 2008 (the affected market size was £3-8 million, the OFT considered it more likely than not that the merger would result in a substantial lessening of competition, and the magnitude of lost competition was expected to be significant. The OFT considered that whilst the likelihood of entry would not counter the expected price increase, entry could occur in the short to medium term, although the OFT was unable to state with any degree of certainty that the adverse 119
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(h) Replicability. The CMA will be less likely to utilise the de minimis exception where it believes that the merger in question is one of a potentially large number of similar mergers that could be replicated across a particular industry sector.120 Such potential replication of transactions in an industry sector could cumulatively lead to “aggregate customer harm far in excess of the costs of referring the individual problematic merger at hand.”121 This issue has arisen, in particular, in relation to acquisitions relating to small bus companies and car dealerships. Given the nature of many of these transactions, and the fact that the markets are often below £3 million in size, the CMA will typically look to apply the de minimis exception to these cases but will assess the likelihood of replicability.122 (i) Consideration of wider implications. The CMA will take account of the wider implications of any decision that it takes to exercise the de minimis exception on its treatment of future cases.123 In addition to replicability, the CMA will consider precedential implications. In this regard, the Exceptions and Remedies Guidance states that the application of the de minimis exception in one case should mean that the exception could also be utilised in analogous cases in the same sector where competitive conditions are comparable,124 although the CMA will take into consideration multiple mergers in the same sector resulting in aggregate customer harm. The CMA will also consider the economic rationale for a transaction when considering whether to apply the
effects would not persist beyond two years. On this basis, the OFT did not apply the de minimis exception). 120 Exceptions and Remedies Guidance, para. 2.40. 121 Ibid., para. 2.42. 122
See, e.g., Completed acquisition by Arriva Passenger Services Limited of the remainder of the entire share capital of Centrebus Holdings Limited, CMA decision of 6 May 2014, para. 123; Completed acquisition by the Diamond Bus Company Limited of the bus business of Firstgroup plc in Redditch and Kidderminster, OFT decision of 23 August 2013, para. 136; Anticipated acquisition by Greater Manchester Buses (South) Limited, a wholly owned subsidiary of Stagecoach plc, of Bluebird Bus & Coach, OFT decision of 22 February 2013, para. 96; Completed acquisition by Arriva Midlands North Limited of the business and assets of Liyell Limited trading as Midland, OFT decision of 21 January 2013, para. 77; Completed acquisition by Midland General Omnibus Limited of the commercial bus services of Felix Bus Services Limited, OFT decision of 30 May 2012, paras. 50-51. In these cases, the Authorities were mindful of the risk that applying the de minimis exception would give rise to an expectation that it would be used in future cases, and noted the CC’s recommendation that the OFT should exercise caution in applying the de minimis exception in bus mergers, but weighed against the other factors to be considered, the CMA considered that a reference to Phase II would not be justified. See also, Completed acquisition by Ridgeway Garages (Newbury) Limited of Parkview Skoda, OFT decision of 21 March 2014, para. 75; Completed acquisition by Lookers Group plc of Shields Land Rover, OFT decision of 9 December 2013. In these cases, the OFT noted that using the de minimis exception might give rise to an expectation that it could be used in similar, future cases but considered that this was a small risk given the localised nature of franchised dealerships. The OFT stated that it would monitor mergers in this sector and intervene where appropriate. 123 124
Exceptions and Remedies Guidance, para. 2.40. Ibid.
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de minimis exception.125 The Exceptions and Remedies Guidance states that the CMA will be less likely to apply the de minimis exception where there is evidence that the merger in question is “solely or primarily motivated by the acquisition of market power.”126
7.4.4
Availability of Undertakings in Lieu
The CMA will not apply the de minimis exception where clear-cut127 undertakings are available and could be offered by the parties to resolve the competition concerns identified during the Phase I investigation.128 The Exceptions and Remedies Guidance explains that this is for the following four reasons:129 (1)
The aim of the de minimis exception is to avoid the cost of a reference where it would be disproportionate to the harm identified. Undertakings avoid both the consumer harm and the full cost of the reference.
(2)
Merging parties should remain “incentivised” to offer clear-cut undertakings or to design transactions so as to avoid giving rise to consumer harm in the first instance (e.g., by way of ‘fix-it-first’ solutions).
(3)
The costs of a reference (in a case where clear-cut undertakings are available) would be outweighed by the long-run aggregated benefit of remedial action at Phase I.130
125
Ibid., para. 2.43. See, e.g., Midland/Felix Bus, supra, where one of the factors that the OFT pointed towards exercising the de minimis exception, despite the fact that the merger resulted in a reduction of competitors from two to one on the affected flows, was that Felix Bus was likely to exit (for strategic reasons) the market in the short term (on the balance of probabilities standard). 126 Ibid. See, e.g., BOC/Ineos, supra, OFT decision of 29 May 2008, para. 125, in which the OFT stated that “there is a good argument in this case that acquisition of market power is an important driver of the transaction, if not the principal one”. The OFT went on to state that “the issue of deterrence is significant, because there is benefit in the merger regime deterring transactions whose rationale, and expected effect, is indeed (enhanced) market power”; Stagecoach/Bluebird, supra, para. 97, where the OFT noted that the rationale for the merger was to expand into North Manchester but that internal documents indicated that synergies would derive from merging certain services and potentially removing a bus from the route. 127
The “clear-cut” standard is considered in Chapter 16. Exceptions and Remedies Guidance, para. 2.21. See, e.g., Completed acquisition by General Healthcare Group of control of four Abbey hospitals and de facto control over Transform Holdings Limited, previously part of the Covenant Healthcare Group, OFT decision of 14 September 2010, the OFT did not apply the de minimis exception in a market worth less than £4 million on the ground that it was open to the parties to divest the Abbey Carrick Glen hospital (which the parties ultimately offered to divest to avoid a reference). 129 Exceptions and Remedies Guidance, para. 2.21. 130 See Completed acquisition by Dunfermline Press Limited of the Berkshire regional newspapers business from Trinity Mirror plc, OFT decision of 4 February 2008, para. 110. 128
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As the CMA does not have the power to impose undertakings at Phase I, it is for the merging parties to decide whether to offer undertakings or to pursue their case at Phase II. Consequently, whether or not the CMA decides to apply the de minimis exception, this does not remove the parties’ ability to offer acceptable undertakings, thereby avoiding a reference.
The CMA will take note of the following considerations when determining whether, in principle, clear-cut undertakings are available. (1)
The CMA will take a conservative approach to the availability of clear-cut undertakings.131 If there is any doubt as to whether such undertakings are available, the CMA will consider that the standard has not been met (i.e., the de minimis exception could be applied).
(2)
The CMA will consider whether clear-cut undertakings are available in principle at the time of considering the de minimis exception (i.e., the merging parties do not need to have actually offered any undertakings).132 The question of whether undertakings have been offered will be considered separately133 and after the CMA’s consideration of whether to apply the de minimis exception.134
131
Exceptions and Remedies Guidance, para. 2.27. See, e.g., Capita/IBS OPENSystems, supra, the OFT was unable to conclude that the merger was a clear candidate for undertakings in lieu and raised concerns as to whether a divestment remedy of IBS’ revenue and benefit software services business would be clearly and effectively severable from the remainder of IBS. The OFT indicated that it would take a cautious view and did not rule out the applicability of the de minimis exception simply on the ground that undertakings in lieu were available. 132 Exceptions and Remedies Guidance, para. 2.22. 133 Ibid., para. 2.19. Sections 22 and 33 of the Enterprise Act require the CMA, first, to consider whether it is under a duty to refer the merger and, if so, it will consider whether any exceptions to the duty to refer are available. If they are not, the CMA will go on to consider whether the parties have offered any undertakings in lieu of reference. 134 Exceptions and Remedies Guidance, para. 2.22. In 2007, the OFT decided two cases on the same day, both of which considered the question of whether the OFT could (or should) accept UILs where a merger might qualify for the de minimis exception (Stagecoach/East Midlands, supra, and Dunfermline Press/Trinity Mirror, supra). In those cases, the OFT stated that the Enterprise Act required it to decide whether the merger in question qualifies for the de minimis exception before deciding whether to consider UILs. The OFT explained that “[t]his sequence is required under the [Enterprise] Act because the question of whether to accept undertakings in lieu of reference that have been offered by the parties arises only once the OFT has decided that it would actually, otherwise, be under a duty to refer the merger to the Competition Commission” (Stagecoach/East Midlands, para. 60). This raised the question of whether the OFT could decide not to apply the de minimis exception where clear-cut undertakings were available. The OFT reasoned that “the sequence of questions that the OFT is required to ask itself under the [Enterprise] Act does not limit the scope of the OFT’s discretion under section 22(2)(a) to decide not to make a reference to the Competition Commission based on the de minimis exception. The Act leaves open to the OFT the considerations it should take into account in exercising that discretion” (Stagecoach/East Midlands, para. 61). In addition, the OFT stated that “[t]he OFT considers it proportionate to make a reference, by declining to exercise its de minimis exception, where clear-cut undertakings in lieu are, in principle, clearly available to the parties to avoid
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(3)
Cases that are, in principle, suitable for resolution by undertakings (and therefore are not suitable for the de minimis exception) are those where the part of the transaction that raises competition concerns can be divested to an independent third party.135
(4)
By contrast, and in accordance with its policy on undertakings, the Exceptions and Remedies Guidance states that the CMA will not consider that undertakings are available in principle where they would be tantamount to a prohibition of the merger.136 The Guidance explains that “it is not the role of the undertakings in lieu process effectively to invite parties to abandon their own transactions.”137 Similarly, the CMA will not consider that undertakings are available in principle where the minimum structural divestment that would be
a reference in the case under consideration” (Stagecoach/East Midlands, para. 63). Indeed, the OFT stated that it would evaluate whether UILs were, in principle, clearly available even where no UILs had in fact been offered by the merging parties. 135
Exceptions and Remedies Guidance, para. 2.24. See, e.g., Dunfermline Press/Trinity Mirror, supra, in which the OFT concluded that Dunfermline could divest either one of the target’s or one of its own newspaper titles to remedy the competition concerns. Indeed, the OFT stated that “this case appears to fit the classical profile of the OFT’s undertakings in lieu cases: a small proportion of a larger benign or even beneficial transaction raises concerns, and those concerns can be addressed structurally by means of a divestiture package” (para. 115). In Completed acquisition by Global Radio UK Limited of GCap Media plc, OFT decision of 8 August 2008, the OFT rejected the application of the de minimis exception on the ground that it was open to Global to divest either the Heart station or the Galaxy station in the West Midlands or a package of all of the GCap stations in each of the East and West Midlands, thereby removing the competition concerns. 136 Exceptions and Remedies Guidance, para. 2.25. See, e.g., Completed acquisition by Midland General Omnibus Limited of the commercial bus services of Felix Bus Services Limited, OFT decision of 30 May 2012 (where the OFT found that the merger resulted in a reduction of competitors from two to one on several flows between Ilkeston and Derby and that the only available structural UIL would have been a reversal of the transaction); Completed acquisition by the Diamond Bus Company Limited of the bus business of Firstgroup plc in Redditch and Kidderminster, OFT decision of 23 August 2013 (where the OFT considered that given the SLC concerns on multiple routes, which represented a substantial proportion of the target’s total revenue, and potentially the need for a depot and buses to operate on these routes, a clear-cut remedy would have involved divesting such a substantial proportion of the acquired business that this would have been tantamount to prohibition); Completed acquisition by Arriva Midlands North Limited of the business and assets of Liyell Limited trading as Midland, OFT decision of 21 January 2013 (where the OFT considered the only structural remedy to be a reversal of the transaction); Anticipated acquisition by Greater Manchester Buses (South) Limited, a wholly owned subsidiary of Stagecoach plc, of Bluebird Bus & Coach, OFT decision of 22 February 2013, paras. 8185 (where the OFT found that UILs were not in principle available on the basis that Stagecoach’s internal documents indicated that the principal flow on which the OFT had found an SLC was key to the rationale for the transaction and was responsible for most of the anticipated synergies). 137 Ibid., para. 2.25.
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required to ensure an effective remedy would be “wholly disproportionate in relation to the concerns identified.”138
7.5
RELEVANT CUSTOMER BENEFITS 7.5.1
Introduction
Under the Enterprise Act, in respect of a merger that has resulted, or may be expected to result, in a substantial lessening of competition, the CMA may decide not to make a reference if it believes that any relevant customer benefits in relation to the creation of the relevant merger situation concerned outweigh the substantial lessening of competition expected to result from the merger and any adverse effects arising from that substantial lessening of competition.139 Section 30(1) of the Enterprise Act states that relevant customer benefits include the following (which, from an economic perspective, are simply merger-specific efficiencies): (1)
lower prices, higher quality or greater choice of goods or services in any market in the UK, irrespective of the market on which substantial lessening of competition concerns have arisen; or
(2)
greater innovation in relation to such goods or services.
7.5.2
Relevant Customer Benefits versus Merger-Specific Efficiencies
Notwithstanding the fact that customer benefits are, in principle, simply another name for efficiencies, merger assessment in the UK distinguishes between “relevant customer benefits” and “rivalry-enhancing efficiencies.” This distinction is a fairly tortuous (legal) one but is of practical importance as the exception to the duty to refer applies to “relevant customer benefits” but not to “efficiencies”. In practice, there are very few efficiencies that benefit customers but do not also enhance rivalry. Technically speaking, “efficiencies” may be taken into consideration by the CMA in its competitive assessment, whilst “relevant customer benefits” may be taken into consideration only after the competitive assessment and at the stage of considering exceptions to the duty to refer.140 In a case that considered efficiencies in detail, the OFT explained this situation as follows:
138
Ibid., para. 2.26. See, e.g., General Healthcare/Covenant Healthcare, supra, the OFT considered that, in addition to the possibility of offering to divest Abbey Carrick Glen hospital in Ayr, Scotland, as a clear-cut undertaking, the parties could have offered to divest BMI Ross Hall, a hospital owned by General Healthcare in the same catchment area. However, the OFT noted that the divestment of BMI Ross Hall would have raised questions about the “proportionality of the remedy relative to the competition concerns identified” (para. 118, footnote 37). 139 Sections 22(2)(b) and 33(2)(c), Enterprise Act. 140 Exceptions and Remedies, paras. 4.3 and 4.4. Paragraph 4.3, footnote 36 states that “[a] given efficiency may potentially be relevant either as a means of preventing a substantial lessening of competition from occurring, through its impact on rivalry in the market, or as a relevant customer
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The Duty to Refer and Exceptions
“[e]fficiencies affecting rivalry are taken into account at the stage in which the OFT is assessing whether there is a realistic prospect that the proposed merger would result in a SLC. Such efficiencies may be sufficient to prevent any SLC from arising in the market being assessed, or the claimed efficiency may mitigate the severity of the SLC. Relevant customer benefits, on the other hand, may be taken into account once the OFT has found that the proposed merger raises a realistic prospect of a SLC and are potentially evaluated as an exception to the OFT’s duty to refer a merger.”141
This explains the dichotomy driven by the stage of the CMA’s analysis at which rivalryenhancing efficiencies and customer benefits can be taken into account. However, it can obscure the fact that there is significant substantive overlap between the two concepts. For example, most cost savings and product improvements that benefit customers of the merged firm directly, via lower prices and higher quality or innovation, will also place appropriate pressure on rivals to respond to those efficiencies as they seek to offer those customers a better deal and retain their own. In this sense, the efficiencies can be said to be both “customer benefits” and “rivalry-enhancing” efficiencies. In relatively few instances will an efficiency benefit customers without also lending itself at least to an argument that it will pressurise rivals to compete harder.142 This distinction was tested in Asda/Netto, where the OFT stated that the “key question” was whether the claimed efficiency would impact on rivalry or whether it would act as a customer benefit.143 The OFT found that most of the claimed efficiencies were indeed rivalry-enhancing and therefore cognisable, subject to evidentiary thresholds, at the competitive assessment stage. These included submissions that the merger would result in procurement savings through increased purchasing volumes on Asda’s terms, and that some suppliers would benefit from a single delivery destination instead of two, premerger.144 The OFT considered that such marginal (short-run variable) cost savings tend to stimulate competition and are more likely to be passed on in the form of lower prices. The OFT considered that cost savings should be considered as efficiencies, because cost savings would reduce short-run variable costs and, in turn, prices to customers, thereby intensifying competition between Asda and its competitors.145 The OFT also considered that the parties’ efficiency arguments based on (a) capacity expansion and increased fascia in the market for mid-size stores and (b) likely competitor reactions to Asda’s presence were also, in principle, (at least arguably)
benefit to the extent that it results in lower prices, higher quality, greater choice or greater innovation for customers”. 141 Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 23 September 2010, paras. 70 and 71. 142 See, e.g., Completed acquisition by Babcock International Group plc of Devonport Management Limited, OFT decision of 20 August 2007, which is discussed below. 143 Ibid., para. 69. 144 145
Asda/Netto, supra, para. 65. Ibid., para. 72.
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rivalry-enhancing arguments that were plausible but did not meet the “compelling evidence” standard required.146
7.5.3
Relevant Customer Benefits and Undertakings
The CMA cannot ‘mix and match’ exceptions to the duty to refer.147 Therefore, it cannot accept UILs or apply the de minimis exception for some markets and accept relevant customer benefits in relation to others.148 The logic behind this position is that, for this exception to apply, the relevant customer benefits must apply to the entire relevant merger situation and not just a part of it.149 This position is reflected in the Exceptions and Remedies Guidance, which states that “relevant customer benefits are an exception to the duty to refer… where they outweigh the substantial lessening of competition and any adverse effects of the substantial lessening of competition from the merger as a whole” (emphasis added).150 This limits the utility of the exception and perhaps explains why it has, to date, never been outcome-determinative in any case.
7.5.4
Evidential Requirements
For the CMA to consider applying this exception, the relevant customer benefits must be clear and the evidence in support of them must be compelling.151 In this regard, the Exceptions and Remedies Guidance states that merging parties must be able to produce “detailed and verifiable evidence” in support of the claimed customer benefits.152 The CMA considers that such evidentiary thresholds reflect the CMA’s status as a Phase I authority applying a discretionary exception to the duty to refer and that these thresholds are analogous to the evidentiary requirements applicable to the existence of efficiencies that would be sufficient to prevent a realistic prospect of a substantial lessening of competition.153 In determining whether to apply this exception, the CMA will apply a sliding scale: having regard to the magnitude of the claimed benefits and the probability of them occurring and weighing this against the magnitude of the 146 Ibid., para. 111. The OFT referred, in this context, to the asymmetry of evidence that is required in these circumstances. Due to the OFT’s low reference threshold, considerably more (compelling) evidence might be required to show that a merger does not raise competition concerns than is required to show that it gives rise to a realistic prospect of a substantial lessening of competition. 147 Exceptions and Remedies Guidance, para. 4.4. See also, Asda/Netto, supra, para. 107. 148 See, e.g., Asda/Netto, supra, and Global/GCap, supra. In both of these cases, the OFT was unable to clear the mergers on the grounds of efficiencies (as part of its competitive assessment) and was unable to apply the relevant customer benefits exception to parts of the transaction because the parties had offered undertakings in lieu, which were sufficient to avoid a reference decision. 149 Sections 22(2)(b) and 33(2)(c) of the Enterprise Act state that the CMA may decide not to refer a merger if it believes that “any relevant customer benefits in relation to the creation of the relevant merger situation concerned outweigh the substantial lessening of competition concerned and any adverse effects of the substantial lessening of competition concerned” (emphasis added). 150 Exceptions and Remedies Guidance, para. 4.4. 151 Ibid., para. 4.9. 152 153
Ibid. Ibid., para. 4.10, footnote 40.
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The Duty to Refer and Exceptions
competition concerns and the probability of them occurring.154 The Exceptions and Remedies Guidance clarifies that the provision, by merging parties, of evidence in relation to any relevant customer benefits in no way implies the existence of a substantial lessening of competition (i.e., parties should not feel reticent in making arguments regarding customer benefits on the grounds that they believe the CMA will draw negative inferences from doing so).155
7.5.5
Relevant Customer Benefits in Hospital Mergers
In accordance with section 79(5) of the Health and Social Care Act 2012, Monitor must, as soon as reasonably practicable after having been notified by the CMA of a merger involving an NHS Foundation Trust that it is investigating, provide the CMA with advice in relation to the relevant customer benefits, if any, resulting from the merger for people who use NHS health care services and any other matters that Monitor considers appropriate.156 Monitor has provided advice on relevant customer benefits to the OFT and the CMA in relation to several mergers, including Royal Bournemouth/Poole,157 Ashford St Peters/Royal Surrey,158 UCLH/Royal Free/Doctors Laboratory,159 and Frimley Park/Heatherwood and Wexham.160
7.5.6
The Authorities’ Decisional Practice
As of 1 January 2016, the Authorities have not exercised their discretion not to refer a merger on the ground of relevant customer benefits. However, this issue has been considered at length in several decisions. (1)
154 155
In Global/GCap, Global Radio UK Limited (“Global”), a privately-owned commercial radio group, acquired GCap Media plc (“GCap”), a commercial radio group owning 71 local analogue radio licences and one digital-only station.161 In brief, the OFT found that the parties were the top two competitive choices for a substantial proportion of advertising customers running regional radio advertising campaigns in the East and West Midlands and that there was a realistic prospect of a substantial lessening of competition in those regions. In London, the parties’ radio stations were not particularly close competitors Ibid., para. 4.10. Ibid., para. 4.11.
156
See also, CMA guidance on the review of NHS mergers – CMA29, July 2014. Anticipated merger between The Royal Bournemouth and Christchurch Hospitals NHS Foundation Trust and Poole Hospital NHS Foundation Trust, OFT decision of 8 January 2013. 158 Anticipated merger of Ashford and St Peter’s Hospitals NHS Foundation Trust and Royal Surrey County Hospital NHS Foundation Trust, CMA decision of 18 February 2015. 157
159 Anticipated pathology joint venture between University College London Hospitals NHS Foundation Trust, Royal Free London NHS Foundation Trust and the Doctors Laboratory Limited, OFT decision of 8 November 2013. 160 Anticipated acquisition of Heatherwood and Wexham Park Hospitals NHS Foundation Trust by Frimley Park Hospital NHS Foundation Trust, CMA decision of 3 June 2014. 161 Global/GCap, supra.
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and attracted different customer demographics. The parties strongly argued that the OFT should take account of the merger’s efficiency gains and that regional advertisers in London and the Midlands would be likely to obtain quantifiable benefits outweighing any possible competitive concerns. The OFT stated that the relevant customer benefits exception to the duty to refer requires the OFT to consider that “any relevant customer benefits in relation to the relevant merger situation concerned outweigh all the findings of a substantial lessening of competition and any adverse effects resulting from them. It is not possible under the Act for the OFT to exercise its discretion in relation to one particular finding of a substantial lessening of competition (in market X) but then to make a reference in respect of another substantial lessening of competition (in market Y). The OFT refers relevant merger situations to the Competition Commission, not individual markets on which it has found a substantial lessening of competition – and the customer benefit must therefore operate in relation to the merger situation as a whole.”162 In this case, whilst the OFT considered that, in theory, the overall claimed customer benefits in respect of the merger could outweigh the competition concerns arising in the East and West Midlands, it lacked clear and compelling evidence that this was the case.163 However, the OFT considered that the efficiencies evidenced in London were sufficient to “tip the balance” of the competitive assessment in favour of clearance for that market. This left unresolved concerns in the Midlands, in respect of which the OFT accepted UILs. (2)
162
In Babcock/Devonport, Babcock International Group (“Babcock”), active in the defence and nuclear sectors and the owner of the Rosyth Royal Dockyard, acquired Devonport Management Limited (“Devonport”), which managed the Devonport Royal Dockyard.164 The OFT found that this acquisition gave rise to a reduction in the number of suppliers of in-service support for submarines from two to one and from three to two in relation to surface warship refitting and maintenance. Nevertheless, the OFT did not conclude that the acquisition resulted in a realistic prospect of a substantial lessening of competition, principally on the grounds that: (i) due to the way in which these services were purchased, there was not much evidence of pre-merger competition and therefore is was not clear that the merger resulted in a substantial lessening of competition; and (ii) the sole (monopsonist) customer for the merged firm’s services was the Ministry of Defence (“MoD”), which actively supported the merger. However, in relation to relevant customer benefits, the OFT stated that even if it had been under a duty to refer the transaction, it would have exercised its discretion not to do so as a result of relevant customer benefits. In this
Ibid., para. 246. Ibid., para. 248. 164 Completed acquisition by Babcock International Group plc of Devonport Management Limited, OFT decision of 20 August 2007. 163
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The Duty to Refer and Exceptions
regard, the MoD supported the merger because it provided benefits, not only in strategic terms, but also resulted in better value for money for the MoD. The OFT stated as follows: “Although in the overwhelming majority of cases the customer benefits exception is subject to strict evidentiary standards due to information asymmetries and the speculative nature of such claims, in this case such claims are endorsed by the only customer: in other words, the MoD’s express belief is that it will be better off in procurement cost terms with the merger than without. These exceptional circumstances make it appropriate to invoke the customer benefits exception in the event that the OFT were otherwise under a duty to refer.”165
(3)
In Royal Bournemouth/Poole, the parties submitted that there were four types of customer benefit that could not be achieved without the merger: (i) improved quality and safety of services; (ii) delivery of financial savings through economies of scale; (iii) improved scope of services; and (iv) enhanced ability to raise capital.166 The parties argued that the improvement in services would be achieved through the reconfiguration of five services (maternity, haematology, emergency department, acute general surgery and cardiology). Monitor advised the OFT that some benefits might accrue to patients in the form of higher quality maternity and cardiology services, but that it would not be appropriate to treat the other claimed benefits as relevant customer benefits for the purposes of the OFT’s assessment, partly because the parties had not provided sufficiently detailed evidence to support their arguments (e.g., in relation to financial savings, the ability to raise capital, etc). Accordingly, the OFT was not satisfied that the relevant customer benefits put forward by the parties were sufficient to outweigh the competition concerns that were identified.
(4)
In Ashford/St Peters, the parties argued that there would be substantial customer benefits arising from the merger of these two Foundation Trusts and submitted a benefits case to Monitor.167 Monitor advised the CMA that three treatment areas should be taken into account as relevant customer benefits: (i) gastroenterology; (ii) stroke; and (iii) interventional radiology.168 Monitor did not find relevant customer benefits in a number of other areas put forward by the parties.169 The CMA considered that the
165 166
Ibid., para. 76.
Anticipated merger between The Royal Bournemouth and Christchurch Hospitals NHS Foundation Trust and Poole Hospital NHS Foundation Trust, OFT decision of 8 January 2013, paras. 144 et seq. 167 Anticipated merger of Ashford and St Peter’s Hospitals NHS Foundation Trust and Royal Surrey County Hospital NHS Foundation Trust, CMA decision of 18 February 2015, paras. 170 et seq. 168 These benefits included the establishment of a shared cross-site rota for consultants in relation to gastroenterology, stroke and interventional radiology to deliver care out of hours and at weekends, as well as earlier consultant review. 169 These included seven day working rota benefits in diabetes and neurology, the development of a cancer centre at Ashford hospital, and neonatal cot management.
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benefits identified by Monitor would result in a higher quality of service that was achievable in a shorter timescale than would be the case by any alternative means (e.g., independently or in partnership). In relation to whether the relevant customer benefits outweighed the identified SLCs, the CMA considered the appropriateness of a quantitative and a qualitative assessment. In this regard, the parties suggested a framework for assessing the SLCs against the relevant customer benefits analogous to that used for considering the application of the de minimis exception (i.e., considering the magnitude of the benefits and the harm, the likelihood of realisation, timing, and duration of the benefit/harm). The CMA considered that many of these factors were relevant to its consideration of relevant customer benefits, but had some concerns with this approach, including the fact that the parties had assumed that the impact of the benefits would be felt on an ongoing and unlimited basis whereas the impact of the SLC would be limited in duration. Overall, the CMA did not consider that this type of quantitative framework was capable of accurately representing the factors to be considered when weighing relevant customer benefits against SLCs. Adopting an approach based on assessing the nature and extent of the benefits on the basis of the evidence available, the CMA considered that the size (in terms of patient numbers) and significance (in terms of proportion of total elective activity) of the specialities in which it found a realistic prospect of an SLC was far greater than the number of patients identified by Monitor as benefiting from relevant customer benefits.
7.6
MERGERS INSUFFICIENTLY ADVANCED OR UNLIKELY TO PROCEED
Section 33(2)(b) of the Enterprise Act provides that, in respect of anticipated mergers, the CMA is not under a duty to make a reference to Phase II where the arrangements concerned are insufficiently advanced or are insufficiently likely to proceed to justify such a reference. This section was included in the Enterprise Act to ensure that the Authorities would be able to give merging parties confidential guidance/informal advice without being under a duty to refer the merger to Phase II when it appeared that the reference test would be met. However, confidential guidance is no longer available to merging parties. Informal advice is available in certain, limited, circumstances, but only as regards mergers in respect of which the parties have a good faith intention to proceed.170 Therefore, this exception to the duty to refer is unlikely to be invoked in the future. As of 1 January 2016, there have been no mergers that the Authorities have decided not to refer to Phase II on the grounds that they were insufficiently advanced or unlikely to proceed. However, the Exceptions and Remedies Guidance suggests that this exception might be appropriate in cases where commercial discussions between the merging parties are still on-going at the time of the CMA’s investigation and there is some ambiguity as to exactly how the transaction will be structured.171
170 171
Jurisdictional and Procedural Guidance, para. 4.30. See Chapter 6. Exceptions and Remedies Guidance, para. 3.4.
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7.7
NO DUTY TO REFER
There are a number of circumstances in which the CMA is not permitted to make a reference. These are as follows: (1)
Where the period within which the CMA is required to decide whether the duty to make a reference applies has expired without such a reference having been made.172 This refers to the 40 working day timetable in which the CMA must reach a decision in Phase I. This is subject to an extension where the merging parties have failed to respond (with or without a reasonable excuse) to comply with any requirement of a notice under section 109.
(2)
Where the CMA has accepted, or is considering accepting, undertakings.173 As discussed in more detail in Chapter 16, when considering undertakings, the CMA’s duty to refer is suspended and the four month statutory timetable for referring mergers to Phase II may be extended to allow the merging parties sufficient time to negotiate undertakings.
(3)
Where the Secretary of State has issued an intervention notice to the CMA under section 42(2) of the Enterprise Act and it is still in force. Where the Secretary of State decides not to make a reference to Phase II on the ground that no public interest consideration to which he is able to have regard is relevant to a consideration of the merger in question, he will require the CMA to deal with the matter. In these circumstances, the CMA would regain its ability to refer the merger to Phase II.
(4)
Where the European Commission is considering a request made by the UK (and possibly other EU Member States) under Article 22(1) of the Merger Regulation for the referral of a merger that does not have an EU dimension to the Commission.174 Where the Commission has decided not to accept the referral request, Member States are able once more to apply national competition legislation and, as a result, the CMA is able to refer the merger to Phase II where the reference test is met.
(5)
Where a reasoned submission has been made requesting the referral of a merger to the European Commission under Article 4(5) of the Merger Regulation. Article 4(5) also prohibits the application of Member States’ national competition legislation whilst the Commission is considering the referral request. As with Article 22 referral requests, the CMA is able to apply the Enterprise Act where the Commission has decided not to accede to the request and may therefore refer the merger to Phase II where the reference test
172 Sections 22(3) and 33(3)(za), Enterprise Act. This circumstance was added by the Enterprise and Regulatory Reform Act and came into effect on 1 April 2014. The period within which the CMA is required to decide whether the duty to refer applies is set out in section 34ZA of the Enterprise Act. It is 40 working days, subject to any applicable extension. 173 174
Sections 22(3)(a) and (b) and 33(3)(a) and (b), Enterprise Act. For further details of the Article 22 referral procedure, see Chapter 5.
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is met. In this context, section 33(3A) of the Enterprise Act provides that the CMA may refer a merger to Phase II (where the reference test is met) once it has been informed that a Member State competent to examine the concentration under its national competition law has expressed its disagreement with the Article 4(5) referral request, thereby preventing a referral to the Commission.
Chapter 8 THE PHASE II PROCESS 8.1 Introduction 8.2 Terms of Reference 8.3 Cancellation or Variation of References 8.4 Statutory Questions 8.5 Standard of Proof 8.6 Time Limits 8.7 Appointment of an Inquiry Group 8.8 Merger Inquiry Case Team 8.9 Suspension of a Reference 8.10 Timetable 8.11 Opening Letter 8.12 Interim Undertakings and Orders 8.12.1 Statutory Restrictions 8.12.2 Interim Measures 8.12.3 Interim Orders 8.12.4 Appointment of a Monitoring Trustee or Hold-Separate Manager 8.13 Information Gathering 8.13.1 Initial Submission 8.13.2 Economic Submissions 8.13.3 Surveys
8.1
8.13.4 Questionnaires 8.13.5 Third Party Submissions 8.13.6 Information-Gathering Powers 8.13.7 Third Party Hearings 8.13.8 Surveys and Consultants 8.13.9 Site Visits 8.14 Issues Statement 8.15 Working Papers 8.16 Annotated Issues Statement 8.17 Sharing Technical Analysis 8.18 Put-Back 8.19 Main Party Hearings 8.20 Provisional Findings 8.21 Notice of Possible Remedies 8.22 Response Hearings 8.23 Remedies Working Paper 8.24 Final Reports 8.25 Disclosure of Information 8.25.1 Core Documents 8.25.2 Evidence and Announcements 8.25.3 Confidentiality
INTRODUCTION
Following a Phase I investigation, if the CMA believes that it is or may be the case that a relevant merger situation has been or will be created, and the creation of that situation has resulted or may be expected to result in a substantial lessening of competition within any market in the UK, the CMA is under a statutory duty to make a reference to its chair for the constitution of a Phase II Inquiry Group,1 unless the CMA believes that an exception to the duty to refer applies or that there is no duty to make a reference (e.g., because it is considering undertakings in lieu).2 As of 1 January 2016, under the Enterprise Act, 132 mergers have been referred to Phase II, representing approximately 10% of all qualifying mergers investigated by the Authorities. 1 2
Sections 22(1) and 33(1), Enterprise Act. Exceptions to the duty to refer are discussed in Chapter 7.
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The CMA’s decision to refer a merger to Phase II is without prejudice to the Inquiry Group’s investigation and its ultimate conclusions. The CMA must refer an entire relevant merger situation, not merely parts of a merger or only certain markets affected by the merger. Therefore, the Inquiry Group essentially starts its competitive assessment afresh, looking at all relevant markets and considering all plausible theories of harm, including theories of harm that may be different to those that were relied upon in Phase I3 – although there is now more continuity between the Phase I and Phase II assessment than there was prior to the creation of the CMA. As of 1 January 2016, a significant proportion of mergers have been unconditionally cleared in Phase II; around 44% of all mergers in respect of which a Phase II investigation has been completed (i.e., mergers that were not cancelled following a reference). Following a reference, the Inquiry Group has various statutory questions to answer in relation to completed and anticipated mergers, including whether a relevant merger situation has been or will be created, whether this situation has resulted or will result in a substantial lessening of competition, and, if so, what remedial action should be taken. This chapter considers each of the stages of a Phase II investigation, including the opening letter, interim undertakings and orders, information-gathering and site visits, hearings, provisional findings, working papers and final reports.
8.2
TERMS OF REFERENCE
Terms of reference will be prepared by the Phase I case team in relation to all referred mergers. The terms of reference are typically a single-page document that sets out: (1)
the decision to make a reference in respect of the merger under consideration;
(2)
the CMA’s belief that it is or may be the case that a relevant merger situation has been or will be created, and the basis on which the CMA believes that the merger falls within the Enterprise Act’s jurisdiction;
(3)
the market(s) on which the CMA believes that the merger may result in a substantial lessening of competition;
(4)
the date by which the Inquiry Group’s report should be determined; and
(5)
the statutory questions that the Inquiry Group must answer.
3 See, e.g., Completed acquisition by Railway Investments Limited of (a wholly owned subsidiary of English Welsh & Scottish Railway Holdings Limited) of Marcroft Holdings Limited and Marcroft Engineering Limited, OFT decision of 6 February 2006. The OFT referred this merger on the basis of horizontal effects (the removal of EWS as potential entrant into the merchant market for wagon maintenance), whilst not ruling out vertical concerns, and the CC took enforcement action on the basis of vertical concerns. See also, Anticipated acquisition by Euronext NV of the London Stock Exchange plc, OFT decision of 29 March 2005. In this case, the OFT ruled out vertical concerns and referred the merger on the basis of horizontal concerns. The CC dismissed horizontal concerns and took enforcement action on the basis of vertical concerns.
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The terms of reference typically follow a relatively pro forma pattern, although the CMA may restrict the terms of reference so as to exclude certain issues from the Inquiry Group’s consideration. For example, in terms of determining whether a relevant merger situation has been, or will be created, the CMA may frame the terms of reference so that the Inquiry Group must disregard either the turnover test,4 the share of supply test,5 or one of these jurisdictional tests if the Inquiry Group finds that the other is satisfied.6 In addition, it there is more than one relevant merger situation created by the merger, only one of these situations may be referred to Phase II.7 However, in practice, it is quite unusual for the terms of reference to be framed in this way.
8.3
CANCELLATION OR VARIATION OF REFERENCES
The CMA may cancel a Phase II reference in respect of an anticipated merger in the event that the merger in question is abandoned.8 To date, this has occurred 28 times under the Enterprise Act, representing around 20% of all cases referred to Phase II. The CMA may also, if it considers that doing so is justified by the facts, treat a reference made in respect of an anticipated merger as the reference of a completed merger, or vice versa.9 In particular, where a transaction ceases to be an anticipated merger and becomes a completed merger, the CMA is likely to require interim undertakings from the merging parties (discussed below).
8.4
STATUTORY QUESTIONS
The Enterprise Act sets out certain questions that must be decided by the CMA when a reference is made.10 In relation to completed mergers, the CMA must determine: (1)
whether a relevant merger situation has been created; and
(2)
if so, whether the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market(s) in the UK for goods or services.11
4
Sections 35(6)(a) and 36(5)(a), Enterprise Act. Sections 35(6)(b) and 36(5)(b), Enterprise Act. 6 Sections 35(6)(c) and 36(5)(c), Enterprise Act. 7 See, e.g., Completed transaction relating to Pork Farms and Kerry Foods’ chilled savoury pastry business, CMA decision of 17 December 2014, paras 26-30. In this case a relevant merger situation was created by Pork Farms’ acquisition of Kerry Foods. A second relevant merger situation was also created by Kerry Foods taking a stake in the merged entity, having veto rights over certain strategic matters and having the right to appoint two out of eight directors to the merged entity’s board. Only the first of these relevant merger situations was referred to Phase II. 5
8
Sections 37(1), Enterprise Act. It is possible that, for example, merging parties may complete their transaction during the course of a reference. 9
10 11
Sections 35 and 36, Enterprise Act. Section 35(1), Enterprise Act.
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In relation to anticipated mergers, the CMA must determine: (1)
whether arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and
(2)
if so, whether the creation of that situation may be expected to result in a substantial lessening of competition within any market(s) in the UK for goods or services.12
As regards either completed or anticipated mergers, in the event that these initial questions are answered affirmatively, the CMA must decide: (1)
whether action should be taken by it for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect that has resulted from, or may be expected to result from, the substantial lessening of competition;
(2)
whether it should recommend the taking of action by others for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect that has resulted from, or may be expected to result from, the substantial lessening of competition; and
(3)
in either case, if action should be taken, what action should be taken and what is to be remedied, mitigated or prevented.13
8.5
STANDARD OF PROOF
The Enterprise Act does not specify a standard of proof for Phase II merger inquiries. However, the Merger Assessment Guidelines state that in answering the above statutory questions, the CMA will apply a ‘balance of probabilities’ threshold to its analysis (i.e., whether it is more likely than not that the relevant merger situation will result in a substantial lessening of competition).14 This is a higher standard of proof than applies to the CMA’s Phase I investigations,15 and derives from the fact that at Phase II the CMA must determine the statutory questions rather than deciding them at the “is or may be the case” standard that applies in Phase I.
8.6
TIME LIMITS
The CMA must prepare and publish a report for each merger that is referred to Phase II.16 The report must contain its answers in relation to the relevant statutory questions (as set out above), the reasons for its answers and such information as the CMA considers appropriate for facilitating a proper understanding of those questions and of 12
Section 36(1), Enterprise Act. Sections 35 and 36, Enterprise Act. 14 Merger Assessment Guidelines, para. 2.12. 13
15 16
See Chapter 7. Section 38(1), Enterprise Act.
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its decisions.17 This final report must be published within 24 weeks from the date of the reference.18 This period may be extended only once19 and by a period of no more than eight weeks.20 The Enterprise Act specifies that the CMA may only extend its deadline where there are “special reasons” why the report cannot be prepared and published within the 24-week period.21 To date, the Authorities have issued a notice of extension in approximately 23% of all completed merger inquiries. The CMA may also extend its investigation period if it considers that a relevant person22 has failed (with or without a reasonable excuse) to comply with any requirement of a notice under section 109,23 requiring the attendance of witnesses at a hearing or the production of documents or information. An extension will come into force when it is published under section 107,24 and will remain in force until either the person concerned provides the information or documents to the satisfaction of the CMA or appears as a witness in accordance with the requirements of the CMA or until the CMA publishes a decision to cancel the extension.25 Therefore, the investigation time-period is effectively suspended until the CMA is satisfied that it has received what it has requested. A merger may be subject to both an extension for up to eight weeks under section 39(3) and an extension for a failure to attend a hearing or to provide documents or information under section 39(4).26 Whilst the CMA must, under normal circumstances, publish its final report “within” 24 weeks from the date of reference, it is relatively rare that a report is published in materially less than 24 weeks. In Long Clawson/Millway, the statutory deadline was 24 March 2009 and the CC published its final report on 14 January 2009. It is not clear on the face of the final report why the CC concluded its investigation in a significantly shorter period of time than usual, but the fact that Millway was accepted by the CC as being a failing firm is likely to have been a factor in the CC finalising its inquiry so early. Similarly, in Optimax/Ultralase the CC’s Phase II inquiry was completed in 16 weeks and two days in circumstances where the target was a failing firm.27 Since
17
Section 38(2), Enterprise Act.
18
Section 39(1), Enterprise Act. Section 40(4), Enterprise Act. 20 Section 39(3), Enterprise Act. 21 Ibid. 19
22
Section 39(5) defines a “relevant person” as “(a) any person carrying on any of the enterprises concerned; (b) any person who (whether alone or as a member of a group) owns or has control of any such person; or (c) any officer, employee or agent of any person mentioned in paragraph (a) or (b).” 23 Section 39(4), Enterprise Act. 24 Section 39(7), Enterprise Act. 25
Section 39(8), Enterprise Act. Section 40(3), Enterprise Act. 27 Optimax Clinics Limited and Ultralase Limited, a report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, 20 November 2013. 26
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1 April 2014, to date, the CMA’s fastest Phase II inquiry has been Xchanging/Agencyport, which was completed in 20 weeks and three days.28
8.7
APPOINTMENT OF AN INQUIRY GROUP
As discussed in Chapter 1, in addition to its Board, the CMA has a Panel comprising a Panel Chair and Inquiry Chair, additional Inquiry Chairs (of which there are seven as of 1 January 2016), and Panel Members (of which there are currently around 25). Members are appointed for an eight-year term29 and usually work on a part-time basis. Panel members come from a variety of backgrounds, including economics, law, accountancy and/or business.30 Following a reference, the Panel Chair will appoint members to form an Inquiry Group and will appoint one of the Inquiry Chairs to each Group. Inquiry Groups will comprise at least three members31 and now typically comprises four members, including the Inquiry Group Chair.32 Before appointing members to an Inquiry Group, the CMA will satisfy itself of members’ availability and consider whether their outside interests could affect the impartiality, or perception of the independence, of the Inquiry Group.33 The chair of the Inquiry Group has the casting vote on any question to be decided by the group.34 In practice, groups of three members have been quite rare.35 In the early years of the Enterprise Act, there was a trend for merger inquiry groups to have five members.36 In
28 Xchanging and Agencyport, a report on the completed acquisition by Xchanging plc of certain companies comprising all of the European operations of Agencyport Software Group, 29 April 2015. To date, of the seven Phase II inquiries that have been completed since the CMA came into existence, three have required an extension to the 24 week Phase II timetable. 29 Schedule 7, para. 6(2), Competition Act 1998. 30
Jurisdictional & Procedural Guidance, para. 10.4. CMA Rules of Procedure for Merger, Market and Special Reference Groups, CMA17 (the “CMA Rules of Procedure for Mergers”), para. 6.3. 31
32
Jurisdictional & Procedural Guidance, para. 10.4. Ibid., para. 10.5. 34 CMA Rules of Procedure, para. 6.4. 33
35 See, e.g., Stericycle International LLC and Sterile Technologies Group Ltd, a report on the completed acquisition of Sterile Technologies Group Ltd by Stericycle International LLC, 12 December 2006 and Kemira Growhow Oyj and Terra Industries Inc merger inquiry, a report on the anticipated joint venture between Kemira GrowHow Oyj and Terra Industries Inc, 11 July 2007. 36 See, e.g., Archant Limited and the London newspapers of Independent News and Media Limited, a report on the acquisition by Archant Limited of the London newspapers of Independent News and Media Limited, 22 September 2004; A report on the completed acquisition of Linpac Containers Ltd by DS Smith Plc, 21 October 2004; National Express Group plc and the Greater Anglia franchise, a report on the acquisition by National Express Group plc of the Greater Anglia franchise, 4 November 2004; Knauf Insulation Limited and Superglass Insulation Limited, a report on the proposed acquisition of Superglass Insulation Limited by Knauf Insulation Limited, 26 November 2004; Serviced Dispense Equipment Limited and the Technical Services function of Coors Brewers Limited, a report on the proposed acquisition by Serviced Dispense Equipment Limited of the Technical Services Function of Coors Brewers Limited, 11 March 2005.
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more recent years, this number has been reduced to four and there has not been a merger reference panel with five members since 2006.37 The reduction in the size of the groups has the merit of not having the potential to produce a 3:2 split in favour of enforcement action, which, because of the CMA’s rule that an Inquiry Group must achieve a twothirds majority decision if an investigation is going to result in remedies,38 would not be possible (i.e., a 3:2 split in favour of a remedy would still be insufficient for the CMA to require a remedy).39 Panels of four members avoid this undesirable outcome.40 Panels of four members have on rare occasions resulted in 2:2 splits,41 which require the Inquiry Group’s Chair to cast the casting vote, but even if the Chair’s vote is in favour of a remedy, this is still insufficient for a remedies outcome. The appointed Inquiry Group are the decision-makers on Phase II inquiries.42 Their role is to set the overall direction of the inquiry, review the appropriate evidence and analysis, and answer the relevant statutory questions. They also hear directly from the main parties in a formal hearing and will usually attend a site visit. Phase II Inquiry Groups are appointed for the duration of the inquiry, up to the point that it is finally determined. In cases resulting in remedies, the merger is finally determined when undertakings are accepted by the CMA or a final remedy order is made. If no SLC is found, the inquiry is finally determined when the final report is published.
8.8
MERGER INQUIRY CASE TEAM
Inquiry Group members are supported by a case team of administrative staff who are typically appointed for the duration of the merger inquiry. This team will often now include at least one member of the Phase I case team, typically the Principal Case Officer or the Economic Adviser. The number of staff appointed to each merger inquiry will vary, but each reference will have a Project Director who is responsible for the dayto-day coordination of the merger inquiry and who is the primary liaison between the members and the staff, and will often include a Project Manager, a Project Officer, a team of economists, at least one member of the Remedies, Business and Financial Analysis team, and at least one member of the CMA Legal Service.43 The case team are responsible for the day-to-day operations of a merger inquiry and the point of contact
37
Pan Fish ASA and Marine Harvest NV Merger Inquiry, 18 December 2006. Schedule 7, para. 20(2), Competition Act 1998. 39 A 3:2 split results in only 60% of the members being in favour of enforcement action, which is insufficient to achieve such a result as a two-thirds majority is necessary if the panel is to require remedial action. 40 Evidently, a 3:1 split in favour of enforcement action achieves the required two-thirds majority for remedial action. 38
41 See, e.g., Game Group PLC and Games Station Limited, a report on the completed acquisition by Game Group PLC of Games Station Limited, 16 January 2008, in which the group chairman, Diane Coyle, cast her vote in favour of unconditional clearance. 42 Jurisdictional & Procedural Guidance, para. 10.6. 43 More often there is a Legal Director and an Assistant Legal Director assigned to Phase II merger inquiries.
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for the merging parties and their advisers will typically be the Project Officer. Parties should not address correspondence directly to the Panel members.
8.9
SUSPENSION OF A REFERENCE
Following the referral of an anticipated merger, in order to avoid wasted or unnecessary work by the CMA, as well as the need for main parties and third parties to respond to initial information requests, the merging parties may request that the Phase II timetable is suspended whilst they consider abandoning the transaction.44 This change to the Phase II process was brought into effect by the Enterprise and Regulatory Reform Act as from 1 April 2014.45 A request may be made by the merging parties at any time within three weeks of the date of the reference and can be accepted by the CMA where it reasonably believes that the merger in question might be abandoned. If the CMA exercises its power to suspend a reference it will publish a notice to this effect (usually at the end of the suspension period).46
8.10
TIMETABLE
The CMA will also draw up an administrative timetable “as soon as practicable” after a referral, which will set out the major stages of the merger inquiry.47 This timetable will be published on the merger inquiry’s webpage and will include the key stages of a Phase II investigation. A more detailed (approximate) timetable for a Phase II process is set out below:48 (1)
Opening letter sent to main parties (Day 1).
(2)
Staff meeting with main parties to discuss administrative matters and interim measures (Week 1-2).
(3)
Send market and financial questionnaires and third party questionnaires (Week 2).
(4)
First group meeting (Weeks 2-3).
(5)
Initial main party submissions due (Week 3).
(6)
Publication of issues statement (Weeks 4-5).
(7)
Site visits (Weeks 3-5).
44
Section 39(8A), Enterprise Act. Jurisdictional & Procedural Guidance, para. 10.11. Schedule 8, paragraph 5(3), Enterprise and Regulatory Reform Act. 46 Section 39(8B), Enterprise Act. See, e.g., Poundland/99p Stores where a notice of suspension was published on 6 May 2015 in relation to a request for a suspension of the Phase II period that was made on 16 April 2015. 45
47 48
CMA Rules of Procedure, para. 7.1. Ibid., para. 7.2.
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(8)
Staff calls/meetings with third parties (Weeks 5-6).
(9)
Put-back working papers (Weeks 8-11).
(10)
Redacted working papers sent to parties (Week 10-11).
(11)
Annotated issues statement sent to parties (Weeks 11-12).
(12)
Main party hearings (Weeks 11-12).
(13)
Publish provisional findings (Week 15).
(14)
Response to provisional findings (Week 18).
(15)
Remedies hearings (if required) (Weeks 18-19).
(16)
Publish final report (Weeks 23-24).
8.11
OPENING LETTER
Once an Inquiry Group has been established, the CMA will send the merging parties a Phase II ‘opening letter’, which marks the formal start of the Phase II inquiry. In relation to anticipated mergers, the CMA will send an opening letter to each of the merging parties, usually via their external advisers. The opening letter: (1)
identifies members of the Inquiry Group where they have already been appointed;
(2)
clarifies the statutory questions that the Inquiry Group must answer and identifies the CMA guidance and rules of procedure that will be relevant to the inquiry;
(3)
identifies key members of the case team (typically the Project Director and Project Manager) and requests administrative details, such as requesting information about the availability of parties or advisers during the inquiry period;
(4)
provides information on how to submit documentation and data to the CMA;
(5)
invites the parties and their advisers to an early meeting to discuss the timetable and administrative arrangements, as well as documents and data that might assist with the inquiry;
(6)
invites the parties to make an initial submission supplementing or updating any submissions made at Phase I and addressing the concerns that the CMA outlined in its referral decision;
(7)
includes an initial information request that builds on the information that has already been collated at Phase I and is on the case file – the Phase II case team
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will have access to the case file in advance of the opening letter being sent in order to reduce the duplicative nature of any requests; (8)
notifies the parties that the CMA would like to make a site visit as soon as possible and that the CMA would like the parties and their advisers to attend a hearing to discuss the issues that will be included in the issues statement; and
(9)
refers the parties to any interim order/s that are already in place and makes the parties aware that under section 78 of the Enterprise Act, the purchaser is prohibited from acquiring, without the CMA’s consent, an interest in shares in any company if any enterprise to which the reference relates is carried on by or under the control of that company.
At the same time as sending out the opening letter, the CMA requests a number of documents from merging parties. These requests are less extensive than was the case prior to the CMA coming into existence as many of these documents will have been provided in Phase I and the CMA will not ask for these documents to be provided again. Examples of documents that will often be requested at this stage, which may not have been provided at Phase I, include valuation documents relating to the target, a wider range of business plans, and management accounts. The parties are usually given a deadline of one week to respond to these requests.
8.12
INTERIM UNDERTAKINGS AND ORDERS
As the Enterprise Act permits merging parties to complete their transactions prior to the receipt of merger control clearance, the CMA must ensure that merging parties do not take action that may prejudice the outcome of its inquiry or restrict its remedial options due to the fact that the target business has been integrated in a manner that makes it difficult (or impossible) for it to be returned to its pre-merger state. There are three main options available to the CMA at Phase II: (i) it could choose to rely on the statutory restrictions contained in the Enterprise Act; (ii) it may accept interim undertakings from the merging parties; or (iii) if the merging parties refuse within a reasonable time-frame to agree to interim undertakings, the CMA may impose an interim order.49 This section considers each of these options.
8.12.1 Statutory Restrictions In relation to completed mergers, the Enterprise Act provides that, when a reference has been made, no “relevant person”50 shall, without the CMA’s consent: (1)
49
complete any outstanding matters in connection with any arrangements that have resulted in the enterprises concerned ceasing to be distinct;
Section 81(2), Enterprise Act. Section 77(8) of the Enterprise Act defines “relevant person” as: (i) any person who carries on any enterprise to which the reference relates or who has control of any such enterprise; (ii) any subsidiary of any person falling within (i); and (iii) any person associated with any person falling within (i) or any subsidiary of any person so associated. 50
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The Phase II Process
(2)
make any further arrangements “in consequence of that result” (i.e., that would lead to further integration); or
(3)
transfer the ownership or control of any enterprises to which the reference relates.51
In relation to anticipated mergers that have been referred to Phase II, the Enterprise Act provides that no relevant person shall, without the CMA’s consent, directly or indirectly acquire any interest in shares in a company to which the reference relates.52
8.12.2 Interim Measures In relation to completed mergers, if the CMA has not made an initial enforcement order (“IEO”) in Phase I (which would be highly unusual), the CMA has the power to accept interim undertakings from the merging parties.53 At Phase II, the CMA would usually attempt to resolve its interim measures concern by way of interim undertakings rather than make an interim order. Whilst the statutory restrictions set out above prevent the parties from ‘completing any outstanding matters’ or ‘making further arrangements’ in connection with a completed merger and from transferring the ownership or control of any enterprise to which the reference relates, there may be other forms of pre-emptive action that fall outside the remit of these statutory restrictions and which the CMA may wish to prevent. For example, the purchaser may have significant incentives to run down or neglect the business or assets of the acquired business, or to extract know-how or other commercially-sensitive information from the acquired business, in order to reduce its competitive capability should a divestment be required. In view of the fact that the CMA now makes an IEO in relation to essentially all completed mergers at Phase I, the need for interim measures has reduced significantly. In relation to the referral of an anticipated merger, the Enterprise Act prevents the transfer of shares, but not assets, pending final determination of the reference. As a result, where the CMA has not put in place an IEO at Phase I, there may be a need for interim measures (including an interim order) in certain cases, including where: (1)
commercially-sensitive information is being exchanged between the merger parties, except where such exchange is objectively necessary for the purposes of commercial due diligence and is subject to appropriate limits and confidentiality obligations on recipients of the information;
(2)
the parties intend to integrate, or have already begun integrating, their businesses;
(3)
the merging parties have begun jointly conducting commercial negotiations with customers or suppliers; and
51
Section 77(2), Enterprise Act.
52
Section 78(2), Enterprise Act. Section 80(2), Enterprise Act.
53
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(4)
281
key staff have begun to leave the target business or are likely to do so (in which case, the interim order would typically be addressed to the target business).54
As of 1 January 2016, under the Enterprise Act, interim undertakings have been required in only a relatively small number of anticipated mergers at Phase II, although there has been a noticeable increase in their use in recent years.55
8.12.3 Interim Orders The CMA also has the ability to make an interim order at Phase II where it considers this to be appropriate.56 This is typically in circumstances where merging parties have either refused to agree to interim undertakings or are taking an unreasonable period of time to do so. In this regard, the CMA may: (i) prohibit or restrict the doing of things that it considers would constitute ‘pre-emptive action’; (ii) impose on any person concerned obligations as to the carrying on of any activities or the safeguarding of any assets; and/or (iii) provide for the carrying on of any activities or the safeguarding of any assets by the appointment of a monitoring trustee.57 The CMA may grant derogations from such an order to allow a person to take action that would otherwise constitute a contravention of the order.58 In circumstances where the CMA has reasonable grounds for suspecting that preemptive action has or may have been taken, it may make an order to restore the position to what it would have been had the action not been taken or for the purposes of mitigating its effects.59 Examples of where this might be appropriate include: (1)
reversal of any re-branding of the target’s assets with the acquirer’s branding;
(2)
destruction of, or retention by a third party of, confidential information relating to the acquired business that has been passed to, or is accessible by, the acquirer (e.g., customer lists);
54
Jurisdictional and Procedural Guidance, Annexe C, para. C.9. See, e.g., Project Kangaroo, supra, SvitzerWijsmuller A/S and Adsteam Marine Ltd, a report on the proposed acquisition by SvitzerWijsmuller A/S of Adsteam Marine Ltd, 9 February 2007; Poundland and 99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015; Ashford and St Peter’s and Royal Surrey County, a report on the anticipated merger of Ashford and St Peter’s Hospitals NHS Foundation Trust and Royal Surrey County Hospital NHS Foundation Trust, 16 September 2015; Reckitt Benckiser and K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015. 55
56
Section 81, Enterprise Act. Section 81(2), Enterprise Act. 58 Section 81(2B), Enterprise Act. Derogations in a Phase I context are discussed in more detail in Chapter 6. 59 Section 81(2A), Enterprise Act. 57
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(3)
reversal of changes to an organisation’s structure, either by requiring departed key staff to be replaced or a hold separate manager to be appointed to manage the acquired business;
(4)
separation of functions or decision-making processes which have previously been integrated (e.g., sales forces or production lines); and
(5)
retraction of regulatory deregistrations).60
requests
(e.g.,
bus
route
registrations
or
8.12.4 Appointment of a Monitoring Trustee or Hold-Separate Manager In certain cases, additional safeguards may be required, including the appointment of a hold-separate manager with executive powers to operate the acquired business separately from the purchaser and in line with the interim measures for the duration of the investigation. Alternatively, or in addition, the CMA may choose to appoint a monitoring trustee to monitor and report on compliance with the interim measures.61 The CMA will normally consider the appointment of a hold separate manager and/or a monitoring trustee at the beginning of a Phase II inquiry and will review the issue throughout the duration of the inquiry.62 The appointment of a hold-separate manager and/or a monitoring trustee will be at the expense of the acquiring party.63 The procedure for appointing a hold-separate manager and/or a monitoring trustee is the same as at Phase I.64 Typically, the appointment of a hold-separate manager would follow from the initial report of the monitoring trustee, where one is appointed. However, there may be circumstances in which it is clear that a hold-separate manager is required, even in the absence of a monitoring trustee’s report. The CMA will normally require a monitoring trustee to be appointed in completed mergers unless parties can provide compelling evidence that there is little risk of preemptive action and/or that none of the following risk factors are present: (1)
there has been substantial integration of the two businesses prior to implementation of the interim measures;
(2)
there have been breaches of the interim measures;
(3)
there is a need for further or continued integration of the business throughout the inquiry subject to the necessary consents from the CMA, for example, if the acquired business were not a stand-alone business;
60
Jurisdictional and Procedural Guidance, Annexe C, para. C.38. Ibid., para. C.29. See, e.g., Sonoco and Weidenhammer, a report on the completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, 3 July 2015 and Xchanging and Agencyport, a report on the completed acquisition by Xchanging plc of certain companies comprising all of the European operations of Agencyport Software Group, 29 April 2015. 62 Jurisdictional and Procedural Guidance, Annex C, para. C.29. 61
63 64
Ibid. See Chapter 6.
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(4)
there is a high risk of deterioration of the business, for example through loss of key customers or members of staff; or
(5)
the pre-merger senior management of the acquired business is absent and/or strong incentives exist for the current senior management of the acquired business to operate the acquired business on behalf of the acquirer. This will typically suggest the need for the appointment of a hold-separate manager.65
The appointment of a hold-separate manager and monitoring trustee was the subject of an appeal to the CAT in Stericycle v Competition Commission.66 In this case, Stericycle International LLC, Stericycle International Limited (together, “Stericycle”) and Sterile Technologies Group Limited (“STG”, and together with Stericycle, the “Applicants”) applied for judicial review of the CC’s decision to issue an interim order as an agreement between the CC and Stericycle regarding interim undertakings had not proved possible. Under paragraph 7 of this order (the “July Order”), the CC issued directions requiring the Applicants to appoint a monitoring trustee. The Applicants challenged the July Order in an application for interim relief. The application for interim relief was adjourned, it being agreed that the CC would not seek to enforce the relevant part of the July Order until such time as it had been able to consider the report of the monitoring trustee. Subsequently, the CC issued a further order (the “August Order”), requiring the Applicants to take relevant steps to separate various functions of Stericycle and STG, namely the position of CEO, sales and marketing, finance, operations and logistics, human resources, and environmental and health and safety issues. The Appellants submitted, inter alia, that section 81 of the Enterprise Act could not be used to undo pre-emptive action that had already occurred and that the imposition of a hold-separate manager was disproportionate and unreasonable. The CAT held that the CC had a wide margin of discretion under section 81 of the Enterprise Act for the purpose of preventing pre-emptive action, including, at section 81(c), the power to appoint “a person to conduct or supervise the conduct of any activities”.67 In addition, the CAT held that the Enterprise Act defined pre-emptive action as “action which might prejudice the reference concerned or impede the taking of any action…(emphasis added).”68 The CAT held that the use of the word “might” implied “a relatively low threshold of expectation that the outcome of the reference might be impeded.”69 The CAT went on to state that “[a]t the time the CC is considering whether to exercise its powers under section 81, it necessarily cannot be sure whether any action being taken (or proposed) by the merging/merged parties will ultimately impede any action being taken by the CC as a result of the reference. The power under section 81 enables the CC to intervene where it considers that there is at
65
Jurisdictional and Procedural Guidance, Annex C, para. 31.
66
Stericycle International LLC and Stericycle International Limited v Competition Commission [2006] CAT 21. 67 Ibid., para. 129. 68 69
Ibid. Ibid.
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least some risk of that happening.”70 Accordingly, the CAT held that the CC had not acted outside its margin of appreciation in deciding that a hold-separate manager was necessary in order to ensure that the “directing mind” ultimately responsible for the STG business was, and was seen to be, entirely independent of Stericycle during the remainder of the CC’s inquiry.71
8.13
INFORMATION GATHERING
The CMA’s primary task in the initial stages of a Phase II inquiry is to gather additional information about the referred merger, and to solicit the views of the merging parties and third parties. The CMA will accomplish this through various means, including from: (i) the parties’ initial submission and subsequent submissions; (ii) questionnaires, both to the parties and third parties; (iii) third party submissions; and (iv) hearings. Each of these is considered below.
8.13.1 Initial Submission The ‘initial submission’ is the opportunity for the main parties to put forward their views on the merger and its substantive impact on the markets at issue. Much of this ground will have already been covered in the parties’ merger notification at Phase I and in subsequent submissions (e.g., any written response to the Issues Letter) and the parties may rely on these submissions if they wish to do so. However, the initial submission can often give merging parties the opportunity to restate their case in the light of the CMA’s concerns at Phase I and, in particular, having read the CMA’s reference decision. The opening letter typically sets out the format in which the CMA would like to receive the parties’ initial submission (e.g., electronic or hard copies, or copies on CD) and the deadline by which the parties should make their submission, which is usually three weeks. The parties will also be required to provide the CMA with a non-confidential version of their initial submission, which will be published on the CMA’s website. The initial submission should include (or should cross-refer, if the information has previously been provided, to) the following information:72 (1)
Background information on the businesses involved in the transaction, including details of their organisation, financial structure, the history of the businesses, details of market entry or exit by the parties in relation to the market(s) affected by the transaction and any related markets.
(2)
Information about the transaction, including a statement of the circumstances leading up to the transaction which should set out negotiations between the parties and a timetable of events leading up to the merger. The parties should
70
Ibid.
71
Ibid., para. 161. Jurisdictional and Procedural Guidance, para. 11.21.
72
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also provide a statement of the rationale for the transaction, including the benefits and financial synergies that are expected to be gained from the merger. (3)
The parties’ views on the economic markets affected by the merger, both in terms of product and geographic scope, and on the competitive conditions in those markets, including identifying the principal competitors, customers and suppliers. The Inquiry Group will also want to understand the parties’ business strategy in relation to the products or services affected by the merger.
(4)
A description of all the barriers to entry, expansion or exit that exist in the relevant markets, including legal or regulatory barriers, patents or know-how, licences, the importance of economies of scale and/or scope, the minimum efficient scale for a business, access to suitable sites, sunk costs and access to sources of supply. Parties should also consider the role of incumbency advantages in the form of information, reputation and cost as a barrier to entry. Parties should also highlight any sizeable entry that they believe is likely to occur in the relevant markets within the next three years as well as whether there will be any sizeable exit.
(5)
A description of what would happen/have happened to the businesses involved in the merger, and in the market in general, in the absence of the merger.
(6)
A statement setting out the parties’ views on the expected impact of the merger on competition in the relevant markets, including, in particular, the expected effects on customers, any effects on price, quality, availability and innovation. In this regard, the parties should refer to the issues raised by the CMA in its reference decision.
8.13.2 Economic Submissions When making submissions of a technical economic nature, parties should refer to the principles set out in the publication Suggested best practice for submissions of technical economic analysis from parties to the CC, which has been adopted by the CMA.73 Whilst parties are free to submit their own economic analysis, parties should not expect the CMA to agree in advance to their proposed approach or to work jointly with parties on its analysis. Although the CMA will consider the parties’ views, it is for the CMA to decide what analysis is appropriate for it to answer the statutory questions and the CMA will undertake its own economic analysis of the transaction.
8.13.3 Surveys Whilst it is normal for the CMA to carry out its own survey where it considers this to be appropriate, merging parties may also wish to submit information derived from surveys. In such cases, it is important that the research is statistically robust and the design and implementation of the survey is effective. Therefore, it is important for the parties, prior to undertaking such a survey, to discuss with the CMA in advance the need for, as 73
Ibid., para. 11.23.
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well as the design and scope of, the survey. Where merging parties have already carried out a survey for the purposes of its Phase I submission, the CMA would still usually wish to conduct its own survey at Phase II.74
8.13.4 Questionnaires As soon as practicable after the start of the Phase II inquiry, the CMA will send questionnaires to the merging parties requesting, as necessary, detailed financial and market information, and volume/price data.75 These requests will, where appropriate, build upon the information submitted at Phase I and their scope and depth will in large part be determined by previously submitted information.76 Overall, since the creation of the CMA, these questionnaires are less burdensome on merging parties and are produced earlier in the Phase II timetable than they were when the OFT and the CC were separate organisations. The questionnaires are now usually sent in the first or second week of the Phase II inquiry and the parties typically have two to three weeks to respond. The financial questionnaire requests a wide range of information, including details of the parties’ structure (including shareholders and the memorandum and articles of association of key entities), the means by which the transaction is being funded, how the target has been valued, details of expected synergies, the consideration paid, any post-acquisition business plan, financial projections, copies of accounts, margins of key products, the value of key assets, details of costs benefits or synergies, and information regarding significant acquisitions or disposals within the last five years.77 The market questionnaire focuses on establishing the economic markets that are relevant to the assessment of the transaction, the structure of these markets, and how competition takes place in these markets. Accordingly, the CMA typically requests details on any regulatory framework within which the parties operate, any intellectual property or licences that affect the ability of companies to operate, the products/services that they supply, potential alternative products, the price sensitivity of customers, information on demand and supply-side substitutability, details on the geographic scope of supply, information regarding the supply chain in the industry in question, the parties’ and competitors’ sales in various potential markets over a period of time (typically five years), pricing, issues relating to capacity (where relevant), details of customers and suppliers, barriers to entry and expansion, and any relevant customer benefits. The parties’ responses to the financial and market questionnaires are not
74 See, e.g., Poundland and 99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015. 75 The CMA typically seeks to obtain a time series of volume and pricing data, either by week or by month, preferably for a five-year period. 76
Jurisdictional and Procedural Guidance, para. 11.12. A financial questionnaire is not sent out in all cases and, depending on the information already available to the CMA, additional questions may be added to the market questionnaire in lieu of a separate financial questionnaire. 77
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published on the CMA’s website, although information from these responses may be incorporated in the CMA’s final decision.78 The CMA recognises that providing timely submissions can place a significant burden on parties to an inquiry and parties should discuss with the case team as early as possible any difficulties in complying with information requests as this enables the CMA to plan its Phase II work within the constraints of the statutory timetable.79 These requests will often be made without the formal exercise of the CMA’s powers under section 109. However, delays in the provision of information can have significant repercussions for merger inquiries. Accordingly, in the event of delay or failure to respond to specific requests, the CMA is likely to issue formal notices under section 109.80
8.13.5 Third Party Submissions Third parties will generally be less involved than merging parties in the Phase II inquiry. However, some will receive data requests and may be invited to participate in hearings with the case team, which may in some cases be attended by members of the Inquiry Group. More often, third parties are encouraged to submit their comments to the CMA in writing and these submissions can be a valuable source of information for the CMA. Depending on the factual circumstances of the case, third parties’ views and evidence can be crucial to an inquiry.81 The CMA will typically issue a press release at a very early stage (often day one or two) in its inquiry inviting third parties to submit evidence in writing, usually indicating a deadline for such submissions of around three weeks from the date of the press release. Third party submissions may be made by competitors in the market, potential competitors or by trade associations or other (potentially) affected third parties, including the merging parties’ customers.82
78 In the event that this information is confidential, the parties will have the opportunity to request its redaction. 79 Jurisdictional and Procedural Guidance, para. 11.17. 80 Ibid., para. 11.18. 81 For example, Groupe Eurotunnel S.A. and SeaFrance S.A. merger inquiry, a report on the completed acquisition by Groupe Eurotunnel S.A. of certain assets of former SeaFrance S.A., 6 June 2013, where the views/evidence of DFDS were of particular importance and a separate hearing was held to test these views/evidence. See also the CC’s inquiry in Ticketmaster/Live Nation, supra, where given the circumstances of the case, and the fact that Live Nation had entered into an agreement with CTS Eventim prior to the merger relating to its entry into the UK market, CTS Eventim’s views were important to the inquiry. 82
See, e.g., Eurotunnel/SeaFrance, supra, where the CMA received submissions from various third parties, a travel agent, a competitor, the Food Storage and Distribution Federation, and a member of the House of Lords; BT Group plc and EE Limited, a report on the anticipated acquisition by BT Group plc of EE Limited, 15 January 2016, where the CMA received submissions from over 20 third parties, as well as many responses to the issues statement and provisional findings.
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8.13.6 Information-Gathering Powers In addition to its requests for information, the CMA may, by notice, require any person to: (1)
attend at a specified time and place and to give evidence to the CMA or to a person nominated by the CMA;83
(2)
produce at a specified time and place, and to a specified person, any documents that are specified or described in the notice or that fall within a category of document that is specified or described in the notice, and which are in that person’s custody or under his control; or
(3)
supply the CMA, at a specified time and place and in a form and manner as may be specified, and to a specified person, such estimates, forecasts, returns or other information.84
A notice under section 109 must specify the “permitted purpose” for which the notice is given and include information about the possible consequences of not complying with the notice.85 In addition, the CMA or any person nominated by it may take evidence on oath, and for that purpose may administer oaths.86 In the event that the CMA requires documents to be produced, the person to whom a document is produced may copy any document produced in accordance with any such notice.87 Any party providing a document that is illegible may be required to provide a legible and intelligible version of the information in the document.88 In relation to its information-gathering powers, the CMA may impose a penalty in the following circumstances:89 (1)
When the CMA considers that a person, without reasonable excuse, has failed to comply with any requirement of a section 109 notice, the CMA may impose a fixed penalty or a daily rate penalty, or both.90 However, the CMA may not impose a penalty in respect of this infringement if the person requested to produce a document has been found guilty of having committed an offence by
83 Although no person shall be required to go more than 10 miles from his place of residence unless his necessary travelling expenses are paid for or offered to him. 84 Section 109, Enterprise Act. 85
Section 109(4), Enterprise Act. Section 109(5), Enterprise Act. 87 Section 109(6), Enterprise Act. 88 Section 109(9), Enterprise Act. 86
89 90
Sections 110 and 111, Enterprise Act. Section 111(2), Enterprise Act.
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intentionally altering, suppressing or destroying any document which he has been required to produce.91 (2)
When the CMA considers that a person has intentionally obstructed or delayed another person’s efforts to copy a document that he has a right to copy under section 109(6) of the Act, the CMA may only impose a fixed penalty.92
In either case, the CMA may not, except in relation to any permitted variation or substitution, impose a penalty if more than four weeks have passed since the publication of the final report on the reference concerned.93 Any penalty imposed will be of such amount as the CMA considers appropriate.94 Fixed fines cannot exceed £30,00095 and daily fines cannot exceed an amount of £15,000 per day.96
8.13.7 Third Party Hearings The Inquiry Group will decide at an early stage which third parties are to be invited to hearings. Such hearings occur in the initial information-gathering stage of the Phase II inquiry – typically around three to six weeks – to ensure that any significant issues that emerge can be put to the main parties. Such third parties often include key customers or competitors. For example, in Poundland/99p, hearings were held with a significant number of the parties’ competitors,97 and in Reckitt Benckiser/K-Y brand98 and Xchanging/Agencyport,99 the CMA held hearings with a wide range of the parties’ customers (as well as some competitors). Third party hearings are usually conducted at staff level, although where the views of third parties are particularly important, Group members may attend. A transcript or recording is usually taken of third party hearings and a summary of the views expressed will be published on the CMA’s website.
8.13.8 Surveys and Consultants Surveys can provide a valuable insight into consumers’ choices and the closeness of competition between competitors in a market.100 As such, a survey can play a useful
91
Section 110(8), Enterprise Act. Section 111(3), Enterprise Act. 93 Section 110A(1), Enterprise Act. 92
94
Administrative Penalties: Statement of Policy on the CMA’s Approach, para. 2.5. Section 111(7)(a), Enterprise Act. 96 Section 111(7)(b), Enterprise Act. 97 These included B&M Stores, Home Bargains, Iceland, Morrisons, Poundstretcher, Poundworld, Savers, and Wilko. 98 These included Amazon, Ann Summers, Asda, Boots, Sainsbury’s, Superdrug, and Tesco. 95
99
The CMA held staff hearings with over 20 customers and published an aggregated summary of this evidence to keep the names of individual customers anonymous. 100 See Chapter 12 for an in-depth discussion regarding surveys and their use in merger control inquiries.
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role in the CMA’s Phase II information-gathering process.101 If the Inquiry Group decides to conduct a survey, the main parties will be consulted on the draft survey design and survey questions,102 and parties will usually be informed which market research organisations have been invited to tender before the award of any contract to conduct the survey.103 Where possible, the parties will be asked if they have any objections (e.g., due to possible conflicts) and any objections will be considered by the Inquiry Group before any appointment is made. In some cases where a survey is conducted, the parties, and possibly some third parties, may be required to provide contact details for a sample of their customers or suppliers so that the survey company can seek the views of relevant contacts.104 For some merger inquiries, the CMA may wish to employ a consultant to provide specialist advice on the sector concerned,105 and where the merger inquiry involves a regulated sector, the CMA will typically seek the views of the relevant regulator.106 Where possible, before any contract is awarded, the main parties will be informed and allowed a short time to inform the CMA of any objections, which will be considered by the Inquiry Group prior to any appointment being made.107
8.13.9 Site Visits During the early weeks of the Phase II inquiry (usually around weeks three to five), a site visit will be arranged for the Inquiry Group and certain members of the case team.108 This is a chance for the CMA to gain a greater understanding of the parties’ businesses by visiting key facilities and meeting key operational staff. Parties are encouraged to organise a short presentation on their businesses in order to explain the nature of the business and the context in which the merger takes place, followed by a tour of the relevant business areas.109 The parties are usually asked to provide a draft itinerary, which is approved by the Inquiry Group.
101 Recent examples of the CMA’s use of surveys in Phase II merger inquiries include Celesio/Sainsbury’s (not yet published); Ladbrokes/Coral (not yet published); Poundland and 99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015; Reckitt Benckiser and K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015; Ashford and St Peter’s and Royal Surrey County, a report on the anticipated merger of Ashford and St Peter’s Hospitals NHS Foundation Trust and Royal Surrey County Hospital NHS Foundation Trust, 16 September 2015. 102 Jurisdictional and Procedural Guidance, para. 11.34. 103 Ibid., para. 11.35. 104 Ibid., para. 11.36. 105
Ibid., para. 11.37. See, e.g., Ashford St Peters/Royal Surrey, supra, where Monitor was consulted by the CMA and BT/EE where Ofcom was consulted by the CMA. In both cases, a representative from the relevant regulator was seconded to the CMA’s case team. 107 Jurisdictional and Procedural Guidance, para. 11.37. 106
108 109
Ibid., para. 11.38. Ibid., para. 11.39.
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ISSUES STATEMENT
Following its initial phase of information gathering and its review of the merging parties’ written submissions, the CMA will publish its issues statement, in advance of the hearing with the merging parties, setting out the major themes that the CMA will want to explore in more detail with the parties at the hearing. The issues statement is often published around four to five weeks into the Phase II process. The issues statement should not be seen as implying that the CMA has reached any conclusions regarding the competitive assessment and the CMA will not formally reach any provisional conclusions until the publication of its provisional findings. The issues statement is typically a relatively short document that will usually include: (1)
the terms of reference;
(2)
the background to the transaction, including some information about the parties and their products/services;
(3)
issues in relation to market definition that the CMA will be investigating;
(4)
the appropriate counterfactual;
(5)
the theories of harm that the CMA has identified to date and the possible effects on competition that these theories of harm might lead to;
(6)
any countervailing constraints, including entry and expansion, buyer power, and efficiencies; and
(7)
possible remedies and relevant customer benefits.
An issues statement is published in all CMA merger inquiries (unless the merger has already been abandoned). The issues statement will normally be accompanied by a press release, both of which are sent to the main parties on an embargoed basis prior to publication. Merging parties may respond in writing to the issues statement, although in some cases the parties choose to cover these issues orally at their hearing. The CMA would also expect to receive responses from third parties in relation to the issues statement, who may also respond to issues set out in the Phase I SLC decision, which should have been published around the time of the issues statement.
8.15
WORKING PAPERS
The CMA uses the information that it gathers during the course of its inquiry to develop its assessment of the merger under investigation. This analysis is developed through internal CMA working papers, which are used to facilitate internal debate on the substantive and procedural issues that arise during the Phase II inquiry and will often form the basis for various chapters of the provisional findings and final report. These working papers will have been commissioned at a much earlier stage in the Phase II inquiry (often at the first Group meeting) with case team members working on their papers during approximately the first ten weeks of the inquiry. Working papers are often prepared in relation to industry background, the parties and their financial
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information, jurisdiction, market definition, the counterfactual, competitive effects and countervailing constraints, including entry, expansion and buyer power. In relevant cases, particularly those involving hospital mergers, a working paper on relevant customer benefits may also be prepared. These working papers contain the CMA’s developing thinking on issues at a point in time. They are not definitive and do not represent the CMA’s final views on a topic. As such, the CMA is not under a general obligation to disclose all working papers.110 However, as discussed below, the CMA may disclose some working papers (or extracts from them) to the merging parties during the course of an inquiry where it considers that to do so would assist the parties to understand their emerging thinking or to check certain acts (this process is referred to as ‘put-back’).111 Working papers are typically sent out around the same time as the annotated issues statement and, in any event, before the main party hearings.
8.16
ANNOTATED ISSUES STATEMENT
In advance of the main party hearing, the CMA will provide the parties with an annotated version of the issues statement that it published earlier in the Phase II process as well as a hearing agenda or a “topics list.”112 The annotated issues statement is not published on the merger inquiry’s webpage and the main purpose of this document is to indicate the Panel’s provisional thinking on key issues and, if appropriate, to indicate if certain lines of inquiry are being closed, such that the Panel does not wish to hear about them during the main parties hearing.
8.17
SHARING TECHNICAL ANALYSIS
In certain cases, the CMA may invite parties to comment on specific pieces of technical analysis.113 In the event that such disclosure raises issues in relation to the confidentiality of the underlying data, the CMA may restrict the disclosure of that data to the main parties’ external advisers only in order to preserve as far as possible the confidentiality of the data concerned.114 In such cases, strict rules will be put in place relating to access and onward disclosure, and recipients will be required to acknowledge that they understand the basis on which such disclosure is made and that they will comply with these restrictions. If advisers fail to comply with these requirements, they will be subject to sanctions including, at a minimum, revoking their access to the data.115
110 CC7, Chairman’s Guidance on Disclosure of Information in Merger Inquiries, Market Investigations and Reviews of Undertakings and Orders accepted or made under the Enterprise Act 2002 and Fair Trading Act 1973 (the “Guidance on Disclosure”), para. 7.3. 111 Ibid. 112 Jurisdictional and Procedural Guidance, para. 12.3. 113 Ibid., para. 12.4. 114 115
Ibid. Ibid.
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PUT-BACK
The CMA will send various documents (or relevant extracts) to parties for the purposes of enabling them to verify the factual correctness of certain information included in these papers and to identify confidential material that is included in these papers.116 Parties should give reasons for any requests that they make for material to be redacted from CMA documents that are to be published and the CMA will not accept blanket requests for excisions. This process is referred to as ‘put-back’. The purpose of this process is not to enable the parties to restate their case and is separate from disclosure of the CMA’s developing thinking. Parties wishing to comment on substantive issues arising from the materials disclosed to them should do so separately.117 Documents that would usually be put-back to the main parties include summaries of third party hearings, summaries of third party representations, and working papers. The acceptance by the CMA of an excision request during the course of an inquiry does not prevent the CMA from revisiting this request for the purposes of the publication of its provisional findings or its final report.
8.19
MAIN PARTY HEARINGS
Main party hearings usually take place towards the end of the assessment phase and often around 11 or 12 weeks into a Phase II inquiry. In anticipated mergers, separate hearings are held with the acquirer and the vendor. In completed mergers, separate hearings will often be held with the acquirer and the entity that is being held separate, possibly with an additional hearing where the parties are heard together. These hearings therefore take place at a time when the Inquiry Group (and the case team) have received a considerable amount of information and have been able to produce an annotated issues statement. Merging parties are able to communicate directly with the group members only at hearings. Indeed, merging parties may have the opportunity to meet the Inquiry Group only once or twice during an entire Phase II inquiry, although they will have the opportunity to interact with the case team more regularly. This places considerable importance on such hearings. Hearings are typically held at the CMA’s premises in central London and are normally attended by all Inquiry Group members, as well as the Project Director and other members of the case team. The CMA will provide the parties with an agenda in advance of the meeting setting out topics that it wishes to explore in the hearing and the Inquiry Group members and the case team will usually have prepared questions in advance of a hearing, typically on the basis of their issues statement as well as on the main parties’ response to the issues statement and submissions, questions relating to working papers and possibly to issues raised by third parties. The inquiry Chair will usually start a hearing by introducing the Inquiry Group members and the inquiry staff. Parties should expect to provide a brief explanation of their case, but thereafter, the Chair will usually direct the hearing by asking the parties questions. Whilst a party might be accompanied by its legal or other professional advisers, the CMA will expect 116 117
Ibid., para. 12.5. Ibid., para, 12.6.
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The Phase II Process
to hear primarily from the representatives of the business themselves.118 The CMA may direct questions at specific individuals. If the parties are unable to provide the requested information in the hearing, they may provide this subsequently in writing. There is no set time-limit for a hearing and hearings typically last several hours (and may last a whole day in exceptional cases). A transcript will be taken of the entire hearing.119 Parties will be given the opportunity to comment on the accuracy of the transcript and to provide any clarifications.120 Transcripts are not published on the CMA’s website, although issues raised in hearings may be referred to in the provisional findings or final report. Hearings may be held in private or in public. Most hearings will be held in private given the commercially-sensitive nature of the information that is often discussed at hearings. In deciding whether to hold any hearings in public, the CMA must have regard to the following factors: (1)
the views of the main and third parties;
(2)
the likelihood that a matter relating to the private affairs of an individual or body might be made known to the public and, being made known, might significantly harm the interests of that individual or body;
(3)
the extent to which an individual or body might be inhibited from providing information to the group if the hearing were to be held in public;
(4)
the extent to which an individual or body might be encouraged to provide information to the group if the hearing were to be held in public;
(5)
the efficient and proper conduct of the reference;
(6)
the administrative timetable;
(7)
the resource implications for the hearing; and
(8)
the transport implications of the location of the hearing.121
Hearings may begin in public and may continue in private if the CMA considers that any of (2), (3), (4) or (5) above might be affected.122 In the event that the CMA has to continue a public hearing in private, it must give its reasons for doing so in public.123 In the event that any further working papers are disclosed to the main parties after this hearing has taken place, they will usually have an opportunity to comment on them 118
Jurisdictional and Procedural Guidance, para. 12.13 Ibid. 120 Ibid. 121 CMA Rules of Procedure, para. 8.2. 119
122 123
Ibid., para. 8.3. Ibid.
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either in writing or, where appropriate, at a case team meeting, in which case a record will be taken of the meeting and provided to the Inquiry Group.124 Given the timing of main party hearings, this would now be done only very rarely.
8.20
PROVISIONAL FINDINGS
The CMA publishes its provisional findings in relation to all Phase II merger inquiries (unless the reference is cancelled prior to the provisional findings stage).125 In addition to the provisional findings themselves, the CMA also publishes a notice of its provisional findings on its website, which is a short document simply setting out whether the CMA considers that the merger has resulted or may be expected to result in a substantial lessening of competition and usually sets out a deadline for any comments. The CMA aims to publish its provisional findings by around week 15 of a Phase II inquiry. The provisional findings will include the CMA’s findings on the first two statutory questions that it is required to answer.126 All provisional findings must provide an explanation of the CMA’s reasons for reaching these findings,127 which will typically include details of the main parties, a description of the relevant merger situation, the principal features of the industry, and a full explanation of the CMA’s reasoning in reaching its provisional findings.128 These findings are not the CMA’s final word on a merger and they are not a draft final report. However, in practice, the Authorities have reversed their provisional findings in respect of whether the merger results in a substantial lessening of competition in only a limited number of cases129 (and typically as a result of late-breaking developments in the inquiry) and, therefore, to date, provisional findings have been a reasonably reliable guide as to the final outcome of the CMA’s inquiry.130 It is also worth noting that, in all of the inquiries in which the CC reversed its provisional findings, it moved from an SLC to a no SLC finding.
124
Jurisdictional and Procedural Guidance, para. 12.3. CMA Rules of Procedure, para. 11.1. 126 Ibid., para. 11.2. 125
127
Ibid., para. 11.4. Jurisdictional and Procedural Guidelines, para. 12.16. 129 There have only been four such cases: British Salt Limited and New Cheshire Salt Works Limited, a report on the acquisition by British Salt Limited of New Cheshire Salt Works Limited, November 2005; Greif Inc and Blagden Packaging Group, a report on the acquisition by Greif Inc of the steel drum and closures business of the Blagden Packaging Group, 17 August 2007; Stagecoach Group plc/Eastbourne Buses Limited/Cavendish Motor Services Limited, a report on the completed acquisition by Stagecoach Group plc of Eastbourne buses Limited and Cavendish Motor Services Limited, 22 October 2009; and Ticketmaster/Live Nation, supra. See also, Sports Direct International Ltd v Competition [2009] CAT 32, para. 46, in which Mark Brealey QC, counsel for Sports Direct, reflected the generally perceived wisdom that there “was a critical window of opportunity for Sports Direct to make known its views on the CC’s proposed findings of fact and analysis. That window opens when the CC sends out working papers and is effectively closed (albeit not completely) when the CC publishes its provisional findings.” 130 To date, the CMA has not reversed its provisional findings in any Phase II merger inquiry. 128
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The Phase II Process
Before the provisional findings are published, the case team will normally put-back to the parties excerpts from the provisional findings not already put-back in some other form to check for factual inaccuracies and to check that all confidential material has been identified.131 As well as identifying any confidential material, parties should, at the same time, explain why they consider that the material in question should be excised by reference to section 244 of the Enterprise Act. Given the time constraints of the inquiry timetable, the deadline for parties to respond to further put-back may be no more than 24 hours.132 When the Inquiry Group has made its decision on excisions, each party is informed of any requests that the Inquiry Group has rejected and parties have the right to make further representations to the Procedural Officer.133 The CMA’s practice is, shortly before publication, to provide the main parties with a copy of: (i) the press release; (ii) the notice of provisional findings; (iii) the summary of provisional findings; (iv) a redacted version of the full provisional findings report; and (v) where relevant, the notice of possible remedies.134 These documents are provided on an embargoed basis to enable the parties to prepare their communications. Typically, this occurs after the London Stock Exchange has closed on the day before publication. By 7:00am on the following day, these documents are published on the merger inquiry’s webpage.135 Sometimes, the provisional findings document is published shortly after the other documents. The notice of provisional findings will invite all interested parties to provide any written comments as to why the provisional findings should not be made final (or should be varied) within a period of not less than 21 days from the publication of the notice.136 In the event that the main parties fail to provide any written comments within the designated period, the CMA is not obliged to take any later comments into consideration.137 Given the importance of provisional findings to a CMA merger inquiry, and the fact that so few provisional findings are reversed in respect of their conclusion as to whether the merger is likely to result in a substantial lessening of competition, an important consideration is whether provisional findings are appealable decisions. Prior to the CAT’s decision in Sports Direct v Competition Commission,138 it was unclear whether provisional findings could be appealed and, to date, none have been appealed. In this case, the CAT considered whether it was lawful for the CC to have considered requests by the OFT and JJB to make redactions to working papers that were to be sent to Sports Direct, and to have concluded that certain information should be redacted and that
131 132
Jurisdictional and Procedural Guidelines, para. 12.17. Ibid.
133
Ibid., para. 12.18. Ibid., para. 12.19. 135 Ibid. 136 CMA Rules of Procedure, para. 11.5. 134
137 138
Ibid., para. 11.6. Sports Direct International Ltd v Competition [2009] CAT 32.
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therefore Sports Direct should not be provided with unredacted versions of those working papers, at least at that stage of the CC’s investigation. In respect of these working papers, the CAT held that “[i]n the context of merger control, where there is a procedure before the CC typically involving preliminary decisions leading to a final decision affecting the parties’ legal rights, judicial review under section 120 may lie against a preliminary decision not affecting legal rights, but which may lead to final decisions which do.”139 As to whether these working papers constituted a decision for the purpose of section 120, the CAT held that “[i]n our judgment a decision will normally be covered by section 120(1) if it is something that could form a ground of challenge in the appeal from the ultimate decision if it were not addressed and, if necessary, remedied on an interlocutory basis.”140 Counsel for the CC argued that Sports Direct should (at the very least) wait for the publication of the provisional findings before making a challenge. It is, therefore, possible that provisional findings could be the subject of a challenge in the future.
8.21
NOTICE OF POSSIBLE REMEDIES
In the event that the provisional findings are that the merger in question results in a substantial lessening of competition, the CMA is required to publish a notice of remedies indicating the range of possible remedial options. The Inquiry Group must have regard to the need to give as much notice as is practicable of the actions that it considers might be taken by the CMA for the purpose of remedying the effects of a merger.141 Any notice of the actions that might be taken by the CMA may be contained in the provisional findings but, if not, the CMA must notify the merging parties as soon as practicable after it has notified them of its provisional findings.142 In practice, the CMA usually publishes a separate notice of possible remedies on the same day that it publishes its press release and summary of the provisional findings. A copy of any remedies notice must be published on the CMA’s website,143 which will not contain any information that is confidential to the merging parties.144 The CMA must consult the merging parties regarding the notice of possible remedies and have regard to any representation received from them.145 Merging parties will usually respond to the CMA’s notice of possible remedies in writing and there is typically a deadline of two weeks for a written response. A redacted version of such a written response will be published on the CMA’s website. The notice of possible remedies will also invite third parties to provide written comments.
139
Ibid., para. 50.
140
Ibid., para. 55. CMA Rules of Procedure, para. 12.1. 142 Ibid., para. 12.2. 143 Ibid., para. 12.3. 141
144 145
Ibid., para. 12.4. Ibid., para. 12.5.
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8.22
RESPONSE HEARINGS
Where the Inquiry Group’s provisional findings are that the merger has resulted or is likely to result in a substantial lessening of competition, response hearings will be held with the main parties and usually with some key third parties where their evidence or views might be useful to the Inquiry Group in reaching a final decision.146 Response hearings may also take place where the Inquiry Group’s provisional findings are that no substantial lessening of competition arises from the merger, although main parties often choose not to take advantage of this.147 Response hearings will be led by the Inquiry Group with support from the case team and may be held in person or by teleconference. Parties will be given the opportunity to comment orally on the provisional findings and the CMA may seek clarification on points made by the parties in written submissions or at the main hearing, although the main focus of the response hearing is likely to be on possible remedies.148 Transcripts of these hearings will be taken although these are not published. Summaries of third party response hearings will not necessarily be prepared or published depending on the circumstances of the case and any confidentiality considerations.149 Where relevant, comments from third parties will be incorporated into the remedies working paper that is disclosed to the main parties. Following the main party response hearing, the merging parties may submit further, or amended, proposals for remedies and, time permitting, non-confidential versions of these proposals will be published in the merger inquiry’s webpage.150 Additional meetings with the case team may also be held at which specific details of the remedy proposals can be explored with the parties. Either a transcript or a note of such meetings will be taken.151
8.23
REMEDIES WORKING PAPER
Where the Inquiry Group’s provisional findings are that the merger results in a substantial lessening of competition and possible remedies have been consulted on, a remedies working paper containing a detailed assessment of the different remedial options and setting out a provisional decision on remedies will be sent to the main parties for comment following the response hearings.152 This paper will also set out the CMA’s views on whether the merger gives rise to relevant customer benefits and, if so, whether the proposed remedy should be modified in order to preserve those benefits. The main parties will usually be given at least five working days to submit their
146
Jurisdictional and Procedural Guidance, para. 13.4.
147
Ibid., para. 13.5. 148 Ibid., para. 13.6. 149 Ibid. 150 Ibid., para. 13.7. 151 152
Ibid. Ibid., para. 13.8.
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comments.153 Third parties may also be consulted about the proposed scope of remedies and their views on any relevant customer benefits. In some (rare) cases, the remedies working paper may be published on the merger inquiry’s webpage if the CMA considers that a wider consultation is necessary.154
8.24
FINAL REPORTS
Once the group has had regard to any oral or written submissions made following its provisional findings, it will make its final decisions on the statutory questions that it is obliged to answer and publish its final report.155 The final report will be structured around the questions that the Inquiry Group is required to answer and the decisions that the group has made in answer to those questions. The group’s decisions must be fully supported by appropriate analysis and argument, and annexes to the report must be included to the extent necessary to understand the decisions.156 A report may contain a statement of disagreement and the member’s reasons for disagreeing with the group’s final decision.157 Reports are published on the CMA’s website and hard copies are also available. As with provisional findings, the final report is provided to the merging parties on an embargoed basis after the London Stock Exchange has closed on the day before publication. By 7:00am on the following day, the final report is published on the merger inquiry’s webpage.158
8.25
DISCLOSURE OF INFORMATION 8.25.1 Core Documents
The CMA publishes a wide range of information on its website (on the merger inquiry’s webpage) throughout its investigation, including, where relevant, the following core documents: (i) the terms of reference; (ii) the members of the inquiry; (iii) the administrative timetable; (iv) any interim undertakings or interim order (including an appointment of a monitoring trustee); (v) the issues statement; (vi) any notice of extension of the inquiry period; (vii) the notice of provisional findings; (viii) the provisional findings report; (ix) the notice of possible remedies; (x) the final report; (xi) notice of proposal to accept undertakings; and (xii) any notice of acceptance of final undertakings.
153
Ibid. Ibid. 155 Ibid., para. 13.9. 156 Ibid., para. 13.12. 154
157
See, e.g., Arcelor SA and Corus Group plc, a report on the acquisition by Arcelor SA of part of Corus Group plc’s UK hot rolled steel piling business, February 2005, in which the CC cleared the merger and a note of dissent was written by Chris Goodall. See also, Francisco Partners LP and G International, Inc, a report on the acquisition by Francisco Partners LP of G International, Inc, in which Diane Coyle and and Peter Stoddart dissented from the CC’s 3:2 clearance decision. To date, there have been no such dissenting opinions in a CMA Phase II merger inquiry. 158 Jurisdictional and Procedural Guidance, para. 13.14.
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8.25.2 Evidence and Announcements The CMA will also publish evidence and announcements on its website. This evidence will include, where relevant: (i) the main parties’ submissions; (ii) third party submissions; (iii) third party hearing summaries; (iv) responses to the issues statement; (v) the main parties’ responses to the provisional findings report and notice of possible remedies; (vi) third party responses to the provisional findings report and notice of possible remedies; and (vii) any consumer research commissioned by the CMA.
8.25.3 Confidentiality The documents that the CMA publishes on its website, both from the merging parties and third parties, will be non-confidential versions of the relevant submissions and the parties will generally be invited to check the accuracy of the documents that the CMA proposes to publish on its website and provide comments in relation to its possible disclosure. The Enterprise Act contains provisions relating to the disclosure of information in CMA reports.159 However, the most comprehensive guidance on the CMA’s approach to confidentiality is set out in the ‘Chairman’s Guidance on Disclosure of Information in Merger and Market Inquiries’ (the “Disclosure Guidance”).160 This guidance states that the CMA aims to be open and transparent in its work while maintaining confidentiality of information that it obtains during its inquiries.161 The guidance notes that transparency is important because: (i) it is a means of achieving due process and ensuring that by having a better understanding of the case against them, the parties are treated fairly; (ii) it enables other interested parties to understand the issues that the CMA is considering and allows them to shape their input accordingly; (iii) transparency helps main parties and other interested persons when providing the CMA with information, including identifying inaccuracies and incomplete or misleading information; and (iv) the effectiveness, efficiency and quality of the CMA inquiries and decisions are improved.162 The Disclosure Guidance states that the Enterprise Act imposes a general restriction on the disclosure of “specified information”163 that it has obtained during the course of an investigation.164 Where the CMA receives information about an individual or the business of an undertaking, the CMA may not disclose this information either during the
159
Section 244, Enterprise Act.
160
CC7 – Guidance on Disclosure, Revised 2013 and adopted by the CMA. Ibid., para. 1.5. 162 Ibid., para. 1.6. 161
163
Section 238(1) of the Enterprise Act provides that, for the purposes of CMA merger inquiries, “specified information” is any information that comes to the CMA in connection with the exercise of its functions. 164 See sections 237 and 238, Enterprise Act.
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lifetime of the individual or during the existence of the undertaking.165 The Disclosure Guidance sets out that “specified information” may be disclosed if:166 (1)
the CMA obtains the required consent;167
(2)
disclosure is required for the purpose of an EU obligation;168
(3)
disclosure is made for the purpose of facilitating the exercise by the CMA of any function it has under, or by virtue of, the Enterprise Act or any other enactment;169
(4)
the information is disclosed to another person for the purpose of facilitating the exercise by that person of any function he has under, or by virtue of, the Enterprise Act or another enactment specified in Schedule 15 to the Enterprise Act or such subordinate legislation as the Secretary of State may specify in an order;170 or
(5)
the information is disclosed: (i) in connection with the investigation of any criminal offence in any part of the UK; (ii) for the purposes of any criminal proceedings there; or (iii) for the purpose of any decision whether to start or bring to an end such an investigation or proceedings.171
Before disclosing any specified information, the CMA is required to have regard to three considerations, namely:172 (1)
the need to exclude from disclosure (so far as practicable) any information the disclosure of which the CMA considers contrary to the public interest;173
(2)
the need to exclude from disclosure (so far as practicable) – (i) commercial information the disclosure of which the CMA considers might significantly harm the legitimate business interests of the undertaking to which it relates or
165
Sections 237(1) and (2), Enterprise Act. Disclosure Guidance, para. 4.2. 167 Section 239, Enterprise Act. If the information relates to the affairs of an individual, the consent of the individual is required. If the information relates to the business of an undertaking, the consent of the person for the time being carrying on the business is required. In the case of a company, consent may be given by the director, secretary or other officer of the company. In the case of a partnership, consent may be given by a partner and in the case of an unincorporated body or association, consent may be given by a person concerned in the management or control of the body or association. 166
168
Section 240, Enterprise Act. Section 241(1), Enterprise Act. 170 Section 241(3), Enterprise Act. 171 Section 242(1), Enterprise Act. 169
172 173
See, Guidance on Disclosure, para. 4.4 and section 244, Enterprise Act. Section 244(2), Enterprise Act.
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(ii) information relating to the private affairs of an individual whose disclosure the CMA thinks might significantly harm the individual’s interests;174 and (3)
174 175
the extent to which the disclosure of the information mentioned in paragraphs (2)(i) or (ii) above is necessary for the purpose for which the CMA is permitted to make disclosure.175
Section 244(3), Enterprise Act. Section 244(4), Enterprise Act.
Chapter 9 THE COUNTERFACTUAL 9.1 Introduction 9.2 The Counterfactual 9.2.1 The Phase I Approach 9.2.2 The Phase II Approach 9.3 The Relevant Time-Period for Assessing the Counterfactual 9.3.1 Future Events 9.3.2 Past Behaviour 9.3.3 A Two-Part Counterfactual 9.3.4 Violations of Competition Law 9.4 The Failing Firm Counterfactual 9.4.1 The Analytical Framework 9.4.2 The Phase I Approach 9.4.3 The Phase II Approach 9.4.4 Limb One: Exit of the Target Firm 9.4.5 Limb Two: Alternative Purchasers 9.4.6 Limb Three: Exit of the Target as a Less Anti-Competitive Outcome
9.1
9.4.7 Exit Uninfluenced by the Merger 9.4.8 Failing Division Counterfactual 9.4.9 The Phase I Decisional Practice 9.4.10 The Phase II Decisional Practice 9.5 Strategic Exit 9.6 Scenarios Short of Exit 9.6.1 The Target as a Weakened Competitive Force 9.6.2 State Rescue 9.7 Market Entry or Expansion 9.8 Exit of a Competitor 9.9 Competing Bids 9.9.1 The Phase I Approach 9.9.2 The Phase II Approach 9.10 Parallel Transactions 9.10.1 The Phase I Approach 9.10.2 The Phase II Approach 9.11 Rail Franchise Bids
INTRODUCTION
Mergers should not be assessed on an entirely static basis. Market conditions do not remain constant. New competitors may enter a market, current suppliers may expand and, in certain circumstances, firms may fail or choose to exit a market for strategic (non-financial) reasons. Therefore, in order to determine whether a merger might result in a substantial lessening of competition on a market in the UK, the CMA must determine the competitive conditions that would have existed on the market in question in the absence of the merger. These alternative competitive conditions are referred to as the ‘counterfactual’ and are those against which a merger will be assessed. Therefore, the counterfactual is an important part of the competitive assessment and can, in certain cases, be outcome-determinative. The Enterprise Act does not expressly consider the issue of the counterfactual, but this feature of the competitive assessment has explicitly been in place since 20031 and has been endorsed by both the CAT and the Court of Appeal. In British Sky Broadcasting Group plc v Competition Commission, the CAT stated that:
1
Mergers – Substantive Assessment Guidelines (OFT 516), paras. 3.8, 3.23 and 3.24.
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“…the purpose of the counterfactual is to assist in assessing the effects of the merger. However, it must be kept in mind that the counterfactual is not a statutory test: it is an analytical tool used to assist in answering the question posed by section 47 of the [Enterprise] Act, namely whether the creation of [a relevant merger situation] may be expected to result in an SLC within any market or markets in the United Kingdom for goods or services. Competitive conditions can and do change over time, and it is important to take into account the potential for change in the market in order to consider as fully as possible the level and intensity of competition without the merger.”2
There are seven principal scenarios in which a merger may not be assessed against premerger competitive conditions. These include circumstances where: (1)
the target business would have failed financially, it would have been unable to reorganise itself successfully and its assets would have exited the market;3
(2)
the target business would not have failed, but would nevertheless have exited the market for strategic, non-financial reasons;
(3)
the target business would have been a weakened competitive force, but would not have exited the market;
(4)
there would have been market entry by one of the merging parties;
(5)
a third party competitor would have exited the market;
(6)
there are competing bids for the target business or parallel transactions are taking place in the same market; and
(7)
there are bids for a rail franchise.
9.2
THE COUNTERFACTUAL
The approach to the counterfactual differs at Phase I and Phase II. This is principally a result of the fact that the standards of proof are different at each stage of a merger investigation but also reflects the difference in the time and resources available for each stage of an investigation. The differing approaches at Phase I and Phase II are set out below.
9.2.1
The Phase I Approach
As discussed in Chapter 7, the CMA is under a duty to make a reference in respect of mergers that have resulted, or may result, in a realistic prospect of a substantial lessening of competition. In practice, this means that for the CMA to make a reference it can be considerably less than 50% likely, and need only be more than fanciful, that a merger has resulted, or may result, in a substantial lessening of competition. This standard of proof has implications for the counterfactual at Phase I. In this regard, the CMA will assess the effects of the merger compared with the most competitive 2 3
British Sky Broadcasting Group plc v Competition Commission & Anor [2008] CAT 25, para. 91. These conditions apply equally to a failing division. See section 9.4.8.
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305
counterfactual providing always that it considers this situation to be realistic.4 In practice, the CMA often adopts the prevailing or pre-merger conditions (referred to, for the sake of simplicity as the status quo) as the most competitive, realistic counterfactual.5 However, this will not always be the case and the CMA may adopt a different counterfactual if, based on the available evidence, it considers that the likelihood of the status quo continuing in the absence of the merger is not realistic (e.g., the target business is a failing firm and the counterfactual is less competitive than the status quo) or if there is a realistic prospect of a counterfactual that is more competitive as between the merging parties than the prevailing competitive conditions (e.g., because one of the parties is planning to enter the market in question).6 The asymmetry of the reference threshold works against merging parties in relation to the counterfactual at Phase I. As the CMA need only find a realistic prospect of a substantial lessening of competition, correspondingly merging parties must show on the basis of compelling evidence that the prevailing conditions of competition are unrealistic in the absence of the merger. Evidentially, this bar is a high one and whilst merging parties have argued for an alternative counterfactual in many cases, the Authorities have adopted their default position of the status quo in the vast majority of decisions.
9.2.2
The Phase II Approach
At Phase II, as the CMA has to determine whether a merger has resulted, or may be expected to result, in a substantial lessening of competition, its approach to the counterfactual differs from that at Phase I. In this regard, the CAT has stated that, at Phase II, “the correct comparison is between the situation post-merger, and the situation which, on the balance of probabilities, is the situation which would have developed in the market in the absence of that merger.”7 If several, alternative, counterfactuals are possible, the CMA must determine which of these possible counterfactuals is “most likely.”8 In the event that there is more than one likely counterfactual, and the choice of counterfactual will make a “material difference” to its competitive assessment, the CMA will carry out a more detailed assessment of the counterfactual before reaching a conclusion as to which counterfactual is “most likely.”9 In determining the “most 4
Merger Assessment Guidelines, para. 4.3.5. Ibid. 6 Ibid. 5
7
Stagecoach Group plc v Competition Commission, [2010] CAT 14, para. 20. Merger Assessment Guidelines, para. 4.3.6. 9 Ibid., para. 4.3.6. See, e.g., Tesco plc and Co-operative Group (CWS) Limited, report on the acquisition of the Co-operative Group (CWS) Limited’s store at Uxbridge Road, Slough, by Tesco plc, 28 November 2007. In between the publication of its provisional findings in this case and its final report, the CC was able to specify that, in the absence of an acquisition by Tesco, it considered the most likely outcome to be a sale of the store to Sainsbury’s. See also, Ticketmaster and Live Nation, a report on the completed merger between Ticketmaster Entertainment, Inc and Live Nation, Inc, 7 May 2010, in which the CC expended considerable effort on deciding what was the most likely counterfactual, with over 100 paragraphs devoted to the counterfactual, representing nearly one-quarter of the entire decision. 8
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likely” counterfactual, the CMA will “incorporate only those aspects of scenarios that appear likely on the basis of the facts available to it and the extent of its ability to foresee future developments; it seeks to avoid importing into its assessment any spurious claims to accurate prediction and foresight.”10 Furthermore, the CMA will include in the counterfactual only those elements that are foreseeable and it should not generally be necessary for the CMA to make finely balanced judgements regarding the elements that should or should not be included.11 As a result of this difference of approach, the Authorities have reached a different conclusion in respect of the counterfactual at Phase II than at Phase I in a number of cases.12 This also reflects the fact that a determination of the appropriate counterfactual in each case involves an element of judgement and that there is greater scope for panel members to exercise their judgement in a Phase II inquiry than there is for a Decision Maker within the confines of a Phase I review.
9.3
THE RELEVANT TIME-PERIOD FOR ASSESSING THE COUNTERFACTUAL
In most cases, the CMA will compare the effects of the merger under consideration against the prevailing or pre-merger competitive conditions. In these cases, the relevant time-period for the consideration of the counterfactual will not be of particular importance because it is assumed that the competitive conditions on the market will not materially alter from those existing pre-merger. However, in circumstances where the counterfactual is not pre-merger competitive conditions, the question arises as to the most appropriate time-period for considering the counterfactual (e.g., should the CMA take into consideration events that have taken place in the past or might take place in the future?). This exercise involves a certain amount of speculation. In the event that the most appropriate counterfactual is not pre-merger conditions, there is typically a particular reason for this determination (e.g., the target firm is failing or a third party plans to enter the market) in which case, as long as the particular event that justifies the counterfactual not being pre-merger competitive conditions is sufficiently proximate in time, it will 10 11
Merger Assessment Guidelines, para. 4.3.6.
Ibid. 12 See, e.g., Linergy Limited and Ulster Farm By-Products Limited, a report on the completed acquisition by Linergy Limited of Ulster Farm By-Products Limited, 6 January 2016; Optimax Clinics Limited and Ultralase Limited, a report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, 20 November 2013; Ratcliff Palfinger/Ross & Bonnyman (Commercial Vehicles Tail Lifts Spare Parts Business), a report on the anticipated acquisition by Ratcliff Palfinger of the commercial vehicles tail lifts spare parts business of Ross & Bonnyman, 10 June 2011; Ticketmaster and Live Nation, a report on the completed merger between Ticketmaster Entertainment, Inc and Live Nation, Inc, 7 May 2010; Long Clawson Dairy Limited and Millway, a report on the completed acquisition by Long Clawson Dairy Limited of the Millway Stilton and speciality cheese business of Dairy Crest Group plc, 14 January 2009; BOC and Ineos Chlor, a report on the anticipated acquisition by BOC Limited of the packaged chlorine business and assets of Ineos Chlor Limited, 18 December 2008; and British Salt Limited and New Cheshire Salt Works Limited, a report on the acquisition by British Salt Limited of New Cheshire Salt Works Limited, November 2005.
The Counterfactual
307
usually be taken into consideration by the CMA and the Merger Assessment Guidelines specify that the CMA may take into consideration events that are “foreseeable.”13 As a general matter, the further forward in time the CMA attempts to speculate, the more difficult it becomes to determine future events to the requisite standard of proof. In most cases, the CMA will attempt to determine what is likely to happen in the future, absent the merger. In rarer cases, the CMA may look backwards in time to determine the appropriate counterfactual. Examples of both of these scenarios are considered below.
9.3.1
Future Events
The foreseeable period for determining the counterfactual in relation to particular mergers will vary on a case by case basis. However, at Phase I, the CMA will usually consider a period of one to two years into the future as being reasonably foreseeable and given the asymmetric nature of the reference threshold, the CMA may only be able to take into consideration a shorter time-period than might be possible at Phase II.14 For example, in BOC/Ineos, the OFT considered the relevant counterfactual to be the prevailing conditions of competition.15 However, at Phase II, the CC determined that the appropriate counterfactual was not the status quo as one of the merging parties’ competitors, Albion Chemicals (“Albion”), was likely to exit the market at some point in the near future, and considered that, as a result, the merger was likely to accelerate Albion’s exit strategy, thereby rendering the counterfactual less competitive than premerger conditions.16 In terms of timing, the merger agreement was signed in March 2008 and the CC completed its inquiry in December 2008, but the CC considered the relevant counterfactual period to be “a period of time over which the future of the relevant market(s) was reasonably foreseeable,”17 which, in this case, was considered to be “until late 2012”18 (i.e., over four years from the date of the merger).
13
Ibid., para. 4.3.2. This is because, at Phase I, the CMA will only move away from prevailing competitive conditions if they are not realistic going forwards, and given that future events are (all else equal) less foreseeable the further into the future they are likely to take place, this might place greater restrictions on the timeperiod that the CMA can take into consideration than might be the case at Phase II. At Phase II, the CMA will consider what future events are likely to occur on the balance of probabilities. This change in the evidentiary threshold may allow the CMA to consider events that are likely to occur but are not so likely to occur that the continuation of prevailing competitive conditions is unrealistic. 15 Anticipated acquisition by BOC Limited of the packaged chlorine business and assets carried on by Ineos Chlor Limited, OFT decision of 29 May 2008. 16 BOC and Ineos Chlor, a report on the anticipated acquisition by BOC Limited of the packaged chlorine business and assets of Ineos Chlor Limited, 18 December 2008. 14
17 18
Ibid., para. 4.21. Ibid., para. 4.22.
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9.3.2
Past Behaviour
In Linergy/Ulster Farm, the parties had previously attempted to merge in 2011/12.19 At that time, Linergy operated a Category 1 plant for processing animal waste and its Board had approved plans to construct a Category 3 plant.20 Ulster Farm By-Products Limited (“Ulster Farm”) operated a Category 1 plant and a Category 3 plant. The OFT investigated the merger and found that there was a realistic prospect of a substantial lessening of competition in relation to the processing of fallen stock, Category 1 nonfallen stock and Category 3 non-fallen stock.21 The transaction was referred to the CC but was abandoned by the parties. Subsequently, Linergy and SAPI SpA (“SAPI”), an Italian company active in animal rendering, entered into a Memorandum of Understanding (“MOU”), which expressed Linergy’s and SAPI’s intention to merge Linergy and Ulster Farm in the event that SAPI were to acquire Ulster Farm. In June 2012, three months after the OFT’s referral decision, SAPI acquired Ulster Farm. In October 2012, Ulster Farm closed its Category 1 plant and in December 2012, Linergy’s Board resolved not to construct a Category 3 plant (thereby removing any actual or potential overlap between the parties). In May 2015, Linergy acquired the entire issued share capital of Ulster Farm from SAPI and the CMA opened an own-initiative investigation. The issue for the CMA was whether the relevant counterfactual for assessing this acquisition was the pre-merger competitive conditions (i.e., with no overlap between Linergy’s and Ulster Farm’s Category 1 and Category 3 operations) or whether the relevant counterfactual should be the period prior to the signing of the MOU (or, in effect, the period prior to the acquisition but seen in the light of the MOU). The CMA found that the MOU provided the parties with an incentive to operate their businesses as if they were already merged. The CMA also found evidence that, following the MOU, the parties had conducted themselves as if they were already merged.22 Overall, the CMA considered it implausible that the MOU had no influence on Linergy’s limited consideration of a Category 3 project following the signing of the MOU and that Linergy would have built a Category 3 plant in the absence of the MOU. 19 Completed Acquisition by Linergy Limited of Ulster Farm By-Products Limited, CMA decision of 17 July 2015. 20 The relevant EU and UK regulations categorise animal by-products according to their risk of transmitting transmissible spongiform encephalopathy and require the different categories to be treated differently. There are two principal categories of animal by-products (Category 1 and Category 3), each requiring a separate licence. Category 1 is the highest risk and Category 3 is the lowest risk material. The regulations allow for Category 3 material to be processed in a Category 1 plant but Category 1 material cannot be processed in a Category 3 plant. 21 Anticipated Acquisition By Linergy Limited Of Ulster Farm By-Products Limited, OFT decision of 15 March 2012. “Fallen stock” refers to animals that have died on farms and need to be disposed of by the farmer. “Non-fallen stock” refers to what remains of an animal after meat and offal for human consumption, and other uses, has been removed. 22 This evidence included third parties informing the CMA that they understood the parties to have already combined their businesses some time prior to the completion of the merger. One customer told the CMA that the merger merely formalised a pre-existing agreement between the parties. Another customer informed the CMA that it had been told by SAPI that the parties had already merged. The CMA also considered that Linergy’s internal documents evidenced the fact that the MOU had influenced Linergy’s considerations about its commercial development plans.
The Counterfactual
309
The CMA also considered that Ulster Farm would not have closed its Category 1 plant. On this basis, at Phase I, the CMA assessed the merger against a counterfactual in which Linergy would have built a Category 3 plant and Ulster Farm would not have closed its Category 1 plant, which would have represented a more competitive counterfactual than the pre-merger competitive conditions. The transaction was ultimately referred to Phase II where the panel concluded that it was most likely that Linergy would not have built the Category 3 plant and that the Category 1 plant would have been closed.23 In Stagecoach/Preston, the CC determined that the appropriate counterfactual was not the pre-merger competitive conditions, as had been the view of the OFT at Phase I, but a period of time at least 18 months prior to the date of the merger.24 In this case, Stagecoach, an international public transport group, acquired Preston Bus Limited (“PBL”), a local bus company providing intra-urban bus services in the Preston area. Prior to the merger, in July 2006, Stagecoach had made an offer for PBL, which had been rejected. At that time, Stagecoach had offered certain services from its depot in Preston, but did not offer intra-urban services in competition with PBL. In terms of the relevant counterfactual, Stagecoach argued that, immediately prior to the merger, PBL was a failing firm, that it was incapable of being restructured and that the most likely outcome was that it would have entered administration and been liquidated, without its assets having been acquired from administration to provide local bus services in Preston.25 The CC disagreed. It considered that, in addition to assessing the pre-merger competitive conditions, it was appropriate to disregard steps taken by the acquiring firm in bringing about the merger. The CC stated as follows: “…we received extensive evidence that Stagecoach’s conduct in the 18 months that preceded the merger was pursued with little regard for profit and normal commercial considerations. This abnormal competition from Stagecoach in our view had the effect (and must have been expected to have the effect) of removing PBL from the market or marginalizing it as a competitive threat to Stagecoach (including by rendering it an unattractive acquisition to third parties). Given the nature of Stagecoach’s behaviour and the significant losses incurred by both companies, we do not consider that the competition that took place during this period reflects the rivalry that could be expected to occur in the absence of the merger. Nor, for the same reason, do we accept that we should assess the counterfactual on the basis that PBL was a ‘failing firm’ at the time of the merger and that Stagecoach would inevitably have ended up with its current high share of the market for bus services in Preston irrespective of the merger.”26
Accordingly, the CC determined that the appropriate counterfactual was the competitive conditions that existed on the market for local bus services in Preston prior to
23
Linergy Limited and Ulster Farm By-Products Limited, a report on the completed acquisition by Linergy Limited of Ulster Farm By-Products Limited, 6 January 2016, section 6. 24 Stagecoach Group Plc/Preston Bus Limited Merger Inquiry, a report on the completed acquisition by Stagecoach Group plc of Preston Bus Limited, 11 November 2009. 25 26
Ibid., para. 6.1. Ibid., para. 6.4.
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Stagecoach’s entry (i.e., more than 18 months prior to the merger).27 However, it is not clear that the CC’s choice of counterfactual was outcome-determinative. The merger resulted in a reduction in the number of competitors on the parties’ overlapping flows from two to one and was, therefore, very likely to have resulted in a substantial lessening of competition even if the CC had chosen to compare the merger against premerger competitive conditions (as the OFT had done).28 Stagecoach appealed, inter alia, the CC’s finding in relation to the counterfactual to the CAT.29 Stagecoach argued that in comparing the position on the market after the merger with the position as it had been in June 2007, the CC had made an error of law. In particular, Stagecoach argued that in describing the events following the launch of the new Stagecoach services in June 2007 as “steps taken by the acquiring company which had the effect of bringing about the merger” and saying that it was appropriate to “disregard” them, the CC had wrongly treated the relevant merger situation as including the 18-month period from mid-2007 until the completion of the transaction. It argued that this was inconsistent with the statutory framework because a relevant merger situation only arises where two enterprises cease to be distinct, which did not occur until the acquisition in January 2009. The CAT did not entirely agree with Stagecoach’s propositions. The CAT found that the CC had addressed its mind to the question of what would have happened in the absence of the acquisition by Stagecoach, and that the CC had dealt with the relevant merger situation in another part of its decision, showing that it had not misunderstood the meaning of a ‘relevant merger situation’. Moreover, the CAT found that: “[t]he Commission’s analysis, so far as the legal test in section 35 is concerned, seems to us entirely conventional. The position in the market immediately before the merger was one 27
Stagecoach launched its service in Preston in June 2007, the purchase agreement for PBL was signed in December 2008, and the transaction completed in January 2009. 28
Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009, para. 53. 29 Stagecoach Group plc v Competition Commission, supra. In summary, Stagecoach’s grounds of appeal included that: (i) the CC had committed an error of law in assessing the effects of the acquisition against the situation prevailing in late 2006 and early 2007 (Stagecoach submitted that it was clear from section 35(1)(b) of the Enterprise Act that the CC was required to consider whether the creation of the relevant merger situation led to a substantial lessening of competition, but, instead, the CC wrongly considered whether Stagecoach’s conduct from late 2006 or early 2007 onwards, including its lawful conduct preceding the merger, had led to a substantial lessening of competition); (ii) the CC had made highly material findings of fact that were unsupported by the evidence and had acted unreasonably. Stagecoach submitted that at least four of the CC’s critical findings of fact in support of its counterfactual were unsupported by the evidence and were therefore unreasonable, namely: (a) that Stagecoach would not have expanded its presence on the Preston intra-urban market after early 2007; (b) that Stagecoach acted with little regard for profit and without reference to “normal commercial considerations” over a period of 18 months prior to the acquisition; (c) that it was predictable that Stagecoach’s entry on the Preston intra-urban market would have the effect of “removing PBL from the market or marginalising it as a competitive threat”; and (d) that PBL responded reasonably to competition from Stagecoach, having no alternative, and did not cause or contribute to the so-called “abnormal” competition on the market following Stagecoach’s entry.
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311
where there was far more bus capacity operating on the routes than was justified by the volume of passenger traffic and where consequently both parties were making substantial losses. The Commission characterised this situation as one of “abnormal” competition. We agree that it is “abnormal” in the sense that it is unsustainable in the medium to long term because it involved the commitment of a significant amount of excess capacity to the routes and significant reductions in the fares… [t]he Commission was therefore fully entitled to find that the level of competition as at the end of 2008 was not sustainable and that even in the absence of the merger, that intensity of competition would not have carried on much longer. It was therefore entitled to conclude that the situation immediately preceding the merger was not the appropriate counterfactual and it was not right to assume that the counterfactual should posit a scenario where Stagecoach had won the whole of PBL’s commercial business and was the sole supplier of bus services in Preston.”30
However, and most crucially, the CAT determined that there was nothing in the CC’s decision to explain or justify its conclusion that the events of the 18 months prior to the merger should have been entirely disregarded, or to disregard what would have happened from September 2008 onwards, if the merger had not taken place, the period of abnormal competition had come to an end, and Stagecoach and PBL had continued to operate services in Preston.31 The CAT considered that the CC’s choice of counterfactual prior to June 2007 followed from its finding that Stagecoach had operated with little regard for profit and that this was not a choice that it was reasonably open to the CC to make, based on the evidence before it.32
9.3.3
A Two-Part Counterfactual
In Lloyds/HBOS, the OFT applied a Stage I and Stage II counterfactual, in which the OFT assessed the impact of the proposed merger against sequential Stage I and Stage II counterfactuals.33 Stage I considered the short-term options and Stage II considered the performance of HBOS in the medium to longer term. At Stage I, the OFT considered that rather than allowing HBOS to fail, the Government would have intervened, absent the acquisition by Lloyds, and that this would have led to some structural limitations on HBOS’ ability to compete, which may have prevented HBOS from competing fully on the market.34 At Stage II, as the Government had indicated that it had no intention of being a permanent investor in UK banks and that it would dispose of its investments, the OFT considered it realistic to expect that, in the medium-term, the Government would have withdrawn its support once the financial crisis had ended and that the Government would not have brokered a sale that would have raised competition concerns. 30 31
Ibid., para. 35.
Ibid., para. 133. Ibid., para. 131. The CAT found that this ground of appeal succeeded and that under normal circumstances it would have quashed this part of the decision and remitted it back to the CC for its reconsideration. However, in this case, Stagecoach stated that it intended to continue with the sale of the Preston business as required by the CC’s decision and that it was not seeking to have this suspended on an interim basis. Therefore, the CAT did not remit any part of the decision back to the CC for reconsideration. 33 Anticipated acquisition by Lloyds TSB plc of HBOS plc: Report to the Secretary of State for Business Enterprise and Regulatory Reform, 24 October 2008, paras. 71-86. 34 Ibid., para.71. 32
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Therefore, the OFT considered it realistic to expect that the Government would have sold its interest in HBOS to a bidder with no overlapping activities or at least a competitor in respect of which any competition concerns could have been resolved via remedies.35 In these circumstances, HBOS would have represented a significant competitor.
9.3.4
Violations of Competition Law
The CMA may not construct a counterfactual that involves violations of competition law (e.g., a cartel).36 To date, there has not been any decision in which the CMA (or its predecessors) have chosen a period of time other than the competitive conditions immediately prior to the merger explicitly because of a violation of competition law and it is unlikely that the CMA will do so in the absence of behaviour that has been deemed to be a violation of competition law, such as a cartel, or is behaviour for which there is no plausible objective justification. However, it is clear from its decision in Stagecoach/Preston (discussed above) that the CC was very unhappy with Stagecoach’s behaviour in the period prior to the merger, particularly the behaviour that it regarded as seeking to driving PBL out of the market and was therefore framed as being behaviour akin to predatory pricing, and this may well have been a factor in the CC (unnecessarily) selecting a counterfactual that was 18 months prior to the date of the merger.37 More recently, it is clear from its decision in Linergy/Ulster Farm that the CMA regarded the merging parties’ behaviour as being highly suspicious, particularly as the parties had abandoned a transaction and then behaved as if the transaction had occurred, and entered into an MOU that may have affected their competitive conduct.38 Again, whilst the CMA did not explicitly refer to this conduct as being unlawful – not least because there had been no such finding in relation to the parties’ behaviour – at Phase I, the CMA essentially adopted a counterfactual that reflected the parties’ competitive position prior to the MOU, which was a more competitive counterfactual than had existed immediately prior to the merger. This view was not taken at Phase II where the CMA essentially took the prevailing conditions of competition as the relevant counterfactual. In Fenland/Fishers, Fenland Laundries Limited (“Fenland”) proposed acquiring the cleanroom laundry business of Fishers Services Limited (“Fishers”) and terminating the joint venture (“JV”) agreement that it had with only other competitor in the UK, Berendsen.39 Fenland and Berendsen jointly controlled Micronclean, which licensed the use of the Micronclean trademark to Fenland and Berendsen for allocated territories in 35
Ibid., para. 80. Merger Assessment Guidelines, para. 4.3.3. 37 Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009. 38 Linergy/Ulster Farm, supra. 39 Anticipated acquisition by Fenland Laundries Limited of the cleanroom laundry business of Fishers Services Limited, CMA decision of 16 December 2015. 36
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313
Great Britain. Under the terms of the JV agreement, Fenland served customers in the North and Berendsen served customers in the South (as determined by customers’ postcodes).40 The JV agreement restricted Berendsen and Fenland from actively selling to customers in each other’s territories but allowed passive sales (although these were very limited in practice). In relation to the counterfactual, the CMA considered whether to assess the merger against a counterfactual absent the JV agreement. The CMA noted that the agreement appeared to impose horizontal territorial restrictions, resulting in a partitioning of the market. However, the CMA stated that “in the light of the potential justifications for these territorial restrictions given the use by both JV parties of the Micronclean trademark, it is not clear that the JV agreement infringes competition law. As a result, the CMA has not disregarded the existence of the JV agreement in its analysis of the counterfactual.”41 The CMA therefore considered the prevailing conditions of competition to be the relevant counterfactual in this case.
9.4
THE FAILING FIRM COUNTERFACTUAL
The Enterprise Act does not specifically incorporate a failing firm counterfactual. Nevertheless, since the coming into force of the Enterprise Act, the Authorities have recognised this type of counterfactual scenario. As set out below, at both Phase I and Phase II, the CMA applies the same analytical framework to the failing firm counterfactual, but given the difference in the evidentiary thresholds at each Phase, a failing firm argument may be successful at Phase II where it has not been successful at Phase I.42 This has led the CC, in the past, to determine the outcome of its failing firm analysis contrary to representations received from a third party, on the basis that it had access to information that the third parties did not have regarding the target business43
40
Ibid., para. 14. Ibid., para. 29. 42 See, e.g., Optimax Clinics Limited and Ultralase Limited, a report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, 20 November 2013; Ratcliff Palfinger/Ross & Bonnyman (Commercial Vehicles Tail Lifts Spare Parts Business), a report on the anticipated acquisition by Ratcliff Palfinger of the commercial vehicles tail lifts spare parts business of Ross & Bonnyman, 10 June 2011; Long Clawson Dairy Limited and Millway, a report on the completed acquisition by Long Clawson Dairy Limited of the Millway Stilton and speciality cheese business of Dairy Crest Group plc, 14 January 2009; and British Salt Limited and New Cheshire Salt Works Limited, a report on the acquisition by British Salt Limited of New Cheshire Salt Works Limited, November 2005. 43 See CC report on Long Clawson/Millway, supra, para. 6.69. Lactalis informed the CC that it was interested in acquiring Millway (and would have been a less anti-competitive purchaser than Long Clawson), but the CC concluded that Lactalis would not ultimately have acquired Millway, had it had access to the same information as the CC. The CC stated that “Lactalis only seems to have been aware of one aspect of Millway’s production problems. Lactalis did not appear to have been aware of the many other problems at Millway… [a]lso, Lactalis did not appear to have been aware of the number of customers which had recently left Millway… [f]or these reasons, and given our findings on the unviable nature of the business and the extent of the challenge to restructure it successfully, we concluded that it was unlikely that Lactalis would have completed an acquisition of Millway.” 41
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or on the basis of its own assessment of the facts.44 As might be expected given its outcome-determinative nature, merging parties have argued for a failing firm counterfactual in numerous cases although it has only been accepted in relation to a small number of mergers. To date, the failing firm counterfactual has been accepted at Phase I in only eight cases under the Enterprise Act,45 representing less than 1% of Phase I merger cases, and partially accepted in one other.46 At Phase II, the failing firm counterfactual has been accepted in only five cases to date,47 representing around 5% of all decisions taken at Phase II.48
44 In Arcelor/Corus, supra, the OFT did not apply the failing firm defence on the basis that Corus had failed to offer the business for sale to alternative purchasers and that it would have been less anticompetitive for the target business to have exited the market and for other market participants to have competed for its assets. However, following the referral of the merger, the CC accepted the failing firm defence (subject to an important dissension from one panel member) on the basis of its own consideration that Corus would have been unsuccessful in selling the business to anyone else. 45 Anticipated acquisition by First West Yorkshire Limited of Black Prince Buses Limited, OFT decision of 27 May 2005; Anticipated acquisition by Tesco Stores Limited of five former Kwik Save stores (Handforth, Coventry, Liverpool, Barrow-in-Furness and Nelson), OFT decision of 11 December 2007 (in relation to stores in Handforth, Liverpool, Barrow-in-Furness and Nelson); Completed acquisition by the CdMG group of companies of Ferryways NV and Searoad Stevedores NV, OFT decision of 24 January 2008; Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008 (in relation to the acquired store in St Albans); Anticipated acquisition by HMV of 15 Zavvi stores, OFT decision of 28 April 2009; Completed acquisition by Smiths News Trading Limited of Certain Assets of Surridge Dawson Limited, OFT decision of 21 August 2009; Anticipated acquisition by Kingfisher plc of 30 stores from Focus (in administration), OFT decision of 7 July 2011; Anticipated acquisition by Sports Direct International plc of 19 stores from JJB Sports (in administration), OFT decision of 21 December 2012. 46 Anticipated acquisition by Taminco N.V. of the European Methylamines and Derivatives Business of Air Products and Chemicals Inc, OFT decision of 16 July 2004. 47 Taminco NV and Air Products and Chemicals Inc, a report on the proposed acquisition by Taminco NV of the European methylamines and derivatives business of Air Products and Chemicals Inc, 2004; Arcelor SA and Corus Group plc, a report on the acquisition by Arcelor SA of part of Corus Group plc’s UK hot rolled steel piling business, February 2005; British Salt Limited and New Cheshire Salt Works Limited, a report on the acquisition by British Salt Limited of New Cheshire Salt Works Limited, November 2005; Long Clawson Dairy Limited and Millway, a report on the completed acquisition by Long Clawson Dairy Limited of the Millway Stilton and speciality cheese business of Dairy Crest Group plc, 14 January 2009; and Optimax Clinics Limited and Ultralase Limited, a report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, 20 November 2013. 48 In Ratcliff Palfinger/Ross & Bonnyman (Commercial Vehicles Tail Lifts Spare Parts Business), a report on the anticipated acquisition by Ratcliff Palfinger of the commercial vehicles tail lifts spare parts business of Ross & Bonnyman, 10 June 2011, the CC would likely have adopted a failing firm counterfactual had it needed to but, in the event, it was unnecessary for it to do so as it found that there was very little competition between the merging parties pre-merger and therefore there was no substantial lessening of competition.
The Counterfactual
9.4.1
315
The Analytical Framework
In forming a view on a failing firm scenario, at both Phase I and Phase II, the CMA will consider the following:49 (1)
whether the firm would have exited the market (through failure or otherwise);
(2)
whether there would have been an alternative purchaser for the firm or its assets to the acquirer under consideration; and
(3)
what would have happened to the sales of the firm in the event of its exit.50
9.4.2
The Phase I Approach
As discussed in section 9.2.1 above, at Phase I, the CMA will assess the effect of a merger compared with the most competitive counterfactual that is realistic. Therefore, in accepting a failing firm counterfactual, the CMA would need to believe that there was no realistic prospect of the pre-merger conditions continuing in the absence of the merger. This high evidentiary threshold is reflected in the Merger Assessment Guidelines, which state that to accept a failing firm argument at Phase I, the CMA would need, on the basis of “compelling evidence”, to believe that it was “inevitable” that the target firm would exit the market and be confident that there was no substantially less anti-competitive purchaser for the firm or its assets.51 The CMA would then consider whether, in relation to the third limb of the analytical framework above, the result of the exit of the firm and its assets would be a substantially less anticompetitive outcome than the merger. If the CMA concludes that there is no realistic prospect of a substantially less anti-competitive alternative to the merger under consideration when taking into consideration all three of the conditions set out above, it will conclude that there is no realistic prospect of a substantial lessening of competition arising from the merger.52 If the CMA cannot reach a sufficient level of confidence in
49
Merger Assessment Guidelines, para. 4.3.8. By comparison, the European Commission’s Guidelines on the assessment of horizontal mergers state that: “[t]he Commission considers the following three criteria to be especially relevant to the application of a ‘failing firm’ defence. First, the allegedly failing firm would in the near future be forced out of the market because of financial difficulties if not taken over by another undertaking. Second, there is no less anti-competitive alternative purchase than the notified merger. Third, in the absence of a merger, the assets of the failing firm would inevitably exit the market.”50 In addition, the U.S. 2010 Horizontal Merger Guidelines, section 11 state that, “[t]he Agencies do not normally credit claims that the assets of the failing firm would exit the relevant market unless all of the following circumstances are met: (1) the allegedly failing firm would be unable to meet its financial obligations in the near future; (2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger.” 50
51 52
Merger Assessment Guidelines, para. 4.3.10. Ibid.
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relation (separately) to each of these three conditions, it will select the pre-merger competitive conditions as the counterfactual against which to assess the merger.53
9.4.3
The Phase II Approach
At Phase II, the CMA must identify the situation that, on the balance of probabilities, would have developed in the market in the absence of the merger. The evidentiary threshold for establishing a failing firm counterfactual is therefore lower at Phase II than at Phase I (i.e., it is not necessary to establish that the target’s exit was inevitable). Where the CMA considers that there is more than one possible counterfactual, it will select the counterfactual that is most likely.54 This evidentiary threshold gives the CMA more flexibility at Phase II in relation to its choice of counterfactual and does not constrain the CMA to the binary position of either selecting a failing firm counterfactual or pre-merger conditions. Having identified the most likely counterfactual, the CMA will generally consider the three conditions as part of its competitive assessment.55 If the CMA considers that there were alternative purchasers, it will try to identify who the alternative purchasers might have been and take this into account when determining the counterfactual. The analysis of whether the effect of the merger would be substantially less competitive than the effect of the acquisition of the target by an alternative purchaser will form part of the CMA’s competitive assessment as will the consideration of how the merger compares to the exit of the target and the dispersal of its sales.56 This difference in the evidentiary thresholds at Phase I and Phase II has contributed to the failing firm counterfactual being rejected in some cases at Phase I but accepted in Phase II.57
9.4.4
Limb One: Exit of the Target Firm
In assessing whether the target firm would exit the market in the absence of the merger, the CMA will consider whether: (i) the firm is unable to meet its financial obligations in the near future; and (ii) whether it is, or could have been, in the absence of the merger, able to restructure itself successfully.58 In relation to the first of these conditions, the target business will usually have been making a loss prior to the commencement of the sale process with the purchaser. In many cases, the target business will have exhausted all available sources of funding. In Sports Direct/JJB, in accepting the inevitability of JJB’s exit, the OFT regarded its financial difficulties as being “insurmountable” and that
53 Ibid. Cf, Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015, where the CMA was unable to accept to consider the target as a failing firm but did not choose pre-merger conditions as the relevant counterfactual because it did not consider those to be realistic. 54 Merger Assessment Guidelines, para. 4.3.6. 55 Ibid., para. 4.3.11. 56 Ibid. 57 58
See footnote 42. Merger Assessment Guidelines, para. 4.3.14.
The Counterfactual
317
“failure was likely to have been imminent.”59 In Kingfisher/Focus, the OFT set out in some detail the financial difficulties of the Focus business noting that it had been experiencing “significant losses for a number of years.”60 In assessing whether the target is able to restructure itself successfully, at Phase I, the CMA will typically require the owner of the target business to have demonstrably explored reorganising the target business in an attempt to achieve profitability in the future, to account for the fact that businesses can emerge from administration in a reorganised form and continue to compete in the market. In this regard, the CMA will consider whether there is a realistic prospect of the target business being reorganised.61 In practice, it will be difficult for merging parties to establish that there was no realistic prospect of the target being reorganised where the target cannot evidence the fact that this option has been actively explored or cannot give credible reasons why this would not have been plausible. In relation to both of these conditions, the fact that a firm is in administration will not necessarily demonstrate conclusively at Phase I that the firm would have inevitably exited the market.62 The CMA will examine the firm’s balance sheet to determine the profile of assets and liabilities and they will consider what action the target’s management has taken to address the firm’s financial position and will review contemporaneous documents such as board minutes, management accounts and strategic plans.63 If the target was part of a corporate group, the CMA will look at the nature and value of the transactions within that group to determine the extent to which the losses were caused by intra-group charges and whether the transactions were on arm’s length terms.64 In this regard, the CMA will apply the same principle to determining whether a particular subsidiary or division would have exited the market absent the merger. The CMA will examine the evidence as to why the seller would have closed the subsidiary or division and recognises that there may be several reasons why a profitable parent would not close down a subsidiary that appears to be loss-making (e.g., the allocation of costs within a business may mean that the accounts of the division may not reflect actual operating cash flow or the division may have a strategic or reputational value that
59
Anticipated acquisition by Sports Direct International plc of 19 stores from JJB Sports (in administration), OFT decision of 21 December 2012, para. 38. 60 Anticipated acquisition by Kingfisher plc of 30 stores from Focus (in administration), OFT decision of 7 July 2011, para. 41. 61 See, in particular, Kingfisher/Focus, supra, and Sports Direct/ JJB Sports, supra. In both of these cases there had been considerable efforts to reorganise the target business before the sale process commenced with the purchaser. 62 Kingfisher/Focus, supra, para. 40; Sports Direct/ JJB Sports, para. 21. 63 64
Merger Assessment Guidelines, para. 4.3.14. Ibid., para. 4.3.15.
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is not reflected in the accounts).65 This reflects the fact that the analytical question is not whether the business was loss-making but whether it would have exited the market. There have been several cases in which the target business was in a parlous financial condition and appeared, prima facie, to be a good candidate for the application of the exiting firm defence. However, in each case, the Authorities concluded at Phase I that it was not inevitable that the target business would have exited the market, absent the merger. The following cases are illustrative of the Authorities’ approach to this analysis. (1)
In Long Clawson/Millway, the parties argued that Millway’s viability was dependent on the financial and commercial backing of the wider Dairy Crest Group.66 Having carefully examined Millway’s financial statements, the OFT acknowledged that Millway made a loss in the financial year of 2007/08. However, the OFT noted that although the reduction in turnover was significant, Millway still had a large portfolio of contracts including with national supermarkets. Moreover, the OFT did not consider that the parties had provided sufficiently compelling evidence regarding the inevitability of Millway’s exit from the market and the fact that it could not be restructured. The OFT specified that it had not seen compelling evidence such as internal correspondence, board minutes or business plans corroborating the parties’ arguments.67
(2)
Similarly, in Dorf Ketal/Johnson Matthey, the OFT could not conclude with a sufficient degree of certainty that the target business, Vertec, would have inevitably exited the market.68 Despite the fact that the parties provided accounts showing that Vertec had been making a loss and provided a number of internal documents and board papers demonstrating that exit had been a genuine consideration for some time, the OFT noted that Johnson Matthey had been considering several options for Vertec, including continuing the business and focusing on new innovation. The OFT found that this option dropped away only after discussions with Dorf had begun. The OFT undertook a detailed analysis of the target’s financial data, which indicated that Vertec had been making a contribution to earnings, albeit that profitability was declining, and that Vertec could have continued to trade as a going concern.69 Moreover, the OFT found that not all of Vertec’s customer accounts were unprofitable and it was not clear to the OFT why Vertec could not be re-organised by supplying only those customer contracts that were profitable.
65
Ibid. Completed acquisition by Long Clawson Dairy Limited of the Millway business of Dairy Crest Group plc, OFT decision of 8 October 2008. This merger was referred to Phase II, where the exiting firm defence was accepted. 67 Ibid., para. 93. 68 Proposed acquisition by Dorf Ketal Chemicals AG of the titanate and zirconate business of Johnson Matthey plc, OFT decision of 19 November 2010. This merger was abandoned at Phase II. 69 Ibid., para. 21. 66
The Counterfactual
319
(3)
In Stagecoach/Preston, Stagecoach argued that, at the time of the merger, Preston Bus Limited (“PBL”) was in severe financial difficulties and that its exit from the market was imminent and inevitable.70 A substantial amount of evidence was provided to the OFT supporting this proposition, including from PBL’s accountant, who considered that PBL would be in negative balance sheet equity within six months. The OFT agreed with this assessment. However, in terms of restructuring the business, the OFT considered that, whilst a strategy of down-sizing PBL would have been difficult (in part because it was employee-owned), such a restructuring was never considered in much detail due to the fact that PBL decided to opt for a sale instead of a restructuring. Therefore, the OFT concluded that whilst it was plausible that the business would inevitably exit the market with no prospect of reorganisation, there was a realistic prospect that PBL could have continued to exist, albeit with a reduced service.71
(4)
In Ratcliff Palfinger/Ross & Bonnyman, the parties, who overlapped in the manufacture and supply of tail lifts and the supply of tail lift spare parts, informed the OFT that Ross & Bonnyman (“R&B”) had decided to exit the tail lift business, had been unable to find a buyer, and had decided to attempt to sell the tail lift spare parts business to Ratcliff.72 The parties argued that the relevant counterfactual should not be pre-merger competitive conditions, and that the counterfactual should recognise that R&B’s tail lift business would exit the market either on financial grounds or on the grounds of a change of commercial strategy. In assessing whether its exiting firm criteria were met, the OFT did not consider that it was inevitable that R&B’s tail lift business would exit the market on financial grounds. This was despite the fact that: (i) no potential purchasers had been identified by R&B’s divestment consultant in over a year; and (ii) R&B’s tail lift business had been loss making for four years prior to the proposed acquisition by Ratcliff and sales had declined by more than 50%. The OFT considered that, despite this level of sustained unprofitability, R&B had continued to run its tail lift business and had informed the OFT that it was still producing and selling tail lifts for commercial vehicles. On this basis, the OFT had “reasonable doubts” that the exit of this business was imminent.73 At Phase II, the CC found that, absent the transaction, R&B would still have stopped manufacturing tail lifts and therefore it did not assess the transaction as if it had resulted in R&B exiting the tail lifts business as well as selling its tail lifts spare parts business to Ratcliff. The CC found that, during the course of
70
Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009. 71 This merger was referred to Phase II, where the CC did not accept the exiting firm defence. 72
Anticipated acquisition by Ratcliff Palfinger Limited of the commercial vehicle tail lifts spare parts business of Ross & Bonnyman Limited, OFT decision of 18 February 2011. 73 Ibid., para. 24. Despite the OFT’s doubts, the target business closed down during the course of the CC’s Phase II inquiry.
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the Phase I investigation, R&B had in fact stopped taking orders for tail lifts, scrapped several tail lift assembly rigs, and had retained only two rigs to complete its existing order book before scrapping these. The CC stated that “[i]n light of the company’s ownership, management and size, we would not expect to find more comprehensive documentation of strategic decisions to exit the business than has already been supplied to the OFT and ourselves. The evidence that is available suggests that the decision to stop manufacturing tail lifts was originally made in April 2008 – over a year before Ratcliff was first approached about buying any part of R&B; that actions were taken on this decision independently of the sale of the spare parts business; and that R&B has exited the manufacturing market notwithstanding that the merger of the spare parts business has not yet been completed.”74
9.4.5
Limb Two: Alternative Purchasers
In order for the CMA to accept a failing firm counterfactual, there must be no other purchasers who would be (or would have been) prepared to acquire the target and whose acquisition of the target would produce (or would have produced) a substantially less anti-competitive outcome compared to the merger under consideration. In this regard, the CMA will consider available evidence supporting any claims that the merger under consideration was the only possible merger75 and there have been several cases at Phase I in which limb one of the failing firm counterfactual has been met but the merging parties were unable to provide satisfactory evidence that there were no less anticompetitive purchasers for the target business.76 The CMA will not accept merging parties’ assertions that the purchaser is the only possible buyer.77 The CMA will take into consideration the prospects of alternative offers above liquidation value (i.e., the CMA will not limit its consideration to acquirers who would have put in bids equivalent 74
Ratcliff Palfinger/Ross & Bonnyman (Commerical Vehicles Tail Lifts Spare Parts Business), a report on the anticipated acquisition by Ratcliff Palfinger of the commercial vehicles tail lifts spare parts business of Ross & Bonnyman, 10 June 2011, para. 4.12. 75 Ibid., para. 4.3.17. 76 See, e.g., Completed acquisition by Healthcare Environmental Services Limited of G.W. Butler Limited, CMA decision of 18 March 2015, where the CMA accepted that limb one of the failing firm counterfactual was satisfied, but found during its market testing that some third parties were interested in acquiring the business, one of whom had held several conversations with GW Butler, had engaged solicitors and accountants, and had submitted an indicative offer; Anticipated acquisition by Stagecoach Group plc of the North Devon business and assets of First Devon and Cornwall Limited, OFT decision of 10 July 2012, where First had not marketed the target business to anyone else and argued that there were no alternative commercially feasible purchasers; and Completed acquisition by Lion Capital LLP of the business and certain assets of Cumbrian Holdings Limited, OFT decision of 27 March 2012, where the offer from Lion was the only formal bid made to PwC to acquire the Cumbrian business but there was tentative interest from other parties in relation to acquiring some of the assets of the business and that, between them, these parties could potentially have acquired all three of the Cumbrian sites. 77 In Acquisition by University College London Hospitals NHS Foundation Trust of Royal Free London NHS Foundation Trust’s neurosurgery services, OFT decision of 21 February 2013, the OFT was unable to accept that limb two of the failing firm counterfactual was satisfied as other potential hospitals were not considered.
The Counterfactual
321
to that of the proposed acquirer or even offers that the vendor would have found commercially attractive),78 and it will be difficult for the CMA to accept the failing firm counterfactual where it considers it realistic that an offer would have been made above liquidation value.79 Where there is only one potential purchaser for the target business, at Phase I, the merging parties must provide the CMA with compelling evidence of this fact to avoid a reference to Phase II.80 This issue frequently arises in relation to completed transactions where the question is a historic one (i.e., could there have been offers if a marketing exercise had been carried out). The Authorities have considered several cases at Phase I in which they have concluded that the failing firm criteria were not met because the parties had provided insufficient evidence that there were no realistic, substantially less anti-competitive alternatives. The following cases are illustrative of this approach and demonstrate the importance (particularly in the context of a completed merger where the issues are being considered ex post) of a thorough marketing process for the business to flush out all possible purchasers: if this has not happened, it will mean that the parties effectively will bear the evidential burden of showing that this was the only merger that was possible. (1)
In Brittany Ferries/P&O, Brittany Ferries proposed acquiring P&O, another ferry operator.81 The OFT’s investigation revealed that Brittany Ferries’ postmerger share of tourist and freight services on the Western Channel82 would have been 70-75% and 75-80%, respectively, and that the two remaining competitors would not have posed much of a constraint on the purchaser. As set out above, in relation to the counterfactual, P&O submitted, and the OFT accepted, that it would exit the Western Channel regardless of the merger. However, the OFT considered that, given the parties’ combined post-merger position on the Western Channel, any other realistic buyer would have resulted in a less anti-competitive outcome and the OFT was unable to exclude the possibility that such a purchaser existed. In particular, there were a significant number of other ferry operators in the Western Channel and other routes between the UK and France who had not been contacted by P&O prior to the proposed merger. In this regard, the OFT’s investigation indicated that other ferry operators might have been interested prior to the announcement of the merger.83 On the basis of these facts, the OFT considered that it had not received “sufficient compelling evidence to dispel the belief that it may be the
78
Merger Assessment Guidelines, para. 4.3.17. See, e.g., Anticipated acquisition by Sports Direct International plc of 19 stores from JJB Sports (in administration), OFT decision of 21 December 2012, para. 40. 80 See, e.g., First West Yorkshire/ Black Prince, supra, in which the target business had engaged in an exhaustive search for an alternative purchaser. 79
81 Anticipated acquisition by Bretagne-Angleterre-Irlande S.A. of certain assets used by P&O Ferries on its Portsmouth to Le Havre service, OFT decision of 7 December 2004. 82
The Western Channel includes longer ferry services between the UK and France between ports such as Portsmouth, Southampton, Poole, Plymouth, Le Havre, Radicatel, Caen, Cherbourg, St Malo and Roscoff. 83 Bretagne-Angleterre-Irlande/P&O, supra, para. 34.
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case that there is a less anti-competitive alternative to the merger, namely a purchaser other than BAI.”84 This merger was referred to Phase II but was then abandoned. (2)
In Thermo/GVI, Thermo Electron Manufacturing Limited (“Thermo”), a worldwide supplier of, inter alia, various analytical instruments and scientific equipment, acquired GV Instruments Ltd (“GVI”), a worldwide supplier of a range of mass spectrometers.85 The OFT’s investigation indicated that the merger had resulted or was likely to result in a substantial lessening of competition on the grounds that, post-merger, the parties would have a near monopoly position in gas isotope ratio mass spectrometers (“Gas IRMS”) and thermal ionization mass spectrometers (“TIMS”), and a duopoly in multicollector-inductively coupled plasma mass spectrometers (“MC-ICPMS”). The parties argued that, absent the merger, GVI would have exited the market as a result of the following factors: (i) GVI had made an operating loss of £1.68 million in the 16 months prior to the transaction and had numerous unrecorded liabilities; (ii) GVI’s significant cash-flow problems had seriously damaged its relationships with key suppliers and suppliers were withholding deliveries until outstanding debts had been paid, with the result that GVI had a considerable order backlog; (iii) immediately after the transaction, Thermo was required to inject £2.4 million into GVI to meet outstanding trading liabilities; and (iv) GVI’s access to external funding was limited as it had insufficient assets to secure a loan. On the basis of this evidence, the OFT was satisfied that GVI was in a parlous financial situation without a serious prospect of reorganisation. However, despite these facts, the parties were unable to provide the OFT with satisfactory evidence that there were no less anticompetitive alternative purchasers. Whilst GVI had spoken to several potential purchasers, including a private equity vehicle established by former Thermo employees, the OFT considered that this was insufficient to establish that there were no realistic alternative purchasers. The OFT noted that there were a number of potential competitors to the parties that had not been approached by GVI and, due to the fact that Thermo had been approached by GVI, the OFT considered that it was “not therefore possible to rule out all of the… potential industry purchasers on the flawed premise that their failure to approach GVI demonstrates that each is an unrealistic alternative purchaser.”86 In addition, as regards whether it would have been substantially less anti-competitive to allow the target to fail and for GVI’s assets to have been acquired by one or more parties out of liquidation, the OFT considered it “plausible” that smaller, potential, competitors could have gained market share by acquiring some of GVI’s assets.87 This case was ultimately referred to Phase II where the CC did
84
Ibid., para. 36. Completed acquisition by Thermo Electron Manufacturing Limited of GV Instruments Limited, OFT decision of 15 December 2006. 85
86 87
Ibid., para. 51. Ibid., para. 53.
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not accept the failing firm counterfactual on the basis of there being a substantially less anti-competitive alternative purchaser. (3)
In NBTY/Julian Graves, Holland & Barrett (“H&B”), a retailer of health foods and nutritional products owned by NBTY Europe (“NBTY”), acquired Julian Graves, another speciality food retailer.88 NBTY argued that, absent the merger, Julian Graves would have failed and exited the market; that it could not have been restructured and that there was no likelihood of Julian Graves being acquired by a less anti-competitive alternative purchaser.89 In support of the parties’ arguments that the failing firm defence should apply and that the appropriate counterfactual was Julian Graves’ exit from the market, the CC’s investigation found that: (i) Julian Graves was highly leveraged, was struggling to maintain its debt payments, and that management was engaging in significant price discounting and opening stores in new locations in an attempt to generate cash;90 (ii) many suppliers had placed ‘stop orders’ on Julian Graves as a customer, causing its stock levels to fall and its range of products to contract; (iii) at the time of the acquisition, Julian Graves was still trading but had negative net assets and Julian Graves’ auditors did not believe that the business was a going concern until they received a letter of parental support from NBTY; and (iv) the CC considered it “very unlikely” that Julian Graves would be able to reorganise itself as it was significantly over-leveraged and could not obtain new debt.91 However, despite these factors, the CC noted that, prior to its sale to NBTY, Baugur Group, Julian Graves’ parent company, had received offers from two private equity bidders, neither of whom were invited to the final stage of confirmatory due diligence. Both of these bidders had experience of transactions in the retail sector and the CC considered that both were highly credible. One of these bidders was even willing to buy the business on an all-equity basis. Both bidders realised that the target business was in financial difficulty but both of the bidders told the CC that, under their ownership, Julian Graves would continue to sell its core offering of nuts, seeds and dried fruit (the areas of overlap with Holland & Barrett). Accordingly, the CC concluded that, absent the acquisition by NBTY, it was very likely that Julian Graves would have been acquired by one of these private equity bidders, neither of whom raised competition concerns. Even in the event that the target business had gone into administration, the CC considered it likely that one of these private equity bidders, or possibly another purchaser, would have acquired a smaller portfolio of Julian Graves’ stores, and that this would still have represented a substantially less anti-competitive outcome than the
88 NBTY and Julian Graves, a report on the completed acquisition by NBTY Europe Limited of Julian Graves Limited, 20 August 2009. 89 Ibid., para. 4.5. 90 91
Ibid., para. 4.7. Ibid., para. 4.8.
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acquisition by NBTY.92 On this basis, the CC concluded that the exiting firm criteria were not met. (4)
In Lion/Cumbrian, the OFT accepted that, absent the merger, Cumbrian, which was active in the processing, packing and supply of chilled fish and seafood products, was likely to have exited the market.93 The Cumbrian business had been profitable until the summer of 2011 when a quality issue resulted in a loss of business and KPMG was tasked with sell the business. KPMG approached 35 parties but received a limited number of offers, two of which were below the solvent sale value and the third offer was withdrawn. With no alternative purchasers, the Cumbrian business issued a notice to appoint administrators in December 2011 and PwC was appointed. Lion Capital’s offer was the only formal bid made to PwC to acquire the business. However, the OFT found that there was tentative interest from other parties in the market with regard to acquiring some of the assets of the business including acquiring and operating some individual sites – which was confirmed by the OFT’s third party enquiries. The OFT found that, between them, the third parties contacted by the OFT had expressed an interest in acquiring all three of Cumbrian’s sites. On this basis, the OFT concluded that it was not confident that there was no prospect of an alternative purchaser for the firm or its assets, although it appeared unlikely that a single purchaser was willing to acquire the entire business.94
(5)
In Stagecoach/Devon, Stagecoach Group (“Stagecoach”) proposed acquiring the North Devon business of First Devon and Cornwall (“First”), a subsidiary of FirstGroup PLC.95 First submitted that, absent the merger, it would have exited the supply of bus services in North Devon. The CMA accepted this submission on the grounds that: (i) the North Devon business was loss-making; (ii) even greater losses were expected in the future as a result of a reduction in the bus service operators grant, changes to concessionary fare schemes, and increasing fuel costs; (iii) First had lost a significant number of tenders since Stagecoach had entered North Devon in 2006; and (iv) First had provided internal documents indicating an intention to close or dispose of the North Devon business. However, First had not marketed the North Devon business to any other potential purchaser. The OFT considered that “the lack of a thorough and open marketing process makes it difficult, from an evidential perspective, for the OFT to reach a view that there is no prospect of a substantially less anticompetitive purchaser for the business.”96 Despite this, First submitted that no bus operator other than Stagecoach would have been interested in acquiring the
92
Ibid., para. 4.11. Completed acquisition by Lion Capital LLP of the business and certain assets of Cumbrian Holdings Limited, OFT decision of 27 March 2012. 94 Ibid., para. 18. 95 Anticipated acquisition by Stagecoach Group Plc of the North Devon business and assets of First Devon and Cornwall Limited, OFT decision of 10 July 2012. 96 Ibid., para. 26. 93
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business, given its financial condition. However, three bus operators in the region informed the OFT that they would have been interested in acquiring the whole or part of the business. On this basis, the OFT was unable to conclude that the North Devon business could not have been sold to a substantially less anti-competitive purchaser absent the merger. (6)
In Optimax/Ultralase, Optimax Clinics (Unlimited) (“Optimax”) acquired Ultralase, which consisted of 23 clinics and three consultation centres providing refractive eye surgery.97 The OFT accepted that Ultralase’s exit from the market was inevitable as a result of the following factors: (i) Ultralase had suffered several years of poor financial performance before the business was sold to Optimax; (ii) sales in the industry had declined by around 29% between 2009 and 2012; (iii) one of Ultralase’s two providers of consumer interest free credit had withdrawn its facilities; and (iv) a report from Grant Thornton confirmed that there was a significant unmet funding gap and that the sale of the business as a going concern was in the best interests of stakeholders. In relation to alternative purchasers, Optimax submitted that, although there were other indicative bidders, none of these would have been likely to purchase Ultralase or a significant part of it. However, the sale process had commenced in 2012 and Grant Thornton had contacted around 50 potential bidders. Of these, two bidders were invited to a second stage of the bidding process. A private equity firm specialising in investing in healthcare markets made an initial bid of £15 million. This firm lowered its bid to £13 million following initial due diligence and indicated to the OFT that it would have undertaken full financial and legal due diligence before it would have proceeded with the transaction. In contrast, Optimax chose to proceed without undertaking any due diligence. Grant Thornton advised the seller’s to accept Optimax’s offer as it had lower execution risk. The OFT concluded that there was a realistic prospect that the private equity firm could have made an offer following full due diligence and that it would have represented a substantially less anticompetitive option. On this basis, the failing firm counterfactual was rejected.98
(7)
In HES/GW Butler, Healthcare Environmental Services Limited (“HES”) acquired G.W. Butler Limited (“GW Butler”).99 HES submitted that, absent the merger, GW Butler would have been declared insolvent. In support of this, HES submitted a due diligence report indicating that GW Butler was in serious financial difficulty. HES also submitted that it had been informed during negotiations that there were several other potential buyers for the business but that it had not found any evidence since completion that this was the case. The CMA accepted that, absent the merger, GW Butler might have exited the
97
Completed acquisition of Optimax Clinics (Unlimited) of Ultralase Limited, OFT decision of 29 July 2013. 98 This merger was referred to Phase II where the failing firm counterfactual was accepted. 99 Completed acquisition by Healthcare Environmental Services Limited of G.W. Butler Limited, CMA decision of 18 March 2015.
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market. However, market testing indicated that some third parties had indeed expressed an interest in acquiring the business, with one third party stating that it had had several conversations with GW Butler about a possible acquisition, had engaged solicitors, discussed the transaction with its accountants and had made an indicative offer. On this basis, the CMA concluded that, absent the merger, there was a realistic prospect that GW Butler would have been acquired by an alternative purchaser and that this acquisition would have resulted in an effective continuation of the pre-merger conditions of competition.100
9.4.6
Limb Three: Exit of the Target Business as a Less Anti-Competitive Outcome
Limb three of the failing firm criteria requires the CMA to consider what would have happened to the sales of the target firm in the event of its exit and whether its exit would have been a substantially less anti-competitive outcome than the merger (e.g., by distributing the target’s sales amongst other suppliers and/or by acting as a spur to new entry into the market). Where this is the case, limb three will not be satisfied and the CMA will not accept an exiting firm counterfactual. The Authorities have considered several cases in which the exiting firm criteria were not met because the parties had provided insufficient evidence that the target business’ exit from the market would not have been a less anti-competitive outcome than the acquisition of the target business by the purchaser (even though there were no less anti-competitive purchasers). The following cases are illustrative of the Authorities’ analysis. (1)
100
In Arcelor/Corus, Arcelor, a steel producer and distributor, acquired the hotrolled steel sheet piling business of Corus UK (“Corus”), a subsidiary of the Corus Group.101 Arcelor argued that Corus’ sheet piling activities, including its mill in Scunthorpe, which was not part of the transaction, were loss-making and that it would have exited the market absent Arcelor’s acquisition. Corus confirmed that its mill was loss-making and that competition from European suppliers and a weak product range (including an inability to develop and produce the so-called ‘Z’ type of sheet piling, which was becoming the industry standard), meant that Corus was unable to compete against European suppliers.102 In addition, Corus considered that the mill would not become profitable and that it was not commercially justifiable to invest to the extent required to bring the mill up to competitive levels. Despite these arguments, the OFT did not find that the exiting firm criteria were met for the following reasons. First, there was evidence that Corus had actively considered joint venture scenarios that involved switching its production to European plants. Secondly, whilst Corus’ European and worldwide sales of sheet piling from the mill in Scunthorpe were loss-making, there was evidence that its UK sheet
Ibid., para. 25. Completed acquisition by Arcelor SA of Corus UK Limited's UK hot-rolled steel sheet piling business, OFT decision of 9 September 2004. 102 Ibid., para. 15. 101
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piling sales were profitable. In addition, the OFT considered that demand for sheet piling may be cyclical so that the performance of the mill might have recovered. Thirdly, it was difficult to reconcile the purchase price for Corus’ non-production assets (as the mill was not part of the transaction) with the fact that, absent the merger, these assets would inevitably have exited the market.103 Fourthly, the OFT questioned the necessity for a commitment in the purchase agreement that Corus would not compete against the acquired business for a certain period of time post-merger. The OFT considered that a possible inference was that Corus could re-enter the UK market without such a commitment.104 As to whether there was a less anti-competitive option than Corus’ acquisition by Arcelor, the OFT concluded that, “[a] Corus decision to exit would have represented the alternative suppliers to the UK with an opportunity to compete for that business. Market exit can provide an opportunity for vigorous competition as the remaining players seek to gain share in competition with rivals. Often this is a time when competition is at its most fierce and, as a result, customers can benefit through the lower prices that this competition brings.”105 This merger was referred to Phase II, where the CC concluded that Corus would have been unsuccessful in selling the business to anyone else and accepted the exiting firm counterfactual. (2)
In Stagecoach/Preston, as discussed above, although the OFT had concluded that not all of PBL’s business would have inevitably exited the market, it went on to consider whether it would have been less anti-competitive for at least some of PBL’s assets to have been allowed to exit the market.106 The OFT noted that this scenario was of particular relevance in this case as, if PBL had been liquidated, any purchaser of PBL’s assets would not also have had to acquire its pension liability. Therefore, the OFT considered whether, in the event of its liquidation, PBL’s assets would have been acquired by a third party that was less anti-competitive than Stagecoach. The OFT found that it could not rule out the possibility that another bidder would have been successful in acquiring at least some of PBL’s assets and Go Ahead advised the OFT that it would have looked to acquire some of PBL’s assets in the event of its liquidation. The OFT also considered that other bus companies may have seen such a sale as an opportunity to expand their operations into areas where PBL had operated. Therefore, the OFT concluded that: “…while the OFT accepts that one possible result of PBL being liquidated is that Stagecoach would ultimately have acquired most or all of PBL’s assets, given the likely interest from at least Go Ahead, it considered there is a realistic prospect that
103
Arcelor argued that the payment was to allow it to make a smooth transition into the UK where it had previously had a sporadic presence. 104 Corus confirmed to the OFT that it had no intention of re-entering the UK and Arcelor argued that the inclusion of this type of clause in the purchase agreement was standard. 105 Arcelor/Corus, supra, para. 19. 106 Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009.
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another company (or companies) could have acquired PBL’s assets and used them to operate commercial local bus services in Preston in competition with Stagecoach. In light of Stagecoach’s relatively large pre-merger market share in Preston, the OFT considers that, in the event PBL was liquidated, almost any other company would have been a substantially less anti-competitive alternative to Stagecoach acquiring PBL. Although the OFT accepted there is a possibility of some very short-term consumer detriment arising in the time between PBL’s liquidation and a purchaser acquiring its assets, the OFT considers that the medium and long term structure of the market would be substantially more competitive in such a scenario.”107
(3)
In Dorf Ketal/Johnson Matthey, the OFT considered that it would have been substantially less anti-competitive for Vertec to have exited the market than for it to have been acquired by Dorf.108 The OFT considered that, although alternative purchasers may not have had the capacity to deal with all of the volumes required by Vertec’s customers (which would have had an impact on the profitability of this business), it was possible that they could have diverted supply from existing customers or increased capacity and to have had toll agreements in place to ensure continued supply. In addition, the OFT believed that Vertec’s exit from the market could have encouraged new entry by creating a supply vacuum for titanate and zirconate in the UK, into which foreign suppliers could have entered.
9.4.7
Exit Uninfluenced by the Merger
In order for the CMA to accept that a business is failing and that it will inevitably exit the market, it must be satisfied that the exit of the business is uninfluenced by the prospect of the merger. This factor has been considered several times at Phase I and may be considered in relation to either the purchaser’s or the target’s business. (1)
107 108
In Brittany Ferries/P&O, P&O announced its intention to close three of its Portsmouth-based ferry routes serving the French ports of Le Havre, Caen and Cherbourg.109 P&O’s intention was to remain active in the so-called ‘short French sea’, in particular on the Dover to Calais route but to withdraw entirely from the ‘Western Channel’ with the exception of the Portsmouth to Bilbao route, with effect from 2005. On the same day as this announcement, Brittany Ferries signed a Memorandum of Understanding with P&O for the acquisition of an assets package comprising P&O’s Portsmouth-Le Havre route, including vessels, staff and port berths. In relation to this acquisition, P&O submitted that the relevant counterfactual was not pre-merger conditions and that it would have exited the Western Channel irrespective of the transaction. In support of this counterfactual, P&O submitted that: (i) it had publicly announced its decision to exit from the Western Channel at the end of 2004 and a reversal of Ibid., paras. 48 and 49.
Proposed acquisition by Dorf Ketal Chemicals AG of the titanate and zirconate business of Johnson Matthey plc, OFT decision of 19 November 2010, para. 34. 109 Anticipated acquisition by Bretagne-Angleterre-Irlande S.A. of certain assets used by P&O Ferries on its Portsmouth to Le Havre service, OFT decision of 7 December 2004.
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this strategy would have triggered a loss of shareholder and investor confidence, causing substantial detriment to P&O; (ii) the Western Channel business had made losses every year since 1994, with 2003 and 2004 being the most dramatic losses to date; (iii) employee negotiations on the issue of closure had started in both the UK and France; (iv) P&O had started to consider its options for the Western Channel well before the start of discussions with Brittany Ferries; and (v) every serious prospect of reorganising the business had been examined and discounted during its 10 years of loss-making. As a result of these factors, the OFT was satisfied that, absent the merger, P&O would have exited the Western Channel and that this exit was not influenced by the merger. (2)
110
In Stena/DFDS, the principal issue for the OFT to consider was whether Stena’s exit from the Fleetwood-Larne route was inevitable and was not influenced by its acquisition of the DFDS business operating on the LiverpoolBelfast and Heysham-Belfast routes in the so-called diagonal corridor between England and Ireland.110 In support of a counterfactual in which Stena would not have been active on the Fleetwood-Larne route, Stena submitted that: (i) the route was heavily loss-making for the first six months of 2010 and projections for the route showed no foreseeable prospect of profitable operations resuming; (ii) it had given notice of termination to Associated British Ports in relation to the Fleetwood port in June 2010 and without access to this port, Stena would have no way of operating on the route; (iii) the Stena board had decided to close the route in September 2009 and had reaffirmed its decision in March, April and June 2010, and these decisions were taken well in advance of merger negotiations (two Stena managers also gave witness statements to the OFT confirming the plan to close the route); (iv) the three vessels operating on the route were near to the end of their useful lives and the cost of new vessels was prohibitive; and (v) Seatruck was expanding its operations from Heysham-Larne, putting Stena at a competitive disadvantage given the unreliable tidal conditions at Fleetwood. The OFT considered these submissions in some detail but was unable to conclude that Stena would inevitably have closed the Fleetwood-Larne route absent the merger. In particular: (i) Stena had attempted to acquire one of the target routes in September 2009, which the OFT considered might have influenced Stena’s decision to close Fleetwood-Larne; (ii) the OFT queried the irreversibility of the Stena board decision in September 2009 to exit Fleetwood-Larne in the light of subsequent meetings at which options for the route were considered; (iii) the OFT was unclear why it took Stena 15 months to close the route; and (iv) the OFT was not sufficiently certain that exit would have been inevitable for financial reasons, noting Stena’s overall financial strength, the foreseeability of capital investment in vessels, other Stena routes that were loss-making but had not closed, and the availability of other options
Completed acquisition by Stena AB of certain vessels and assets from DFDS A/S operated on the Irish Sea, OFT decision of 8 February 2011.
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(e.g., investment in vessels, port upgrades or switching to alternative ports in the diagonal corridor).111 (3)
In Ratcliff Palfinger/Ross & Bonnyman, Ratcliff proposed acquiring R&B’s business relating to spare parts for commercial vehicle tail lifts (the R&B business).112 R&B submitted to the OFT that it had decided to exit the commercial vehicle tail lifts business to concentrate on its other products (yard lifts and mezzanine lifts) as well as the niche segment of tail lifts for ambulances. This decision was taken after R&B had been unable to sell its tail lifts business (including the spare parts business). This strategy would have allowed R&B to pay down its bank debt and improve its negotiating position if further bank funding had been required. The OFT was unable to conclude that the proposed sale to Ratcliff had not influenced by the decision to exit this market for the following reasons: (i) the parties had not submitted a date (however rough) by which R&B would have exited the market and R&B was still supplying tail lifts; (ii) the R&B board document agreeing the sale of the spare parts business and the corresponding exit from the tail lift market was from mid-2010, more than six months after Ratcliff has expressed an interest in the spare parts business; and (iii) the decision to exit the tail lifts business did not appear to be irreversible, particularly as R&B continued to make sales.
9.4.8
Failing Division Counterfactual
A number of Phase I cases involving the failing firm counterfactual have concerned a failing division or business unit of the target group.113 The failing firm criteria apply in the same way to failing ‘divisions’ as they do to failing ‘firms’. For example, in HRG/Focus, the OFT assessed the failing firm criteria in relation to the Focus store in St Albans and stated that “in cases involving alleged exit of one merging party’s competitive assets absent the transaction, the OFT has applied the same approach and evidentiary standards whether or not the parties specifically frame their claim as a failing firm or failing division defence. In practice, the OFT has applied the same standard to divisions or stand-alone business units, such as individual stores, as to an
111
This merger was referred to Phase II where the CC accepted that Stena’s decision to exit Fleetwood – Larne was unrelated to the merger. 112 Anticipated acquisition by Ratcliff Palfinger Limited of the commercial vehicle tail lifts spare parts business of Ross & Bonnyman Limited, OFT decision of 18 February 2011. 113 See, e.g., Anticipated acquisition by Tesco Stores Limited of five former Kwik Save stores (Handforth, Coventry, Liverpool, Barrow-in-Furness and Nelson), OFT decision of 11 December 2007; Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008; Anticipated acquisition by HMV of 15 Zavvi stores, OFT decision of 28 April 2009; Anticipated acquisition by Kingfisher plc of 30 stores from Focus (in administration), OFT decision of 7 July 2011; Anticipated acquisition by Sports Direct International plc of 19 stores from JJB Sports (in administration), OFT decision of 21 December 2012; and Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015. This could equally apply to an acquiring group but no such case has yet arisen.
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entire firm.”114 The CMA is currently applying the same approach to failing divisions as the OFT did in the past.
9.4.9
The Phase I Decisional Practice
This section considers the Phase I decisions in which the acceptance of the failing firm counterfactual was outcome-determinative. As noted above, to date, the failing firm counterfactual has been accepted at Phase I in eight cases,115 and partially applied it in one other,116 since the coming into force of the Enterprise Act. The CMA has not yet accepted the failing firm counterfactual in any case since 1 April 2014. As the application of the failing firm counterfactual is fact-specific, and as there have not been many cases, it is instructive to consider each of these decisions briefly. (1)
In First West Yorkshire/Black Prince Buses, First West Yorkshire (“First”), an operator of transport services across the UK, including bus operations in and around Leeds, proposed acquiring Black Prince Buses (“Black Prince”), a bus operator with around 40 vehicles, which it operated from its depot in Morley, near Leeds.117 The OFT found that the transaction was essentially a merger to monopoly and that there was an absence of any competing bus service on all but one overlapping route. In respect of the counterfactual, Black Prince submitted that, absent the merger, it would have exited the relevant markets for the following reasons. First, Black Prince was a family-owned operation and the owner had been seeking to sell the business and retire on medical grounds since before First’s offer (the owner had approached several potential bidders, including First in early 2003 and had undertaken a public campaign to find other potential bidders).118 Secondly, the finances of the business were unsustainable. Black Prince had a negative cash flow, was loss-making in the
114 HRG/Focus, supra, para. 87. This is similar to the approach taken in the U.S. 2010 Horizontal Merger Guidelines, which state that “a merger is unlikely to cause competitive harm if the risks to competition arise from the acquisition of a failing division. The Agencies do not normally credit claims that the assets of a division would exit the relevant market in the near future unless both of the following conditions are met: (i) applying cost allocation rules that reflect true economic costs, the division has a persistently negative cash flow on an operating basis, and such negative cash flow is not economically justified for the firm by benefits such as added sales in complementary markets or enhanced customer goodwill; and (ii) the owner of the failing division has made unsuccessful goodfaith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed acquisition” (section 11). 115 See note 33 above. 116 In Anticipated acquisition by Taminco N.V. of the European Methylamines and Derivatives Business of Air Products and Chemicals Inc, OFT decision of 16 July 2004, in which the OFT concluded that the target’s Billingham plant would exit the market, but that the target would still have its toll agreement. The OFT’s acceptance of the failing defence in relation to the Billingham plant was therefore not outcome-determinative. 117 Anticipated acquisition by First West Yorkshire Limited of Black Prince Buses Limited, OFT decision of 27 May 2005. 118 Ibid., para. 18.
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then current financial year and had made only a small profit in the previous two financial years. The business was also supported by an overdraft with a rolling extension, which might have ceased in the absence of the merger.119 In addition, significant investment was required to replace a depot that Black Prince was selling to a property developer – a point that the OFT found strongly suggested that Black Prince intended to exit the market.120 Thirdly, whilst there was some scope for a purchaser to restructure the business, there was no material prospect of such a restructuring being directed from within Black Prince. Having established that Black Prince would have inevitably exited the market absent the merger, the OFT considered whether there was a less anti-competitive outcome than the sale of Black Prince to First. The OFT concluded that this was not the case on the basis that: (i) Black Prince had undertaken a considerable marketing campaign prior to its agreement with First, including approaching more than 60 bus companies in the UK, but only First had submitted a bid; (ii) third parties confirmed the lack of interest in Black Prince; and (iii) no venture capital firms had shown any interest in acquiring Black Prince. On this basis, the OFT found that, absent Black Prince’s acquisition by First, it would have exited the market. (2)
119
In Tesco/Kwik Save, Tesco acquired five former Kwik Save stores from FreshXpress, following their entry into administration. In relation to four of these stores (Handworth, Liverpool, Barrow-in-Furness and Nelson), the OFT considered that the exiting firm criteria were met.121 The stores had been marketed to national and local supermarket chains by a property agent. The stores were then placed into administration. FreshXpress, a company run by the former management of Kwik Save, provisionally managed the stores until a buyer was found. Three of the stores (Liverpool, Barrow-in-Furness and Nelson) had been closed and the Handforth store was being restocked on a limited and temporary basis by Costcutter. As a result, the OFT concluded that there was no serious prospect that the businesses could be reorganised and that they would exit the market in the absence of their acquisition by Tesco. As to the existence of a less anti-competitive alternative, Tesco was the only bidder for the four stores and the OFT had been provided with sufficiently compelling evidence by the administrator and FreshXpress that the major grocery chains had been given the opportunity to bid for the stores. Moreover, the OFT did not consider that it would be a better outcome in this case for the stores to be allowed to exit the market as this was unlikely to result in any competition for their assets and would have resulted in a fascia reduction in the relevant areas and decreased output in the sense of net retail floor space devoted to grocery sales.122
Ibid. Ibid. 121 Anticipated acquisition by Tesco Stores Limited of five former Kwik Save stores (Handforth, Coventry, Liverpool, Barrow-in-Furness and Nelson), OFT decision of 11 December 2007. 122 Ibid., para. 32. 120
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(3)
In CdMG/Ferryways and Searoad Stevedores, CdMG, part of the Cobelfret group, active in the supply of short-sea unitised freight shipping, acquired Ferryways, which was also active in the supply of short-sea unitised freight shipping, and Searoad Stevedores (“Searoad”), which provided stevedoring services in Ostend, Belgium.123 Cobelfret submitted that the target business was insolvent and had been trading on a fraudulent basis prior to the acquisition. As a result, Searoad had lost its concessions to use the Ostend terminal and Ferryways’ charter agreements in respect of its vessels had been terminated, meaning that the target business had ceased to operate, had lost its goodwill, and its customers had moved to other suppliers.124 The OFT confirmed this information, as well as information regarding the parlous financial state of the target business, from third parties. On this basis, the OFT concluded that the target business would have exited the market absent the acquisition by Cobelfret. In terms of there being a less anti-competitive outcome, the OFT did not consider that there would have been a materially different outcome in the absence of the merger, either as the result of the assets being acquired by another purchaser or as a result of the assets being allowed to exit the market.
(4)
In HRG/Focus, Home Retail Group (“HRG”), the parent company of Homebase and Argos, acquired 27 leasehold properties from Focus.125 The OFT concluded that there was a competition concern in relation to the Focus store in St Albans. HRG argued that, absent the merger, this store would inevitably have exited the market. The OFT was provided with documentary evidence that this store would have been sold or closed if a transfer to HRG could not occur by 31 March 2008.126 The evidence provided to the OFT also confirmed the parties’ submissions regarding the poor financial performance of the St Albans store. In addition, Hilco, a restructuring company specialising in the retail sector, was commissioned by Focus to manage several stores, including the one in St Albans, until their disposal or closure. Property agents were also instructed. The OFT also considered that the nominal consideration being paid by HRG and the location and size of the store (which were suboptimal), were important factors in concluding that the St Albans store would have been disposed of by Focus, absent the merger. In relation to whether there was a less anti-competitive outcome than the acquisition by HRG, the OFT was provided with evidence that there had been an open sales process and that the St Albans store had been offered for sale to each of the other national DIY ‘sheds’ (B&Q and Wickes). The OFT considered it “untenable” that another DIY shed would have operated a store from this site.127 Moreover, the
123 Completed acquisition by the CdMG group of companies of Ferryways NV and Searoad Stevedores NV, OFT decision of 24 January 2008. 124
Ibid., para. 12. Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008. 125
126 127
Ibid., para. 89. Ibid., para. 91.
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OFT did not consider that it would have been less anti-competitive to allow the St Albans store to close. The OFT noted that this would have resulted in a fascia reduction from three to two and would have resulted in a significant reduction in supply in this local market.128 (5)
In HMV/Zavvi, HMV, active in selling entertainment products, including prerecorded music, films, and electronic games, proposed acquiring 15 stores from Zavvi, which was also active in the sale of entertainment products and which had entered into administration in December 2008.129 In respect of seven of these stores, the OFT considered it disproportionate to require the parties to provide an in-depth assessment “given the clarity of evidence indicating the application of the failing firm defence that the OFT was able to attain at an early stage of the investigation.”130 Regarding whether the stores would inevitably have exited the market, the OFT noted that they were already in administration, but that this, by itself, was insufficient to conclude that the stores would not have emerged from administration having been reorganised.131 However, the administrator confirmed that Zavvi was in considerable debt and that its sole supplier was also in administration. As a result, Zavvi’s business model was no longer viable and it could not secure any supplies on acceptable credit terms. The market conditions were also such that an acquisition by trade, private equity or a management buy-out was not possible. As to whether there was a less anti-competitive alternative outcome, the stores had been marketed to parties that the landlords of the stores and the administrator believed might be interested. In respect of three of the seven overlapping stores, no offers had been forthcoming. In respect of the remaining four stores, an offer had been forthcoming from Head, a company run by former Zavvi management, but this was not considered acceptable by the landlords. This fact, in itself, was not sufficient for the OFT to conclude that there was no less anti-competitive alternative. The question for the OFT was whether, in the absence of HMV’s offer, the landlords would have accepted Head’s offer or whether they would have preferred to leave the stores empty and sought an ‘out of market’ alternative (e.g., a non-entertainment retailer). However, the landlords provided the OFT with evidence that the offers from Head were unacceptable in absolute terms, and not just in comparison with HMV’s, and that they would have rejected Head’s offer in preference for leaving the stores vacant. The OFT did not regard leaving the stores vacant as a less anti-competitive outcome than their sale to HMV, as their closure would have been a reduction in competing fascia.132
(6)
In Smiths/Surridge Dawson, Smiths News Trading (“Smiths”), active in the supply of wholesale newspaper and magazine distribution, acquired certain
128
Ibid., para. 92. Anticipated acquisition by HMV of 15 Zavvi stores, OFT decision of 28 April 2009. 130 Ibid., para. 28. 129
131 132
Ibid., para. 33. Ibid., para. 50.
The Counterfactual
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assets from Surridge Dawson (“Dawson”), namely plant equipment and machinery, customer records, and a number of Dawson employees.133 Dawson also took over responsibility for leasing depots located in territories where it had been appointed by publishers as the chosen wholesaler. Although the OFT did not consider this to be a “classic” failing or exiting division case, it applied the failing/exiting division criteria.134 The OFT considered whether it was realistic that Dawson would have been able to preserve the acquired assets until the next tender round, in the light of the contracts that it had lost. Smiths argued that this was not the case and Dawson had stated in its May 2009 interim results that it had no viable alternative other than to seek an orderly exit from the market.135 The OFT’s investigation (including discussions with Dawson’s administrators) confirmed these views. The OFT also considered whether there might have been a less anti-competitive, alternative purchaser for the assets but found that, even if an alternative purchaser could have been found, acquiring the assets five years in advance of the next tender round would not have been a commercially sensible proposition and there was, in any event, no guarantee that the purchaser of the assets would have been successful in the next tender round.136 On these grounds, the OFT concluded that, absent the merger, the assets would have exited the market. (7)
133
In Kingfisher/Focus, Kingfisher, the parent company of B&Q, proposed acquiring 30 stores from Focus (DIY) Limited (“Focus”).137 Focus went into administration in May 2011. However, the OFT did not find this factor to be conclusive in relation to the failing firm assessment. The OFT considered whether Focus was able to meet its financial obligations in the near future and whether it was able to restructure itself. The OFT concluded that following the sales of the Wickes stores to Travis Perkins in 2005, Focus had been in financial difficulties. Focus was acquired by Cerberus in 2007 which undertook a restructuring programme that included reducing head count by 20% and closing 76 stores in 2008. In 2008, its revolving credit facility was extended until 2011 and a creditors’ voluntary arrangement (“CVA”) was commenced. In 2010, Rothschild were engaged to refinance the revolving credit facility but no agreement could be reached. With central/unallocated costs removed, Focus suffered losses in 2008, 2009 and 2011. Despite significant financial difficulties, management had kept the business trading and
Completed acquisition by Smiths News Trading Limited of Certain Assets of Surridge Dawson Limited, OFT decision of 21 August 2009. 134 Ibid., para. 30, footnote 14, the OFT stated that this case was differentiated from “classic” failing/exiting division cases as, at the same time as the transaction, Dawson had lost out to its two major competitors in a tendering round for many of the major UK publishers of newspapers and magazines. Therefore, the competitive force of the acquired assets was reduced as a result of this tendering round, rather than as a result of the transaction. 135 Ibid., para. 33. 136 Ibid., paras. 37 and 38. 137 Anticipated acquisition by Kingfisher plc of 30 stores from Focus (in administration), OFT decision of 7 July 2011.
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the OFT was unable to conclude that exit was inevitable solely for financial reasons, pre-administration. In relation to a possible restructuring, a plan was presented to the board in April 2011, which considered a range of restructuring options and recommended a new CVA in preference to a substantial store disposal. However, Cerberus, the major secured creditor and owner, rejected the plan and put Focus into administration. On this basis, the OFT considered the exit of the Focus stores to be inevitable. The financial issues alone were not sufficient for the OFT to reach this conclusion but it considered that Focus’ survival was dependent on the support of its major creditors. Once this support was withdrawn the company was no longer viable. The OFT assessed whether there were any alternative purchasers for the business. Kingfisher was the only DIY ‘shed’ that had shown a realistic interest, pre-administration. However, the OFT considered that this was not sufficient to rule out any alternative purchaser as the entry into administration can change incentives of other firms to acquire the target business. The OFT noted that this was consistent with internal documents which indicated Kingfisher’s belief that other firms might become interested once the business was in administration. Third parties confirmed that they had maintained an active interest although they had no interest in making offers whilst Focus was still trading. The OFT considered these to be realistic alternative purchasers. Travis Perkins and HRG were interested in buying several stores but not stores that overlapped with those that Kingfisher was interested in acquiring.138 The OFT considered that if the stores had been allowed to exit the market entirely, there would have been a significant amount of diversion to B&Q in any event. Therefore, the OFT concluded that the exiting firm criteria were met. (8)
138
In Sports Direct/JJB Sports, Sports Direct International plc (“Sports Direct”) proposed acquiring 19 stores from JJB Sports plc (in administration) (“JJB”).139 Whilst JJB was in administration at the time of the transactions, the OFT did not consider that this conclusively demonstrated that the failing firm criteria were met. However, in relation to the inevitability of exit, the administrator informed the OFT that it was not possible to rescue JJB as a going concern as no credible offer had been made for the company following the commencement of a formal sales process and the administrator was attempting to sell the JJB business to achieve the best possible result for creditors. The OFT found that JJB had been struggling financially for several years and that losses after tax in the financial year prior to the transaction were £181 million. Several attempts had also been made to restructure the company but it continued to make losses and there was no prospect that there was financial support for continued trading for the short to medium term sufficient for the directors to be confident that they could pay the creditors. These attempts to restructure and refinance had ended with JJB’s entry into insolvent
One exception to this, Buxton, but Travis Perkins was no less anti-competitive and it was not clear that Travis Perkins would have acquired this store in any event. 139 Anticipated acquisition by Sports Direct International plc Of 19 Stores From JJB Sports plc (in administration), OFT decision of 21 December 2012.
The Counterfactual
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administration. On this basis, the OFT was satisfied that the overall JJB business, including the 19 target stores, would inevitably have exited the market. In relation to whether there were any less anti-competitive purchasers for the target stores, the OFT found that of the 109 potential bidders contacted, eight indicative bids were made, of which three were not considered credible as they were below liquidation value or they required further investment by existing shareholders that would not have been available. Another bid was rejected because it was considerably lower than Sports Direct’s indicative bid. Ultimately, only Sports Direct made an offer at liquidation value or higher. The OFT contacted all relevant bidders to verify that no alternative offers at liquidation value would have been made. Accordingly, it concluded that there would have been no less anti-competitive purchasers for JJB and that, absent the merger, following JJB’s exit from the market, Sports Direct would in any event have been expected to attract a significant proportion of the sales switching from JJB given its status as a leading sports retailer. Therefore, the OFT concluded that the failing firm criteria were met. The exiting firm counterfactual has also been applied to transactions in which this counterfactual might apply to certain assets being acquired by the purchaser, but not all of them. Such a case arose in Taminco/Air Products.140 Taminco, a producer of methylamines and methylamine derivatives, proposed acquiring certain assets from Air Products (“AP”), another producer of methylamines and methylamine derivatives. Taminco proposed acquiring AP’s customer contracts, stock, IP rights, business records, goodwill and know-how, but did not propose acquiring AP’s production plant in Billingham, which AP had announced it intended to close irrespective of the merger. AP supplied methylamines and three main derivatives, dimethylformamide (“DMF”), alkylalkanolamines (“AAA”) and choline chloride, from its Billingham plant as well as via a toll agreement with a third party producer. In respect of the competitive assessment, the parties’ combined shares of supply were very high (up to 80-90% for certain derivatives) with significant increments. However, the parties argued that the OFT should not assess the merger against these pre-merger shares of supply, but should instead assess the merger in the light of the closure of the Billingham plant, the termination of the toll agreement and closure of the toll facilities. The OFT agreed that the closure of the Billingham plant was imminent and that AP had conducted an auction of the business, approaching industrial and investment purchasers. Despite these efforts, no purchaser for the business was found. Therefore, in relation to the products manufactured at the Billingham plant – methylamines, DMF and choline chloride – the OFT considered the appropriate counterfactual to be the closure of the Billingham plant. However, in relation to AAAs, where the merger represented a reduction in the number of European competitors from three to two, the OFT did not find that the appropriate counterfactual was the termination of the toll agreement and closure of the toll facilities. The OFT found that there were significant questions in relation to whether it was more economically rational to close the toll plant than to 140
Anticipated acquisition by Taminco N.V. of the European Methylamines and Derivatives Business of Air Products and Chemicals Inc, OFT decision of 16 July 2004.
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transfer it to an alternative purchaser and that insufficient evidence had been provided by the parties. Accordingly, the OFT considered the appropriate counterfactual to be the transfer of the toll agreement to a third party (i.e., not pre-merger conditions).
9.4.10 The Phase II Decisional Practice As of 1 January 2016, the failing firm counterfactual has been accepted in Phase II in only five cases.141 Each of these mergers is considered below. (1)
In Taminco/Air Products, the facts of which are set out above, the OFT accepted that the appropriate counterfactual was that the Billingham plant would close, resulting in the fact that the merger would not result in a realistic prospect of a substantial lessening of competition in relation to methylamines, DMF or choline chloride.142 However, the OFT found that the counterfactual in relation to the toll agreement with ICI for the production of AAAs at its plant in Chocques, France, using methylamines supplied by AP, would not be the termination of the toll agreement and the closure of the toll facilities. The CC agreed with the OFT that, absent the merger with Taminco, AP would have closed the Billingham plant and exited the European methylamines and derivatives market.143 In respect of the toll agreement with ICI, the CC concluded that AP might have transferred the toll agreement to BASF, but not to another party144 and that, in any event, the CC expected the Chocques facility to close, even if BASF were to purchase the AAA business.145 Although the CC considered the timing of such a closure to be uncertain, it did not expect that the Chocques facility would have been likely to remain operational for longer if the merger were to take place than under the counterfactual.146 Accordingly, the CC concluded that the merger would not result in a substantial lessening of competition.147
(2)
In Arcelor/Corus, as set out above, the parties argued that the relevant counterfactual was that Corus’ sheet piling activities were loss-making and that this business would have exited the market in the absence of its acquisition.148
141 The CC did not expressly apply the failing firm criteria in all of these cases. For example, in Taminco/Air Products, neither the parties nor the CC used the language of ‘failing firm’, but, in substance, the parties’ arguments were that the target business would close and its assets would exit the market, which was an argument based on Air Products being a failing firm. 142
At Phase I, the OFT had partially accepted the failing firm defence. Taminco NV and Air Products and Chemicals Inc, a report on the proposed acquisition by Taminco NV of the European methylamines and derivatives business of Air Products and Chemicals Inc, November 2004, para. 5.57. 144 Ibid., para. 5.60. 143
145
Ibid., para. 5.77. Ibid. 147 Ibid., para. 5.86. 148 Arcelor SA and Corus Group plc, a report on the acquisition by Arcelor SA of part of Corus Group plc’s UK hot rolled steel piling business, February 2005. 146
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Without specifically mentioning the failing firm defence, the CC considered eight possible counterfactual scenarios, four of which involved Corus continuing to supply hot-rolled steel sheet piling (“HRSSP”)149 and the remaining four involved Corus ceasing to supply HRSSP. In short order, the CC dismissed the four scenarios in which Corus continued to supply HRSSP as unrealistic due to the fact that: (i) its existing piling range was uncompetitive and would come under increasing pressure; (ii) Scunthorpe (the site of its mill) was remote from European customers; and (iii) on average, the mill was unprofitable.150 In respect of the four scenarios in which Corus would cease supplying HRSSP, the CC considered the following scenarios: (i) Corus could sell its UK sheet piling commercial operations to Salzgitter and close the Scunthorpe mill; (ii) Corus could sell its UK sheet piling commercial operations to another party, such as Mittal Steel and close the Scunthorpe mill; (iii) Corus could close the Scunthorpe mill before the end of 2004 without selling it; and (iv) Corus could close the Scunthorpe mill before the end of 2005 without selling it.151 The CC’s report confirmed that Corus did not offer to sell the target business to Salzgitter152 or to any other party,153 although the CC noted that a sale of the business to Mittal Steel might have had some benefits.154 The CC’s assessment of scenarios (iii) and (iv) above are, for the most part, redacted and therefore it is not clear what the CC’s reasoning was in respect of what would have been likely to happen in the event that the mill was closed without any sale (i.e., in circumstances where the business would have failed and no purchaser had been identified), although the CC’s report suggests that scenario (iv) is the one that Corus itself considered most likely.155 However, far from the issue of Corus not having approached any other potential purchasers being determinative (as it was for the OFT – in addition to the fact that the OFT thought it would have been less anti-competitive for Corus to have exited the market and for other suppliers to have competed for its assets), the CC concluded that: (i) Corus would most likely have ceased producing piling, even if there had been no sale to any other party; and (ii) it was unlikely that Corus would have been successful in selling the business to anyone else (although the CC noted that Mittal might have been interested and was never approached). The CC’s decision gives no indication that there was 149
These counterfactual scenarios were: (i) Corus continues to operate the Scunthorpe mill without making any investments or otherwise taking steps to improve its position; (ii) Corus invests in its Scunthorpe heavy section mill so as to be able to produce wide Z piling; (iii) Corus continues to operate its Scunthorpe heavy section mill, whilst investing in its Teeside beam mill, before switching piling production there and closing the Scunthorpe mill; and (iv) Corus retains its sales force and sells imported steel sheet piling, having closed the Scunthorpe mill. 150
Exact details about the mill’s profitability were redacted from the CC’s decision. CC report on Arcelor/Corus, supra, para. 6.19. 152 Ibid., para. 6.20. 153 Ibid., para. 6.22. 151
154 155
Ibid. Ibid., para. 6.24.
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rigorous consideration of what might have happened to the target business’ assets in the event that it had exited the market, as the CC considered was most likely to occur. In this regard, one member of the CC’s merger inquiry group, Chris Goodall, dissented from the CC’s conclusion that the merger did not result in a substantial lessening of competition.156 Mr Goodall accepted that the most likely counterfactual was that Corus would have exited the market by the end of 2005 but, absent the acquisition by Arcelor, Mr Goodall considered that the transaction had resulted in the mill being closed 18 months earlier than would otherwise have been the case. In the absence of the acquisition by Arcelor, Mr Goodall noted that, as Arcelor had told the CC, a price war would have occurred between Arcelor and Salzgitter, as the largest remaining competitors. In Mr Goodall’s view, Arcelor acquired Corus’ business in order to avert a price war and that, as a result of the acquisition, Arcelor had captured a very large share of the UK market. Mr Goodall also believed that the acquisition had allowed Arcelor to lock other suppliers out of the UK market by taking over Corus’ programme of customer service and support. (3)
In British Salt/New Cheshire, British Salt, active in the production and sale of vacuum salt products, acquired New Cheshire Salt Works (“NCSW”), which was also active in the production and sale of vacuum salt products.157 The parties did not argue the failing firm defence at Phase I and the OFT referred the merger on the basis that it resulted in a reduction in the number of vacuum salt producers in the UK from three to two. However, at Phase II, the CC considered in detail whether NCSW would have remained active on the market in the short-term. NCSW told the CC that it was not a viable economic entity and that, had it not been sold, it would almost certainly have closed in the near future.158 The former shareholders of NCSW (i.e., the owners prior to the sale to British Salt) also told the CC that they had considered all possible options available to NCSW, including diversification, the takeover of British Salt, alternative sources of brine, receivership, short-term trading, sale to a foreign company, and the sale of NCSW’s site for property development. On the basis of these facts, the CC concluded that: (i) the former shareholders would have closed NCSW absent the sale of the business; (ii) they would most likely have taken the decision to close the business during the winter of 2005/2006, with the closure of the business occurring in late 2006;159 (iii) the former shareholders would have sought to realise what value they could from the assets, which would probably have involved selling the NCSW customer list to, most likely, British Salt or Salt Union, as many customers preferred to
156
Ibid., pgs 35-36. British Salt Limited and New Cheshire Salt Works Limited, a report on the acquisition by British Salt Limited of New Cheshire Salt Works Limited, November 2005. 157
158 159
Ibid., para. 5.4. Ibid., para. 5.24.
The Counterfactual
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source their salt from UK producers;160 and (iv) in the event that the former shareholders had not sold NCSW’s customer list, the remaining salt producers would have competed for NCSW’s market share, which the CC anticipated would have been dispersed approximately in accordance with competitors’ market shares.161 Against this counterfactual, the CC concluded that the merger did not result in a substantial lessening of competition. (4)
In Long Clawson/Millway, Long Clawson Dairy (“Long Clawson”), a cheeseproducing dairy, acquired the Millway business of Dairy Crest Group, which also produced a variety of cheeses.162 As described above, the OFT was unconvinced that, although Millway had been loss-making for a number of years, given its large portfolio of contracts it could not successfully restructure itself, mainly as a result of insufficient evidence having been provided by the parties. Long Clawson argued to the CC that the OFT had reached the wrong conclusion in this respect, that Millway was no longer a viable business, and would have been closed, absent the merger. The CC considered the failing firm defence in considerable detail. It found that, as a result of the following considerations, the relevant criteria were met. First, Millway had been trading at a loss and had been dependent on its parent company for many years. In each of its 2007 and 2008 fiscal years, Millway had lost approximately £2.5 million.163 Secondly, the CC was satisfied that all of Millway’s turnover had been generated from sales to third parties on an arm’s-length basis, that there had been no manipulation of Millway’s turnover, and that no central costs had been allocated to Millway. Indeed, the CC found that Millway’s actual financial condition was worse than it appeared in its accounts.164 Thirdly, the CC considered it very unlikely that Millway would have been able to restructure itself. Dairy Crest had told the CC that it had tried everything to make Millway profitable. Management at Millway had changed several times in an attempt to address Millway’s problems. Dairy Crest had taken the decision that if the sale to Long Clawson did not proceed, then it would close Millway. Finally, in terms of alternative purchasers for Millway, Dairy Crest had only approached three companies to ascertain their interest: First Milk, Milk Link and Long Clawson. It had not contacted less anti-competitive alternative purchasers such as Arla or Lactalis. However, the CC contacted both Arla and Lactalis. Arla told the CC that it would not have been interested in acquiring Millway as it was aware of its production problems and the fact that some customers had begun to switch to other suppliers. Lactalis, however, told the CC that, had it been approached, it would have been interested in acquiring Millway. Nevertheless, the CC considered that, as Lactalis was not
160
Ibid., para. 5.25. Ibid., para. 5.26. 162 Long Clawson Dairy Limited and Millway, a report on the completed acquisition by Long Clawson Dairy Limited of the Millway Stilton and speciality cheese business of Dairy Crest Group plc, 14 January 2009. 161
163 164
Ibid., para. 6.31. Ibid., para. 6.36.
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fully aware of Millway’s production problems or the fact that customers had recently left Millway, it was “unlikely that Lactalis would have completed an acquisition of Millway.”165 (5)
In Optimax/Ultralase, as discussed above, the OFT had found that, absent the merger, Ultralase would have exited the market but that there was a realistic prospect of the target business being acquired by a private equity firm, which would have been a substantially less anti-competitive option than Optimax.166 At Phase II, the CC also found that Ultralase’s revenues had declined, that its cash flow was negative and that it would have been unable to restructure itself. This was confirmed by Grant Thornton. Indeed, on 30 October 2013, after the CC had published its provisional findings, Ultralase was put into administration. As to the issue of alternative purchasers, whilst the CC considered that the private equity bidder was the most likely alternative purchaser, it did not consider it likely that this bidder would have completed a purchase of Ultralase once it had completed full due diligence. On this basis, the CC concluded that there were no credible alternative purchasers that would have acquired Ultralase as a going concern and, therefore, the exiting firm counterfactual was accepted.167
9.5
STRATEGIC EXIT
As discussed above, the purpose of the failing firm defence is to determine the appropriate counterfactual against which a merger should be assessed. In the case of genuinely failing firms, in merger scenarios that fulfil the CMA’s exiting firm criteria, any post-merger substantial lessening of competition is not a result of the merger in question. The target business would have exited the market absent the merger in any event and therefore there would be no causal link between the merger and the removal of a competitor from the market. Whilst this has traditionally been framed in terms of firms or divisions of firms exiting the market as a result of their parlous financial situation (given that firms most frequently exit the market because of their financial situation), the question arises as to whether there are reasons other than financial failure that could result in the appropriate counterfactual not being pre-merger conditions, but where the target business would nevertheless have inevitably exited the market, resulting in a lack of causality between the merger and the substantial lessening of competition. The Merger Assessment Guidelines state that firms may exit the market due to a change in the selling firm’s corporate strategy.168 In this regard, the Merger Assessment
165
Ibid., para. 6.69. Optimax Clinics Limited and Ultralase Limited, a report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, 20 November 2013. 167 Ibid., para. 5.44. 168 Merger Assessment Guidelines, para. 4.3.9. Indeed, conceptually, the reason why a business is exiting the market should not matter as long as it is inevitable that the business would in fact exit. However, most frequently, firms exit a market for financial or strategic reasons. It is nevertheless 166
The Counterfactual
343
Guidelines note that the CMA will be particularly interested in evidence that has not been prepared in contemplation of the transaction. In particular, the CMA will be interested in evidence relating to the transaction’s rationale and why the firm or assets in question would have exited the market for non-financial reasons, absent the merger. The criteria against which an exiting firm scenario will be assessed are the same as set out above for failing firms. The Merger Assessment Guidelines state that, as with the assessment of failing firms, for the CMA to accept an exiting firm argument, it would need compelling evidence that the firm would exit the market, absent the merger, and that there would have been no less anti-competitive purchaser for the firm or asset. In the event that both of these criteria were satisfied, the CMA would also consider whether it would be substantially less anti-competitive for the assets to be allowed to exit the market.169 A recent example of a business exiting a market for strategic reasons was Müller/Dairy Crest.170 In this case, Müller proposed acquiring the liquid milk, packaged cream, flavoured milk and bulk commodity ingredient business of Dairy Crest. In relation to this acquisition, Dairy Crest submitted that if the sale to Müller was unsuccessful then it would have effected its ‘Plan B’, which was essentially a partial exit from the market for strategic reasons and would have involved: (i) downsizing its milk business to a single dairy at Severnside as well as reducing its depot network; (ii) the retention of sufficient fresh liquid milk processing capabilities at Severnside to allow Dairy Crest to preserve the profitable parts of Dairy Crest’s business; and (iii) exiting the supply of milk to national multiples (i.e., supermarkets). The CMA considered whether there was evidence that such a downsizing of the target business was inevitable due to financial failure. In this regard, Dairy Crest submitted that: (i) the target business had been trading at a loss of £15.8 million in 2014/15; (ii) the business had audited losses (after costs of restructuring were taken into account) over the last four years; (iii) the business had been cash flow negative since 2011/12 and required significant funding from the Dairy Crest group; and (iv) Dairy Crest’s internal forecasts for the next three years were negative. Whilst indicating that the business’ financial conditions were very challenging, the CMA did not consider that the financial difficulties indicated that the target business would be at risk of financial failure in the near future. The CMA therefore considered whether there was compelling evidence of a plan to downsize for strategic reasons. Dairy Crest submitted that it had taken significant steps to revitalise the target business as part of an effort to achieve a 3% margin but had failed to reverse its decline. Dairy Crest submitted that the underlying causes of the trading losses would persist for several reasons including the negative and declining margins from supplying to national multiples, the terminal decline of the doorstep business and the presence of high fixed costs that cannot be reduced in line with volume declines. Dairy Crest
conceivable that a business could exit a market for other reasons (e.g., change in Government regulation, etc). 169 Ibid., para. 4.3.10. 170 Anticipated acquisition by Müller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015.
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argued that these factors meant that it could no longer achieve its commercial objectives and that downsizing the business was the only credible option. Dairy Crest submitted reports from equity analysts supporting the need to downsize and internal documents evidencing the consideration of multiple options but moving to developing a more detailed single site option that ultimately culminated in ‘Plan B’. The CMA concluded that, based on this evidence, it was not realistic to assume that absent the merger Dairy Crest would compete with Müller on the basis of prevailing competitive conditions and that downsizing the target business was inevitable. The CMA also assessed whether there would be any less anti-competitive purchaser. In terms of acquiring the target business as a whole, noting that the only realistic buyers would be those that could capture material synergies from the acquisition, the CMA considered that Müller and Arla would be the only buyers that could extract the necessary synergies and that Arla would not be substantially less anti-competitive. As regards a sale of the individual assets of the target business, Dairy Crest had been unsuccessful in selling any of the five dairies it had sold since 2009 as going concerns, indicating that realistically there were no alternative buyers. Accordingly, the CMA considered that the continuation of prevailing competitive conditions was unrealistic and that, absent the merger, Dairy Crest would have effected a downsizing of the target business for strategic reasons.
9.6
SCENARIOS SHORT OF EXIT
In certain cases, the counterfactual may not be pre-merger or prevailing competitive conditions as a result of the fact that, in the absence of the merger under consideration, the target business would not have exited the market, but would nevertheless have been in financial difficulty and would have been a weakened competitive force in the future (i.e., the counterfactual would lie on the spectrum between pre-merger conditions and failing firm). There are two types of scenario in which this has arisen. First, where the target is in a parlous financial condition but is unlikely to exit the market entirely. Secondly, where a company in a parlous financial condition would not exit the market due to State intervention. Both of these scenarios are set out below.
9.6.1
The Target as a Weakened Competitive Force
There may be cases in which merging parties are unable to establish to the requisite legal standard that the target business meets the failing firm criteria but where it is not realistic that the prevailing competitive conditions will continue post-merger. In such cases, at Phase I, the Merger Assessment Guidelines specify that the CMA will select the pre-merger competitive conditions as the relevant counterfactual, but that “it might have regard to facts that are insufficient for it to adopt a counterfactual other than the pre-merger conditions (for example, by taking account of the reduced competitive impact of a firm in financial difficulties even though the conditions of the exiting firm are not met).”171 At Phase II, the CMA does not have this binary option and will select the counterfactual that it considers is most likely. In the past, the CC has investigated a number of mergers in which, despite the parties’ arguments to the contrary, they have found that, whilst the target business is in a parlous financial condition, the failing firm 171
Merger Assessment Guidelines, para.4.3.2, footnote 39.
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criteria are not met (e.g., because there are less anti-competitive alternative purchasers), but has accepted that the target business is a weakened competitor and acknowledged this lesser competitive position in the counterfactual. The following cases are illustrative of the Authorities’ approach to these cases:172 (1)
In NBTY/Julian Graves, the CC did not accept that the failing firm criteria were met on the basis that there were, as described above, other private equity bidders who would have been realistic, less anti-competitive purchasers than NBTY.173 However, although the failing firm criteria were not met, the CC considered that one of these private equity bidders would have acquired Julian Graves and that it would have continued trading, although possibly through a smaller number of stores due to its financial condition.174
(2)
In Stagecoach/Eastbourne/Cavendish, the CC rejected Stagecoach’s arguments that Eastbourne Buses Limited and Cavendish Motor Services Limited (“Cavendish”) were failing firms.175 However, in relation to Cavendish, the CC found that, given, inter alia, its financial condition, Cavendish would have been unlikely to have been sold to a different owner and its present owner, Renown Coaches Limited, would have been likely to close a “very substantial proportion of its Eastbourne operations”, which were failing to cover their costs.176 The CC’s expectation was that Cavendish would have become “a much smaller operator than it was in 2008, and that this change would have taken place within a period of 12 months, and possibly substantially quicker.”177
(3)
In Kerry/Headland, the parties argued that Headland was a failing firm and would inevitably have exited the market.178 In the alternative, they argued that, if Headland had not exited the market, its financial position was such that the competitive constraint it would have exerted on Kerry would have been minimal. In relation to the failing firm submission, the OFT found that whilst Headland had been loss-making for a considerable period of time and its financial position had been deteriorating, Headland had continued to trade and although it had lost important contracts in 2010, it was also winning new contracts that would have earned revenue exceeding the revenue of the lost
172
To date, the CMA has not considered such a case. NBTY and Julian Graves, a report on the completed acquisition by NBTY Europe Limited of Julian Graves Limited, 20 August 2009, paras. 4.9 to 4.12. 174 Ibid., para. 4.14. 175 Stagecoach Group plc/Eastbourne Buses Limited/Cavendish Motor Services Limited, a report on the completed acquisition by Stagecoach Group plc of Eastbourne Buses Limited and Cavendish Motor Services Limited, 22 October 2009, paras. 6.9 and 6.14. 176 Ibid., para. 6.34. 177 Ibid. 178 Completed acquisition by Kerry Foods Limited of the frozen ready meals business of Headland Foods Limited, OFT decision of 12 July 2011. 173
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contracts.179 The OFT found that the new contracts were on loss-making terms but would have allowed Headland to recover some of its fixed costs and there was insufficient evidence that the losses on these contracts would have been so significant that Headland could not, at least in the short term, have borne them. There was also insufficient evidence that Headland faced severe or imminent liquidity problems. Furthermore, Headland’s restructuring plans in the form of a closure of one of its two factories gave, at least in the short term, a realistic prospect of a return to profitability for Headland. Therefore, the OFT was unable to accept Kerry’s failing firm submissions. In addition, as regards the ‘flailing firm’ arguments, the OFT considered that it was not clear that the losses that Headland would have incurred on its new contracts would have been as commercially unsustainable as Kerry had submitted, and there was no evidence that any third parties considered that Headland had lost or was losing its position as a credible supplier of frozen ready meals. Therefore, the OFT did not accept that Headland’s ability to compete with Kerry would have been significantly weakened.
9.6.2
State Rescue
In very rare cases, a financially distressed firm may not exit the market in the counterfactual due to the fact that it would have been rescued by the State. Such a scenario arose in the midst of the economic crisis in 2008, precipitated by the collapse of Lehman Bros in the United States on 14 September 2008, when Lloyds proposed acquiring one of the UK’s largest financial services groups, HBOS.180 In this case, Lloyds argued that the transaction was negotiated in a very short period of time in the context of the significant worsening of the global financial markets in mid-September when HBOS’ position in terms of its share prices and funding had become vulnerable.181 In these circumstances, the parties argued that the relevant counterfactual against which to assess the transaction was not prevailing competitive conditions but a “very significant reduction in the competition pressure exerted by HBOS”, that HBOS “would be a very different bank to the ‘pre-credit crunch’ HBOS” and that it “would be, at best, 179
Ibid., para. 37. Anticipated acquisition by Lloyds TSB plc of HBOS plc, a report to the Secretary of State for Business Enterprise and Regulatory Reform, 24 October 2008. 181 Ibid., para. 30. Annexe 2 of the OFT’s decision includes a note from the Financial Services Authority (“FSA”) to the OFT, dated 16 October 2008, in which the FSA explains to the OFT HBOS’ financial position. It states that HBOS had been seeking to reduce its wholesale funding and to lengthen the maturity profile of its liabilities. It had only had limited success in achieving these goals given the extremely difficult market conditions. As a result, by the end of June 2008, HBOS had a loan to deposit ratio of 177% and a funding gap of £197.8 billion, both of which were significantly higher than its peer banks. Following the collapse of Lehman Bros, financial markets and investors reappraised their risk appetite and the cost of wholesale funding increased dramatically. Given the size of HBOS’ funding gap, it was particularly exposed to this risk reappraisal. Consequently, HBOS’ share price fell 18% on 15 September and a further 22% on 16 September. On 17 September, Lloyds agreed to acquire HBOS. 180
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a very weak competitor.”182 The parties argued that a more realistic counterfactual was that the Government would have intervened with a rescue package to save HBOS from financial collapse and that such intervention would probably have led to some structural limitations being placed on HBOS’ ability to compete effectively.183 In relation to the failing firm defence, the parties argued that the failing firm defence rules should be relaxed and that the OFT should apply a flexible approach in the light of the highly unusual nature of the circumstances surrounding the transaction. The OFT agreed with the parties that the appropriate counterfactual was not the prevailing competitive conditions and that its rebuttable presumption in favour of the status quo could not be safely applied in this case, although the OFT noted that if it were assessing a merger that did not involve Government intervention that was expected to influence the counterfactual, even under similar economic circumstances, it would have analysed the merger against the standard counterfactual of pre-merger competitive conditions.184 Instead, the OFT contemplated a two-stage counterfactual as described above in section 9.3.3. Stage I of this counterfactual related to a public sector solution to HBOS’ financial condition and the possibility of Government support. Whilst the OFT noted that it was not best-placed to predict with any certainty what action, if any, the Government might take, in the light of the action that the Government had taken by the time of the merger, the OFT considered it realistic that HBOS would have received some specific Government support.185 This support was likely to have included some level of recapitalisation, but the OFT did not want to speculate on whether this would have involved the Government taking HBOS into temporary public ownership (as it had with Northern Rock) or whether it would have taken some lower level of shareholding in the bank.186 However, irrespective of the precise level of Government support, the OFT found that it was realistic to expect that HBOS would have been an effective competitor. Stage II of the OFT’s perceived counterfactual was a private sector solution following Government support. This would have meant that, in the short to medium term, the Government would have withdrawn its support and, in the case of recapitalisation, sold its shares to a third party or on the sold open market.187 In either case, the Government would have ensured that the on-sale would not have raised any competition concerns. In these circumstances, following the Government’s withdrawal of support, HBOS would have been a significant competitor.188
182
Ibid., para. 52.
183
Ibid., para. 53. Ibid., para. 46. 185 Ibid., para. 72. 186 Ibid., para. 73. 184
187 188
Ibid., para. 79. Ibid., para. 83.
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9.7
MARKET ENTRY OR EXPANSION
The Merger Assessment Guidelines state that “[t]he Authorities will consider whether the counterfactual situation should include the entry into a market of one of the merger firms or, if already within the market, whether the firm would have expanded if the merger had not taken place.”189 There are two types of entry that are relevant to the counterfactual: (i) when one of the merging parties would have entered the market absent the merger (referred to as actual potential entry); and (ii) where one of the merging parties is considered to be a potential market entrant and the mere threat of its entry poses some competitive constraint on the other merging party (referred to as perceived potential entry).190 Both of these theories of potential competition could apply in the same merger, as a transaction could, in principle, eliminate both the existing constraint posed by the threat of entry (perceived potential entry) and the potential for increased actual competition post-entry (actual potential entry).191 The standard of proof does not change in potential entry counterfactual cases. Accordingly, the CMA’s starting point at Phase I will still be the most competitive realistic counterfactual. Therefore, where the CMA is considering whether one of the merging parties might have entered the market absent the merger (i.e., where the counterfactual would be more competitive as between the merging parties than the status quo), it will do so on a realistic prospect basis. In other words, if there is a realistic prospect that one of the merging parties would, say, have entered a local area in competition the other merging party, the CMA will consider this local area in its competitive assessment. At Phase II, the CMA would consider this entry on the balance of probabilities. In relation to the entry of a third party into a market in which the merging parties compete (i.e., where the counterfactual would be more competitive as between the merging parties than the status quo), the CMA will consider whether the continuation of prevailing competitive conditions is realistic and will only include the entry of the third party in its counterfactual where not to do so would be unrealistic. Again, at Phase II, the CMA would consider this entry on the balance of probabilities. Accordingly, the evidentiary threshold for the incorporation of a third party in the counterfactual is lower at Phase II than at Phase I. This is appropriate given that such entry is easy to allege and can be difficult to substantiate within the confines of a Phase I investigation. The two leading cases in which the Authorities have included a non-incumbent firm in the counterfactual are Air France/VLM and Ticketmaster/Live Nation. In Air France/VLM, Air France KLM (“Air France”), via two wholly-owned subsidiaries, Air France Finance S.A.S. and City Jet Ltd, acquired VLM Airlines (“VLM”), a Belgian registered regional airline active in the supply of scheduled short-haul air transport 189 190
Merger Assessment Guidelines para. 4.3.19.
Entry by a third party is considered as a countervailing constraint to any prima facie finding of a substantial lessening of competition (see Chapter 15). 191 See Completed acquisition by Air France finance S.A.S./City Jet Ltd of VLM Airlines N.V., OFT decision of 9 May 2008, paras. 106 and 107.
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services, primarily focused on business customers.192 The OFT’s competitive assessment focused on two city-to-city routes, London-Amsterdam and LondonRotterdam. In respect of the route from London City airport (“LCY”) to Amsterdam Schipol airport (“AMS”), prima facie, the merger resulted in a reduction of air transport operators from two to one.193 However, rather than assess the merger in relation to the pre-merger competitive conditions, the OFT considered that the counterfactual should be adjusted to take account of the imminent entry of BA (the merger took place in February 2008 and BA’s entry was planned for May 2008).194 By including BA as a competitor, the merger could, therefore, be viewed as reducing the number of competitors from three to two.195 On the LCY to Rotterdam (“RTM”) route, VLM was the only competitor and the merger gave rise to no direct overlap. However, the OFT considered whether Air France should be regarded as a potential competitor on this route; the potential theory of harm being that Air France may have constrained VLM’s competitive behaviour even though it was not actually present on the LCY-RTM route, and that this constraint would be lost as a result of the merger. In this case, however, the OFT considered that VLM would have been fully aware, pre-merger, that the slot constraints at LCY meant that its monopoly position was relatively insulated from likely potential entry. On this basis, it would not have been profit-maximising for VLM to limit price (or take equivalent actions on service levels or quality). Accordingly, its incentive would have been to exploit its monopoly position whilst it lasted. For the above reasons, the OFT determined that any constraint imposed by Air France was too weak for its removal to be considered as a substantial lessening of competition.196 In Ticketmaster/Live Nation, Ticketmaster Entertainment (“Ticketmaster”), active in ticketing sales, resale, marketing and distribution, signed an agreement to merge with Live Nation Inc. (“Live Nation”), which was active upstream from Ticketmaster in the promotion and production of live entertainment, as well as operating live music venues.197 For many years, Ticketmaster and Live Nation had a contractual relationship, whereby Ticketmaster was Live Nation’s preferred global ticketing agent. This relationship expired in the United States at the end of 2008 and in the UK at the end of 2009. In replacement of this contract, Live Nation signed a global agreement with CTS Eventim AG (“Eventim”), the world’s second-largest ticketing services
192
Completed acquisition by Air France Finance S.A.S./City Jet Ltd of VLM Airlines N.V., OFT decision of 9 May 2008. 193 Ibid., para. 54. 194
Ibid., para. 55. The OFT, nevertheless, considered that the merger raised very serious unilateral effects concerns, as BA was a far weaker competitor on the LCY-AMS route than either of Air France or VLM, with a total number of weekly frequencies on this route of only 21, compared to the merged entity’s 108. In relation specifically to business passengers, the competitive situation was worse as BA had only two daily peak time services, in comparison to the merged entity’s 17. Moreover, BA’s earliest morning slot was only 08:55, which was considered too late by some business passengers. 196 Air France/VLM, supra, para. 124. 197 Anticipated merger between Ticketmaster Entertainment Inc and Live Nation Inc, OFT decision of 11 June 2009. 195
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provider, behind Ticketmaster. However, on 10 February 2009, Ticketmaster and Live Nation announced their merger. Ticketmaster and Live Nation were active at different levels of the live music industry and had no overlapping activities in the UK. Therefore, in the event that the appropriate counterfactual against which to compare the merger was pre-merger competitive conditions, the merger would have raised no horizontal competitive concerns. However, neither the OFT nor the CC considered the appropriate counterfactual to be pre-merger conditions. At Phase I, the OFT considered that, although Eventim was not (yet) active in the UK, outside the UK, it had annual sales of more than 60 million tickets across 17 other countries, with over 2,000 clients, including promoters, sports teams and venues. Due to the fact that Live Nation had ended its relationship with Ticketmaster and signed a distribution agreement with Eventim, the OFT considered that the scale of Eventim’s entry into the UK was likely to be significant – accounting for 10-20% of all live music tickets in the UK, making Eventim the third largest ticketing agent in the UK, behind Ticketmaster and See Tickets. Therefore, as a result of the contract with Live Nation, absent the merger, the OFT considered the counterfactual to include Eventim as a significant competitor in the primary ticketing market in the UK.198 The correct counterfactual against which to assess this merger became a focal point of the CC’s investigation, following the merger’s referral by the OFT.199 This is reflected in the fact that the counterfactual section of the CC’s final report is 24 pages and 102 paragraphs long, comprising nearly one-quarter of the entire decision. Whilst the full reasoning of the CC’s decision is beyond the scope of this chapter, the CC concluded that: (i) the agreement with Live Nation provided Eventim with a way to enter the UK with a secure revenue stream that would cover its fixed costs and entry costs in the short term; (ii) Eventim would have access to a guaranteed minimum volume of tickets from Live Nation to offer for sale; (iii) on the basis of the agreement alone, Eventim would have achieved only a small-scale position in the UK market for the primary retailing of live music tickets; and (iv) for competition to increase materially, Eventim would have needed to become a large-scale retailer of live music tickets. In addition, the CC noted that from the foothold established by its agreement with Live Nation, Eventim was likely to have offered similar services to other live music promoters and venue operators (and organisers and venues for other events) in order to try to grow, and as Eventim would have been a distinctive new entrant into the UK it might have been able to overcome the significant barriers to large-scale entry and 198 Ultimately, the OFT concluded that: (i) Eventim’s entry into the UK was contingent upon its agreement with Live Nation; (ii) no promoters of a comparable scale to Live Nation indicated that they would consider entering into a similar distribution arrangement with Eventim; (iii) the merger gave rise to a realistic prospect that Live Nation would significantly reduce the ticket volume that it sold through Eventim; and (iv) Eventim would not enter the UK market (the OFT was unclear on whether Eventim had already entered the UK market or had simply made preparations for entry, but Eventim had not entered the UK market at the time of the merger’s announcement). 199 Ticketmaster and Live Nation, a report on the completed merger between Ticketmaster Entertainment, Inc and Live Nation, Inc, 7 May 2010.
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expansion that had inhibited growth by other small-scale retailers of live music tickets in the past. The CC determined that the extent of Eventim’s success in overcoming these barriers would have been dependent on its ability to attract consumers and to gain further live music ticket allocations and although its agreement with Live Nation was critical to its decision to enter the UK, Eventim’s success in becoming a large-scale retailer of live music tickets in the UK would have been dependent primarily on its own efforts and abilities.200
9.8
EXIT OF A COMPETITOR
The appropriate counterfactual against which to assess a merger may not be pre-merger competitive conditions in the event that a competitor plans to exit the market in the near future for strategic or financial reasons. In this scenario, the counterfactual would be less competitive than the pre-merger competitive conditions. For example, in BOC/Ineos, BOC, active in the manufacture, distribution and sale of industrial, medical and speciality gases, the bulk supply of liquefied gases and the distribution of packaged chlorine, proposed acquiring the packaged chlorine business and assets of Ineos Chlor (“Ineos”), active in the production of chlorine, chlorine derivatives and PVC.201 Prior to the proposed merger, there were four competitors on the market for packaged chlorine: BOC, Ineos, Albion Chemicals (“Albion”), Air Products and Gerling Holz. However, there were only two chlorine packaging facilities in the UK, one at Ineos’ Runcorn site and another at Albion’s site at Sandbach. Albion sold the chlorine that it packaged at Sandbach to two distributors: BOC and Air Products, and filled some drums for itself. BOC and Air Products differed from Albion in that they were distributors of industrial gases whereas Albion was a bulk and packaged chemical distributor. Albion told the CC that its Sandbach packaging facility would become uneconomical once BOC purchased Ineos’ chlorine business and began to package its own chlorine at Runcorn rather than sourcing it from Sandbach. However, Albion also told the CC that this would only have affected the timing of its decision about the future of its packaging operations at Sandbach, rather than the decision itself, because of the terms of Albion’s lease of the Sandbach site from land developers. The CC concluded that: (i) it was highly likely that Albion would have ceased packaging chlorine at some time between 2009 and late 2012, regardless of the merger, but would have remained in distribution during this period; (ii) it was possible that Albion would have ceased packaging chlorine earlier rather than later in this period, given the progress of Albion’s plans to move its more crucial ferric chloride manufacturing activities from Sandbach to elsewhere; (iii) the proposed merger and
200 Crucially, therefore, the CC did not agree with the OFT’s conclusion that Live Nation would have provided all of, or even a significant proportion of (e.g., equivalent to the number of tickets that it had sold via Ticketmaster) its live music tickets through Eventim. Therefore, following the merger, if Live Nation had chosen not to sell any tickets through Eventim, as could have been anticipated given its merger with the world’s largest ticketing provider, the CC’s reasoning was that the foreclosure of Eventim would not have resulted in a substantial lessening of competition. 201 BOC and Ineos Chlor, a report on the anticipated acquisition by BOC Limited of the packaged chlorine business and assets of Ineos Chlor Limited, 18 December 2008.
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Albion’s resulting loss of BOC as a customer of its chlorine packaging business might have brought forward Albion’s withdrawal from packaging but would not have affected Albion’s ultimate decision to exit; and (iv) Albion’s future in the distribution of packaged chlorine beyond late 2012 depended on its ability to source packaged chlorine from Ineos (or any new owner of the Runcorn packaging facility). In terms of the appropriate counterfactual, the CC determined that, absent the merger, Ineos would not have sold its chlorine packaging business, competition between Ineos, Albion, BOC and Air Products would have taken place until Albion’s exit from the market and then, following Albion’s exit, competition would have taken place only between Ineos, BOC and Air Products. Given the likely effect of Albion’s exit on the competitive conditions for packaged chlorine distribution, the CC carried out its competitive assessment both before and after Albion’s exit.
9.9
COMPETING BIDS
The appropriate counterfactual against which to assess a merger might not be the premerger or prevailing conditions of competition if there are competing bids for the target business. The CMA’s approach at Phase I and Phase II to these scenarios is different and each is set out below.
9.9.1
The Phase I Approach
If the CMA is faced with multiple bids for the same target business, it will compare each bid separately against a counterfactual of the prevailing conditions of competition to determine whether that bid would result in a realistic prospect of a substantial lessening of competition.202 The CMA will not engage in speculation as to the most likely preferred bidder or which bid would be the least anti-competitive.203 An example of this type of scenario arose in 2003, when the OFT considered multiple bids for Safeway (then the UK’s fourth largest supermarket chain with 479 stores), from Morrison, Asda, Sainbury’s and Tesco. The OFT considered each of these bids against the prevailing conditions of competition. In each case, the OFT considered that there was a significant prospect204 of a substantial lessening of competition and referred all four bids to the CC for an in-depth investigation. Similarly, in the OFT’s consideration of Deutsche Börse’s and Euronext’s bids for the London Stock Exchange, the competitive assessment of these bids was considered against an independent LSE (i.e., the prevailing conditions of competition).205
202 203
Merger Assessment Guidelines, para. 4.3.20.
Ibid. 204 As discussed in Chapter 6, prior to the IBA Health litigation, the OFT applied a higher standard of proof to merger references. 205 Anticipated acquisition by Euronext N.V. of the London Stock Exchange plc, OFT decision of 29 March 2005 and Anticipated acquisition by Deutsche Borse of the London Stock Exchange plc, OFT decision of 29 March 2005.
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In the event that the CMA is faced with one or more actual bids and additional possible bids, it would need to determine the likelihood of the possible bids. Alternative bids would need to be “imminent and likely” for the CMA to take them into consideration. For example, in Sky/ITV, the OFT was informed that Sky’s bid for a 17.9% shareholding blocked a bid from Virgin Media, thereby effectively positing Virgin acquiring ITV as the appropriate counterfactual to Sky’s acquisition. The OFT was cautious in its approach to substituting the pre-merger competitive conditions for a potentially outcome-determinative counterfactual and noted that there was “an inherent risk of speculation associated with claims that a rival transaction is pro-competitive relative to prevailing conditions because it is generally far from certain that: (i) the rival transaction would in fact proceed but for the merger; and (ii) such a transaction would in fact be pro-competitive.”206 For these reasons, the OFT determined that a rival bid for ITV by Virgin Media was neither ‘likely’ nor ‘imminent’ and that the appropriate counterfactual should be the pre-merger competitive conditions. However, it is considered highly unlikely that the CMA would find that, in a rival bidding situation, a merger which if considered on its own merits would not result in an SLC, would result in an SLC if compared against a rival bid. It is much more likely that the CMA would consider each individual bid against the prevailing conditions of competition and refer any such bids that resulted in a realistic prospect of an SLC on this basis.
9.9.2
The Phase II Approach
As the CMA must undertake a determinative competition assessment, it cannot compare each bid against the prevailing conditions of competition. Therefore, the CMA must decide which counterfactual it considers most appropriate. Where only one bid is referred to Phase II, the counterfactual may be the prevailing conditions of competition.207 If more than one bid is referred to Phase II, the counterfactual may be either the prevailing competitive conditions or an alternative bid that has not been referred.208 The counterfactual is less likely to be an alternative bid that has been referred as this would involve the comparison of two prima facie anti-competitive mergers.209 If all bids were referred, then it is likely that the counterfactual would be the pre-merger competitive conditions,210 as the alternative would be to compare one prima facie anti-competitive merger with another. However, in this scenario, the CMA would also consider whether there were any other potential purchasers that had not yet been identified as bidders.211
206
Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc, a report to the Secretary of State for Trade and Industry, 27 April 2007, para. 98. 207 Merger Assessment Guidelines, para. 4.3.22. 208 Ibid., para. 4.3.23. 209 Ibid. 210 211
Ibid., para. 4.3.24. Ibid.
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9.10
PARALLEL TRANSACTIONS 9.10.1 The Phase I Approach
There may be cases in which the CMA is required to consider a merger when there is another merger in the same market that is either in contemplation or is a completed merger. Such a parallel transaction may also have been referred to Phase II and the outcome might be unknown. In these instances, the CMA is likely to consider whether the reference threshold would be met irrespective of whether the parallel transaction were to proceed, unless the parallel transaction could clearly be ruled out as being too speculative.212 Therefore, if the CMA were to conclude that the reference test would be met if either the merger proceeded or did not proceed, it would refer the merger in question to Phase II on the basis that it “may be the case” that the relevant merger situation has resulted, or may be expected to result, in a substantial lessening of competition. The following cases are illustrative. (1)
In Capita/IBS213 and Northgate/Anite,214 all four parties were active, inter alia, in the provision of IT solutions to local authorities and housing organisations. In particular, they overlapped in the provision of: (i) software and related services to local authorities for revenues & benefits applications; (ii) software and related services to local authorities and housing organisations for social housing applications; and (iii) secure information solutions to the criminal justice sector. Although the Capita/IBS transaction closed first on 26 June 2008, Northgate and Anite notified their transaction to the OFT first, on 1 August 2008. Capita and IBS did not notify their transaction to the OFT until after Capita received an Enquiry Letter from the OFT on 21 August (their notification was made on 15 September 2008). Prior to the merger of Capita and IBS, Capita was the largest supplier in the market, followed by Northgate, IBS, whilst Anite was a much smaller fourth competitor. Therefore, the relevant mergers were between the first and third, and the second and fourth largest suppliers in the market. Both of these mergers were unlikely to be possible given the structure of the market and its pre-merger levels of concentration. There were effectively three large competitors on the market (Capita, Northgate and IBS), and one of Capita or IBS was successful in tendering for new contracts in 70-80% of cases.215 The OFT determined that Anite was a limited competitive constraint on Northgate, with Anite having only 5-15% of legacy contracts.216
212
Ibid, para. 4.3.26. Completed Acquisition by Capita Group plc of IBS OPENSystems plc, OFT decision of 19 November 2008. 214 Anticipated acquisition by Northgate Information Solutions UK Limited of Anite Public Sector Holdings Limited, OFT decision of 27 October 2008. 213
215 216
Capita/IBS, supra, para. 25. Northgate/Anite, supra, paras. 20 and 26.
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The OFT considered Northgate/Anite first, as their submission was made over a month before Capita’s. In this case, the OFT’s counterfactual was the status quo (as the Northgate/Anite merger was an anticipated acquisition) and Capita and IBS were not regarded as being independent competitors (because their merger had completed on 26 June 2008), despite the fact that the eventual outcome was unknown, as the OFT had not finalised its investigation and would ultimately refer the merger to the CC. The OFT reiterated its position that it would consider mergers against the pre-merger or prevailing competitive conditions before considering an alternative counterfactual. As, in this case, it was not considered a realistic prospect that the Northgate/Anite merger would result in a substantial lessening of competition when considered against the status quo (i.e., Capita and IBS no longer being separate competitors), the OFT determined that it was not necessary to consider the Northgate/Anite merger against a counterfactual in which Capita and IBS were separate competitors (as this could not possibly have resulted in a realistic prospect of a substantial lessening of competition). In Capita/IBS, the OFT’s counterfactual was also the status quo. Against this counterfactual, the OFT found that the merger may have resulted in a substantial lessening of competition. Therefore, a fortiori, if the OFT had also assessed the Capita/IBS merger against a counterfactual in which Northgate and Anite were no longer independent competitors, which was certainly an eventuality that was in contemplation at the time of the OFT’s assessment, the Capita/IBS merger would still have been referred to the CC. (2)
More recently, the OFT considered this issue in relation to a proposed pathology joint venture between University College London Hospitals Foundation Trust, Royal Free London NHS Foundation Trust and the Doctors Laboratory.217 At the time of the OFT’s consideration of this joint venture, the OFT was aware of a proposed merger between Royal Free and Barnet & Chase Hospitals NHS Trust. This had been cleared by the Cooperation and Competition Panel (which became Monitor’s Cooperation and Competition Directorate in April 2013) but there were still a number of regulatory hurdles to overcome before the transaction could complete. The parties had also submitted that another pathology JV was being contemplated in proximity to London involving a number of NHS Foundation Trusts and that South West London Pathology Service consortium was being formed (also involving several NHS trusts). Fortunately for the OFT, it found that it did not need to conclude whether or not any of these transactions was likely to succeed or was too speculative, as under any scenario, the OFT would not have had any competition concerns with the transaction. Out of caution, the OFT therefore considered whether the merger gave rise to a realistic prospect of an SLC, irrespective of the other transactions under consideration.
217 Anticipated pathology joint venture between University College London Hospitals NHS Foundation Trust, Royal Free London NHS Foundation Trust and the Doctors Laboratory Limited, OFT decision of 8 November 2013.
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(3)
In Xchanging/Agencyport, the CMA noted that it was also considering the anticipated acquisition by Xchanging of TOL, which was active in the same market and also in adjacent markets to the parties.218 The CMA therefore considered Xchanging/TOL to be a parallel transaction for the purposes of its assessment and that the merger should be assessed against both the pre-merger conditions of competition (i.e., absent the anticipated Xchanging/TOL transaction) and, in the alternative, against the conditions of competition that would exist if Xchanging were to acquire TOL. Similarly, in Xchanging/TOL, the CMA took the Xchanging/Agencyport transaction into consideration in the counterfactual.219
(4)
In Iron Mountain/Recall, the CMA noted that there was a parallel transaction in contemplation between Restore and Wincanton in the same market as the merging parties.220 In the event, it was not necessary for the CMA to assess the transaction against a counterfactual in which Restore and Wincanton had merged as the CMA had found a realistic prospect of a substantial lessening of competition even without taking into consideration this additional transaction and therefore the additional consolidation that was likely to take place.
9.10.2 The Phase II Approach The Merger Assessment Guidelines state that, at Phase II, the relevant counterfactual will depend on whether it expects the parallel transaction to proceed.221 If the CMA does not expect the parallel transaction to proceed, the counterfactual will be the premerger or prevailing conditions. However, in the event that it does consider that the parallel transaction will proceed, the CMA will have to determine the appropriate counterfactual. Whilst the Merger Assessment Guidelines do not provide any guidance on this point, it is presumed that, if the parallel transaction were considered likely to proceed, and would complete before the transaction under consideration, the CMA would be likely to consider the counterfactual as not being the pre-merger or prevailing competitive conditions, but with the parallel transaction as occurring and therefore affecting the counterfactual. In Capita/IBS, the Northgate/Anite transaction had already completed, so there was no need for the CC to speculate and Northgate/Anite was considered to be a single entity in the counterfactual against which to consider Capita’s acquisition of IBS (although the CC did consider whether, absent the Capita/IBS deal,
218
Completed acquisition by Xchanging of Agencyport Software Europe, CMA decision of 2 December 2014. 219 Anticipated acquisition by Xchanging Holdings Limited of Total Objects Limited, CMA decision of 9 December 2014. 220 Anticipated acquisition by Iron Mountain Incorporated of Recall Holdings Limited, CMA decision of 30 December 2015, paras. 22-24. 221 Merger Assessment Guidelines, para. 4.3.27.
The Counterfactual
357
Northgate would still have acquired Anite, or whether it might have acquired IBS instead).222 The CMA recently considered the issue of parallel transactions in BT/EE.223 In this case, on 9 June 2015, the CMA referred the anticipated acquisition by BT Group plc (“BT”) of EE Limited (“EE”) for a Phase II inquiry. On 11 September 2015, during the course of the CMA’s Phase II inquiry, Hutchinson 3G UK Investments Limited notified its intention to acquire Telefónica Europe Plc from Telefónica S.A (the “H3G/O2 merger”) to the European Commission. This merger would bring together two of the four mobile network operators (“MNOs”) in the UK. The CMA considered that there were three possible outcomes for the H3G/O2 merger: (i) the transaction would not proceed, due to prohibition by the Commission or for any other reason; (ii) the transaction would proceed without the Commission finding any competition concerns; (iii) the transaction would proceed subject to remedies. The CMA recognised that it was not possible, at the time of its investigation, to predict the outcome of the Commission’s investigation, or to predict the outcome of the transaction on competition in markets relevant to BT/EE in the UK. However, whilst the CMA was unable to characterise any one of the three possible outcomes as ‘most likely’, it noted that the transaction gave rise to prima facie concerns, and considered the extent to which there were foreseeable similarities between the conditions of competition resulting from a prohibition or a conditional clearance. The CMA considered that in either scenario, the Commission would seek to restore the level of effective competition in the relevant markets and that these competitive conditions should be “materially equivalent” to those absent the H3G/O2 merger.224 Therefore, the CMA carried out its investigation against a counterfactual in which the level of competition was equivalent to that existing prior to the H3G/O2 merger.225
9.11
RAIL FRANCHISE BIDS
In rail franchise cases, the pre-merger situation cannot be the appropriate counterfactual, as the existing rail franchise is coming to an end and must be awarded to one of the short-listed bidders,226 and there is no expectation that the company running the
222 Capita and IBS, a report on the completed acquisition by Capita Group plc of IBS OPENSystems plc 4 June 2009, para. 4.7. 223 BT Group plc and EE Limited, a report on the anticipated acquisition by BT Group plc of EE Limited, 15 January 2016. 224 Ibid., para. 7.14. 225 Ibid., para. 7.16. 226 Merger Assessment Guidelines, para. 4.3.28. See also, FirstGroup plc and the Greater Western Passenger Rail franchise, a report on the acquisition by FirstGroup plc of the Greater Western Passenger Rail franchise 8 March 2006, paras. 4.3 to 4.6; Completed acquisition by Arriva Trains Cross Country Limited of the Cross Country Rail Franchise, OFT decision of 20 December 2007 and Completed acquisition by National Express Group plc of the Intercity East Coast Rail Franchise, OFT decision of 20 December 2007; Completed acquisition by Stagecoach Group plc of the East Midlands passenger rail franchise, OFT decision of 4 February 2008.
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franchise prior to the takeover by the new franchise holder will continue to operate the franchise in the absence of the merger. The CMA will therefore treat the appropriate counterfactual as the award of the franchise either to a firm that raises no competition concerns or, if there is no alternative bidder that does not raise competition concerns, to a hypothetical bidder, with any competition concerns being remedied through behavioural remedies.227 An alternative to this approach, where there are multiple bidders, would be to compare the bids against each other, so that the acquisition by company A would be compared against the counterfactual of an acquisition by each of company B and C. The CC considered and dismissed this approach in FirstGroup/Greater Western Passenger Rail franchise. In this case, the CC stated that: “[i]f all three shortlisted bidders were still in the frame, the problem that would arise would be how we would choose the appropriate counterfactual as this would involve analysing the competitive effects of each shortlisted bidder being granted the franchise as opposed to the other two, ie we would need to rank the bidders in order of competitive effects. All the shortlisted bidders would have to be assessed against the same criterion, a circular and wholly impractical approach.”228
More recently, the CMA has considered the counterfactual in relation to rail franchise bids in Inter City Railways/East Coast Franchise.229 In this case, the CMA has stated that: “The CMA generally adopts the prevailing conditions of competition as the counterfactual against which to assess the impact of anticipated mergers. However, in rail franchise cases, the pre-merger situation cannot be the appropriate counterfactual, as the existing rail franchise is coming to an end and a new franchise must be awarded to one of the short-listed bidders. The CMA therefore treats the appropriate counterfactual to the merger as the award of the franchise to a train operating company (TOC) that raises no competition concerns or where any competition concerns could be remedied through undertakings in lieu (UILs) of a reference to phase 2.”230
In addition, the CMA has considered whether it should depart from the prevailing levels of competition in relation to other transport services operated by the winner of the rail franchise. In these recent cases, the CMA has assumed that existing transport services will continue to be provided irrespective of the franchise award.231
227
Ibid., para. 4.3.29. See also, FirstGroup/Greater Western Passenger Rail franchise, para. 4.6.
228
FirstGroup/Greater Western Passenger Rail franchise, para. 4.5. Anticipated acquisition by Inter City Railways Limited of the ICEC Franchise, CMA decision of 6 February 2015. 229
230 231
Ibid., para. 22. Ibid., para. 23.
Chapter 10 MARKET DEFINITION 10.1 Introduction 10.2 The Hypothetical Monopolist Test 10.2.1 Use of the Hypothetical Monopolist Test 10.2.2 A SSNIP Test Algorithm 10.2.3 Narrow Versus Wide Markets and the Choice of SSNIP 10.3 Product Market Definition: Demand-Side Substitution 10.3.1 Product Characteristics 10.3.2 Pricing Evidence (a) Absolute price levels (b) Price correlation (c) Stationarity tests (d) Own-price and cross-price elasticities (e) Customer markets, price discrimination and price sensitivity 10.3.3 Switching Costs 10.3.4 Critical Loss Analysis 10.3.5 Evidence From Surveys and Diversion Ratios 10.4 Product Market Definition: Supply-Side Substitution 10.5 Geographic Market Definition 10.5.1 Hypothetical Monopolist Test 10.5.2 Factors Considered in Geographic Market Definition 10.5.3 Sensitivity of Share Data to the Candidate Geographic Market Definition Employed
10.1
(a) (b) 10.5.4 10.5.5 10.5.6 10.5.7 10.5.8 (a)
UK-wide versus wider than national UK-wide versus regional or local Point-to-Point Transport Flows Chains of Substitution Import and Trade Flows Regional Markets Local Markets Mergers involving national chains of local stores (b) The CMA’s standard approach to local market definition where customer data are available (c) The Phase I approach where customer data are not available 10.6 Other Issues in Product Market Definition 10.6.1 Competitive Versus Prevailing Level SSNIP Tests 10.6.2 Indirect Demand-Side Constraints 10.6.3 Product Bundles (a) Aftermarkets (b) ‘One-stop’ purchasing (c) Other examples 10.6.4 10.6.5 10.6.6 10.6.7 10.6.8
Two-Sided Markets Asymmetric Constraints Innovation and Product Life-Cycles Internet Sales Branded and Own-Label Products
INTRODUCTION
The CMA’s obligation to refer a merger is only engaged where it believes that it is or may be the case that a relevant merger situation has resulted, or may be expected to result, in a substantial lessening of competition (“SLC”) “within any market or markets in the United Kingdom for goods or services”. Therefore, market definition or the “frame of reference” is an important part of the CMA’s competitive assessment and
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should provide a framework for the CMA’s analysis of the competitive effects of a merger.1 There is an overlap in evidence relevant for market definition and the competitive assessment; in recent years, the Authorities have placed less emphasis on market definition and, instead, focused more on the competitive assessment. For that reason, the Merger Assessment Guidelines emphasise that market definition is “a useful tool, but not an end in itself” and “the boundaries of the market do not determine the outcome of the [CMA’s] analysis of the competitive effects of a merger in any mechanistic way.”2 The CMA will identify the relevant markets within which a merger may give rise to an SLC,3 and these markets will contain the most significant competitive alternatives available to the merging firms’ customers.4 Such markets will have two main dimensions, a product dimension and a geographic dimension, although markets may also be defined by reference to customer groups or temporal factors.5 The CMA will ensure that the identified relevant market satisfies the hypothetical monopolist test (“HMT”) and whilst the relevant market identified by the CMA need not be the narrowest market that meets the HMT, to the extent that it uses them, the CMA will not normally have regard to market share and concentration thresholds calculated on anything other than the narrowest market that satisfies the HMT.6 However, the CMA recognises that identifying the relevant market involves an element of judgment, and irrespective of the market definition chosen, the CMA will take into account so-called ‘out of market’ constraints in its competitive assessment, recognising that products outside the relevant market may exercise some constraint on those inside the market. Reflecting the differences between the two phases of investigation, in most cases, at Phase I, the CMA will usually make an initial assessment of the boundaries of the relevant market but may not reach a definitive conclusion. As a practical matter, at 1
Merger Assessment Guidelines, para. 5.2.1. Ibid., para. 5.2.2. This can be explained as follows. While the process of market definition assists in the competitive assessment, it is not determinative; in some cases lengthy debates about “is the market narrow or wide?” can sensibly be avoided by focusing on the more important question of “does the merger give rise to a realistic prospect (or likely) SLC? 3 Ibid., para. 5.2.1. 4 Ibid., para. 5.2.1. 2
5
Ibid., para. 5.2.5. Ibid., para. 5.2.3. In undifferentiated product markets, the CMA might have greater regard to market shares and concentration thresholds in its assessment of a merger. In differentiated product markets, the key issue is usually the degree to which the merging parties compete – something that may not be captured well by an assessment of market shares. (This is not to suggest that market shares are necessarily good indicators of harm in undifferentiated product markets, although in such markets the CMA is more likely to rule out concerns where market shares are low. This is because the undifferentiated nature of products means that the merging parties’ offers would not be particularly close substitutes, since all other market participants would have an ‘equally close’ offer. It should further be noted that high market shares are not necessarily a sign of harmful effects, since they may fail to capture important constraints such as the ease of expansion by rivals, the ease of new entry or buyer power.) 6
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Phase I, the CMA tends to take, as its starting point, either its own standing position on the relevant market (as set out in its decisional practice) or the position adopted by its predecessors, if one has been established, and shift from this position only if there is sufficiently compelling evidence to do so. The CMA may also be guided by the conclusions reached by the European Commission.7 Like the European Commission in Phase I decisions under the Merger Regulation, the CMA will frequently not conclude on the precise definition of the relevant market if the merger raises no competition concerns on any reasonable definition, including the definition that is most ‘adverse’ to the parties (e.g., the lens which generates the highest combined share of supply). At Phase II, on the other hand, the CMA will usually reach a conclusion as to the boundaries of the relevant market (although it will take into account out of market constraints where necessary).8 Whilst the CMA may be more likely to define the market ‘narrowly’ (in particular at Phase I) and then take into account out of market constraints,9 the CMA may sometimes define the markets ‘widely’. In the latter case, it will take into account the possibility that some market participants may be weaker constraints on the merging parties than others; it will also assess whether an SLC is likely to arise within segments of that wider market.10 This chapter examines the legal and economic assessment of market definition, including the fundamental concepts of the HMT, its implementation by the small but significant, non-transitory increase in price (“SSNIP”) test, as well as the demand-side and supply-side considerations that are important to the analysis of product and geographic market definition. Finally this chapter discusses other selected aspects of market definition relevant to the CMA’s practice.
10.2
THE HYPOTHETICAL MONOPOLIST TEST
The Merger Assessment Guidelines state that the relevant market must satisfy the HMT.11 Both product and geographic market definitions employ the HMT to identify the narrowest set of products and the smallest geographic area over which a hypothetical monopolist (i.e., a firm that is the only present and future seller of the
7 See, e.g., Anticipated acquisition by the Coca-Cola Company of a minority interest in Fresh Trading Limited, OFT decision of 26 May 2009, paras. 19 and 20, in which the OFT noted the Commission’s approach of distinguishing between the assessment of the supply of carbonated drinks in the ‘take home’ channel and to the ‘on-premise’ channel, which the OFT followed. See also, Completed acquisition by Air France S.A.S./City Jet Ltd of VLM Airlines N.V., OFT decision of 9 May 2008, para. 15. Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT Decision, 11 May 2012, para. 26 where a Commission case was cited to rebut the evidence of the merging parties. 8
Merger Assessment Guidelines, para. 5.2.4. In this way, the CMA will seek to avoid the ‘binary fallacy’ (i.e., the presumption that a product that lies outside the define market cannot constrain a product within the defined market). 9
10 11
Ibid., para. 5.2.2. Merger Assessment Guidelines, para. 5.2.1.
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Market Definition
products in the candidate market) could profitably sustain a small but significant increase in price or a small but significant reduction in quality, range or service.12 Conceptually, then, this test identifies a group of products ‘worth monopolising’. Monopoly power is the maximum variant of market power, the latter generally being defined as the ability to profitably sustain price above the competitive level.13 Market power is a matter of degree; conceptually it occurs on a sliding scale from perfect competition at one extreme (where no market power exists) to monopoly at the other.14 Whilst a monopolist may exercise its market power in a variety of ways (e.g., charge monopoly prices, lower quality, reduce service), for the purpose of implementing the HMT, it is normal to ask the question whether a SSNIP would be profitable. In turn, the SSNIP is usually considered to be a price rise of (at least15) 5%.16 Although market definition is often practised by way of qualitative ‘thought experiment’, and the trend is towards taking a looser and non-mechanistic approach (with a shift in emphasis towards the assessment of competitive effects), the HMT, as implemented by the SSNIP test, is the foundation for its application. Its logic is compelling: if a 100% share of supply is not worth monopolising and therefore not a competitive concern, it cannot be the case that any lesser ‘market’ share of, say, 40%, 60% or 80% is a concern either. A SSNIP may be rendered unprofitable by customers switching away (a demand-side perspective) or suppliers rapidly, and without incurring substantial sunk costs, introducing new products to which customers would switch (a supply-side perspective). 12 References to a “SSNIP” as a concept should also be understood to mean a reduction in quality, range or service (such reductions may give rise to a small but significant non-transitory increase in quality-adjusted price). 13
Some standard economics textbooks refer to market power as pricing above marginal cost. However, this definition fails to capture the fact that where firms need to recover fixed costs (as is generally the case), pricing above marginal cost is necessary (at least on some units). 14 Intuitively, where firms face very many identical competitors; consumers can (and do) switch quickly and without cost between suppliers following very small price changes; and suppliers have a ‘flat’ average variable cost schedule and do not require a substantial mark up over average variable cost in order to recover any fixed costs, then raising price even a fraction of a percentage point above average variable cost could be unprofitable. This would be due to consumers switching away to lower priced firms, which price at cost, which in this special case, would be the competitive level. On the other hand, if that same industry were monopolised, the monopolist might profitably sustain prices at a level considerably in excess of the competitive level (depending on the nature of demand). Depending on the strength of competitive forces, prices could lie anywhere between these two extremes. 15 The reference to “at least” is important in the assessment of demand-side substitution. If demand is such that a monopolist would not profitably exercise a 5% price rise in a candidate market but would profitably exercise a much higher price rise (e.g., 20%), then the candidate market is a relevant market for the purpose of the HMT. 16 References to the “SSNIP test” in this chapter mean the implementation of the HMT by the consideration of whether a hypothetical monopolist would profitably sustain a certain price rise (e.g., 5%). A higher or lower percentage than 5% may sometimes be used. Merger Assessment Guidelines, 5.2.12.
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10.2.1 Use of the Hypothetical Monopolist Test Whilst market definition is a means to an end and the CMA does not define markets “mechanistically”, it is nonetheless helpful for conducting the market definition ‘thought experiment’ to set out more formally what a “mechanistic” approach might entail. The Merger Assessment Guidelines state that a set of substitutable products (referred to as a candidate market), which include at least the substitute products of the merging parties,17 will satisfy the HMT if a hypothetical monopolist in the candidate market would find it profitable to introduce a SSNIP on at least one product within the candidate market.18 This candidate market of products will fail the HMT if the SSNIP would be unprofitable (i.e., if a sufficient number of customers would stop buying products within the candidate market and would switch to products outside the candidate market). The main steps involved in applying the HMT on the demand-side are as follows: (1)
Select a “candidate” market. This will include at least one (and possibly more) products that are supplied by one of the merging parties. This may be widened to include additional, functionally substitutable, products and a candidate market may include some or all of the substitutes from which customers choose.
(2)
Consider the impact of a 5%19 increase on the prevailing market price20 of the product or products in the candidate market. In some cases, it may be appropriate to consider a higher or lower percentage price increase. For the purposes of the test, the prices of products outside the candidate market should be held constant.
17
Ibid., para. 5.2.11. Ibid., paras. 5.2.10-5.2.11. 19 Merger Assessment Guidelines, para. 5.2.12. The CMA’s approach is very similar to the approach taken under the 2010 U.S. Horizontal Guidelines, where, in section 4.1.1, it states that the U.S. agencies will apply a SSNIP of 5% of the price paid by customers for the products or services to which the merging firms contribute value. The 2010 U.S. Horizontal Merger Guidelines note, however, that “what constitutes a ‘small but significant’ increase in price, commensurate with a significant loss of competition caused by the merger, depends upon the nature of the industry and the merging firms’ positions in it” and that the U.S. agencies may, accordingly, apply a price increase that is higher or lower than 5% (section 4.1.1). 18
20 The Merger Assessment Guidelines state that “in most cases”, the HMT test would be conducted relative to prevailing prices (para. 5.2.12). The U.S. Horizontal Merger Guidelines take a slightly different approach, stating that the U.S. Agencies will apply the HMT “starting from prices that would likely prevail absent the merger. If prices are not likely to change absent the merger, these benchmark prices can reasonably be taken to be the prices prevailing prior to the merger”, but if prices are likely to change, absent the merger, because of entry or innovation, the U.S. agencies might use anticipated future prices as the relevant benchmark (section 4.1.2.). For mergers where identifying pre-existing market power is important (e.g., concerns that markets are subject to pre-existing tacit or explicit coordination or the competitive effects of non-horizontal mergers), the relevant benchmark for the application of the SSNIP test is, at least conceptually, the competitive level.
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(3)
Adjust the scope of the products, if necessary. In the event that the hypothetical monopolist would find it unprofitable to increase the price of the original candidate market by 5% (e.g., because a sufficient number of customers would switch to products outside the candidate market), additional products should be added to the candidate market.
(4)
Repeat the test until a group of products has been identified in respect of which a 5% price increase would be profitable.
10.2.2 A SSNIP Test Algorithm In this section we consider an algorithm that may (in theory at least) be used to define the narrowest group of products worth monopolising in the sense of imposing a SSNIP of 5%.21 The following section then discusses whether adopting a wider market is appropriate in certain cases. First, suppose that one of the merging parties owns product X and increases the price of X by 5% above its prevailing level – the prices of all other products are held constant at their prevailing levels. We then consider whether this price rise is profitable or whether there would be sufficient switching by customers to other products to defeat the profitability of the price rise. If the price rise were profitable, then X would be a relevant market unto itself (according to this algorithm). In practice, this would be unusual because if it were profitable to increase the price of X by 5% above its prevailing level, it would be expected that a profit-maximising firm would have already increased X’s price. Therefore, for the purposes of explaining this algorithm, it is assumed that such a price rise would be unprofitable due to the fact that a sufficient number of customers would switch away from product X to products U, V, W, Y and Z, and in the following proportions: 40% to Y, 30% to W, 15% to Z, 10% to V and 5% to U. In this case, the “best” substitute for product X is product Y (at prevailing price levels), because it captures the greatest share of all diverted custom (as highlighted by the following diagram).
21
There is no universally accepted “correct” algorithm for applying a SSNIP test. The aim here is to set out a meaningful algorithm that draws out many of the conceptual issues that arise when conducting a SSNIP test. See Werden, G. J, (2002), “Market Delineation Algorithms Based on the Hypothetical Monopolist Paradigm,” US DOJ Antitrust Division Economic Analysis Group Discussion Paper No. 02-8 for a helpful discussion of many of these points.
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Allocation of lost volumes from X
Diversion patterns to U, V, W, Y and Z following a 5% price rise for Product X
10
5
V
40
30
W
X x
Y
15
Z
Lost volumes by X
U
-100
Next, if both X and Y have their prices increased by 5% above their prevailing levels, would that be profitable? If so, products X and Y would be a relevant market. If not, the next closest substitute to product X should be added into the group, which, in this example, would be product W. If products W, X and Y have their prices increased by 5% above prevailing levels, would that be profitable? If so, W, X and Y form a relevant market. If not, the closest substitute to X is added from the remaining products not yet included in the candidate market (i.e., product Z), and so on. A conclusion is reached when sufficient products are included in the group to render the 5% price rise profitable.
10.2.3 Narrow Versus Wide Markets and the Choice of SSNIP The algorithm defined above identifies the narrowest relevant market, although just how narrow depends on the SSNIP threshold adopted. For example, adopting a SSNIP threshold of 5% leads to a narrower market than a 20% SSNIP threshold.22 Furthermore, the preceding algorithm raises the theoretical question as to whether in the second and subsequent iterations of the algorithm, the analyst should consider: (i) a 22
One reason to deviate from the 5% norm might be that a 5% price rise might be so out of line with normal price movements or lead to such an extreme increase in profitability (e.g., in markets where gross margins are typically very small) that a smaller price increase would appear more appropriate. Whilst there is no theoretically correct threshold regarding the value of the SSNIP, two principles are helpful. First, the price rise considered should not be so low that even if it occurred as a result of a merger, the CMA would not be concerned. Secondly, the SSNIP adopted should provide meaningful information on switching patterns. Intuitively, the smaller the price increase that gives rise to a material reaction by customers (or suppliers that might rapidly introduce capacity to the market), the greater the competitive constraint placed on the hypothetical monopolist. Therefore, the threshold should not be so low that there would rarely be a reaction to the price rise. Neither should it be so high that switching is inevitable such that the analyst learns very little as regards whether or not the merger would give rise to smaller price rises than would be of concern to the CMA.
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Market Definition
uniform price rise of 5% on each product in the candidate market; (ii) a weighted average price increase on each product in the candidate market (where some prices increase by less than 5% but others by more than 5% so that the volume weighted average price rise exceeds 5%); or (iii) a price rise of 5% on just one product.23 The Merger Assessment Guidelines state that the CMA will select a candidate product group and then “assess whether a hypothetical monopolist could profitably raise the price of at least one of the products in the candidate market by at least a small but significant amount over a non-transitory period of time (emphasis added).”24 The price rise considered is neither an ‘across the board’ price rise, or a weighted average price rise, but potentially a price rise in relation to just one product (and not necessarily a product that is controlled by the merged firm). In theory, this approach could lead to very narrow markets being defined.25 The choice of SSNIP is therefore closely related to the question of how narrowly markets should be defined. As the CMA treats market definition as a reference point for the analysis of competitive effects, it will not necessarily define the narrowest market that could be defined by a strict application of a SSNIP algorithm. On the contrary, the CMA might at times prefer a more inclusive approach to market definition (especially when analysing differentiated products). This can be justified because it helps reduce error costs by lowering the risk of excluding important constraints on the merging parties (albeit that out of market constraints should in any event be considered). If weak substitutes are included in the relevant market, their implication for the merger can be dealt with in the analysis of competitive effects. It is better to have considered these substitute products properly and come to the view that they are only weak substitutes than to have simply left them out of the framework entirely. This effect can be illustrated by the example above of products U, V, W, X, Y and Z. Even if the narrowest relevant market is W, X, and Y, products U, V and Z together account for a constraint equal to W (i.e., following a price rise for product X, the diversion from X to W is 30% of lost volumes, whilst the diversion to U, V and Z is respectively 5%, 10%, and 15%, or 30% in total). If substantial new entry were likely,
23
In the context of negotiated pricing, the concept of a weighted price rise was employed as being more preferable to considering a separate markets for customer groups by the CC in Global Radio Holdings Limited and GMG Radio Holdings Limited, a report on the completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited, 21 May 2013, paras. 5.31-5.32. 24 Merger Assessment Guidelines, para. 5.2.11. 25 If only one product in the candidate market must increase by 5%, then profitable price rises are far more likely to be found in narrow markets compared to a situation where all prices in the candidate market must increase by 5% (whether on a uniform or weighted average basis). Where the hypothetical monopolist increases prices on a weighted average basis, the relevant market may be defined more narrowly then when a uniform price rise is considered. (Intuitively, the hypothetical monopolist choosing to increase a weighted average price always has the option to increase all prices by the same percentage. If it rejects the option of a uniform price rise, this must be because it would be more profitable to increase prices by different percentages. Thus, allowing the hypothetical monopolist greater pricing flexibility will sometimes lead to markets being defined more narrowly.)
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for example, into a product space between products V and W (i.e., outside the narrowest relevant market), then that might be an important constraint on the merged firm – and this should not be excluded by focusing on a market definition that is too narrow.26 Furthermore, evidence on diversion does not always tell a consistent story (e.g., it is not straightforward to measure switching patterns). This might also point to the need to adopt a more inclusive approach to market definition at the start of the investigation (and then sift the evidence carefully at the competitive effects stage). We might term the relevant market so defined as not so much a ’narrowest SSNIP’ market but a ‘reasonable substitutes’ market. This can be defined as a collection of products that are functional substitutes for those of the merging parties (i.e., used for a similar purpose) and where the available evidence (or common sense) indicates that there is likely to be at least some (and potentially a substantial) diversion from the parties’ products to functional substitutes following a small increase in the price of the merging parties’ products. This should still be a market ‘worth monopolising’; for this reason, the CMA’s approach to market definition will sometimes be one of verifying that their chosen approach is consistent with the HMT as opposed to actively seeking to employ the narrowest market consistent with the HMT. In summary, the CMA may define a market narrowly or widely. In the former case, it is important to take into account out of market constraints, whilst, in the latter case, the CMA may identify some within market products to be weaker substitutes than others. So long as the binary fallacy is avoided, the precise level of the SSNIP applied (and whether the price rise is for a single product or many products) should not matter.
10.3
PRODUCT MARKET DEFINITION: DEMAND-SIDE SUBSTITUTION
Demand-side substitutes are those products to which consumers would switch following a SSNIP of one of the merging parties’ products (holding all other prices unchanged). In order to assess whether a SSNIP would be profitable, the CMA would need to consider: (i) the extent to which the price change would give rise to substitution to demand-side substitutes; and (ii) whether there would be enough switching to render the hypothetical price rise unprofitable. In practice, the CMA almost always attempts to identify demand-side substitutes. However, it will rarely rely on (and may not even conduct) a quantitative assessment of the degree to which switching would render a SSNIP unprofitable in order to determine a relevant product market, particularly at 26 Of course, it might still be possible to define the market narrowly and a monopolist of that narrow market would face stronger constraints on raising prices than would a monopolist of the wider market. So long as the true constraints on the merged firm are accounted for properly, the ultimate conclusion on the competitive effects of the merger should not differ according to the chosen market definition. Put another way, because, in practice, market definition is not precise and there is no clear line between what is ‘in’ and what is ‘out’, it is important to remember that just because a product has been excluded from the relevant market as an immediate competitive constraint, it may still be of considerable importance as constraint (whether immediately or in the medium to long term). For example, a nascent product today may be expected to become a major force in the medium term due to technological change. This may impact on both the competitive assessment and the appropriateness of remedies.
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Phase I, where the CMA will frequently not have sufficient data (and often insufficient time) to carry out any sophisticated SSNIP analysis. Nonetheless, the CMA will typically use the HMT and SSNIP concepts to guide the evidence that it gathers on demand-side substitution.27 The assessment of demand-side substitutes is essentially a way to understand which products are the best substitutes for those sold by the merging parties. This evidence is relevant both for the market definition as well as the competitive effects of the merger (e.g., tests of closeness of substitution). The Merger Assessment Guidelines do not provide any detailed guidance as to the evidence that the CMA will take into consideration for market definition, but does provide an indication of the types of evidence that can be used to assess the closeness of substitution between products.28 These include the following,29 which are discussed below and/or in Chapter 12 on unilateral effects and Chapter 11 on screens: (1)
information about product characteristics (i.e., are the products functionally substitutable?);
(2)
information about relative price levels and the extent to which prices of products within the candidate market are correlated to each other as compared to products outside the candidate market;
(3)
information on prices and sales volumes over time that permit analysis of the way in which customers respond to changes in prices or to firms entering or exiting the market (for example, the CMA may test the extent to which a price rise (or cut) causes volumes to divert from one firm to another or analyse how new entry by different types of retailer within a given distance from one of the merging parties impacts on that party’s price, volumes or turnover);
(4)
information on switching costs (as distinct from the price difference between products);
(5)
variable profit margins (these are relevant, for example, in a critical loss assessment);
(6)
information about the price sensitivity of customers;
(7)
responses from the merging parties, customers and competitors; and
(8)
documents such as marketing studies, consumer surveys prepared in the ordinary course of business, market analyses prepared for investors, and internal business documents.
27
For example, as part of its market testing, the CMA will typically ask customers whether they would switch from the parties’ products in the event of a 5% price increase and, if so, to which products these customers would switch. 28 29
Merger Assessment Guidelines, para. 5.2.15. Ibid.
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It is emphasised again that information relevant to market definition is also usually of direct relevance to the competitive assessment and the CMA would typically place a greater emphasis on that part of the analysis than on defining the market.
10.3.1 Product Characteristics Intuitively, where products offer similar characteristics, they may serve very similar requirements. Therefore, products that share a number of characteristics common to the merging parties are candidates for being included in the same market. However, it is important to emphasise that common characteristics do not necessarily imply close substitutability.30 Likewise, just because two goods do not share certain common characteristics, this does not necessarily imply that they are in separate markets. The relevant question to ask is not: “are the characteristics of the products similar?” but rather “to what extent are characteristics likely to affect substitutability?” That is to say, it is necessary to first identify the features that are key to customer purchasing decisions in order to then make a sensible comparison of how well the products considered to be in the candidate market offer those important characteristics. In some cases, despite products having a large number of common features, the CMA has considered them to be in separate markets. For example, in Pure Gym/The Gym the CMA did not define the market but (in effect) ruled out a very large number of gyms as constraints because they failed to offer certain characteristics that both the merging parties did offer.31 In Poundland/99p, the CMA indicated that a good overlap in range does not necessarily imply actual substitutability (discussed further in the following section) but a lack of overlap in range is indicative of a lack of substitutability.32 In ABF/Dorset, the 30 The Commission Notice on the definition of relevant market for the purposes of Community competition law, [1997] O.J. C372/3, paragraph 36, states that “[A]n analysis of the product characteristics and its intended use allows the Commission, as a first step, to limit the field of investigation of possible substitutes. However, product characteristics and intended use are insufficient to show whether two products are demand substitutes. Functional interchangeability or similarity in characteristics may not, in themselves, provide sufficient criteria, because the responsiveness of customers to relative price changes may be determined by other considerations as well. For example, there may be different competitive constraints in the original equipment market for car components and in spare parts, thereby leading to a separate delineation of two relevant markets. Conversely, differences in product characteristics are not in themselves sufficient to exclude demand substitutability, since this will depend to a large extent on how customers value different characteristics.” 31 The CMA identified the following key characteristics of the merging parties: (i) low price (below £25 per month); (ii) absence of long-term contractual commitments (i.e., a 12 month contract averaging £25 per month was not deemed a good substitute for a monthly contract at the same price); (iii) extended opening hours (24 hours a day, seven days a week); (iv) large venues (typically between 10,000 to 20,000 square feet), a large number of pieces of training equipment (typically over 150 pieces of equipment and often over 200) and the provision of classes; and (v) multiple sites. For screening purposes, the CMA considered that the following gyms would be excluded from the effective competitor set: (i) gyms charging more than £25 per month and £30 per month inside London (on a monthly contract basis); (ii) gyms with substantially fewer pieces of equipment (fewer than 50); (iii) gyms with a membership of less than 500. 32
Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April
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Market Definition
CMA considered separate markets for muesli and granola. It found that branded and private label products were in the same market in part based on specific product characteristics which showed a high degree of similarity between branded and private label muesli and granola, including the tiered 2 quality of products offered, the packaging, flavours, variety and the ability for private label products to innovate.33 Where there are differences in the qualities and prices of a group of products, it cannot be presumed that products of a similar price or quality level are in separate markets from products of different price and quality levels. This is for the simple reason that higher prices may reflect higher quality such that all products offer similar ‘value for money’. For example, just because the price of a product is more than 5% above the price of another is not evidence of those products being in separate markets. The question is how customers react to a price change. For example, it may be that higher quality justifies the price differential of the higher priced product. However, if the price of the more expensive product rose further, that may lead to sufficient switching to the lower priced product (and vice versa) to place those products in the same relevant market. Usually the CMA would expect to see evidence of such switching occurring.34
10.3.2 Pricing Evidence The cornerstone of market definition is the HMT, which is usually implemented by a SSNIP thought experiment. It follows that pricing evidence can be an important evidential factor in determining relevant markets. There are various types of pricing evidence, including evidence relating to: (i) absolute price levels of different products; (ii) the correlation of the prices of different products over time; and (iii) own-price and cross-price elasticities. In respect of these data, the OFT has previously noted that evidence relating to absolute price levels of different products is generally weaker evidence than price correlation evidence due to the fact that it is less probative of the likely behaviour of marginal customers (i.e., whether customers might switch from one product to another in the event of a change in relative prices),35 and this is likely to be the case with the CMA as well. (a) Absolute price levels. A significant difference in the absolute price levels of different, functionally substitutable, products may be a preliminary indication that products might be in different product markets if such price differences are not easily explained by differences in quality levels.36 In Poundland/99p, the business offer of the
2015, para 4.24c. 33 Anticipated acquisition by Associated British Foods plc of Dorset Cereals Limited, CMA decision of 6 October 2014, para. 5. 34 See the discussion of the groceries in section 10.3.2.b below. 35
Completed acquisition by Long Clawson Dairy Limited of the Millway business of Dairy Crest Group plc, OFT decision of 8 October 2008, para. 22. 36 NBTY and Julian Graves, a report on the completed acquisition by NBTY Europe Limited of Julian Graves Limited 20 August 2009, para. 5.14, where the CC stated that “[i]n theory, prices of goods in the same market tend to be close to one another…”. More recently, in ABF/Dorset, the CMA
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merging parties was to offer a single price point at £1 or 99p. On the one hand, this might appear to be an ideal candidate for defining the market by price levels. However, while a comparison of range and prices was conducted, at Phase II, the CMA gave far greater weight to: (i) an assessment of the impact of entry and exit by various retail chains on Poundland store or 99p store revenues; and (ii) survey evidence based on a selection of areas found to be problematic at Phase I. It should be noted, however, that the preceding two analyses indicated that certain types of retail store were weaker constraints than others (and they were weighted accordingly in the competitive effects assessment).37 Conversely, it may also be the case that products with a substantial price difference are considered to be in the same market or competitor set (although supporting evidence would usually be required, e.g. in the form of surveys or entry/exit analysis).38 For example, in the groceries sector, retailers such as Waitrose and Marks & Spencer are considered to be part of the same competitor set as Asda,39 despite there being a material difference in the price of a basket of groceries. It should be noted, however, that this view is based on evidence obtained in the groceries market investigation of the impact of new entry on store gross margins. (b) Price correlation. Price correlation data are typically more informative than comparisons of absolute price levels, although nonetheless subject to important caveats. A price correlation analysis involves assessing how closely prices move in relation to each other over a given period of time. The intuition behind this analysis is that products that compete against each other and are in the same product market would be expected to have similar price movements over time. For example, if products A and B were close substitutes, in the event that (all else being equal) the price of A increased, this would be expected to shift demand from product A to product B, causing B’s price to increase as well. Therefore, if they competed against each other, product A’s and B’s prices might be expected to move together.
stated, when considering whether private label and branded products were in the same market: “The CMA notes that some private label products in the muesli and granola segments are priced higher than some of the parties’ products. In any event, in a differentiated product market such as this, price differentials may reflect perceived differences in quality and do not necessarily suggest that there would not be switching between products. Anticipated acquisition by Associated British Foods plc of Dorset Cereals Limited, CMA decision of 6 October 2014, para. 48. 37 Specifically, single price point retailers counted as a “whole” fascia when located within half a mile of one of the parties; other retailers that were included in the CMA’s effective competitor set, that were located just as close, counted only as half a fascia. When located between half a mile and one mile, single price point retailers counted as half a fascia and the other retailers in the effective competitor set counted as quarter of a fascia. 38 See CC report on Stena/P&O, supra, para. 4.14. 39 See, e.g., Anticipated acquisition by Netto Limited of three grocery stores from Co-operative Group Limited, CMA decision of 24 July 2015
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Market Definition
The ‘correlation coefficient’ of products is measured between -1 and +1. Where product A’s and B’s prices are perfectly negatively correlated (e.g., an increase in A’s price is always associated with a given decrease in B’s price), the value of the correlation coefficient is said to be minus one. Where there is no correlation at all between the price series, the correlation coefficient takes a value of zero. Where product A’s and B’s prices move perfectly in line with each other, the correlation coefficient will be +1. For the purposes of defining a product market, the CMA might test to see if the correlation coefficient of two series of prices is positive and “high” (i.e., sufficiently close to one) and where, as discussed below, a value of 0.31 would be deemed relatively low.40 However, there are limits to the utility of price correlation data. In Lactalis/Lubborn, the OFT stated: “[t]he OFT is conscious of the shortcomings of using price correlations for the purpose of defining relevant markets. In particular, even if the prices of two products are highly and positively correlated, this does not necessarily imply that they are in the same relevant market, as the correlation may be spurious or due to both products using a common input (for example, raw milk in this case) or common trends, such as strong seasonality in sales (say, at Christmas). As a result, while noting that, on the basis of these figures, there is no (or even negative) correlation between Somerset and French origin Brie and Camembert cheeses in this case, the OFT attaches limited weight to this evidence taken in isolation.”41
A certain degree of caution with respect to price correlation analysis can be explained briefly as follows. First, the key point of interest is the so-called ‘cross-price effect’: (i.e., whether an increase in product A’s price leads to higher demand for product B (and vice versa)). Price correlation analysis captures this only indirectly – the idea being that as demand is shifted from product A to product B, this leads to a higher price for product B. If the price of product A was increased only due to an idiosyncratic 40
The Authorities have considered price correlation data in numerous cases, including: CC report on NBTY/Julian Graves, supra, paras. 5.14 to 5.20; InBev NV/SA of Anheuser-Busch, supra, para. 16; Anticipated acquisition by FirstGroup PLC of the Greater Western Passenger Rail Franchise, OFT decision of 30 September 2005, para. 32, which specifically notes that the OFT received a price correlation of 0.39; Anticipated acquisition by South Eastern Railways Limited (a joint venture between DSB and Stagecoach Group plc) of the Integrated Kent Rail Franchise, OFT decision of 31 March 2005, paras. 25-28 (in FirstGroup/Greater Western Passenger Rail Franchise, para. 32, footnote 7, the OFT noted that the correlation coefficient in this case was +0.84); Anticipated acquisition by British Sugar plc of Billington Food Group plc, OFT decision of 4 August 2003, para. 14; National Express Group plc and the Greater Anglia franchise, a report on the acquisition by National Express Group plc of the Greater Anglia franchise, November 2004; Long Clawson Dairy Limited/Millway merger inquiry, a report on the completed acquisition by Long Clawson Dairy Limited of the Millway Stilton and speciality cheese business of Dairy Crest Group plc, 14 January 2009, paras. 4.4 to 4.10; Arcelor SA and Corus Group plc, a report on the acquisition by Arcelor SA of part of Corus Group plc’s UK hot rolled steel sheet piling business, February 2005; and Pan Fish ASA/Marine Harvest N.V., 18 December 2006, paras. 5.11, 5.36 and 6.32 to 6.40 (the data submitted by the parties showed a price correlation of +0.89). 41 Completed acquisition by Lactalis McLelland Limited of Lubborn Cheese Limited, OFT decision of 6 August 2009, para. 24.
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shock to the cost of producing A, this would impact on demand for product B via the strength of the cross-price effect. However, if other factors (such as increases in seasonal demand or in production costs affecting both products) lead to higher prices of product A and product B, then the cross-price effect may not be the main impact on prices and may be hard to disentangle from other influences on prices.42 Another difficulty in relation to price correlation analysis is in determining how much correlation is enough to determine close substitutability. A possible benchmark is to measure the correlation between two goods in the same market that are known to be close substitutes. However, whilst intuitive, this benchmarking still suffers from the fact that products in the same relevant market may be closely correlated due to both their substitutability and spurious factors such as common demand and cost shocks. This can weaken inferences drawn from benchmarking where the common demand and cost shocks are strong.43 At Phase I, in Reckitt Benckiser/K-Y, the CMA assessed some price correlation analyses presented by the parties.44 In relation to price correlation between the retail price of Durex Play Feel and the average price of private label lubricants, the CMA noted firstly that the result was not informative due to the use of an average price for private label products, which may themselves be differentiated both in terms of their characteristics and in terms of their distribution and availability across grocery retailers and national pharmacy chains. The CMA also noted that the price correlation identified by the parties between Durex Play Feel and the average price of private label lubricants, which was 0.31, was not particularly strong. Finally, the CMA noted that the analysis did not shed light on any interaction between K-Y and private labels (since private labels might constrain K-Y and Durex in different ways). Further, the CMA did not place material weight on an assessment showing an absence of price correlation between certain products of the parties because the main driver of price variation would be discounts 42 For example, suppose that the price of cement and the price of flour are correlated because when energy costs rise, the costs of making cement and flour go up. The correlation would be driven by having a common element in production costs, not because cement and flour are good substitutes – an increase in the price of cement does not induce consumers to purchase more flour and vice versa. Likewise, suppose that during December the prices of hotel rooms in London and flights to London go up. This would not be a sign that the two are substitutes. 43 Other concerns with price correlation analysis include the following. First, the appropriate time period must be chosen to allow time for prices to react. If the prices of products A and B do move together, but sometimes prices react immediately, and other times they react after one quarter, it might be difficult to discern this effect. For example, assessing how well monthly prices move together would capture immediate reactions but not lagged reactions, occurring after two or three months. Secondly, even if prices do diverge substantially over time, it should be noted that this might give rise to substantial changes in volumes. If the price of product A increases in relation to the price of product B and there is a marked switch in volumes from product A to product B, then the absence of close correlation between product A’s and product B’s prices does not rule out the possibility that these products are closely substitutable without a further analysis of volume movements (controlling for other influences on prices and volume). 44 Anticipated acquisition by Reckitt Benckiser of the K-Y brand from Johnson & Johnson, CMA decision of 19 December 2014.
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Market Definition
and promotions; since the parties’ products may have been discounted at different times a low degree of correlation between their prices did not imply an absence of competition.45 (c) Stationarity tests. A stationarity test assesses the ratio of products’ relative prices within a candidate market over time. If the price ratio is stationary (i.e., the price ratio of products reverts to its mean after any deviation),46 this implies that the price series for the products in question do not diverge over time. Where reversion to the mean is rapid, the CMA might view this as consistent with the products in question being in the same relevant market. For example, a stationarity test was conducted by the merging parties in Pan Fish/Marine Harvest and was analysed by the CC.47 The parties argued that these data indicated that Scottish salmon and Norwegian salmon were in the same product market. The analysis of the time series of the ratio of Scottish to Norwegian salmon prices in the UK showed that the ratio was stationary, with 84% of a ‘shock’ (a deviation from the mean ratio) in the relative price being absorbed within four weeks as the price ratio returned to its mean value. The CC stated that, as the price ratio was found to be stationary, this was consistent with Scottish and Norwegian salmon being the same product market.48 As with price correlation analysis, stationarity tests must also be considered in the light of other factors that may impact substantially on the ratio of relative prices.49 (d) Own-price and cross-price elasticities. The ‘elasticity’ of a product’s price indicates how (in proportionate terms) demand for that product responds to changes in a given price. The own-price elasticity of demand is a measure of price sensitivity; it captures the percentage change in volumes sold of a product as a result of a 1% increase in price of the same product. For example, if the price of product A is increased by 1%, and its demand decreases by 3%, this product is said to have a demand elasticity of -3.50
45 46 47
Ibid., para. 34, paras. 59-63 and paras.163-165. A shock to the price ratio would not be permanent and would eventually die out.
Pan Fish ASA/Marine Harvest N.V., 18 December 2006, para. 5.12. Ibid., para. 5.14. 49 Stationarity tests could be misleading where one product has experienced a structural change (such as an improvement in quality or a steady but permanent, idiosyncratic shift in demand) midway through the period being analysed. In each case, product A would, over time, command a higher price relative to product B, even if B remains a strong competitive constraint on A (in terms of the cross-price effect). Thus, one might observe a permanent change in the ratio of prices, even if it remains the case that (other things being equal) a higher price of A would substantially increase demand for B, and vice versa. Further, even if relative prices are stable over time, this need not reflect close substitutability – it may simply reflect the fact that: (i) both products employ similar inputs and so face similar cost shocks, or that (ii) both products face similar demand shocks – e.g., rising incomes may increase the demand for (and hence price of) high quality furniture such that the relative prices of (say) premium tables and premium chairs stay broadly constant, however, this does not mean that teak tables and leather chairs are substitutes. 50 A point to watch is that because demand for a product is expected to fall when its price rises, economists often refer to the absolute value of own-price elasticity of demand (i.e., here they would 48
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Cross-price elasticity measures the proportionate change in demand for product A as a consequence of a change in the price of product B. Substitute goods exhibit positive cross-price elasticities. For example, if a 1% increase in the price of product B leads to a 2% increase in demand for product A, then the cross-price elasticity is +2. The higher the cross-price elasticity, the stronger the constraint between the products and so evidence on cross-price elasticities are useful for market definition (and closeness of substitution).51 By way of illustration, in Pan Fish/Marine Harvest, the CC constructed a model of demand for Scottish salmon in the UK to examine the interaction between demand and price for Scottish and Norwegian salmon. The model indicated that demand for Scottish salmon was elastic (with a 1% increase in the price of Scottish salmon being likely to result in a decrease in demand for Scottish salmon of over 3%). Further, a 1% increase in the price of Norwegian salmon was considered to be likely to lead to an increase in demand for Scottish salmon of just less than 3%. The CC stated that “this indicated a high degree of demand-side substitutability between Scottish and Norwegian salmon, and therefore that these products are likely to be in the same market.”52 An own-price and cross-price elasticity can be used to estimate a diversion ratio. For example, suppose that if the price of product A increases by 1% then 5% of volumes are lost (the absolute value of the own-price elasticity of A is 5) and that demand for product B increases by 3% (the cross-price elasticity of B’s volumes with respect to A’s price is 3). If A’s volumes are 100 and B’s volumes are 67 prior to the price rise then the 1% price increase causes A’s volumes to decline by 5 of which B captures 2. The diversion ratio from A to B is therefore 40%, indicative that B is a close substitute to A. Cross-price elasticities were discussed ABF/Dorset.53 The merging parties presented an econometric model that sought to demonstrate substantial diversion from muesli and granola to cereal products outside the muesli and granola segments. The CMA had concerns with the model and so ultimately did not need to place material weight on it,
refer to an own-price elasticity of demand equal to “three” instead of “minus three”). An absolute value of an elasticity that exceeds 1 is said to be “elastic”; if the absolute value is less than 1, demand is said to be “inelastic”. (For a discussion of elasticities, see Completed acquisition by NBTY Europe Limited of Julian Graves Limited, OFT decision of 24 March 2009, paras. 77-87.) 51
See CC report on Pan Fish/Marine Harvest, supra, para. 5.37, footnote 1. Ibid., para. 5.39. See, e.g., National Express Group plc and the Greater Anglia franchise, a report on the acquisition by National Express Group plc of the Greater Anglia franchise, November 2004, para. 6.24. The CC commissioned a review of existing studies on the price elasticities of coach and rail. On the basis of these reviews, it was concluded that there was very high cross-price elasticity of coach leisure demand with respect to rail (of up to nine in the case of London–Colchester) but with very low cross-price elasticity of rail leisure demand relative to coach (of less than 0.1). On the basis of these data, the CC found there to be only a modest degree of substitutability for leisure passengers between coach and rail service. 53 Anticipated acquisition by Associated British Foods plc of Dorset Cereals Limited, CMA decision of 6 October 2014, para. 39. 52
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since competition was deemed to be sufficient in a granola only and a muesli only market.54 (e) Customer markets, price discrimination and price-sensitivity. Price discrimination may exist when prices vary across customer segments and this variation cannot be entirely explained by variations in marginal cost (i.e., there is price discrimination between customer groups when the price difference between them is not attributed to any cost differences). Where firms are able to price discriminate between different types of customers, they may set higher prices for ‘captive’ consumers (those least likely to switch following a price rise) and lower prices for ‘marginal’ consumers (those most likely to switch following a price rise). Targeting higher and lower prices in this way requires that different types of customer can be identified and that there is limited scope for resale (otherwise those purchasing at lower prices might profitably undermine the price discrimination strategy by re-selling to those being offered at higher prices). Where price discrimination is sustainable, firms typically set lower mark-ups for the most price sensitive consumers and higher mark-ups for the more captive customers. In some cases, the captive group will be so distinct, and have such a different degree of price sensitivity, that it will make sense to define them to be a separate customer market in their own right.55 For example, separate markets may be defined for peak travel and off-peak travel. The Authorities indicate that where some types of buyers clearly have a weaker negotiating position than others, this might also give rise to separate markets. However, an alternative approach is to take account of different negotiating strengths within a wider market as part of the competitive assessment (e.g., by taking into account that some purchasers may have greater buyer power than others).56 As explained above, the CMA sometimes defines the market ‘widely’ and then assesses whether there are any particular customer segments that might be more likely to suffer harm post-merger because they are particularly reliant on the merging parties (and where the merged firm could identify them and charge them higher prices post-merger). In Reckitt Benckiser/K-Y, the CMA focused only on the supply of personal lubricants to the grocery retailers and national pharmacy chain market in which the parties enjoyed a combined market share of 60 to 80%.57 While lubricants were purchased in other channels, namely adult specialist shops and online, the merging parties had lower shares in these channels which were defined to be separate markets, where new entry was 54
Ibid., para. 29. Merger Assessment Guidelines, paras. 5.2.28 to 5.2.31. Customer markets were considered in, for example, Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT decision of 11 May 2012, paras. 34 et seq., considering splitting customers by size and by the nature of their business. See also A report on the completed acquisition by Booker Group PLC of Makro Holding Limited, CMA decision of 19 April 2013, para. 8. 55
56
Ibid., paras. 5.2.29. It would also be important to consider whether, by removing an alternative independent supplier, the merger substantially reduces the negotiating strength of each buyer. 57 Reckitt Benckiser and K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015.
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considered to be unproblematic. Independent pharmacies were also defined to be a separate market. In Pan Fish/Marine Harvest, the CC received suggestions that salmon processors who were only willing to use Scottish salmon were charged higher prices for the same Scottish salmon than ones who were willing to use Norwegian salmon (i.e., these processors might be subject to “third-degree price discrimination” on the basis of their preference for a particular type of salmon).58 Indeed, the CC noted that some customers could be identified as having a Scottish-only purchasing policy and that these purchasers were less price-sensitive than others.59 The CC tested whether the presence of these less price-sensitive customers gave suppliers an opportunity to pricediscriminate. The CC examined transaction data that allowed it to identify transactions, prices, specifications and quantities over a two-year period by customer, who could be characterised by customer class (e.g., processor, wholesaler, retailer, smoker or reexporter) and whether they bought only Scottish salmon from the parties, or whether they bought both Scottish and Norwegian salmon.60 Overall, the CC did not consider that the evidence of past price discrimination was strong and it concluded that Scottish and Norwegian salmon formed part of the same product market, although, in view of strong customer preferences, Scottish salmon could form a relevant product segment.61 The Merger Assessment Guidelines note that if customers are insensitive to changes in the price of products in the candidate market, the HMT is more likely to be satisfied because a SSNIP will not result in a sufficient number of lost sales to render the SSNIP unprofitable.62 However, just because many captive or price-insensitive customers exist, this does not mean that the market will necessarily be defined narrowly. If suppliers are unable to discriminate between price-insensitive and price-sensitive (the latter being ‘marginal’) customers, the existence of a relatively small share of marginal customers may be sufficient to frustrate a SSNIP.
58
CC report on Pan Fish/Marine Harvest, supra, para. 6.44. Price discrimination can take different forms. The most common forms are where suppliers offer their customers a menu of tariffs and customers select the one that suits them best (“second-degree” price discrimination) and where customers are segmented by some observable characteristics that are associated with different demand elasticities (“third-degree” discrimination). 59 Ibid., para. 6.46. 60 Ibid., para. 6.48. 61
Ibid., para. 5.82. The CC also considered the price sensitivity of customers in Nufarm and AH Marks, a report on the completed acquisition by Nufarm Crop Products UK Limited of AH Marks Holdings Ltd, 10 February 2009, para. 5.39, where the CC assessed the price-sensitivity of cereal farmers to the introduction of new chemistries. Third parties told the CC that farmers who did not switch were effectively ‘tied’ to phenoxies and would be extremely unlikely to switch in the event of a 5% price increase. 62 Merger Assessment Guidelines, para. 5.2.15(c).
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10.3.3 Switching Costs The CMA may assess switching costs. Switching costs are non-recoverable expenditures or lost ’utility’ arising from switching supplier. These may include: (i) the lost utility arising from purchasing a product that is not quite so well suited to customers’ needs; (ii) costs of quality assuring a new input and/or adjusting production or distribution processes to operate with that input; (iii) costs of breaching contractual lock-ins; (iv) the need to purchase or adapt complementary assets to work well with the rival product; and (v) perceived costs (e.g., due to consumer information or behavioural traits). At the market definition stage, the issue is the extent to which switching between substitute goods can take place sufficiently quickly and without incurring a substantial sunk cost (so that switching would be profitable following a SSNIP). A time frame of one year is often considered acceptable. However, the appropriate time-period depends on the nature of transactions in the market under consideration. For example, if customer contracts are renewed annually then one year may be the natural time period to consider. However in some markets purchases are made on a more frequent basis (e.g., groceries), it would be informative to consider whether switching would take place in a shorter space of time (e.g., by considering evidence on how consumers react to in-store promotions). ‘Customer markets’ may arise where firms can identify those purchasers that face high switching costs (making them less price sensitive) and profitably charge them a higher price than customers with low switching costs. Switching costs are also important for the analysis of competitive effects. For example, they impact on the ability of, and incentive for, buyers to switch to: (i) rivals already in the market; (ii) new entrants; or even (iii) self-supply. Furthermore, the merging parties may be close competitors if it is substantially easier to switch from one merging party to the other, as opposed to switching from one merging party to other rivals. In Sonoco/Weidenhammer, the CMA considered switching costs incurred by customers when switching to alternative packaging formats.63 Rather than include them in the relevant market, which was composite cans for food use where the parties’ post-merger share was 90-100%, with an increment of 20-30%, the CMA identified alternative packaging formats as an out of market constraint. Specifically, the CMA assessed the switching costs involved along with any cost savings from the use of alternative materials and found the gains from switching to be customer specific. However, the CMA found no examples of customers switching due to prior price increases in the price of composite cans. The CMA also noted that the Parties could discriminate postmerger between those customers that could switch and those that could not switch. At Phase II, the CMA nonetheless concluded that a number of larger customers could constrain pricing in composite cans in the UK through the option of a switch to alternative forms of packaging noting recent decisions of some customers to switch 63
Sonoco and Weidenhammer, a report on the completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, 3 July 2015.
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away from composite cans, despite either a long history of using the format or evidence gathered at Phase I that customers would not switch in response to a SSNIP; one larger customer had also threatened to switch to plastics and gained a substantial discount from the UK composite can supplier concerned.64
10.3.4 Critical Loss Analysis Critical loss analysis assesses candidate market definitions by comparing the critical loss of volumes resulting from a SSNIP to the actual loss resulting from such a price increase.65 The critical loss is the percentage decrease in volumes that would (just) render unprofitable a SSNIP by a hypothetical monopolist on a candidate market. The actual loss is the predicted percentage decrease in volumes in response to a SSNIP by the hypothetical monopolist. If the actual loss exceeds the critical loss, the price increase would be unprofitable and this suggests that the candidate market has been drawn too narrowly.66 In this scenario, the analysis could be repeated incorporating additional products into a wider candidate market. To illustrate, consider a firm that sells just one product. When this firm increases price, there are two impacts on profit. First, profit is lost on any volumes that are no longer sold. The lost profit (in the short term at least) equals the lost volumes of unit sales multiplied by the (absolute value of the) gross margin (here defined to be price less marginal cost) that was previously earned on those volumes. Secondly, on any retained volumes, an increment in profit is achieved, equal to the retained volumes multiplied by the absolute value of the increase in the gross margin. Suppose, for example, that the firm sells 100 units at a price of £1.00 and that its variable cost per unit is £0.90, so the gross margin is £0.10. A 5% increase means the price rises to £1.05 and the gross margin rises to £0.15, an increment of £0.05. If the firm loses 33 units, the price rise is just profitable. The lost profit equals £3.30 (i.e., 33 lost units multiplied by £0.10 of lost margin), whilst the profit gained equals £3.35 (i.e., 67 retained units multiplied by £0.05 increment in margin). Under a critical loss approach, the analyst would calculate the minimum volumes required to make a 5% price rise (just) unprofitable (in the above example, that is 34 units) and then assess whether the available evidence indicates that a 5% price rise would cause at least those critical volumes to be lost. If so, it would not be profitable to impose a 5% SSNIP and hence the firm’s product would not comprise a relevant market. 64
Ibid., paras. 7.135 – 7.179. See Langenfeld & Li, Critical Loss Analysis in Evaluating Mergers, 46 The Antitrust Bulletin 299; Baumann & Godek, Could and Would Understood: Critical Elasticities and the Merger Guidelines, [1995] The Antitrust Bulletin 885; Katz & Shapiro, A Critique of Critical Loss: Let’s Tell the Whole Story, 2002 (available at: http://faculty.haas.berkeley.edu/shapiro/critical.pdf); Danger & Frech, Critical Thinking about “Critical Loss” Analysis in Evaluating Mergers, 46 Antitrust Bulletin 299; O’Brien & Wickelgren, A Critical Analysis of Critical Loss Analysis Working Paper No. 254, Bureau of Economics, Federal Trade Commission, 2003 (available at: www.ftc.gov/be/workpapers/wp254.pdf); and Farrell and Shapiro, Improving Critical Loss Analysis, Antitrust Source, February 2008. 66 Completed acquisition by NBTY Europe Limited of Julian Graves Limited, OFT decision of 24 March 2009, para. 88. 65
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Market Definition
If we are considering a SSNIP above prevailing price levels, a single product firm should have already priced at the profit maximising level and so we would not expect to find a 5% SSNIP to be profitable.67 Therefore, to apply the critical loss approach usually requires a more typical market definition scenario, such as a collection of products owned by different firms that comprise a candidate market. For example, suppose that the prevailing prices of products W, X and Y are £1.00 each and that on each of these products the gross margin over variable cost is £0.10 per unit. Suppose also that at prevailing prices there are 100 units sold of products W, X and Y in total. In this case, a firm owning products W, X and Y would find it profitable to impose an across the board price increase of 5% provided that no more than 33 units would be switched to other products outside the W, X, Y group.68 If we assume that the observed gross margin is unrelated to customer switching patterns, then the higher the percentage gross margin employed in the critical loss test, the lower the proportion of volumes that must be lost before the price rise becomes unprofitable (i.e., a high gross margin implies a small critical loss). This is for the simple reason that lost volumes are most ‘costly’ in terms of lost profit. However, economic theory suggests that a single product firm would choose a percentage gross margin in direct proportion to the inverse of the elasticity of demand that it faces. Put another way, higher margins might be found only where consumers are not very price sensitive.69 Katz and Shapiro state that “[u]sing this fundamental economic principle, there is a strong presumption that a high gross margin indicates that the product faces inelastic 67 If prices are indeed profitable, this could mean either that the firm pursues an objective other than short term profit maximisation, or that we have used an inappropriate measure for the firm’s margin. 68 To make this example straightforward, we assume that margins earned on each product are the same. However, if margins differ, the critical loss approach becomes far less tractable. We have to take into account carefully both switching patterns within the candidate market (since price rises may shift consumers from low to high margin products within the candidate market, or vice versa) as well as switching to products outside the candidate market (again, we need to know whether volumes are lost to products outside the market from high margin or low margin products within the candidate market). 69 Failure to take this point into account may lead to the following issues. Suppose that some survey evidence indicates that customers are price-sensitive in relation to a group of products for which firms generate very high margins. In this case, we might observe high margins to exist and then draw on survey evidence that consumers are price-sensitive to come to a view that further price rises would not be profitable. In this case, if the high margins observed arise primarily from the pre-existing exercise of market power, then the relevant market implied by a critical loss test would be wider than the definition that we would adopt had the test been conducted at competitive price levels (i.e., where margins would be lower). Whether this matters or not for the analysis depends on the importance of pre-existing market power for the merger assessment (with horizontal mergers the issue is usually whether prices will rise further, not whether they are already above the competitive level). Conversely, a group of firms with no market power at all (e.g., struggling to earn a positive margin) might erroneously be found to operate in too narrow a market simply because the very low margin earned implies that a price rise would be profitable unless a very large share of volumes is lost. For example, a group of firms whose margins all equal 3% could profitably increase prices by 5% unless 62.5% or more of the group’s volumes would be lost. If the Authorities took the view that such a large loss in volumes was unlikely, the market would be defined to include only those group members (although this may fail to reflect appropriately the strength of constraints arising from firms outside the group).
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demand.”70 The CMA would usually take this theoretical relationship into account when weighing up the available evidence on price sensitivity.71 However, in some Phase II cases they have directly combined survey evidence on switching with accounting gross margin estimates in order to conduct a critical loss test.72 Examples of two different approaches to critical loss analysis are discussed below. In Zipcar/Streetcar, the CC stated the “standard formula for critical loss” (for a single product firm):73 Critical loss = price rise / (price rise + margin) = t / (t + m) In other words, if the percentage gross margin over variable costs is denoted m% and the SSNIP threshold is t%, then the break-even percentage for lost volumes following a price rise of t% is t / (t + m).74 The CC went on to note that actual loss is determined by the following formula: Actual loss = own-price elasticity * (1 – recapture rate) * price rise 70
Katz and Shapiro, supra. See, e.g., NBTY/Julian Graves, supra, para. 90 et seq, where the OFT took the parties’ own estimates of gross margins and combined these with the elasticities of demand suggested by the OFT’s survey (which the OFT considered were not materially different from the elasticities of demand suggested by the Lerner Condition, i.e., that the percentage margin over marginal cost is the inverse of the price elasticity of demand). See also, Zipcar/Streetcar, Annex H. It should be noted, however, that the inverse of the observed gross margin will not necessarily provide a good indication of the pricesensitivity of customers (for example, the firm’s perceived marginal cost may be different from the accounting marginal cost used when measuring the gross margin). Moreover, the Lerner condition is derived from an economic model where single product firms set just one price – this may not be a good approximation of the price setting models employed by the merging parties. 72 See Sportech plc and the Vernons football pools business of Ladbrokes plc, a report on the anticipated acquisition by Sportech plc of the Vernons football pools business from Ladbrokes plc 11 October 2007, Annex F, paras. 32-38. In this case the CC used margin estimates from the parties and survey evidence on diversion ratios to conduct a critical loss test. The CC employed an approach for testing whether a hypothetical monopolist could profitably sustain a SSNIP on just one product owned by the merging parties. Suppose that the accounting margin implies that if v% of volumes is retained (or “recaptured”) in the candidate market, then a SSNIP would be profitable (where the SSNIP is applied to just one product). If the survey indicates that following a SSNIP on that product, more than v% of volumes is diverted to other products within the candidate market, then this indicates that the candidate market is a relevant market. 73 Zipcar and Streetcar, a report on the completed merger between Zipcar, Inc and Streetcar Limited, 22 December 2010, Annex H, para. 10. 74 For example, with a SSNIP of 5% and a margin of 10%, a SSNIP is profitable unless more than 33% of volumes are lost. With a margin of 45%, the SSNIP is not profitable if more than 10% of volumes are lost. If there is a plausible concern that a 5% price rise would not be profitable but a far higher price rise would be (e.g., because there is a high share of loyal infra-marginal consumers who would remain purchasing at higher prices), then sensitivity testing to different thresholds may be important. 71
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Market Definition
This can be explained as follows. Suppose that two single product firms, 1 and 2, merge. If Firm 1 increases price by t%, its lost volumes equal t% multiplied by the (absolute value) of the own-price elasticity of demand.75 So, if the own-price elasticity of demand is 2, then a 5% price rise leads to lost volumes of 10%. However, if Firm 1 also owns Firm 2 and, importantly, if Firm 2’s (absolute) margin is the same as that for Firm 1, then any volume shifted from Firm 1 to Firm 2 generates no loss in profit – the profit is recaptured exactly in this particular case. The ‘recapture rate’ is the diversion ratio from Firm 1 to Firm 2 (denote this to be D12). It is the percentage of volumes lost by Firm 1 that are switched to Firm 2, following a price rise by Firm 1. If the Lerner condition applies (as would be the case if the firm behaved like a single product firm that maximises short run profit), then own-price elasticity of demand is the inverse of the percentage gross margin. This allows us to write the formulae above (after some simple algebraic steps) as follows: Critical Loss > Actual Loss is implied if m * D12 > t * (1 – D12) Therefore, the higher the margin (assumed the same for both firms), and the higher the diversion ratio, the more likely the products are to be in the same market.76 A second example of the use of critical loss analysis for the purpose of market definition is Long Clawson/Millway.77 In this case, the Lerner condition was not employed. One issue was whether there was a separate market for Blue Stilton or whether Blue Stilton was constrained by other blue cheeses. The CC estimated the gross margin at the wholesale level (supply to retailers) from accounting data provided by one of the parties and concluded that this meant that the critical loss was around 14%. Rather than use that accounting price-cost margin to infer a price elasticity of demand at the wholesale level, the CC instead estimated the price elasticity of demand based on retail data (i.e., sales made to consumers). The CC concluded that the wholesale price elasticity of demand was not likely to exceed the retail price elasticity of demand. The CC’s econometric evidence indicated that the own-price elasticity of demand for Blue Stilton (estimated at the retail level) was not likely to exceed the critical (absolute) value of 2.79, and hence that the wholesale price elasticity of demand would not exceed 2.79.78 The relevant market was therefore not extended to include other blue cheeses.
75
Here we assume that the elasticity of demand is constant over the range of price rises considered. More general formulae can be developed to take into account differences in relative margins. If Firm 2’s absolute margin is half of Firm 1’s absolute margin, then each volume shifted from 1 to 2 involves a loss of half of Firm 1’s absolute margin and so the diversion ratio from Firm 1 to Firm 2 must be correspondingly higher to ensure the price rise is worthwhile. 77 Long Clawson Dairy Limited/Millway merger inquiry, a report on the completed acquisition by Long Clawson Dairy Limited of the Millway Stilton and speciality cheese business of Dairy Crest Group plc, 14 January 2009. 78 A 5% price rise would generate a loss of approximately 14% of volumes if the (absolute value of the) own-price elasticity of demand was 2.79. 76
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More recently, at Phase I in Poundland/99p, the merging parties submitted a critical loss analysis which looked at the amount of diversion that would be needed outside a hypothetical single price point retail market, which was the narrowest plausible candidate product market, in order for a 5% increase in price to be unprofitable.79 In their analysis, the parties estimated that the critical loss required to render a 5% price increase unprofitable would be 10-20%.80 On this basis, they submitted that the HMT in relation to a single price point candidate market would only be satisfied if the diversion outside the candidate market was below 17%. In this regard, the parties argued that the consumer survey indicated that the diversion from the parties to nonsingle price point retailers was substantially higher than 10-20%. The CMA agreed that the frame of reference should be wider than single price point retailers, partly as a result of the critical loss analysis, noting that “despite the concerns about the reliability of the consumer survey results, the CMA agrees that a critical loss analysis based on these results indicates that the market is likely to be wider than SPP retailers.”81
10.3.5 Evidence From Surveys and Diversion Ratios Evidence from surveys, in particular on estimated diversion ratios, is regularly used by the CMA to inform both the competitive assessment and market definition. The higher the diversion ratio from a merging party’s product (A) to another product (B), the more likely that: (i) B constrains A; and (ii) A and B are in the same relevant market for the purpose of assessing the impact of the merger on A’s price (or quality). The following cases are illustrative of this approach. (1)
In Sports Direct/JJB, the CC stated that it aimed to identify the extent to which customers could switch to alternative products in response to a change in price imposed by a hypothetical monopolist.82 The CC mainly assessed this on the basis of responses to a consumer survey in which customers were asked where they would have considered making a purchase if the store in question had been closed.83 The CC dismissed the possibility of considering individual products as both parties stocked many thousands of products.84 Given the overlap between the parties’ retail offerings, the CC considered whether it
79
Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015. 80 Ibid., para. 36. 81
Ibid., para. 40. Sports Direct International plc and JJB Sports plc, a report on the acquisition by Sports Direct International plc of 31 stores from JJB Sports plc, 16 March 2010. 82
83
A survey question also asked what respondents’ reactions would have been to a 5% price increase at that store. However, very few respondents indicated that they would switch meaning the sample size of “marginal” consumers was too small. (Marginal consumers were identified by the CC to be those responding that they would switch to another retailer or stop purchasing in response to a 5% price increase.) Ibid., Appendix C, paras. 2.14-2.15. 84 Ibid., para. 6.8 et seq. The CC did recognise that some items (such as golf clubs or football boots) should be assessed on a product by product basis.
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could include all of their products within a single product market.85 In terms of evidence relied upon, the CC focussed on diversion ratios, an analysis of entry events and third party responses. Its survey indicated that the largest diversion ratios from SDI were to JJB and JD Sports, and noted that if competition had been on a per product basis, it would have expected to see higher diversion to more specialised stores. However, the consumer survey indicated only a very low diversion ratio to such specialised stores (4%). On the other hand, the diversion ratio to JJB was 61%, and in areas where there was a JD store (but no JJB store), 33% of customers still indicated that they would switch to the nearest JJB store (thereby incurring higher travel costs, etc).86 As a result, the CC concluded that the market should be defined to include only Sports Direct and JJB.87 However, the CC also recognised that a number of retailers outside the “market” were likely to provide some competitive constraint on the parties, albeit weaker than the constraint imposed by the parties on each other. The CC, therefore, reflected the constraint from these other retailers in its analysis. (2)
In Zipcar/Streetcar, the CC stressed that market definition and competitive assessment were not separate analyses.88 The CC undertook a consumer survey of current and lapsed members of the parties. This survey indicated that if Streetcar and Zipcar were not open, 42% of respondents would have joined another car club.89 Of these customers switching to another car club, 70% of Zipcar members said they would have joined Streetcar and 51% of Streetcar members said they would have joined Zipcar. However, the CC also stated that among price sensitive members (who would leave their car club if journey prices rose by 10%) only 22% would join another car club, while the remainder would use alternative transport options.90 The CC concluded that the relevant market was only as wide as car clubs and did not include other modes of transport. However, as in Sports Direct/JJB, the CC stated that a proportion of customers would have switched to other modes of transport and therefore the CC would take these into consideration in assessing the effects of the merger.91
(3)
In Greene King/Spirit, the parties conducted an internet survey for the purpose of the assessment that asked respondents what they would do if the pub they had previously visited was closed for refurbishment.92 The CMA considered that the survey evidence did not provide sufficient evidence to include in its
85
See above in relation to product bundles. Ibid., para. 6.28. 87 Ibid., para. 6.46. 86
88 Zipcar and Streetcar, a report on the completed merger between Zipcar, Inc and Streetcar Limited, 22 December 2010. 89
Ibid., para. 6.14. Ibid., para. 6.22 91 Ibid., para. 4.11. 92 Anticipated acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015. 90
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frame of reference restaurants and other licensed premises (stating that these would be taken into account in the competitive assessment). The CMA limited its frame of reference to pubs. In the competitive assessment, however, the CMA differentiated between dry-led and wet-led pubs. The CMA applied a primary filter in which wet-led pubs did not constrain dry-led pubs (but both dry-led and wet-led pubs constrained wet-led pubs). In relation to the constraint placed on dry-led pubs, wet-led pubs were taken into account in a secondary filtering step where they were deemed to count as one fifth of the constraint of a dry-led pub, based on relative diversion ratios in the survey. This suggests that the average diversion ratio from a dry-led pub to a wet-led was 20% of the average from a dry-led to another dry-led pub. (4)
In Poundland/99p, the parties conducted an online survey throughout the entire Poundland estate and in all of 99p’s stores within one mile of a Poundland store.93 The parties submitted that, based on this survey, the diversion from the merging parties to non-single price point retailers was on average 80-90% at a national level and ranged from 60-100% at a local level. The parties submitted that this strongly indicated that the market was wider than single price point retailers. The CMA agreed, partly on the basis of this survey evidence, noting that “the Parties’ consumer survey evidence indicates that the VGMs [value general merchandise retailers] place a material constraint on the Parties.”94
10.4
PRODUCT MARKET DEFINITION: SUPPLY-SIDE SUBSTITUTION
The Merger Assessment Guidelines state that the boundaries of the relevant market are usually determined by demand-side considerations alone,95 but that, in certain circumstances, the CMA may aggregate several narrow relevant markets into a single wider market on the basis of supply-side considerations.96 Supply-side substitution addresses the extent to which suppliers could (and would) introduce capacity into the market in response to a SSNIP. The Merger Assessment Guidelines state that this may occur in two circumstances. First, where production assets can be used by firms to supply a range of different products that are not demand-side substitutes and the firms have the ability and incentive (quickly) to shift capacity between these different products depending on
93
Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April
2015. 94
Ibid., para. 39. Merger Assessment Guidelines, para. 5.2.17. The 2010 U.S. Horizontal Merger Guidelines state that “market definition focuses solely on demand substitution factors, i.e., on customers’ ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service” (section 4). 96 Ibid. 95
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demand.97 Such capacity must usually be capable of entering the market within one year (if supply-side substitution is to be as powerful a constraint as demand-side substitution, the merged firm must ‘fear’ the threat of customers switching to a product quickly brought into the candidate market just as much as if they switched to a product already in that market)98 and should not incur significant sunk expenditure.99 In this scenario, supply-side substitution is most likely to take place where firms already have the relevant assets available (e.g., production capability, distribution requirements, customer contacts, brand) and spare capacity to employ those assets for the purpose in question.100 Secondly, the same firms compete to supply the products in question and the conditions of competition between the firms are the same for each product. In the latter case, aggregating the supply of these products and analysing them as one market would not affect the outcome of the competitive effects assessment.101 In some cases (e.g., in relation to different grades, sizes or varieties made from the same equipment), capacity is switched so flexibly and easily between products that are not demand-side substitutes that it makes sense to consider market shares on the basis of capacity as opposed to individual products. That is to say, even if certain products are highly differentiated on the demand-side, if most producers find these products easy to replicate on the supply-side then focusing on the availability of productive capacity makes more sense than focusing on one of many specific goods produced by that capacity. For example, A3 and A4 sheets of paper are not usually substitutable on the demand-side. However, firms with the ability to make either grade of paper would most 97 See, e.g., Anticipated acquisition by Tesco Holdings plc of Dobbies Garden Centres plc, OFT decision of 3 August 2007, paras. 6-7. 98 As with demand-side substitution, the frequency of purchases matters. Thus, if products are bought on a weekly basis, demand-side substitution to existing products will usually be a more powerful constraint on a supplier than the threat of customers switching to a new product that could be brought into the market only in a year’s time. However, if contracts are renegotiated on an annual basis, it may be straightforward for a customer to switch between a supplier currently offering the required services and a supplier that, if given sufficient notice, would be ready to offer those services when the given customer’s current contract ends. 99 Sunk costs are costs which, once incurred, are not recoverable when a firm exits a market. Where assets can be leased or production out-sourced, it may be easier to avoid incurring substantial sunk costs. 100 In Nufarm/AH Marks, the CC found that formulated products for broadleaf weed control should not be segmented by the format of supply (i.e., whether they were supplied as branded packaged products or non-branded bulk products) on the basis of supply-side substitution. The underlying product was quality assured by regulation such that investments in branding were not critical; further packaging bulk products was relatively straightforward and could be (and indeed was) out-sourced thereby avoiding the need for substantial sunk investments. In Wienerberger Finance Service BV and Baggeridge Brick plc, a report on the anticipated acquisition by Wienerberger Finance Service BV of Baggeridge Brick plc, 10 May 2007, facing and engineering bricks were found to be supply-side substitutes based on evidence that they were both produced in the same plant, their margins were similar (so that a SSNIP would make it worth switching a substantial share of production from one to the other) and evidence that one of the merging parties had recently used spare capacity in a facing bricks plant to produce engineering bricks. 101 Ibid.
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likely have the ability to flex their production of A3 and A4 grades of paper seamlessly, so that a competitive analysis based on the capacity to produce either grade of paper should capture all the essential elements of the competitive process.102 The previous example illustrates that sometimes supply-side substitution can lead to the market being defined more widely (on the basis of capacity to produce additional products) than that which would arise on the basis of demand-side factors alone. However, on other occasions, supply-side substitution will not widen the demand-side market but rather may widen the production capacity that should be considered to be within the relevant market to include capacity that would rapidly be brought into the relevant market in the event of a SSNIP. In this case, a notional market share would be allocated to hypothetical new products.103 Having done so, the competitive assessment would consider the extent to which the newly introduced products would compete closely with the products of the merging parties (just as one would consider the extent to which existing products in the market constrain the merged firms). Even if capacity is easy to flex from one product to another, in some cases it may not be switched in the event of a SSNIP in the relevant product market. For example, potential entrants may have contractual commitments to devote a certain amount of capacity to a certain activity (thereby generating a switching cost due to contractual breach).104 Alternatively, a potential entrant may prefer not to switch capacity from its current use into the relevant market because the margin available on current use exceeds that available in the relevant market even after a SSNIP.
102 In Anglo American PLC and Lafarge S.A., a report on the anticipated construction materials joint venture between Anglo American PLC and Lafarge S.A., 1 May 2012, the CC found that different grades of the same aggregate were in the same market on the basis of supply-side substitutability (para. 5.36) and that, on the supply-side, having the ability to produce CEM I implied the ability to produce CEM II and CEM III, provided the additives required to turn CEMI into CEM II and CEM III were widely available (para. 5.11b). In Breedon Aggregates and Aggregate Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014, grades of ready-mixed concrete and asphalt were found to be in the same market on the basis of supply-side substitution (respectively, para. 4.26(a) and para. 4.38(a)). 103 If most suppliers can flex capacity seamlessly between products (as may be the case where they make different grades, sizes or varieties of a fundamentally similar product) then markets may be defined on the supply side. Where just one or two suppliers have the ability to flex capacity so quickly, the market is more likely to be defined on the demand side. 104 Similarly, sometimes the Authorities would consider whether the capacity of a vertically integrated firm currently employed for ‘internal’ use (i.e., to supply its downstream operations), could or would be switched to supply non-integrated firms, such that it should be included as part of the ‘external’ market. In Breedon Aggregates and Aggregate Industries UK, supra, the CC included internal and external sales in the same market (para. 4.16). The Authorities might exclude the capacity of a vertically integrated firm that historically has not supplied the merchant market at all. In the latter case, it would still be important to assess how the integrated firm’s downstream operation competes with buyers on the merchant market and the extent to which ‘indirect effects’ are important constraints on pricing in the merchant market. (Indirect effects are discussed further below.)
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Ultimately, since supply-side substitution is simply a form of very rapid and low-cost entry, all the factors that impact on entry will impact on the ease of supply-side substitution. Moreover, supply-side factors may typically be left out of the market definition exercise and addressed as part of the analysis of competitive effects; a proper assessment would still come to the same conclusion on market power.
10.5
GEOGRAPHIC MARKET DEFINITION
Geographic market definition focuses on the geographic scope of the relevant product market on which the merging parties compete. The Merger Assessment Guidelines state that the CMA will define a geographic market.105 As with product market definition, the primary tool for assessing the scope of the geographic market is the HMT, although in practice the focus of the HMT is to ensure that the CMA has not defined the geographic market too narrowly,106 rather than focusing on precisely defining the geographic scope of the market. The geographic scope of a product market may be based on the location of customers or the location of suppliers.107 In practice, the Authorities have typically found geographic markets to fall within one of four categories: (i) supra-national markets; (ii) national markets; (iii) regional markets; and (iv) local markets. In some cases, particularly transactions involving national chains of retail outlets, the CMA has usually assessed the merger on both a national and local level, and sometimes a national, regional and local level. Geographic market definition has received a considerable amount of attention in relation to retail mergers. In these cases, the most direct effects of the merger are felt within a certain distance of the parties’ local stores, which is often measured as a drivetime, a walk-time or a particular travelling distance. Customer loyalty card data (and sometimes survey data) are often used to determine where a stores’ shoppers live and calculations are made as to the distance that a certain percentage of the store’s customers are prepared to travel in order to shop at the store in question. Likewise where the merging parties make deliveries to their customers, the local area may be based on a catchment within which a certain percentage of deliveries are made. This section sets out briefly the theoretical background to geographic market definition, but focuses on the CMA’s approach to defining geographic markets in practice, with particular emphasis on the definition of local geographic markets.
10.5.1 Hypothetical Monopolist Test The hypothetical monopolist test is used to identify the geographic scope of a market as well as to identify the products within that market. The geographic boundaries of a market are determined by the area within which a hypothetical monopolist can maintain 105
Merger Assessment Guidelines, para. 5.2.21.
106
Ibid. Ibid.
107
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a SSNIP for a particular product/service. As with the application of the HMT to product market definition set out above, the steps are applied iteratively, starting with the narrowest plausible candidate market to determine whether a hypothetical monopolist would be able to profitably maintain a SSNIP over this area. If a SSNIP over this area would not be profitable, because customers would switch to alternative sources of supply from outside the candidate market, the area should be widened. The analysis is then repeated until an area over which a hypothetical monopolist would be able to profitably maintain a SSNIP has been identified. It is important to note that relevant markets may differ according to the dimension of competition being considered. Different aspects of competition may take place on different geographic markets. For example, where a merger involves competing chain stores with national pricing policies, the relevant geographic market for the purpose of assessing price competition may be defined to be national (especially where competitors to those chain stores also have national pricing policies). However, competition between each individual store may take place at a local level in terms of some other feature valued by consumers (e.g., quality, range and service). The CMA may therefore assess the merger on the basis of both national and local geographic markets, in particular as regards retail mergers. A second example relates to pharmaceutical products. For currently marketed pharmaceutical products, a national market is commonly found (e.g., due to differences in national regulations). However, where pharmaceutical products are still at the innovation stage, an EEA wide or global market may be defined (inter alia because the aim is to develop a product to be sold on a worldwide basis).108 Since the underlying concept of the HMT is the same whether applied to products or areas, the analysis of the relevant geographic market is very similar to that of product market definition. The key elements are demand-side and supply-side substitution. Since these have been covered above, this section focuses only on those factors that are specifically relevant to the assessment of the relevant geographic market.
108 In Anticipated joint venture between GlaxoSmithKline plc and Pfizer Inc in relation to their respective HIV businesses, OFT decision of 9 July 2009, the OFT stated: “In previous merger cases the [European] Commission has defined the markets for pharmaceutical products (which are currently marketed) as national in scope, because they show wide differences in terms of regulatory frameworks, pricing mechanisms, purchasing policies, and marketing strategies across Member States. However, the markets for pipeline HIV products may be defined on the basis of the underlying R&D activity, which is normally global. As a result, the Commission in previous cases has defined the market for future products as at least EEA-wide or possibly worldwide in scope. Neither the parties nor third parties submitted any contrary evidence to this view. Therefore, in line with previous decisions by the Commission, the OFT has assessed this merger on the basis of the geographic frame of reference for currently marketed HIV medicines being national in scope, while for pipeline HIV products being at least EEA-wide or possibly worldwide. However, given the lack of competition concerns in this case, the geographic scope of the relevant markets can be left open.” (paras. 19-21).
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Market Definition
10.5.2 Factors Considered in Geographic Market Definition As with product market definition, the HMT is the primary conceptual assessment tool and can be implemented by considering a SSNIP test. Specifically, following a SSNIP in one area, the CMA will focus on: (i) how likely is it that customers would substitute substantially to purchasing their products in another area (demand-side substitution); and (ii) how swiftly suppliers focusing on another area would introduce their products to the area in question (supply-side substitution), such that the posited SSNIP would be rendered unprofitable. When making this assessment, the Merger Assessment Guidelines state that the CMA may consider the following. (1)
The perishability of products. Where a product maintains its quality despite being transported considerable distances, then all else equal the market is likely to be wider. For example, in Muller /Dairy Crest, the CMA considered that the market for skimmed milk powder was likely to be at least EEA wide.109 In contrast, ready-mixed concrete must be delivered before it dries out which limits how far it can be delivered in practice to a drive time of around 2 hours.110
(2)
Information on differences in pricing, sales, advertising and marketing strategies by area. For example, where firms adopt a national pricing policy and there are no (or only very limited exceptions) a national geographic frame of references would normally be adopted.111 Conversely, where prices (or quality, range and service) are determined locally, a local lens will be adopted. Even where a local lens is adopted for certain dimensions of competition, if advertising and marketing strategies are determined at a national level, the CMA may consider the extent to which these would be adversely affected by the merger. (National and local SLCs are discussed in detail in Chapter 12.)
(3)
Information on switching costs that customers might incur in switching to a supplier in a different geographic area. Switching to a supplier in a different area may include the costs of: time required to switch, quality assuring the input concerned, using a slightly different quality of input, additional transport costs, or customer reactions to products not being sourced ‘locally’ or ‘regionally’.112
109 Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015, paras. 168-171. 110 Breedon Aggregates and Aggregate Industries UK, supra, para. 2.38. 111 Cf. Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015, in which the CMA accepted that the parties had a strict national pricing policy (which was evident given the nature of their business model) but nevertheless considered the impact of the merger at both a national and a local level. 112 In Anticipated acquisition of W Corbett & Co (Galvanizing) Limited by Joseph Ash Limited, CMA decision of 25 June 2015, para. 42(a), the CMA noted that a significant proportion of customers suggested that a galvanizer’s location may have an impact on their ability to meet their requirements in
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(4)
Responses from customers, competitors, and third parties (at Phase II, the CMA may elicit responses via its consumer survey). For example, customers might be asked about the location of their current source of supply and their willingness to source from further afield. Competitors might also be asked for their views on the strength of competitors based in different locations or, if they are based outside the candidate market, whether they would be willing to supply that market.
(5)
Transport costs. In the event that relevant transport costs in relation to a product are high, this may indicate that it would not be possible for the product to be sold at a competitive price outside a certain distance. The Authorities have considered these issues in several cases. Usually the CMA will consider transport cost evidence in conjunction with evidence on actual transport distances (since the latter will be determined by the former).113
(6)
Information on trade flows. The CMA is more likely to consider region A as a constraint on region B where substantial trade flows occur from A to B, in particular in response to a relative increase in price in region B.114 This is discussed further below.
Other factors that the CMA may consider include chains of substitution and point-topoint transport flows. These are considered below, along with some further examples of the factors set out above.
10.5.3 Sensitivity of Share Data to the Candidate Geographic Market Definition Employed In principle, it might be assumed that the CMA will reach a conclusion on geographic market definition and only then consider share data calculated on the appropriate geographic basis. In reality, the approach is often not conducted in isolated steps and
terms of factors such as: cost; turnaround time; delivery frequency and the galvanizer’s willingness to compete for their business. In addition, a number of these customers indicated that plant location was an important factor in their choice. 113 See, e.g., Breedon Aggregates and Aggregates Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014, para. 10. See also Joseph Ash/Corbett, supra, para. 42b. In Completed acquisition by Tata Chemicals Limited of a controlling interest in Brunner Mond Group Limited, OFT decision of 21 April 2006, the OFT’s investigation suggested that the geographic market was supranational as customers confirmed that they sourced soda ash from outside the UK. However, the OFT noted that high transport costs meant that the constraint diminished as the delivery distance increased, suggesting a geographic market narrower than worldwide. 114 In Completed acquisition by Allflex of Cox Agri Limited, CMA decision of 7 May 2015, the CMA was told by third parties UK engravers of blank cattle tags and blank sheep tags were supplied from across the EEA, and potentially from a wider area. The CMA identified the market to be at least EEA wide, paras. 59-62.
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market shares are often considered on the basis of different candidate geographic markets. (a) UK-wide versus wider than national. In practice, at Phase I, the Authorities have sometimes reversed the assessment as part of a sensitivity analysis to test how sensitive market concentration is to the geographic lens selected. This is particularly the case in unfamiliar markets where there are at least respectable arguments that the markets are transnational rather than UK-wide. In other words, rather than ask for, or review, market share data having a preordained view or working hypothesis on market definition, the CMA may ask for share of supply data calculated on the basis of various lenses, invariably including shares on a UK-wide basis, as well as on the wider (EEAwide, transatlantic or global) bases. Having done so, the CMA would then identify on which lens (or lenses) the share data looks most problematic and assess whether any such lens could conceivably be a relevant market. Provided there is no realistic issue of the market being narrower than UK-wide (for example, due to service or maintenance elements requiring a domestic physical presence), the CMA may leave open whether the market is wider than the UK if the share data do not present concerns under any reasonable definition. If, however, the UK share data raises concerns whilst no concerns arise on the wider lens, the CMA will typically assess the transaction assuming the narrower UK-wide market, partly because the disparity in share data suggests a concern that the merging parties are closer substitutes for UK customers than they may be in general on an EEAwide or worldwide basis and, more generally, due to the non-homogenous competitive conditions across the candidate wider-than-UK market. So doing should permit the CMA to come to the correct outcome by taking into account ‘out of market’ constraints. For example, if UK customers can generally source the required product from abroad or if foreign based suppliers face very low barriers to expansion within the UK then the high shares within a candidate UK market should not be a cause for concern. (b) UK-wide versus regional or local. In cases where the debate, on the other hand, is whether the market is UK-wide or narrower, the CMA will (again) usually require share of supply data on a UK-wide, regional and local basis and then assess whether there are any parts of the UK for which high shares may indicate a customer group that could be subject to adverse effects post-merger. Note that ‘regional’ may in some cases mean Southeast, Southwest, Northeast, and so forth; in some cases, it will be ‘national’ in the sense of separately broken-out data for one or more of England, Wales, Scotland and Northern Ireland in cases where regulatory regime, or possible transport costs, or consumer preferences suggest such possible distinctions.115
115
National, regional and local effects were considered in: Thomas Cook/Co-operative Group/ Midlands Co-operative merger inquiry, a report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, 16 August 2011; and Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT Decision of 11 May 2012.
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If the case involves retail markets, the CMA will typically consider that parameters of competition take place at the national level (such as branding and advertising, and in a significant number of cases, pricing) and other parameters are driven at the local level (including competitors or markets subject to local pricing, such as cinemas, deviations from national pricing, and non-price service level aspects).
10.5.4 Point-to-Point Transport Flows The Authorities have considered ‘point-to-point’ transport routes or ‘flows’ in numerous cases, including air, rail, bus, and coach mergers.116 In some of these cases there are ‘mixed’ transport flows, including ‘rail on bus’, ‘coach on rail’, and ‘bus on coach’ flows.117 In rail and bus cases, the relevant geographic markets have typically been defined in terms of the parties’ overlapping ‘flows’, and the OFT has also considered the competitive effect of the transaction in a wider geographic area. For commercial services, this is principally due to the fact that operators with depots in neighbouring areas may easily be able to divert resources to the route in question, and this threat may act as a constraint on the operator on the route.118 In airline mergers, the question arises as to whether the relevant geographic market is the ‘city-to-city’ overlap or whether ‘airport-to-airport’ overlaps should be considered as the relevant geographic market. In Flybe/BA Connect, the OFT decided to consider airport substitutability on a route-by-route basis.119 In this case, the OFT noted that “it is relevant that most of the overlaps in this merger occur on short-haul domestic routes, for which flight time (and total travelling time) is relatively short. This will affect the extent of competitive constraint imposed by neighbouring airports, as a potential passenger is unlikely to travel far for a flight of such short duration.”120 The OFT considered whether Belfast City (“BHD”) to Manchester were substitutable for flights from Belfast International (“BFS”) to Manchester. It noted that BFS is located approximately 31 minutes from BHD, although BHD is located substantially closer to Belfast city centre (12 minutes versus 26 minutes). The CC (then the MMC) had
116 See, e.g., Completed acquisition by Stagecoach Group plc of Traction Group Limited, OFT decision of 12 April 2006; Completed acquisition by Stagecoach Group plc of the South Western franchise, OFT decision of 27 February 2007; Completed acquisition by Stagecoach Group plc of Highland Country Buses Limited and Orkney Coaches Limited, OFT decision of 17 October 2008; Completed acquisition by Air France finance S.A.S/City Jet Ltd of VLM Airlines N.V., OFT decision of 9 May 2008; Completed acquisition by Stagecoach Group plc of Preston Bus Limited, OFT decision of 28 May 2009; Anticipated acquisition by Inter City Railways Limited of the ICEC Franchise, CMA decision of 6 February 2015; Anticipated acquisition by Stagecoach Devon Limited of the Plymouth Depot business and certain associated assets of First Devon & Cornwall Limited, CMA decision of 21 September 2015. 117 Completed acquisition by Stagecoach Group plc of the South Western franchise, OFT decision of 27 February 2007. 118 Stagecoach/Traction, supra, para. 22. 119 Anticipated acquisition by Flybe Group Limited of the BA Connect business of British Airways plc, OFT decision of 7 February 2007. 120 Ibid., para. 12.
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previously considered these airports to be in the same geographic market, and the OFT received no evidence to contradict this finding. The OFT also considered whether flights to Southampton were constrained by services from Heathrow and Gatwick. The parties suggested that a significant number of passengers on the routes were derived from within the catchment areas between Southampton, Heathrow and Gatwick. However, the OFT noted that it received no convincing evidence that pricing decisions on flights to Southampton were strongly influenced by pricing on services from Heathrow or Gatwick, and that whilst Heathrow and Gatwick might provide some competitive constraint on Flybe’s Southampton services, the OFT was not satisfied that the constraint was sufficient to alleviate any reduction in competition at Southampton.121 In rail cases, in relation to competition in the market, the CMA has considered rail services to be separate from bus and coach services, and has considered overlaps between the operator and the rail franchise on a flow by flow basis. In relation to ‘rail on rail’ overlaps, the CMA has considered that these overlaps might occur where there are: (i) journeys between the same two stations; (ii) journeys between the same two settlements, even where different stations are used in the same settlement; and (iii) journeys to a main commuter town (e.g., London) from two alternative stations in nearby towns or villages.122 However, the Authorities have also considered, and recognised, the competitive interaction between different modes of transport and have therefore also considered ‘rail on bus’ and ‘rail on coach’ overlaps.123 Rail on bus overlaps occur: (i) on flows serving inter-urban areas (either at one or both ends) where bus stops and train stations are within 1,200m of each other; (ii) for other flows (in more rural areas), where bus stops and train stations have been treated as having the same start and end point where they serve the same settlement; and (iii) for flows involving intra-urban travel, where bus stops and train stations are within 400m of each other. Rail on coach overlaps occur where they serve the same settlement.
10.5.5 Chains of Substitution The concept of a chain of substitution is interesting in the sense that even if two products A and C do not compete directly (i.e., customers do not switch between them), then the existence of product B (that competes both with A and C) means that a price rise for product A is less attractive due to the presence of C.124 However, a problem with chain of substitution arguments is that even if there is no break in the chain, it may be that all a hypothetical monopolist needs to do is to control a sufficient number of 121
Ibid., para. 36.
122
Anticipated acquisition by Inter City Railways Limited of the ICEC Franchise, CMA decision of 6 February 2015, para. 39. 123
Ibid., paras. 41-45. If the price of A rises, some demand is lost to B. That may induce B to increase price such that A would lose fewer volumes than if B left its price unchanged. However, B’s incentive to increase price will be dampened if it would lead to many volumes being lost to C. 124
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overlapping links in the chain in order to exercise market power. For example, it is sometimes argued that whilst local geographic areas A and D are not contiguous, they are joined in a chain of substitution because area A overlaps with area B, which overlaps with C, which overlaps with D and do on. This is a theory that has had more traction in the EU125 in mergers assessed under the Merger Regulation.126 As discussed below, the Authorities have typically assessed local markets on the basis of individual isochrones of a certain size (usually determined by distance or drive-time). Examples of this type of argument in the UK are much rarer. In Tesco/Co-op store in Slough, Tesco argued that the market for grocery retailing was national, due to chains of substitution between local markets and provided mapping evidence based on customer loyalty card data suggesting that local catchment areas overlapped to the extent that they joined up across the entire country.127 However, the CC dismissed this argument for the following reasons.128 (1)
The chain of substitution breaks down where there is discontinuity in catchment areas and, given the physical geography of the UK, it was considered unlikely that there would be no breaks in the chain of substitution.
(2)
Even where there are a large number of closely located stores, the chain of substitution effect “fades” with distance. This is a result of the fact that to prevent a hypothetical monopolist profiting from simultaneously raising prices
125 Commission Notice on the definition of relevant market for the purposes of Community competition law, O.J. C 372 , 09/12/1997, para. 57 states “[i]n certain cases, the existence of chains of substitution might lead to the definition of a relevant market where products or areas at the extreme of the market are not directly substitutable. An example might be provided by the geographic dimension of a product with significant transport costs. In such cases, deliveries from a given plant are limited to a certain area around each plant by the impact of transport costs. In principle, such an area could constitute the relevant geographic market. However, if the distribution of plants is such that there are considerable overlaps between the areas around different plants, it is possible that the pricing of those products will be constrained by a chain substitution effect, and lead to the definition of a broader geographic market” (emphasis added). 126 See, e.g., Case COMP/M.5047, Rewe/Adeg, Commission decision of 23 June 2008 (where the Commission found that the relevant market for the retail sale of daily consumer goods was generally limited to 20-30 minutes’ drive-time but that the market could be broader if local areas overlapped); Case COMP/M.4919, StatoilHydro/ConocoPhillips, Commission decision of 21 October 2008 (where the Commission stated that the market for service stations was national on the basis that there was a chain of substitution effect between service stations chains); Case IV/M.1221, Rewe/Meinl, Commission decision of 3 February 1999 (where the Commission found that the market for grocery retailing was national in Austria on the basis of overlapping local areas); conversely, in Case COMP/M.3397, Owens-Illinois/BSN Glasspack, Commission decision of 9 June 2004, in which the Commission found that there was no chain of substitution in relation to the supply of glass packaging as supplies could price discriminate by catchment area. 127
Tesco plc and the Co-operative Group (CWS) Limited, a report on the acquisition of the Cooperative Group (CWS) Limited’s store at Uxbridge Road, Slough, by Tesco plc, 28 November 2007, paras. 5.58 and 5.59. 128 Ibid., Annex D, paras. 16-19.
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Market Definition
at all stores, the size of the marginal (switching) customer group would have to become larger as the number of stores in the candidate market increased (to offset the fact that including more stores in the candidate market would generate greater scope for switching to be recaptured within the candidate market). (3)
The HMT does not require that prices at all stores in the candidate market would need to be increased by a SSNIP for the HMT to be satisfied. It is only necessary for prices to be increased by a SSNIP in (at least) one store. The CC gave the example of a hypothetical monopolist of stores A and B being able to exercise market power by increasing the price only at store A. By doing this, a sufficient degree of profits lost by store A would be recaptured by store B. In this scenario, store C does not act as a strong enough constraint on the hypothetical monopolist and this breaks the chain of substitution.
10.5.6 Import and Trade Flows When assessing the scope for defining geographic markets to be wider than the UK, the CMA considers the extent to which customers would switch to imports in the event of a SSNIP on domestically supplied products. Evidence in favour of an international market would include: (1)
substantial trade flows of the product in question from abroad into the UK; UK-based customers purchasing directly from foreign based suppliers directly (as opposed to those suppliers selling through a UK warehouse or depot);
(2)
UK customers operating both in the UK and abroad and negotiating contracts so that the terms of supply are the same for an area that is wider than the UK (e.g., where customers procure on identical terms for the UK and Ireland);
(3)
increased purchasing by UK customers from abroad, or a reduction in the prices of UK-produced goods that are sold in the UK, in response to sustained exchange rate movements that make importing more attractive;
(4)
spare capacity held by foreign based suppliers targeting the UK;
(5)
a high product value in relation to transport costs (e.g., transport costs to the UK that are below 5% of the UK price so that a 5% domestic price rise would make imports far more attractive for any potential supplier based abroad); and
(6)
the absence of domestic regulations that restrict or make it more costly for foreign produced goods to make headway in the UK.
Sometimes imports arise from a diverse set of countries such that there is no ‘neat’ international market within which meaningful capacity shares can be considered. In this case, even if the market were not defined to be wider than the UK for the purposes of calculating market shares, the view might be taken (e.g., during the analysis of competitive effects) that imports act as a powerful constraint such that their share would
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grow substantially in the event of a SSNIP on domestically supplied products).129 In this sense, imports can be seen as analogous to one or more domestic rivals facing low barriers to expansion.
10.5.7 Regional Markets At Phase I, the Authorities have found various product markets to have (or at least potentially to have) a regional geographic scope. Below are some examples of the Authorities’ approaches to these cases, although a finding of a regional element to a geographic market is quite rare in the Authorities’ decisional practice.130 In these cases, the ‘regional’ aspect is nothing to do with any specific geographic regions per se but rather that the viable delivery area (or catchment) was sub-national but not so small as to be considered ‘local’.131 (1)
In Phoenix/EAP, Phoenix Healthcare Distribution (“Phoenix”) proposed acquiring East Anglian Pharmaceuticals (“EAP”), which had a single distribution depot in Norwich, East Anglia (Phoenix had 13 distribution depots nationwide, the closest of which was in Cambridge).132 The parties argued that the geographic market should be national because the sector was characterised by national players supplying national customers. However, the OFT noted that, whilst this was true for certain suppliers, others were operational only on a regional basis, including EAP. In addition, the OFT had received evidence from the parties’ competitors indicating that full-liners (i.e., pharmaceutical wholesalers that can supply all pharmaceutical products on a twice-daily basis) could only deliver an effective service to customers located within a drive-time of approximately two hours from their depots.133 The OFT found that as the distance from a full-liner’s depot increases the “gap” in time between the “cut-
129 See, e.g., Completed acquisitions by Celsa Steel Service (UK) Limited of the manufacturing and reinforcement divisions of: BRC Limited, Express Reinforcements Limited, and The ROM Group, OFT decision of 29 January 2009, paras. 15-23. 130 Note that the distinction between local and regional is often not entirely clear cut as the Authorities’ practice in cases involving ‘local’ overlaps is to consider the catchment area in which 80% of a party’s customers are based. In some cases, ‘local’ areas can become quite large and have clearly taken on a regional element even if this is not explicitly recognised in the Authorities’ decisional practice. See, e.g., Anticipated acquisition of W Corbett & Co (Galvanizing) Limited by Joseph Ash Limited, CMA decision of 25 June 2015 (where the CMA found the relevant catchment area to be 60 miles around Corbett’s plant in Telford). 131 ‘Regional’ here refers to areas that are sub-national. There have also been a number of cases where, for example, Scotland has been considered as a separate market. See, e.g., Anticipated acquisition by Lloyds TSB plc of HBOS plc, Report to the Secretary of State for Business Enterprise and Regulatory Reform, 24 October 2008; Breedon Aggregates and Aggregate Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014; and Completed acquisition by BCA Marketplace plc of SMA Vehicle Remarketing Limited, CMA decision of 17 November 2015. 132 Anticipated acquisition by Phoenix Healthcare Distribution Limited of East Anglian Pharmaceuticals Limited, OFT decision of 16 June 2005. 133 Ibid., para. 21.
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Market Definition
off” for orders and the delivery tends to increase, and that whilst this did not affect the morning drop-off, it made an afternoon drop-off less viable. On this basis, the OFT concluded that in addition to having national aspects, this market also had local and regional aspects.134 (2)
In Wienerberger/Baggeridge, the OFT considered the geographic scope of the brick market.135 The parties argued that the geographic scope was national on the basis that: (i) bricks are routinely collected and transported over significant distances and sold profitably; (ii) the number and spread of brick production plants is such that there is overlap with a competitor within 50 mile radii of each manufacturing plant; and (iii) price differentials were limited throughout Great Britain.136 However, the OFT found that:137 (i) there was evidence of regional variations in the choice of brick types; (ii) Wienerberger occasionally engaged in regional promotions; (iii) major customers would typically negotiate at a national level but would receive plant-specific prices, and occasionally regional prices, reflecting differing transportation costs; and (iv) third parties argued that transportation distances should be kept to a minimum due to costs, with transportation costs accounting for around 10-20% of the value of the delivered product. As a result of these considerations, the OFT concluded that there were valid arguments in favour of regional and national markets, and that it was appropriate to consider both in the context of the merger’s assessment.138
(3)
In Müller/Dairy Crest, the CMA assessed the geographic market for the supply of fresh liquid milk to middle ground customers (i.e., a diverse group covering purchasers that were neither national multiple customers nor consumers requiring doorstep delivery).139 The CMA noted that the delivery range differed by the type of customer supplied (some middle ground customers purchased on a national basis) and that the number of middle ground suppliers differed by region. The CMA therefore assessed this segment on a national basis and took into account regional aspects where relevant in the competitive assessment.140
134 Ibid., para. 25. The OFT reached a similar conclusion in Anticipated acquisition by Boots plc of Alliance UniChem plc, OFT decision of 6 February 2006 (para. 22). 135 Anticipated acquisition by Wienerberger Finance Service BV of Baggeridge Brick plc, OFT decision of 11 December 2006. In a previous decision, the OFT had considered the geographic scope of the brick market to be as wide as Great Britain (Completed acquisition by Hanson Building Products Ltd of Marshalls Clay Products Ltd, OFT decision of 2 March 2005). 136
Ibid., para. 27. Ibid., paras. 28 and 29. 138 See also a similar discussion in Completed acquisition by Stericycle International LLC of Sterile Technologies Group Limited, OFT decision of 28 June 2006. 139 Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015. 140 Ibid., paras. 135-6. 137
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10.5.8 Local Markets Under the Enterprise Act, the Authorities have considered a significant number of cases involving local markets, many of which have resulted in undertakings in lieu at Phase I or have resulted in an SLC finding following a Phase II investigation. The assessment of local markets is, therefore, of central importance to UK merger control under the Enterprise Act. An important preliminary question, before determining the physical dimensions of a local market in accordance with the HMT, is whether a merger should be assessed at a national, regional or local level. It may seem somewhat counterintuitive to consider whether a merger affecting local markets should also be assessed at a national level. However, the choice is not a binary one and not all mergers can (or should) be assessed at only one of these levels. Some mergers may have the potential to affect competition on multiple geographic levels,141 including, in particular, mergers involving retail goods and services markets, where there are national chains with numerous local retail outlets. Indeed, in some cases where the merger will clearly have a local effect, such as in mergers between entire national retail chains (as opposed to acquisitions of a number of retail stores), the CMA may not undertake an assessment of every single affected local area, instead assessing local overlaps on a more generic basis (as well as considering the national effects of the merger).142 (a) Mergers involving national chains of local stores. The Phase I approach under the Enterprise Act has been that the “strong starting assumption”143 for consumer goods and services markets is that, absent compelling evidence to the contrary,144 there will be material local competition across each relevant local area to attract and retain customers, even if not all parameters of competition are determined locally (i.e., the price, quality, range, and service of the parties’ offering or ‘PQRS’).145 The CMA will 141 See, e.g., HMV Group plc and Ottakar’s plc, Proposed acquisition of Ottakar’s plc by HMV Group plc through Waterstone’s Booksellers Ltd, 12 May 2006, para. 4.14, in which the CC concluded that the geographic market was no wider than the UK but that it should look separately at local, regional and national aspects of competition. See also, Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014, in which the CMA assessed the impact of the merger on a national and local level, finding SLCs at both a national level and in multiple local areas. The CMA also considered national and local aspects of competition in Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015. 142 See, e.g., Anticipated acquisition by HMV Group plc, through Waterstone’s Limited, of Ottakar’s plc, OFT decision of 6 December 2005; Completed acquisition by Game Group plc of Gamestation Limited, OFT decision of 9 August 2007; Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015 (where the CMA did not undertake an analysis in each local overlap area). 143 Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008, para. 38. 144 Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc, OFT decision of 1 May 2009, para. 35. 145 See, e.g., HRG/Focus, supra, para. 38 and Sports Direct/JJB Sports, supra, para. 35. See also Poundland/99p, supra, in which the CMA reiterated that, even in cases where it appears that essentially all aspects of PQRS are determined at a national level, the CMA will want to assess local competition. The CMA stated that “Even if, pre-merger, the Parties have a national policy for all aspects of their
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Market Definition
assess each competitive parameter separately to the extent possible. For certain sectors, competition may be weighted towards parameters being set on either a national, regional or local basis.146 However, the CMA does not take a binary approach to geographic market definition (i.e., either national or local/regional and certain parameters may be set at the national level (e.g., advertising and, possibly, price) whilst others may be set locally (e.g., service and/or quality), and, in practice, the CMA’s starting point will be that retail mergers of this type (i.e., national chains with local stores) will feature both national and local elements of competition.147 At Phase II, the decisional-practice does not set out any starting assumptions regarding the treatment of local markets and the CC’s general approach was to assess each merger on its specific facts. The Authorities will apply the HMT as the appropriate conceptual framework for considering the geographic market,148 but will also consider a range of additional evidence, where relevant, including customer survey evidence of shopping patterns and store catchment areas, customer diversion ratios,149 econometric analysis of entry,150 the views of the merging parties and third parties,151 and the impact of internet sales in the sector in question.152
retail offer, if a merger increases market power in some local areas, the CMA would consider whether the merged firm would have an incentive to change its policy in order to be able to flex some local variables in areas where they gain market power” (para. 53). 146
Ibid., supra, para. 38. See Pure Gym/The Gym, supra, Poundland/99p, supra, and Anticipated acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015, in which the CMA considered both local and national elements of competition. In relation to the OFT decisional practice, see HRG/Focus (DIY), supra, para. 127; Proposed joint venture between Alliance Boots Limited and Dolland & Aitchison Limited in relation to their respective optical businesses, OFT decision of 1 May 2009; Anticipated acquisition by Virgin Active Group Limited of Holmes Place Health Clubs Limited, OFT decision of 19 October 2006, paras. 15 to 31; Anticipated acquisition by HMV Group plc, through Waterstone’s Limited, of Ottakar’s plc, OFT decision of 6 December 2005; Anticipated merger between Co-operative Group (CWS) Limited and United Co-operatives Limited, OFT decision of 23 July 2007, in relation to the assessment of grocery retailing; Anticipated acquisition by Nationwide Building Society of the Derbyshire Building Society, OFT decision of 19 November 2008; Completed acquisition by WM Morrison Supermarkets plc of 30 stores from Co-operative Group Limited, OFT decision of 10 July 2009; Anticipated acquisition by Co-operative Group Limited of Somerfield Limited, OFT decision of 20 October 2008; Anticipated acquisition by Lloyds TSB plc of HBOS plc, Report to the Secretary of State for Business Enterprise and Regulatory Reform, 24 October 2008; and Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 26 October 2010. 148 See, e.g., Sports Direct International plc and JJB Sports plc, a report on the acquisition by Sports Direct International plc of 31 stores from JJB Sports plc, 16 March 2010, para. 6.49. 149 The CMA may conduct a customer survey at various store locations to ascertain where customers would have shopped if the current store were closed. From this evidence, the CMA should be able to determine the proportion of surveyed customers that would be prepared to travel various distances to reach an alternative store. 150 Such econometric analysis may assess the impact on the revenues of stores from the entry of a competing store. A reduction in revenues at the incumbent store indicates customer diversion as a 147
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(b) The CMA’s standard approach to local market definition where customer data are available. The standard approach at Phase I to determining the boundaries of local, geographic markets is to identify the smallest area within which 80% of sales have been generated by the merging parties.153 This may be determined from loyalty card or membership information,154 which identifies at which store a customer shops and indicates the customer’s home address.155 Where the product is delivered, a similar exercise can be conducted that identifies the smallest distance (or shortest drive time) within which 80% of a firm’s volumes are delivered (or within which 80% of the firm’s revenues are generated). Such information may be available from the merging parties’
result of entry. The CMA may then be able to compare the reduction in revenues as a result of entry at different distances from the incumbent store, which would provide an indication of how customers’ willingness to switch to competitors varies with distance. 151 Merging parties and third parties may often provide the CMA with their views on the scope of the relevant geographic market. Where available, the merging parties will usually provide the CMA with customer data from their customer databases or loyalty card information as well as internal documents. Third parties may provide anecdotal evidence or their opinions as to the size of the geographic market, but they may also provide the CMA with more “concrete” data, including internal documents or studies of purchasing behaviour they have conducted or commissioned. 152 Ibid., paras. 6.64 to 6.73. See also below. 153 See, Merger Assessment Guidelines, para. 5.2.25; Commentary on retail mergers, OFT1305/CC2 com 2, paras. 2.13-2.16. See also, Completed acquisition by Cooperative Group (CWS) Limited of Fairways Group UK Limited, OFT decision of 19 July 2006, para. 24; Completed acquisition by Pendragon plc of Reg Vardy plc, OFT decision of 4 August 2006, paras. 17 and 18; Anticipated acquisition by Virgin Active Group Limited of Holmes Place Health Clubs Limited, OFT decision of 19 October 2006, paras. 23 and 28; Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008, paras. 76, 80, 97, 100, 104, 110, and 113; Anticipated acquisition by Nationwide Building Society of the Derbyshire Building Society, OFT decision of 19 November 2008, paras. 19 and 21; Completed acquisition by Inchcape plc of European Motor Holdings plc, OFT decision of 26 March 2007, paras. 19, 27 and 33; Anticipated merger between Co-operative Group (CWS) Limited and United Co-operatives Limited, OFT decision of 23 July 2007, para. 48; Completed acquisition by Lodge Brothers Funerals Ltd of two funeral homes in the London Borough of Hillingdon, OFT decision of 26 November 2009, para. 11; Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 26 October 2010, para. 40; Anticipated acquisition by Joseph Ash Limited of W. Corbett & Co (Galvanising) Limited, CMA decision of 25 June 2015, paras. 44-45; Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 57; Celesio/Sainsbury’s, supra, para. 49. 154 See, e.g., Anticipated acquisition by Virgin Active Group Limited of Holmes Place Health Clubs Limited, OFT decision of 19 October 2009, in which the OFT was provided with membership data to determine where 80% of its members lived; Alliance Boots/Dolland & Aitchison, supra, in which Boots and D&A provided “internal data” to the OFT; Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008, where the OFT received information based on Homebase’s ‘Spend & Save’ loyalty card. 155 Such information cannot always be entirely accurate as not all members/customers will necessarily have provided their home address details and they may not necessarily travel from their home to the store/facility in question (e.g., they may travel from work).
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Market Definition
transaction data.156 The OFT may sensitivity test the results by employing a different percentage (e.g., 70% instead of 80%). There are some exceptions to this general approach and the 80% catchment area will not be suitable in relation to all sectors or transactions. The CMA does not apply this approach rigidly and, in certain cases, may decide to use an area that represents a smaller percentage of total sales (which may be a smaller isochrone depending on the location of customers), where there is evidence to suggest that a deviation is warranted or if a small percentage of total sales is in line with the merging parties’ internal documents and represents a more conservative approach than the CMA’s.157 It is worth noting that following a SSNIP, customers may be willing to travel further (and suppliers may be willing to deliver greater distances) and so the above catchment area approach tends to understate the size of a market that would be defined according to the HMT, as the CMA notes.158 That said, in practice the CMA commonly adopts the 80% ‘rule of thumb’ for estimating catchment areas.
156
See, e.g., Completed acquisition by Aggregate Industries Limited of Foster Yeoman Limited, OFT decision of 20 November 2006, paras. 44-49; Completed acquisition by Aggregate Industries UK Limited of Atlantic Aggregates Limited and of Stone Haul Limited, OFT decision of 2 March 2009, paras. 27 to 31. 157 Anticipated acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015 (where the parties did not have the necessary information on customer locations and the information that they did hold was not based on the value of customer’s spend. The parties therefore submitted catchment area information based on the area from which 60% of customers travel. The CMA also calculated its own catchment areas based on the drive time that captured 80% of diverting customers, based on the consumer survey); Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014 (where the CMA noted that “customers will not always visit the gym local to their home address, but may choose to visit a gym near to where they work. Therefore, an average 80% catchment area based on customers’ home addresses may be too wide, given that some of the gym’s customers may not choose between gyms near their homes but between those near their workplace”, para. 49); Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT decision of 11 May 2012 (where the OFT adopted a narrower frame of reference than the 80% catchment area on the basis that a customer survey indicated a 10 mile catchment compared to the 22.5 mile 80% catchment of Electric Center; Breedon Aggregates and Aggregate Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014 (where the CMA increased the 80% catchment by 50% for the purpose of filtering out sites where the transaction would not lead to concern; Alliance Boots/Dolland & Aitchison, supra, para. 37, where the parties provided data on the basis of an area in which 65-75% of its customers lived as this was the way in which they carried out, in the ordinary course of business, their own internal assessments in relation to opening new outlets. However, the OFT stressed that it had not altered its standard approach and the use of the 65-75% isochrone was actually more conservative than the OFT’s standard approach. 158 Merger Assessment Guidelines, para. 5.2.25.
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Once the parties have undertaken this data-gathering exercise and have produced maps,159 they should be able to provide the CMA with maps for each overlapping area, which will either show one isochrone (or radial)160, centred on one of the merging parties (usually the target)161 or it will show two isochrones,162 one centred on each of the merging parties.163 (In some cases isochrones drawn around a demand-centre will also be required – see below.) These isochrones will often be presented as a ring around the relevant store and will highlight the location of the merging parties and the customers within each isochrone. With these maps, and the underlying data in a disaggregated format to allow the CMA to verify and sensitivity test the isochrones), the CMA will be able to see: (i) the distance travelled by 80% of customers; (ii) the area from which the customer-base is derived; and (iii) the location of the merging parties and their competitors relative to this customer-base. The CMA may also consider demand-centred approaches. That is to say, isochrones drawn around key sources of demand for a particular product, to ensure that customers located at those demand centres have sufficient choice post-merger. Where customers are not likely to travel further than a certain distance (or for longer than a certain amount of time), the question sometimes arises as to whether the catchment areas should be defined around a store or around a population centre (i.e., a heavily populated area). In the former case (around the store), potential customers of the store in question are identified (i.e., Store X’s catchment area is identified). In the latter case, the choices available to a group of potential Store X customers living in a Store X’s catchment area are identified. These approaches can also be combined. For example, suppose that consumers travel no more than 10 minutes to reach a particular store. A 10 minute isochrone around Store X might then be considered to assess the number and strength of rival stores within Store X’s catchment area. Within that area, key sources of potential demand (e.g., densely populated areas) can also be identified and then it is possible to consider 10 minute isochrones around each of these population centres to assess whether most
159 The CMA is not in a position to undertake this process itself and merging parties will typically be encouraged to provide this information to the CMA. 160 An isochrone captures drive-time (or walking-time) distances, e.g., a 10 minute isochrone drawn around a store identifies an area within which any customer would be within 10 minutes’ drive of the store. A radial (or isodistance) of 10 miles refers to a circle centred on a store such that any customer within the circle is within 10 miles of the store “as the crow flies”. 161 See, e.g., HRG/Focus (DIY), supra, para. 15 April 2008, para. 67, where the OFT stated that the OFT applied various isochrone filters all centred on the target Focus store and CGL/Fairways, supra, paras. 40 to 48 where the OFT specified that the isochrone analysis was centred on the acquired Fairways businesses. In Joseph Ash/Corbett, supra, the 80% catchment area was centred on Corbett’s galvanising plant in Telford. 162 See, e.g., Anticipated acquisition by Nationwide Building Society of the Derbyshire Building Society, OFT decision of 19 November 2008, para. 13 and Anticipated acquisition by Nationwide Building Society of Cheshire Building Society, OFT decision of 19 November 2008, para. 13. 163 The information provided to the CMA will often be dependent on the information that is available to merging parties.
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Market Definition
potential users of Store X have sufficient alternative stores within 10 minutes of where they live. This approach is standard in grocery mergers (see Chapter 11). (c) The Phase I approach where customer data are not available. In circumstances where customer data are not available, or have not been provided to the CMA, the CMA will be unable to calculate, for each location, the isochrone within which 80% of an outlet’s revenues are generated. In such cases, the CMA can either rely on its previous decisions in the sector (where such decisions exist) or it can apply some initial filters in an attempt to reduce the number of locations that require further assessment. The following cases are illustrative of the Authorities’ approach. (1)
In Sports Direct/JJB Sport, the OFT was not provided with information regarding the distances travelled by customers to the parties’ retail outlets. As a result, the OFT undertook its own screening exercise by, first, filtering out those locations where the nearest remaining JJB store was substantially closer to the JJB outlet being acquired than the nearest Sports Direct store. On this basis, the OFT considered that competition would not be substantially lessened whatever the geographic market.164 This enabled the OFT to exclude 11 locations from its analysis. Secondly, the OFT determined that, given the distance between the acquired store and existing Sports Direct stores, and given the presence of other JJB stores in the area, there would either be no loss of competition or any loss would be marginal.165 Thirdly, in an additional six locations, the OFT considered that, given the distance between the acquired stores and the nearest Sports Direct store, the parties would not have exerted a significant constraint on each other.166
(2)
In The Original Bowling Company/Bowlplex, the CMA calculated isochrones on the basis of where 80% of the parties’ customers lived where it had the data to do so.167 Where this data was not available, the CMA used an average drive-time isochrone of 25 minutes based on the drive-times of the isochrones for which it had data and expanded these isochorones up to 40 minutes as a sensitivity check.
(3)
In Iron Mountain/Recall, the CMA was unable to calculate 80% catchment areas on the basis of the information provided by the parties.168 As a result, the
164 Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc, OFT decision of 1 May 2009, para. 48. 165 Ibid., para. 49. 166 Ibid., para. 50. Following this merger’s reference, the CC commissioned a customer survey, which calculated a customer’s average journey time to a Sports Direct store to be 17.3 minutes, with 62% of customers travelling for less than 15 minutes. 167
Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 58. 168 Anticipated acquisition by Iron Mountain Incorporated of Recall Holdings Limited, CMA decision of 30 December 2015.
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CMA applied catchment areas of 50 miles (based on feedback from customers) and Recall’s estimate of its 80% catchment areas.169
10.6
OTHER ISSUES IN PRODUCT MARKET DEFINITION
This section discusses a range of other issues that sometimes arise in a merger context in relation to market definition. These include: (i) the appropriate price level at which a SSNIP should be applied; (ii) indirect constraints; (iii) product bundles; (iv) two-sided markets; (v) asymmetric constraints; (vi) the concept of a “chain of substitution”; and (vii) situations where life-cycle effects are important due to product innovation.
10.6.1 Competitive Versus Prevailing Level SSNIP Tests An important (theoretical) issue is to establish the benchmark from which the hypothetical monopolist increases its price. This benchmark should be established by the counterfactual. In relation to horizontal mergers, the counterfactual price (i.e., the price that would be in place absent the merger) is usually the prevailing price level. The issue in these cases is, therefore, whether the merger would lead to higher prices relative to current price levels. So even if there is pre-existing market power which leads to the current price level being above the competitive level, that is taken as a given in the context of the HMT. The CMA’s remit is not to restore competitive levels but to ensure that (quality adjusted) price levels are not increased by the merger relative to the level that otherwise would have prevailed. In some cases, it is important to assess whether a party to the merger already has market power. This issue arises with: (i) non-horizontal mergers (where market power must already be present before harmful effects from a merger are a realistic prospect); (ii) horizontal mergers that might strengthen pre-existing coordination;170 or (iii) a merger with a potential entrant, which, on entry, might undermine pre-existing market power.171 In these cases, the correct benchmark for the application of the HMT is the competitive price level. This is a largely theoretical point. In practice, if it were easy to identify the competitive price level then it would be possible to simply compare current price levels with the competitive level and come to a view on market power. This is discussed in more detail below. In respect of mergers involving at least one party that already exercises market power, a SSNIP algorithm based on prevailing levels may be conceptually flawed as a way of identifying market power. To illustrate this point, consider the following hypothesis: 169 Customers indicated that a supplier’s maximum distance from its facility was important in order to meet optimal retrieval times, which were estimated to be approximately 50 miles for a two hour retrieval and possibly longer. 170 If the alleged coordinating group does not collectively have market power, then there is no preexisting coordination. 171 Where the merger is with a potential entrant, it may prevent pre-existing market power being eroded by the entrant. In this case, it is helpful to identify whether the incumbent firm has market power – if not, the new entrant could not have eroded its market power and so the merger is not likely to be problematic.
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Market Definition
firm X does not have market power because if it were to increase prices, consumers would switch to a wide range of substitute goods rendering that price rise unprofitable. The concern here is that any profit-maximising firm should have reached a situation where further prices rises are not profitable – even a monopolist would not increase prices beyond a certain point. This issue has been dubbed the “cellophane fallacy”,172 and the intuition behind this issue is explained by the following example. Suppose that Mr Gastro owns all restaurants in a medium-sized town. One week, Mr Gastro increases prices by 5-10% in all of his outlets and notices that his demand falls substantially due primarily to consumers eating out in a neighbouring town, 10 miles away. Mr Gastro therefore decides to change prices back to their original level. Should it be inferred from this that Mr Gastro cannot exercise monopoly power? The evidence on switching tells us that, at current prices, Mr Gastro is constrained by restaurants in the nearby town. Thus there is a plausible candidate geographic market that includes both towns. However, as the owner of all restaurants in the medium-sized town, it may well be that Mr Gastro’s prices are already considerably above competitive levels and hence that Mr Gastro can exercise substantial market power. In the latter case, the narrowest relevant geographic market (defined for the purpose of assessing pre-existing market power) is no wider than the medium-sized town. Note that the cellophane fallacy does not rule out the relevance of the concept of a candidate market. First, even if the switching evidence is not probative, we might consider the medium-sized town as a plausible candidate market and then ask the question whether substantial new entry to that market would be feasible within a short period of time. If so, it might be concluded that Mr Gastro has no market power. Secondly, we might consider evidence on the extent to which Mr Gastro’s “normal” price level exceeds competitive levels. For example, we can assume that relevant geographic markets are local (e.g., no wider than a single town). Given this assumption, Mr Gastro is a monopolist and so we should observe Mr Gastro to have set higher prices in his restaurants compared to other comparable restaurants in towns where greater competition exists (and controlling for other influences on price).173 If Mr Gastro’s
172
This is based on the U.S. case U.S. v EI Du Pont de Nemours & Co, [1956] 351 U.S. 377, where the U.S. Supreme Court concluded that cellophane was part of a wider market for “flexible packaging material”, in which Du Pont (the largest cellophane producer) had around a 20% share. However, most commentators reviewing the evidence considered by the Supreme Court would probably come to the view that cellophane prices were not materially constrained by the prices of other flexible packaging materials and that Du Pont, with its 75% share of cellophane sales, most probably had market power in a relevant market for sales of cellophane. In short, by defining the market too widely, inappropriate inferences on Du Pont’s market power were drawn from its apparently low market share. 173 The benchmark restaurants would ideally be similar in quality and facing similar demand and cost conditions to those owned by Mr Gastro. For example, suppose that: (i) there are many other medium-sized towns in the country; (ii) within each of the other towns there are many competing restaurants of similar quality to those owned by Mr Gastro; and (iii) the cost of inputs (e.g., food, staff, energy consumption, rent) does not differ materially across the country. In this case, prices in other restaurants may be good benchmarks against which to compare Mr Gastro’s prices. Note that even if cost and demand conditions differ across the country, econometric techniques may allow us to “control”
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prices are not substantially higher than those in benchmark restaurants this, in itself, is consistent with Mr Gastro not having exercised market power (and therefore being subject to effective competitive constraints). Further, it allows us to place greater weight on the switching evidence for the purpose of market definition.174
10.6.2 Indirect Demand-Side Constraints In some cases, upstream firms sell inputs that are not substitutable for technical reasons, even though the downstream firms may use the input for a similar purpose. This gives rise to the question as to whether the upstream market should be defined on the basis of the technology (because switching between competing technologies is, in the short term, too costly) or whether there is a case for a wider market to encompass competing technologies (e.g., because a lower wholesale price for one technology impacts on sales of the other technology indirectly, via downstream firms). Consider the example illustrated in the figure below. Wholesaler A provides services to retailers R1, R2 and R3. In turn, these retail service providers supply final consumers. Wholesaler B delivers services to the same end-user market via a different retailer, R4, using a distinct technology that cannot be used by retailers R1, R2 and R3. On the one hand, wholesaler A is a monopolist over retailers R1, R2 and R3 because the latter have no alternative provider. On the other hand, if wholesaler A attempts to increase its price, and if those prices are passed on by its retailers, there could be substantial switching to R4 (generating sales for wholesaler B). Likewise, if wholesaler B lowers its price, and if R4 passes on this lower price to final consumers, retailers R1, R2 and R3 may lose share and thus wholesaler A’s volumes might fall. Therefore, even though wholesalers are not competing directly for the same customers, they compete indirectly because: (i) ultimately, they are trying to reach the same end-consumers via their retailers and (ii) as such, if one lowers its wholesale price, the other loses volumes (as would happen if wholesalers were competing directly).
for these differences so that we can still make a sensible comparison between Mr Gastro’s prices and those charged in other restaurants which face more competition. 174 In Sportech plc and the Vernons football pools business of Ladbrokes plc, a report on the anticipated acquisition by Sportech plc of the Vernons football pools business from Ladbrokes plc, 11 October 2007, the CC mentions both the cellophane fallacy and the so-called “reverse cellophane fallacy” (respectively, at footnote 21 and footnote 52). The CC described the latter to be the case where a firm prices below the competitive level such that its consumers are less price-sensitive than they would be at the competitive price level; evidence would understate switching and may lead to an overly narrow market being defined.
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Market Definition
Wholesaler A
R1
R2
Wholesaler B
R3
R4
Final Consumers
In Nufarm/AH Marks, the OFT explained its approach to the role of indirect constraints in market definition in the following terms: “The OFT considers that for the purposes of assessing the market for the supply of MCPA and 2,4-D [inputs into products for post-emergence control of broad leaf weeds] in the UK, it is entirely correct to consider the strength of indirect downstream constraints. Conceptually, this could be done at either the market definition stage or at the market power assessment stage (under the 'Unilateral Effects' section). In the former case the defined market may include products that are not directly substitutable at the upstream level. In the latter case market power may be constrained in practice by products outside of the defined market. Therefore, in principle it should not matter to the overall market assessment which of these approaches is taken, provided the presence of indirect constraints is correctly reflected in the analysis. However, in practice, and in line with case precedent, the OFT considers that it is generally preferable to include sources of indirect constraints at the market definition stage.”175
In order to assess whether or not indirect constraints would widen the relevant upstream market, the OFT employed a version of the critical loss test along the following lines.176 For this test, it is necessary to identify the following: (1)
175
expenditure on wholesaler B’s product as a percentage of R4’s downstream marginal costs;177
Completed acquisition by Nufarm Limited of AH Marks Holdings Limited, OFT decision of 29 August 2008, para. 16. 176 The presentation here is slightly different to that set out by the OFT. The OFT considered the input price as a percentage of the price set by the downstream firm. Here, we have considered the input price as a percentage of the marginal cost of the downstream firm. Thus our pass-through measure (a pass-through elasticity) relates the impact of a percentage change in marginal cost to the percentage change in the selling price. 177 If the upstream input does not account for a substantial share of the downstream price, this may make it less likely that the relevant market is widened to account for indirect constraints. Intuitively, if the share is small, an increase in the wholesale price is less likely to generate a large impact on
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(2)
the percentage pass-through (i.e., the percentage increase in R4’s price that is caused by a 1% increase in R4’s marginal cost – this is also called a passthrough elasticity178);
(3)
the own-price elasticity of demand faced by R4 (i.e., the percentage of volumes that R4 would lose in the event that it increased price by 1%); and
(4)
the volume of inputs used per unit sold of the final product.179
Suppose that the preceding values are, respectively 50%, 80% and 4 and 1. This means that if there is a 5% increase in the input price set by wholesaler B, R4’s marginal cost increases by 2.5% (i.e., 50% of 5%). In turn, this would induce R4 to increase its selling price by 2% (i.e., 80% of 2.5%) and so R4 would lose 8% of its volume (2% multiplied by 4). Given that an 8% reduction in R4’s volume translates into an 8% reduction in wholesaler B’s volumes sold (because one unit of B’s input is used in one unit of R4’s output), we can then apply the critical loss test. In this example, a 5% price rise leads to an 8% fall in volumes and so will be profitable unless wholesaler B’s gross margin is above 57.5%.180
downstream prices and thus is less likely to lead to lost sales (other things being equal). More generally, the Authorities state: “The Authorities may consider widening the relevant product market, to include products that are not directly substitutable because of indirect competition. This can happen, for example, when the merger firms make inputs used in different production processes to make the same output. If the merged firm imposed a SSNIP on one of the inputs, it may make the associated technology more expensive, leading to higher sales by suppliers that use the competing technology, and greater demand for the inputs made by the other merger firm. In practice, the extent to which indirect switching constitutes an important factor when defining the relevant product market depends on: (i) how competitively the final product is supplied; (ii) how competitively the input is supplied; (iii) how competitively other, complementary inputs are supplied; and (iv) what proportion of the total cost of the output is accounted for by the input.” See Merger Assessment Guidelines, para. 5.2.20. 178 For a detailed discussion of cost pass-through, see Cost pass-through: theory, measurement, and potential policy implications, A Report prepared for the Office of Fair Trading RBB Economics, February 2014. 179 Theory indicates that these percentages should all be related. This is in particular important when we assess input foreclosure with vertical mergers. 180 See, e.g., Completed acquisition by British Sky Broadcasting Group plc of TV channel business of Virgin Media Television, OFT decision of 14 September 2010, at para 36: “The comparability of viewing shares and the offering of pay TV and FTA channels suggest that the channels do compete strongly for viewers. The OFT is mindful that where concerns regard the wholesale supply of pay TV channels as an input for pay TV retailers, that FTA channels cannot be considered directly substitutable in this respect. The OFT considers that some weight should be given, however, to the constraint from FTA. This is because a wholesale pay TV channel's carriage price will be in large part determined by its ability to attract viewers and subscribers. To the extent that there is significant competition for viewers, therefore, wholesale pay TV channels are constrained in their ability to attract a significant share of viewers and increase their value to pay TV retailers.”
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Market Definition
In some cases, market definition with intellectual property (IP) can be understood in terms of the principles discussed above. For example, if the IP is an input to a downstream product, then, even if there is no direct substitute for the IP in question, it may still be subject to strong indirect constraints from competing systems which provide the same end functionality for end customers but using alternative IP.
10.6.3 Product Bundles Market definition seeks to identify substitutable products from a demand-side perspective. In some cases, however, groups of non-substitutable products are treated as a single product because it makes sense to view customers as purchasing a bundle of products at the same time (or as part of the same contract). In this case, firms may compete to offer customers a product bundle. Examples are considered below in relation to aftermarkets, one-stop shopping and other scenarios. (a) Aftermarkets. Aftermarkets relate to products (sometimes called “secondary” products) that are purchased as a result of having first purchased a “primary” product. For example, a consumer would generally buy printer cartridges only after having first purchased a printer. In this case, secondary products are complementary (as opposed to substitutable) for the primary product.181 However, where consumers usually purchase the secondary good when they purchase the primary good, and from the same supplier, the two goods may be viewed as a single product or ‘system’.182 It is important to consider the implications of interdependent demands between primary and secondary goods. If customers wish to calculate the ‘whole-life cost’ (i.e., estimate the lifetime cost of using the primary product and any secondary goods associated with it), then, even if they do not purchase the primary and secondary goods together, their choice of primary good may be heavily influenced by the cost of the complementary products that they expect to purchase at some later date. This is more likely to be the case where customers are well informed about likely future purchases of complementary products (and where manufacturers do not price discriminate between informed and uninformed (or captive) purchasers).183 In this case, when assessing the profitability of price rises in a candidate market for secondary products, it must be considered whether this would deter purchases of the primary product, which in turn may lead customers to switch to rival primary products and their associated complementary products.184 Likewise, when 181
Where products A and B are complementary, a lower price for A leads to greater demand for B (as customers buy more of A, which also increases their demand for B). Where A and B are substitutes, a lower price of A leads to lower demand for B (because customers switch from B to A). 182
Merger Assessment Guidelines, para. 5.2.20. Customers may be well informed because they are repeat purchasers or because they have engaged in research on likely expenditure on secondary products (e.g., as may be the case where a large part of total expenditure on the overall system is spent on the secondary product(s), as opposed to the primary product itself). 184 Suppose, for example, that printer cartridges can be used only with printers made by the same manufacturer. Thus, having purchased a printer made by a hypothetical manufacturer, PrinterCo, consumers may only have one source of supply for the printer cartridge. However, a 5% increase in the price of PrinterCo’s cartridges may induce customers to switch to rival printers and the printer 183
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considering the profitability of price increases in the primary product, we should take into account the possibility that the hypothetical monopolist would lose not only volumes of the primary good but also associated follow-on sales of secondary products. Where there are several suppliers of the primary product (A) and the secondary product (B), and (nearly) all A and B products are compatible with each other, it is normal to consider separate markets for A products and B products (“dual markets”).185 For example, printers are complementary goods for personal computers. Since most brands of printers are compatible with most brands of personal computer, we would typically consider a relevant market for printers to be separate from that for personal computers. Where the secondary good is not compatible with primary goods made by other suppliers, then an AB system market is more likely to be adopted if customers wholelife cost and if A and B are purchased in fixed proportions (e.g., if one unit of product A is always used with one unit of product B, such that the two products can be thought of as a single “AB system”). In the event that suppliers sell B products that are compatible only with their own A products, and customers do not whole-life cost, then brandspecific aftermarkets are more likely.186 Whatever the ultimate market definition adopted, the analysis of competitive effects should take into account the extent to which complementarities between the two products impact on pricing incentives postmerger.187 (b) ‘One-stop’ purchasing. In some cases, firms compete to offer customers a range of non-substitutable products that, for the sake of convenience, are typically purchased together (sometimes called ‘cluster’ markets). For example, when analysing grocery mergers, supermarkets with a sufficient floor space devoted to groceries might be viewed as competing to offer consumers the opportunity to make a “one-stop shop” or a “weekly shop”.188 The relevant product is therefore defined to be the full range of
cartridges associated with those printers. This is more likely where expenditure on printer cartridges accounts for a large share of the consumer’s total cost of the ‘printer plus printer cartridge system’. As in the discussion of customer markets, we must also take into account the extent to which a hypothetical monopolist is able to price discriminate between customers (e.g., charging substantially higher prices to customers that have already purchased the primary good compared to those with the choice of which primary good to purchase). 185 Merger Assessment Guidelines, para. 5.2.20. 186 In this case, effective competition for the primary product can induce the primary good to be priced very aggressively so as to induce consumers to purchase the secondary product (on which the manufacturer may earn a substantially higher margin). Such “refunding” of secondary market profit in the primary market may mean that manufacturers do not earn excessive profits, despite earning high margins on secondary products. For this reason it may be argued that very high shares in after markets need not be evidence of substantial market power. 187
If one of the merging parties focuses primarily on the A type product and the other principally on the B type product then the merger may provide an incentive to lower price because each party will take into account that raising the price harms sales of the complementary product sold by the other party. 188 See, e.g., Somerfield plc/Wm Morrison Supermarkets plc, a report on the acquisition by Somerfield plc of 115 stores from Wm Morrison Supermarkets plc, 2 September 2005, where,
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Market Definition
products in the store as opposed to there being a separate market for each individual product. (c) Other examples. In retail mergers, where the merging parties offer a large number of similar products, it is common for the CMA to define the market to be the retail offer (as opposed to defining individual markets for the retailing of each individual product) or at least a given retail category. This can be justified where the conditions of competition are likely to be similar for each product or where, to have a credible offer, a certain range of products must be supplied, which is easy to flex on the supply-side.189 In Sports Direct/JJB, the CC dismissed the possibility of considering individual products as both parties stocked many thousands of products.190 Its survey (and analysis of entry events) suggested that the parties were closest competitors at a local level. The survey indicated low diversion to specialist stores. The CMA ultimately concluded that the relevant market was for just the two merging parties; that constraints outside the market should be taken into account due to many retailers with overlapping offers to some degree; and that certain products should be assessed on a product-by-product basis due to their specific uses (golf clubs and football boots were mentioned as examples).191 In Edmundson Electrical/Electric Center, the OFT defined the relevant market to be the wholesaling of electrical products (as opposed to individual electrical products), stating: “Electrical products are generally complementary rather than substitutable in use… It seems likely, therefore that the ‘hypothetical monopolist test’ would show different electrical products to constitute different product markets, because customers would not respond to a price rise for a specific product (for example cable) by switching to another product (for example switchgear) to such an extent that a price increase by the hypothetical monopolist would not be profitable. Therefore, from a demand side perspective, separate markets for each individual electrical product could exist. Notwithstanding the above, in this case there are a number of reasons why it may not be considered appropriate to define markets with reference to individual product types, including that: a) customers will often purchase a bundle of products in a single transaction, so products will be in joint demand b) electrical wholesalers typically stock a similar range of products to meet their customers’ requirements c) electrical wholesalers’ products are often homogeneous, although there is some brand differentiation; and d) the OFT’s market investigation has not
depending on store size, the CC distinguished between secondary (e.g., top-up or convenience) shopping and one-stop shopping. 189 On supply-side substitution see Anticipated acquisition by Tesco Holdings plc of Dobbies Garden Centres plc, OFT decision of 3 August 2007, paras. 6-7. 190 Sports Direct International plc and JJB Sports plc, a report on the acquisition by Sports Direct International plc of 31 stores from JJB Sports plc, 16 March 2010, para. 6.8 et seq. 191 Ibid., paras. 6.46-6.48.
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indicated that there is a key product in the market which drives searching or switching behaviour.”192
10.6.4 Two-Sided Markets A two-sided market is characterised by three features: (i) two separate groups or ‘sides’; (ii) an intermediary (or platform) that facilitates exchange between the two sides; and (iii) cross group externalities (e.g., where the value of a customer joining one side depends substantially on the number of members on the other side).193 An example of a two-sided market is a free newspaper. The free newspaper is the platform. It seeks to build readers on one side (by giving the newspaper away for free), so as to be able to sell access to those consumers to advertisers. The price on the “readership side” is so low (in this case, zero) only because that enhances the ability of the newspaper to generate profits from selling advertising space (the “advertiser side”). If we considered the readership side alone, a small increase in price from zero to, say, £0.05 would be profitable even if the number of readers fell from 1 million to just one paying reader. But that would fail to consider the fact that if only one reader purchased the newspaper, there would be no scope to generate advertising revenues and so the price rise would not be profitable due to lost advertising revenues.194 For these reasons, the Merger Assessment Guidelines state that, in two-sided markets, it may be difficult to conduct an HMT as: (i) there is no single price to both sets of customers to which a SSNIP could be applied; (ii) the effect of the SSNIP on the demand of one set of customers may be exacerbated by indirect network effects; and (iii) competitive constraints may come not only from other suppliers of two-sided platforms, but also from “one-sided” firms serving only one set of customers.195 In StepStone/Evenbase, the CMA explained that substitutability among suppliers of generalist job boards could be affected by both sides of the market.196 The CMA highlighted that the recruiter and the candidate sides of the market are linked by an indirect network effect. Specifically, a job board is more attractive to a recruiter if it has a large pool of suitable candidates, since the recruiter will be able to reach a larger pool 192 Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT decision of 11 May 2012, see paras. 21-23. 193 See, e.g., Completed acquisition by Global Radio UK Ltd of GCap Media plc, OFT decision of 8 August 2008; Anticipated merger between Ticketmaster Entertainment Inc and Live Nation Inc, OFT decision of 11 June 2009; Ticketmaster and Live Nation, A report on the completed merger between Ticketmaster Entertainment, Inc and Live Nation, Inc, 7 May 2010; Anticipated acquisition by Deutsche Börse AG of the London Stock Exchange plc, OFT decision of 29 March 2005. 194 In Completed acquisition by Didix International B.V. of Taste Marketing Limited, CMA decision of 28 January 2015, paras. 28-31, the CMA assessed the provision of subscription-based memberships for discounted restaurant dining to consumers in the UK. The CMA was mindful of the feedback effects (i.e., fewer subscribers would make accepting the cards less attractive to restaurants) but focused on the subscriber side, since this side was the paying side. The CMA noted that (one-sided) out of market constraints (e.g., discounts available directly from the restaurant) were important. 195 Merger Assessment Guidelines, para. 5.2.20. 196 Anticipated acquisition by StepStone UK Holding Limited of Evenbase Recruitment Limited, CMA decision of 8 September 2014.
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Market Definition
of candidates for a certain price. Similarly, a job board may also be more attractive to a candidate the more jobs are advertised on it. In essence, the number of members on one side can be thought of as a measure of quality to the other side. The CMA noted that the extent to which users on either side of online candidate sourcing multi-home (that is, join other job boards) may affect the degree of substitutability between different jobsites. The CMA considered that if two job boards attracted the same set of candidates, they would be more substitutable from the perspective of a recruiter and so closer competitors. On the other hand, if two job boards attracted different sets of candidates, recruiters who wanted to use both job boards may find them less substitutable. The CMA also assessed whether the merger would create a large group of unique (non-multihoming) candidates such that post-merger market power may arise.197 In Ticketmaster/Seatwave, the CMA assessed a merger between providers of websites consisting of online exchange platforms on which consumers and professional resellers can resell tickets (‘secondary tickets) that have initially been bought from venues, promoters or ticket agents for all types of live entertainment events (e.g., music, theatre, comedy and sports) in the UK.198 The CMA noted that secondary ticket sellers are attracted to platforms with more buyers and vice versa (an indirect network effect). The CMA also assessed both the buying and selling side together on the basis that individuals that bought tickets often sold them and vice versa. Ultimately the CMA assessed the impact of the Merger in the supply of online exchange platforms for selling and buying secondary tickets for all types of live entertainment events. The CMA took competitive constraints from outside this frame of reference into account in its competitive assessment.199
10.6.5 Asymmetric Constraints If product A constrains product B by substantially more than B constrains A, then there is said to be an ‘asymmetric constraint’.200 In particular, this may be the case in differentiated product markets. Products do not need to exert the same (or similar) constraint on each other to be part of the same product market. Conversely, just because two products are in the same market does not mean that they constrain each other to the same degree. As noted by the Merger Assessment Guidelines, a particularly good example of this phenomenon is provided by grocery retailing. In grocery markets, the Authorities have found that there are three types of stores determined by size; convenience stores (less than 280 sq metres), mid-size stores (280 to 1,400 sq metres), and one-stop stores (more
197
Ibid., para. 39-42. Completed acquisition by Ticketmaster Europe Holdco Limited of Seatwave, CMA decision of 26 March 2015. 198
199 200
Ibid., paras. 26-45. Merger Assessment Guidelines, para. 5.2.20.
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than 1,400 sq metres).201 One-stop stores are considered to be their own product market and are not constrained by mid-sized stores or convenience stores. Mid-sized stores are considered to be constrained by one-stop shops and other mid-sized stores. Convenience stores are considered to be constrained by one-stop shops, mid-sized stores and other convenience stores. Two leading examples of cases involving asymmetric constraints are AG Barr/Britvic and Asda/Netto.202 (1)
In AG Barr/Britvic, the OFT and the CC found that AG Barr’s IRN BRU drink was unlikely to be a material constraint on Pepsi and other drinks distributed by Britvic, such as Tango and 7Up.203 However, the OFT was concerned at Phase I, based on its interpretation of the parties’ survey evidence, that Britvic distributed brands might constrain IRN BRU.204 The CC ultimately found, inter alia, based on econometric demand modelling, that Britvic brands were not an important constraint on IRN BRU.
(2)
In Asda/Netto, the OFT’s focus was on the constraint that a large grocery retailer such as Asda imposed on a limited assorted discounter (“LAD”) like Netto.205 In this case, the OFT found that whilst Asda constrained Netto, Netto did not constrain Asda to any material extent.206 The evidence on which the OFT relied in this regard was principally expenditure weighted diversion ratio data, although there was other evidence which suggested that there were asymmetric constraints between the parties. On this basis, the OFT included Asda, all other large grocery multiples, other LADs, regional multiples and “symbol” groups in the competitive set. It should be noted that although the OFT found that Netto did not constrain Asda to any material extent, the fact that consumers switch between the two types of store might mean that if there were many nearby small stores, collectively they may constrain a single larger store.
201 See, e.g., Anticipated acquisition by Co-operative Group Limited of Somerfield Limited, OFT decision of 20 October 2008, paras. 10; Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 23 September 2010, para. 14. 202 See also Heinz/HP where the OFT found little evidence of HP brown sauces constraining Heinz but documentary and switching evidence that Heinz constrained HP, leading the OFT to conclude that the merger gave rise to a realistic prospect that the merged firm would be able to profitably raise the price of brown sauce post-merger. 203 Anticipated acquisition by A.G. Barr plc of Britvic plc, OFT decision of 13 February 2013. 204 The OFT rebased diversion ratios to exclude diversion to the outside good and diversion to brands within the AG Barr portfolio. The parties argued that this was incorrect; a point with which the CC agreed at Phase II. 205 Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 23 September 2010. 206 Ibid., para. 20.
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(3)
Market Definition
As discussed above, in Greene King/Spirit, the CMA considered dry-led pubs to constrain wet-led pubs.207 However, for the purpose of assessing the constraint placed by wet-led pubs on dry-led pubs, a wet-led pub counted as only 20% of the constraint of a dry-led pub.
10.6.6 Innovation and Product Life-Cycles In certain cases, the issue of market definition may arise in relation to products that have not yet reached the market (i.e., pipeline products). The relevant question in these cases is whether there should be a separate relevant market for pipeline products and whether distinct phases of clinical trials should form their own product markets. In GlaxoSmithKline/Pfizer, the OFT considered the establishment of a joint venture into which the merging parties would place their existing HIV businesses.208 In respect of pipeline HIV products, the OFT noted various stages of the product life-cycle of pharmaceutical products, namely: (i) basic research; (ii) the development stage (comprising pre-clinical, e.g., animal testing, and clinical); and (iii) the marketing stage (when the product finally reaches the market). The clinical stage of the development stage has three parts: Phase I (small studies on healthy humans to determine safety and side effects, with a 10% success rate); Phase II (studies on patients with a disease to test the efficacy of the new medicine and the use of control groups, with a 30% success rate); and Phase III (long term trials with large patient groups, with a 50% success rate). In this case, the OFT stated that (emphasis added): “[t]he [European] Commission has previously also considered products under R&D (pipeline products), limiting its analysis to products at Phase 3 of clinical trials. Given the differences in R&D costs and success rates across the various development stages, it could be argued that each Phase of clinical trials comprises a distinct separate market. The OFT has adopted a cautious approach and has assessed the parties’ overlaps in pipeline HIV products at each clinical stage as well as for all stages. This is because while the parties' main overlap is at Phase 2 of the clinical stages, this is a market particularly characterised with substantial R&D development, and so it is not appropriate to conduct the competitive assessment on a static (that is, one phase only) basis.”
Although the latter three development stages may be quite distinct from a clinical perspective, from an economic perspective they are closely related. To argue, for example, that two merging firms had a monopoly at Phase II of the process would be misleading if, in fact, there were other firms already at Phase III or at the marketing stage with very similar products. This is due to the fact that, if the Phase II products ever made it to market (which is by no means guaranteed given the probabilities of success), they would compete with substitutes already marketed and would be expected to compete with some products also “ahead” of them at Phase III. In contrast, if the merger related to two potentially close substitutes at Phase III for which there were no
207
Anticipated acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May
2015. 208
Anticipated joint venture between GlaxoSmithKline plc and Pfizer Inc in relation to their respective HIV businesses, OFT decision of 9 July 2009.
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equivalent already marketed product and no other product following close behind (e.g., likely to emerge out of Phase II and enter Phase III), then a merger could potentially be problematic. In this case defining the market to be Phase III would not give misleading results. However, it would implicitly fail to consider the extent to which constraints on the merging parties would occur from products at different stages in their life-cycle.209 It is interesting to contrast this discussion with an approach proposed by Gilbert and Sunshine, who have advocated a definition of “innovation markets” where a hypothetical monopolist “would impose a small but significant non-transitory reduction in R&D effort.”210 The latter approach risks coming to a speculative view that just because two firms are innovators they probably would have competed to bring a substitute innovation to market in some (perhaps unspecified) field, even though neither have new, potentially competing products in the pipeline at present. In contrast, where the focus is on products known to be in the pipeline, and likely to compete closely with each other if developed, it is possible to make a more focused judgement on the impact of the merger on products actually being trialled.
10.6.7 Internet Sales In some cases, the CMA will consider the extent to which bricks and mortar stores in a local market (or on a national basis) are constrained by internet sales. This can widen the geographic constraints faced by any local bricks and mortar store (e.g., if the merging parties’ customers are in the delivery area of an online supplier that is not present in the standard catchment and so would not otherwise count as a fascia in a preliminary screen). Alternatively, and depending on the case, the inclusion of online retailers can be considered as widening the product scope211 or an out of market
209 Pipelines were considered in Anticipated acquisition by Actavis UK Limited of Auden Mckenzie Holdings Ltd, CMA decision of 21 May 2015. The CMA assessed the impact of the merger on the supply of current and pipeline generic pharmaceuticals based on: (i) the same molecule, strength and galenic form; and (ii) the same molecule, but different strengths and/or galenic forms. To the extent that the evidence available to the CMA indicated that certain generic pharmaceuticals supplied by the Parties based on different molecules within the same ATC3 category could be demand-side substitutes, the CMA also assessed the Merger within a frame of reference for the supply of these pharmaceuticals defined at the wider ATC4 category level. The CMA adopted a national geographic scope (paras. 5960). 210 Gilbert & Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, (1995) 63 Antitrust Law Journal 569. 211 In Completed acquisition by Midcounties Co-operative Limited of Tuffin Investments Limited, OFT Decision of 18 October 2012, the parties submitted that internet grocery retailing – in the form of online delivery – imposed a real competitive constraint on mid-sized and one-stop stores in certain locations, as customers were able to quickly and easily plan their shopping outputs, arranging delivery at a time and date which was convenient for them. The OFT considered this to be an argument on product scope as opposed to geographic scope. The OFT considered the evidence to be mixed, that internet sales could more appropriately be taken into account as an out of market constraint and that, in any event, they should be captured in the survey question on diversion (see paras. 47-50).
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Market Definition
constraint to be included in the local assessment.212 A leading case as far back as 2006, when internet sales of books in the UK were estimated to be around 8%, was Waterstone’s/Ottakar’s.213 Here the CC stated: “Following the proposed merger, the merged entity would continue to face local competition from, among others, WH Smith, the supermarkets, and the Internet retailers in the overlap areas, just as it does in non-overlap areas. The merged entity would not have an incentive to depart from national pricing by reducing discounts in overlap areas.”214 In terms of evidence considered by the CC in relation to the online constraint, the CC’s survey identified that just under half of respondents said that they had bought a book of some type on the internet at some point and about 30% had bought a new book on the internet in the past 12 months; ‘residual spend’ evidence showed that when customers of each of the merging parties bought books from a different retailer (e.g., Waterstone’s customers’ spend when not buying in Waterstone’s), the internet ranked highly among alternative channels; in response to a diversion type question, internet retailers ranked highly for Waterstone’s customers but were relatively low in the case of Ottakar’s.215 In GAME/Gamestation, the CC noted mixed evidence with respect to the parties’ monitoring of the internet but ultimately concluded the internet to be a “significant constraint on bricks and mortar retailers” due to evidence on switching, from third parties and the nature of the product (computer games).216 More recently, in Sports Direct/JJB, the CC stated that “the relevant question for defining the market is whether Sports Direct customers would switch [sufficiently] to the Internet in response to a price increase of the order of 5 per cent.”217 The CC concluded that internet sales were not in the relevant market. Whilst internet sales accounted for 5-7% of sports goods (i.e., only a little below the level in Waterstone’s/Ottakar’s), the CC found that only 2-3% of consumers considered the internet before deciding to buy from their chosen store. Further, few consumers researched on the internet before buying. In Edmundson Electrical/Electric Center, the 212 In Thomas Cook/Co-operative Group/ Midlands Co-operative merger inquiry, a report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, 16 August 2011 (paras. 7.4-7.7 and para. 7.16), the parties argued that online alternatives should form part of the relevant market. However, the CC concluded that the most appropriate candidate market was likely to encompass the sale of overseas package holidays via high street travel agents with online alternatives being considered as a potential out of market constraint in its local assessment. 213 HMV Group plc and Ottakar’s plc, a report on the proposed acquisition of Ottakar’s plc by HMV Group plc through Waterstone’s Booksellers Ltd, 12 May 2006. 214 Ibid., para. 25. 215 Ibid., paras. 2.14, 5.58 and 5.60. 216 A report on the completed acquisition by Game Group PLC of Games Station Limited, 16 January 2008, paras. 6.57-6.59. 217 Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc, OFT decision of 1 May 2009, para. 6.72b. The CC did not state “sufficiently” although by implication it meant this; some switching was bound to occur but the CC implicitly considered the degree of switching to be too small to merit including the internet in the relevant market.
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internet was not considered to be an important constraint on the basis of limited diversion to that channel and customers and competitors viewing it to be a weak constraint on branch-based electrical wholesalers (e.g., being used typically be used for distressed purchasing).218 Further, in Thomas Cook/Co-Op, the CC noted that the internet accounted for a substantial and growing share of sales (i.e., 31% in 2009/2010, up from 23% in 2005/6).219 The CC also found that around half of consumers searched online.220 However, the CC noted that “[h]igh street agents have traditionally offered an element of service and advice as a feature that distinguishes the channel from other forms of distribution” and that “while the sale of package holidays via the Internet is increasing, the majority are still sold via the high street channel.”221 The CC’s survey also identified limited diversion to online alternatives (i.e., 14%222) although the CC acknowledged that the influence of the internet impacted on many who purchased in store.223 In Rank/Gala, the CC rejected online casinos as a material constraint on bricks and mortar casinos.224 The overall conclusion (in line with the CMA’s approach to any sales channel) appears to be that when the main overlap relates to bricks and mortar stores, the internet may be considered as a potential out of market constraint. However, to be included within the relevant market requires sufficient evidence of diversion to the internet, ideally backed up by documentary and third party support.225
218 Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT decision of 11 May 2012, para 132. 219 Thomas Cook/Co-operative Group/ Midlands Co-operative merger inquiry, a report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, 16 August 2011, para 5.20. 220 Ibid., paras. 9.23(d). 221 Ibid.,paras. 7.5-7.6. 222 Ibid.,Appendix B, para. 133. 223 Ibid., para. 9.23(e), around a quarter of those who asked for a discount did so because they had seen one online. 224 The Rank Group plc/Gala Coral Group, a report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, 19 February 2013. See para. 8, para. 5.16 (nearby casinos but not online casinos were mentioned in internal documents) and para. 5.17 (very few respondents to the CC survey stated that they would divert to online gambling if the casino that they last visited was permanently closed). 225 Outside bricks and mortar cases, the CMA noted in Completed acquisition by Immediate Media Company Bristol Limited of certain assets of Future Publishing Limited, CMA decision of 23 October 2014, para. 6, that although there was some substitution in the relevant segments (craft and genealogy) between print magazines and the internet, there was insufficient evidence that a large number of readers considered the internet as a good substitute for print magazines. On that basis, the CMA excluded nonprint media from the frame of reference (taking into account the potential for competition from websites in the competitive assessment). Para. 47 summarises earlier OFT views on whether the internet has a competitive impact on print magazines, in all cases finding that the internet was not a good substitute for print magazines.
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Market Definition
Finally, where a merger involves two pure online retailers or where the overlap is primarily online, the CMA would be expected to focus on online constraints.226 Competition from bricks and mortar stores would not be disregarded, where relevant it would be taken into account as an out of market constraint.
10.6.8 Branded and Own-Label Products Whilst functionally substitutable, and, in some cases, identical, it is not necessarily the case that the CMA would view branded and own-label products to form part of the same relevant product market. Moreover, there is no ‘general rule’ as to whether branded and own-label products are likely to be considered as forming part of the same product market. Each case needs to be considered on its own facts, and, as discussed below, the Authorities have reached different conclusions in different cases. The relevant question is whether a hypothetical monopolist of, say, a branded product could effect a SSNIP for this product or whether such a price increase would be rendered unprofitable by consumers switching to own-label equivalents. It should also be noted that where mergers of manufacturer brands are considered, even if own-label products are not seen as part of the relevant market, they may nonetheless give rise to important constraints on the behaviour of manufacturers through providing retailers with enhanced buyer power. For example, if final consumers view own-label and branded products to be close substitutes, this may endow retailers with the credible threat to replace manufacturer brands with own-labels. Retailers may also be able to shape consumer purchasing patterns through promotions or making investments to develop their own-label range. As discussed in Chapter 11, the fact that products are not within the same relevant product market is not determinative in respect of unilateral effects analysis, and a consideration of branded versus own-label products should not assume that, if own-label products are considered not to be in the same relevant market as branded products, that they will not impose any constraint on branded products and should not therefore be taken into consideration in assessing the competitive effects of the merger. The outcome is not a binary one. The Authorities have considered this issue in a number of cases coming to differing views on the importance of own label products depending on the evidence. Some of the more recent cases are discussed briefly below.227
226 This approach was taken, for example in Anticipated merger of Betfair Group plc and Paddy Power plc, CMA decision of 17 December 2015; Anticipated acquisition relating to Compagnie Financière Richemont S.A., YOOX S.p.A and The Net-A-Porter Group Limited, CMA decision of 2 September 2015; Anticipated acquisition by Amazon.com Inc of the Book Depository International Limited, OFT decision of 26 October 2011. 227 See also: Anticipated acquisition by R&R Ice Cream Plc of Fredericks Dairies Limited, OFT decision of 1 July 2013, paras. 20; Completed acquisition by Cott Beverages Limited of Macaw (Holdings) Limited, OFT decision of 28 November 2005, paras. 17-20; Anticipated acquisition by United Biscuits (UK) Limited of the Jacobs Bakery Limited, OFT decision of 10 September 2004, para. 5; and Anticipated acquisition by British Sugar plc of Billington Food Group plc, OFT decision of 4 August 2003, para. 24.
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(1)
In ABF/Dorset, the CMA found that private label muesli and private label granola did constrain the branded muesli and granola products of the merging parties based on a number of factors: product characteristics which showed a high degree of similarity between branded and private label muesli and granola, including facts that private label cereals innovated to match the full range and quality offered by branded suppliers; evidence of actual consumer behaviour from loyalty card and Homescan data (e.g., an apparent switch by households away from brands to private label cereals); a review of the interaction between the market shares of branded and private label muesli and granola products (e.g., gains by private label at the expense of branded cereal); the views of third party customers and competitors; and a review of the internal documents of the parties.228
(2)
In Diageo/United Spirits, the OFT considered that private label and branded whisky were in the same relevant market at the off-trade level from the perspective of a retailer.229 The OFT noted views that branded whisky was more likely to constrain private label whisky (than the other way round). It further noted that higher margins on private label whisky were a reason why some retailers might use the threat of switching to private label products as a negotiation lever with manufacturers of branded whisky. Finally, retailer views were corroborated by consumer switching patterns (although the latter evidence carried less weight given the fact that direct customers were retailers and not consumers).230 In the case of vodka, while empirical evidence indicated substitution between private label and branded products at the consumer level, this was ‘trumped’ by evidence from almost all off-trade customers that they did not consider private label vodka to constrain branded vodka. Some retailers also indicated that lower margins on private label vodka and so the OFT considered this might make it less likely that they would threaten to switch to private label vodka following a rise in the price of branded vodka.231
(3)
In AG Barr/Britvic, the OFT excluded private labels from the relevant market on the basis that the competitive constraint placed by private label suppliers was not the same across all retailers and may be weaker for some retailers (e.g., those with smaller sales of private labels). Further, the OFT did not receive evidence on retailers using threats to switch to private labels in their negotiations and the parties’ evidence on consumer switching did not indicate substantial diversion to private labels, at least for the main products of interest.232 In Reckitt Benckiser/KY, the CMA excluded private label brands from the relevant market at Phase
228
Anticipated acquisition by Associated British Foods plc of Dorset Cereals Limited, CMA decision of 6 October 2014, para. 5. 229 Completed acquisition by Diageo plc of United Spirits Limited, OFT decision of 25 November 2013. 230 Ibid., paras. 31-34. 231 Ibid., paras. 57-58. 232 Anticipated acquisition by A.G. Barr plc of Britvic plc, OFT decision of 20 February 2013, para. 36.
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I.233 At Phase II, private label brands were included in the relevant market and considered to be substitutes, on balance, for the parties’ branded products. The CMA noted that when branded products where discounted they gained share from private labels but pointed out that this did not necessarily mean that a higher price of branded products would cause material switching to private labels.234 Further, the CMA did not consider that grocery retailers and national pharmacy chains exercised buyer power, by implication the CMA did not consider that private labels were not a strong constraint on the parties.235 (4)
In Princes/Premier, the parties argued that the share of supply of own label ambient pies should be attributed to retailers and not to the merging parties because: (i) retailers set the terms of trade; (ii) retailers undertook their own label promotional activity; (iii) formalised contracts for the duration of supply rarely existed; and (iv) where there were contracts, if retailers reduced demand then suppliers would have no alternative outlet for those volumes.236 As a result the parties argued that they had limited brand power across the relevant overlaps and that none of the parties’ products were ‘must stock’ items. The OFT considered that information sufficient to attribute sales of own label pies to retailers would have needed to show that: (i) there was a shift from own label to branded pies over time and heavy discounting on branded pies leading to a narrower price differential between the two products; (ii) there was evidence of customer shifting to own label and evidence that own label was gaining its own ‘brand’ presence; (iii) branding was not important in ambient pies; (iv) there was a continuous chain of price across branded and own label with no significant pricing gaps; and (v) there was significant evidence of customer switching between own label and branded pies, including where delisting or promotional activity of one had affected sales of the other.237 In this case, the OFT considered that the parties had not been able to provide sufficient evidence for it to be able to conclude that own label should be considered to form part of the same market as branded ambient pies. In addition, several of the parties’ customers and other food producers indicated that Fray Bentos (one of Premier’s food brands) was synonymous with ambient pies and was a strong brand. Furthermore, the limited presence of own label products in this market was considered to be consistent with existing brand strength and a reason for a historic lack of entry from own label products.238
233 Anticipated acquisition by Reckitt Benckiser of the K-Y brand from Johnson & Johnson, CMA reference decision of 19 December 2014, para. 66. 234 Reckitt Benckiser and K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015, paras. 6.9 and 8.124. 235
Ibid., para. 18. Anticipated acquisition by Princes Limited of the canning business of Premier Foods Group Limited, OFT decision of 22 June 2011, para. 32. 236
237 238
Ibid., para. 35. Ibid., para. 34.
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(5)
In Lactalis/Lubborn, the OFT considered whether branded and own-label soft cheeses formed part of the same relevant product market.239 On balance, the OFT considered that the evidence suggested that:240 (i) both branded and ownlabel products were supplied by the same competitors; (ii) Lactalis did not differentiate in its UK sales figures between branded and own-label sales; (iii) over 80% of soft cheese sold in the UK was sold by supermarkets, of which over 80% was own-label; (iv) almost all of Lubborn’s soft cheese was sold as own-label; and (v) third parties did not consider that there was a distinction between branded and own-label soft cheese. On this basis, the OFT considered that branded and own-label soft cheeses were in the same product market.241
(6)
In Heinz/HP, the OFT considered that there was mixed evidence of the constraint imposed by own-label products242 (ketchup, brown sauce, barbecue sauce, tinned beans and pasta) with customers suggesting that own-label may not be a strong constraint and competitors generally considered some constraint is exerted.243 Whilst leaving open the exact definition in its product market section, the OFT clearly considered that branded and own-label products did not constrain each other and should be treated as being in separate product markets. At Phase II, the CC considered that the evidence was inconclusive and included own-label products within a “working definition” of each of the relevant product markets so as to consider further the extent of the constraint imposed by own-label on branded products.244
239 Completed acquisition by Lactalis McLelland Limited of Lubborn Cheese Limited, OFT decision of 6 August 2009. 240 Ibid., para. 46. 241 See also Anticipated merger between First Milk Limited and Milk Link Limited, OFT decision of 12 December 2007, in which the OFT concluded that branded and own-label cheddar were in the same product market. 242
The OFT explained that “[c]ompetition in the supply of products under consideration is a linked, two-stage process. Suppliers of branded goods compete with each other for supermarket shelf space; they may also compete for shelf space with the supermarkets’ own label products. Secondly, having obtained a position on the shelves, products compete for a share of supply to consumers” (para. 12). 243
Anticipated acquisition by HJ Heinz of HP Foods Group, OFT decision of 26 October 2005, paras. 11-18 and 86-91. Whilst the OFT did not reach a conclusion in its market definition section, it is clear from its substantive assessment of the merger that it did not treat branded and private-label products as being in the same market (e.g., the OFT concluded that the merger would result in a reduction in the number of suppliers of branded ketchup from two to one). 244 HJ Heinz and HP Foods, a report on the completed acquisition of the HP Foods companies by HJ Heinz Company and HJ Heinz Company Ltd, 24 March 2006, para. 4.51.
Chapter 11 CONCENTRATION MEASURES AND SCREENS 11.1 Introduction 11.2 Market Shares 11.2.1 The 40% Share Screen For Unilateral Effects in Undifferentiated Markets 11.2.2 Mergers Resulting in Small Increments 11.2.3 Calculating Market Shares 11.2.4 Interpreting Market Shares 11.3 The ‘Significant Competitor’ Set and ‘Fascia Counts’ 11.3.1 Fascia Counts 11.3.2 Mergers of Large Full-Range Retailers or ‘Superstores’ 11.3.3 Selected Other Cases 11.3.4 The 5 to 4 Screen for MultipleOverlap Retail (and Others) Cases (a) Retail cases (b) Non-retail cases 11.3.5 Examples of Fascia and Market Share Screens (a) Phase I demand- and supply-centred ‘4 to 3’ fascia counts
11.1
(b)
Phase I store count share and increment (motivated by a 4 to 3 concept) (c) Phase I screens in pharmacies (d) Phase I screen, 40% market share threshold, 10% increment (e) Phase I ‘4 to 3’ screen applied only to target stores, supplemented by further distance screens (f) Phase I ‘4 to 3’ screen plus diversion ratios (g) Phase II ‘4 to 3’ and ‘3 to 2’ screens based on prior econometrics assessment (non-retail) (h) Phase II ‘5 to 4’, ‘4 to 3’ and related market share screens (non-retail) 11.3.6 Examples of Aggravating and Mitigating Factors 11.4 Other Concentration Measures and Screens 11.4.1 HHIs 11.4.2 Concentration Ratios 11.4.3 The 30% Screen For Non-Horizontal Theories
INTRODUCTION
The CMA uses certain measures of concentration as initial indicators of competition concerns in substantive merger assessment. Whilst UK merger control has moved on from an assessment of the structure of the market and the merger’s impact on this structure as the core of competitive effects analysis,1 concentration measures remain important. Indeed, at Phase I, in the absence of compelling evidence on countervailing factors, concentration measures, if calculated on the basis of a robust frame of reference, can still be a strong indicator of the merger resulting in a realistic prospect of a substantial lessening of competition, particularly in cases with multiple (typically,
1
There has been a shift in focus, in the case of horizontal mergers that may give rise to unilateral effects, to closeness of substitution. See Chapter 12.
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local) affected markets when there are time constraints that prevent a more in-depth analysis of each market. The Merger Assessment Guidelines refer to four lenses for measuring concentration: (i) market shares; (ii) number of firms; (iii) the Herfindahl-Hirschman Index (“HHI”); and (iv) concentration ratios, each of which is discussed below. Of these measures, market shares have traditionally received the greatest attention both as an initial indicator of the change caused by the merger as well as a guide to merged firm’s market power. For an assessment of unilateral effects, market shares carry greater weight in undifferentiated or commodity product markets than in differentiated product markets (where a greater focus is placed on closeness of substitution). Market shares are typically important in the assessment of coordinated effects theories of harm and are indicative of an ability to foreclose in non-horizontal theories of harm.2 Alongside traditional market shares, perhaps the most significant concentration measure in the Phase I assessment of competitive effects is the simpler device of counting the number of ‘significant’ or ‘effective’ competitors that will remain post-merger. Put simply, the CMA will frequently identify competitors that are important constraints on at least one of the merging parties (the ‘effective competitor set’) and then consider the extent to which there are geographic areas or customer groups that will suffer a material reduction in choice of such competitors (e.g., a reduction from four to three, or ‘worse’). Such ‘fascia tests’ may be used as a screen to identify areas for further detailed scrutiny or (in the absence of other evidence) as a test for whether a realistic prospect of harm exists. By contrast, whilst they are still referenced in the Merger Assessment Guidelines, HHI data are rarely employed as tools in differentiated markets and are quite rarely used even in commodity market cases where, in relative terms, they offer the most probative value. Concentration ratios are also rarely used and then only in a subordinate capacity (or in coordinated effects cases where it is of interest to identify the market coverage of not just the merging parties but also the alleged coordinating group of firms). Both measures have arguably been included in the Merger Assessment Guidelines for the sake of completeness and consistency with previous UK (and current EU) guidelines, rather than because they currently have great practical significance. Finally, in retail mergers or mergers involving manufacturers of branded products, the Authorities have frequently placed emphasis on screens involving diversion ratios combined with estimates of margin data. These screens are price pressure tests, namely ‘illustrative price rises’ (“IPRs”) and the Gross Upward Pricing Pressure Index (“GUPPI”).3 Such measures are often employed after the initial fascia count filter (e.g., in the case of a retail merger as part of the more detailed assessment of local areas 2
Whilst market shares (and other concentration measures) may be more informative of competitive effects in undifferentiated product markets, where closeness of competition is usually far less of an issue, even with undifferentiated products, market shares may fail to capture important dynamic constraints such as the ease of expansion or entry by rivals, or buyer power. 3 These screens are not discussed in any detail in the Merger Assessment Guidelines but are addressed in Section 4 of the CC and OFT publication, Commentary on retail mergers, March 2011.
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that could not be screened out at an early stage). In an assessment of local areas, there are also rules of thumb frequently employed by the CMA. These ‘second step screens’ are also discussed in this chapter.4
11.2
MARKET SHARES
The Merger Assessment Guidelines explain that market shares, both in absolute terms and relative to each other, can give an indication of the potential extent of a firm’s market power.5 In absolute terms, in horizontal mergers involving undifferentiated products, unilateral effects are more likely where the merger results in a firm with a large market share.6 The idea is intuitive. Market shares may reflect the parties’ capabilities; if both parties are particularly cost efficient (or particularly strong in terms of quality or reputation), they may both have a large share and be the most important competitors for each other because their rivals face higher costs (offer lower quality or suffer from a poor reputation). It is sometimes also argued that larger firms have a weaker incentive to lower price across the board, since the gain from securing an increased number of customers is more likely to be offset by losses generated for existing customers. That said, where price discrimination is possible, this argument does not apply. Merger control addresses the effects of a particular merger, rather than focusing on premerger market power as such, and so the CMA will also consider the change between the pre-merger and post-merger combined shares as indicative of the change in market power resulting from the merger (i.e., whether, to a material degree, market power is created or enhanced).7 When market shares are used, the assessment is therefore comprised of two elements: (i) the combined market share; and (ii) the market share increment or delta, the latter being the smaller of the two pre-merger shares (regardless of whether the share is held by the acquirer or the target).8 Two sliding scale propositions flow from this. The greater the combined share, the lower the increment need be for the CMA to be unable to rule out concerns. Conversely, the greater the increment, the lower the combined share need be for the CMA to be unable to rule out concerns. These issues are discussed in turn below.
4 5
See Chapter 12 for a detailed discussion of price pressure tests. Merger Assessment Guidelines, para. 5.3.4.
6
Ibid. Ibid. In some cases, it is important to assess whether a party to the merger already has market power. This issue arises with: (i) non-horizontal mergers (where market power must already be present before harmful effects from a merger are a realistic prospect); (ii) horizontal mergers that might strengthen pre-existing coordination; or (iii) a merger with a potential entrant, which, on entry, might undermine pre-existing market power. 7
8
Although it may appear obvious, the increment is frequently confused. If an acquirer with a 2% market share acquires a target with a 20% market share, the increment is 2%, despite the fact that the acquirer is adding 20 percentage points to its pre-merger market share. The point is that prior to the merger, 20% of the market was already under the control of a single firm. Post-merger, that rises to 22%.
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11.2.1 The 40% Share Screen for Unilateral Effects in Undifferentiated Markets The Merger Assessment Guidelines state that “[w]here products are undifferentiated, unilateral effects are more likely where: the market is concentrated; there are few firms in the affected market post-merger; the merger results in a firm with a large market share; and there is no strong competitive fringe of firms.”9 In other words, the Authorities’ competitive assessment will be more focused on structural factors than in relation to differentiated products, which require a more nuanced approach to the closeness of competition between rivals. In this regard, the Merger Assessment Guidelines further state that, for these purposes, market shares will normally be calculated on the basis of the narrowest market that satisfies the hypothetical monopolist test (“HMT”), and that where market shares are considered for the purposes of applying thresholds, the narrowest market that satisfies the HMT must be used.10 In relation to a threshold for undifferentiated product markets, the Merger Assessment Guidelines indicate that combined market shares of less than 40% will not usually give rise to a cause for concern in respect of unilateral effects.11 This continues to be the case.12 This reflects a view that in undifferentiated product cases, the competitive constraint that exists between the merging parties should be reflected in their market shares to a much greater degree than in differentiated product cases. Therefore, inferences can be 9
Merger Assessment Guidelines, para. 5.4.4. Ibid., para. 5.3.1. 11 Ibid., para. 5.3.5. 12 See, e.g., Anticipated acquisition by Roper UK Limited of CliniSys Group Limited, CMA decision of 11 December 2015 (where the parties’ post-merger combined share was 35-45% and this case did not proceed to a CRM); Anticipated merger of Betfair Group plc and Paddy Power plc, CMA decision of 17 December 2015 (where the parties would become the largest supplier of online fixed odd betting in the UK with a combined share of 20-30%, which the CMA described as “moderate”); Anticipated acquisition by Heineken N.V. of Diageo plc assets, CMA decision of 18 December 2015 (where the parties’ combined share of on-trade premium lager of 30-40%); Anticipated acquisition by Platinum Equity, LLC of Malcolm Enamellers Limited, CMA decision of 9 November 2015 (where the parties would become the largest supplier of e-coating services with a combined share of 30-40% with an increment of 5-10%); Anticipated acquisition by North Sea Midstream Partners Limited of certain assets of Total E&P UK Limited, CMA decision of 12 November 2015 (where the parties’ combined share of gas throughput was 20-30% with an increment of 5-15% and the CMA did not consider this to raise any concerns); Completed acquisition by Atlantic SFDT SA of Woolamai Holdings Jersey Limited, CMA decision of 5 June 2015 (where the parties’ post-merger combined share was 30-40% with an increment of 0-10% and the case did not proceed to CRM); Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015 (where the parties’ combined share of procurement of raw milk at a national level, including purchasing through brokers, was 30-40% with a 10-20% increment and this aspect of the transaction did not result in an SLC); Cf, Completed acquisition by Allflex of Cox Agri Limited, CMA decision of 7 May 2015 (where the parties had a combined share of 40-50% of engraved cattle tags, the merged entity would have been by far the leading supplier, and the next largest suppliers had shares of only 10-20%, but the CMA cleared the case without a CRM on the basis of competitor expansion). 10
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Concentration Measures and Screens
drawn with a greater degree of confidence based on market shares and the level of concentration. Accordingly, mergers that result in a combined share of supply of over 40% with a non-negligible increment are more likely to be the subject of a more indepth Phase I assessment and to raise competition concerns.13 Mergers involving undifferentiated products resulting in low combined shares should, therefore, be a strong indication that the merger is unlikely to result in competitive concerns. In the case of mergers with differentiated products, the focus is less on market shares and more on closeness of substitution.14 Poundland/99p provides a good recent example, although in earlier cases small increments at the national level have been
13 Anticipated acquisition by Whittan Intermediate Limited of Apex Linvar Limited, CMA decision of 8 January 2016 (where the parties’ combined share of 40-50% of pallet racking in the UK, with an increment of 10-20% – this case went to CRM but was ultimately cleared); Anticipated acquisition by Iron Mountain Incorporated of Recall Holdings Limited, CMA decision of 30 December 2015 (where the parties had a combined national share of records management services of 50-60% by revenue and capacity – this merger was ultimately referred to Phase II); Anticipated merger between Just Retirement Group plc and Partnership Assurance Group plc, CMA decision of 28 October 2015 (where the parties had a combined share of 60-70% although with an increment of only 0-10% – this case went to CRM but was ultimately cleared); Completed acquisition by Sheffield City Taxis Limited of certain assets and business of Mercury Taxis (Sheffield) Limited, CMA decision of 13 October 2015 (where the parties’ combined share of private hire and hackney transport services in Sheffield was 5060% with an increment of 10-20% – this case resulted in an SLC in relation to tender customers but the de minimis exception was applied); Anticipated acquisition by Reed Elsevier (UK) Limited of Jordan Publishing Limited, CMA decision of 10 September 2015 (where the parties’ combined share of legal information in the family law practice area was 50-60%, with an increment of 20-30% – this case resulted in an SLC and UILs were agreed); Anticipated acquisition of W Corbett & Co (Galvanizing) Limited by Joseph Ash Limited, CMA decision of 25 June 2015 (where the parties’ combined share of galvanising services was 60-70% with an increment of 10-20% – this case resulted in an SLC and was referred to Phase II); Completed acquisition by GTCR Canyon UK Investments Ltd of Gorkana Group Limited, CMA decision of 27 March 2015 (where the parties’ combined share of media databases was 50-60% with an increment of 10-20% – this case resulted in an SLC and UILs were agreed. The CMA specified, at para. 64, that “[t]his combined market share is higher than that which would normally give the CMA comfort that unilateral effects are unlikely”). 14 See, e.g., Completed acquisition of Avanta Serviced Office Group plc by Regus plc, CMA decision of 18 November 2015, para. 91 et seq (where the CMA did not even reference any market shares and highlighted that the factors for assessing unilateral effects in each local area were focused on closeness of competition, post-merger competitive constraints and entry/expansion by competitors); Completed acquisition by BCA Marketplace plc of SMA Vehicle Remarketing Limited, CMA decision of 17 November 2015 (where the parties had a combined national share of 44-55%, with an increment of 5-15%, but the CMA did not find a competition concern on the basis of the parties’ differentiated geographic offering); Anticipated acquisition by Pearson Professional Assessments Limited of the computer-based testing business of learndirect Limited, CMA decision of 2 December 2015 (where the CMA stated that “[s]hares of supply are generally a useful tool to start to assess market power. However, in the market for end-to-end post-school (16+) invigilated CBT services, these shares are less conclusive as services are highly differentiated”; Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015 (where the CMA did not consider shares of supply but focused on the parties’ consumer survey, third party responses and internal documents).
UK Merger Control
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indicative of the absence of national effects.15 Relevant screens are discussed further below in relation to the significant competitor set, fascia screens and price pressure tests.
11.2.2 Mergers Resulting in Small Increments There are no precise rules as to the importance of the increment resulting from a merger. The Authorities’ decisional practice indicates that small increments (1-5 percentage points) are unlikely to cause concern where combined shares are below 25% and more likely to give rise to greater scrutiny where combined shares exceed 40%.16
15 See Poundland/99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015, paras. 6.132-6.138. For the purpose of assessing a national theory of harm, in response to the parties’ estimated national market share of 20-30%, the CMA noted that national shares of supply were not informative of the closeness of competition between the parties and other retailers. This was because: “(a) they do not take account of the relative closeness of competition of different retailers; (b) they do not take account of the extent of geographic overlap between the Parties’ network of stores and those of competing retailers. This is important as the Parties and other retailers do not compete for national customers but rather for local customers; and if based on the total revenue of competing retailers, they would also capture revenue from products sold that do not overlap with the Parties’ products. In particular, VGM retailers typically have wider product ranges than the Parties (as they sell many products of value substantially greater than £1) and including revenues from the sale of these products would materially distort national shares of supply.” In contrast, in Booker/Makro, a report on the completed acquisition by Booker Group PLC of Makro Holding Limited, 19 April 2013, para. 8.57, the CC found it sufficient to assess the size and increment: “At the national level, the transaction brings together the numbers 1 and 4 cash-and-carry operators. If we include both delivered and cash-and-carry in the wholesaling market, this is a merger between the 2nd and 11th largest operators. We concluded that there is not likely to be an SLC at the national level. This is due to the relatively small size of Makro at the national level and limited market share increment resulting from the transaction” (emphasis added). 16 See, e.g., Anticipated acquisition by NBTY Inc. of Dr Organic Limited, CMA decision of 18 November 2015 (where the parties had a combined share of supply of 5-15% with an increment of 0-5%); Anticipated acquisition by Heineken N.V. of Diageo plc assets, CMA decision of 18 December 2015 (where the parties had a combined share of on-trade premium lager of 30-40% with an increment of 5-10% and 20-30% in off-trade premium lager with an increment of 0-5%); Anticipated acquisition by Roper UK Limited of CliniSys Group Limited, CMA decision of 11 December 2015 (where the parties had a combined share of 35-45% with an increment of 0-10%); Completed acquisition by Henry Schein UK Holdings Ltd of the dental consumables business of Plandent Limited, CMA decision of 21 April 2015 (where the parties’ combined share of supply of dental consumables in the UK by full line distributors was 40-50% with an increment of 0-5% which the CMA noted was an indication that the merger “has a relatively limited impact on competition”); Completed acquisition by Solera Holdings, Inc. of CAP Automotive Limited, CMA decision of 5 May 2015, para. 80 (where the increment to Solera’s share of supply of vehicle registration mark enablement services was approximately 0-5%); Anticipated acquisition by Bako North Western (Group) Limited of Bako Northern (Holdings) Limited, Bako Scotland Limited and Bakers (Area 1) Limited, CMA decision of 15 July 2015 (where the parties’ combined share of wholesale supply of bakery products and ingredients was 20-30% with a 0-10% increment and this case did not proceed to CRM); Anticipated acquisition by Tattersalls Limited of the bloodstock auctioneering business of Brightwells Limited, CMA decision of 15 September 2015, para. 96 (the parties’ combined share of supply of auctioneering
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Concentration Measures and Screens
However, relatively small increments may be problematic in cases where: a firm is expected to grow substantially such that its small share today is not indicative of its likely future position (e.g., an important potential competitor that had only just started to enter the market); the firm with a small share is a particularly aggressive competitor and there is reason to believe that the acquirer might adopt a less aggressive strategy; the merging parties are particularly close competitors such that the (greater) market shares of their rivals substantially overstate the competition that the merged firm would face; and post-merger there would be fewer than four firms.17
11.2.3 Calculating Market Shares The CMA will usually calculate market shares or ranges for at least the largest firms in the relevant market, often using the parties’ estimates as a starting point if no reliable third party data source exists. This is frequently not possible in local markets, in which case the CMA will typically rely on fascia count principles (see further below). The purpose of calculating market shares is to shed some light on the future competitive significance of the merging parties and their rivals, absent the merger. General principles for market share calculations are as follows: (1)
Shares by value. These are the default preference in most cases and the CMA will almost always request and analyse market shares by value, and will inevitably do so in a differentiated product market case.18
(2)
Shares by volume (output, customers served) and capacity. In a case involving commodity goods, or where it is meaningful to measure production of firms according to the same volume metric, the CMA may consider volume
services for national hunt horses was as high as 70-80% on the basis of auctioneer revenue but the CMA emphasised the limited 0-5% increment). 17 See, e.g., Completed acquisition by GXS Inc of Inovis Inc, OFT decision of 25 June 2010, para. 69; Anticipated acquisition by G4S Cash Services (UK) Limited of Abbotshurst Group plc, OFT decision of 25 May 2007, paras. 63-65 and 22-29; Proposed acquisition by Dorf Ketal Chemicals AG of the titanate and zirconate business of Johnson Mattey plc, OFT decision of 19 November 2010, para. 78; and Completed acquisition by Bucher Industries AG of Johnston Sweepers Limited, OFT decision of 6 April 2005, para. 47. 18 The Merger Notice requires merging parties to provide the shares of supply in both value and volume terms for themselves and their principal competitors. See, e.g., Completed acquisition by Henry Schein UK Holdings Ltd of the dental consumables business of Plandent Limited, CMA decision of 21 April 2015, para. 67; Completed acquisition by Solera Holdings, Inc. of CAP Automotive Limited, CMA decision of 5 May 2015, paras. 81 and 87; Anticipated acquisition by Actavis UK Limited of Auden Mckenzie Holdings Ltd, CMA decision of 21 May 2015 (the parties provided their shares of supply of pharmaceuticals products on both a value and volume basis); Anticipated acquisition by Willis Group Holdings of Miller Insurance Services LLP, CMA decision of 21 May 2015; Anticipated acquisition by Bako North Western (Group) Limited of Bako Northern (Holdings) Limited, Bako Scotland Limited and Bakers (Area 1) Limited, CMA decision of 15 July 2015, para. 51; Anticipated acquisition by AXA PPP healthcare Limited of the private medical insurance business of Simplyhealth Limited, CMA decision of 21 July 2015, para. 38.
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shares. Capacity shares may also be of interest where available (for example to identify which competitors have spare capacity and how that spare capacity is distributed). Although such markets are rarely considered in practice, the CMA may also consider data on reserves (e.g., in a metal or minerals market) as future reserves, rather than past sales, as being a better guide to future competitive potential in appropriate cases.19 Stability of production share was an important feature of the alleged coordinated effects in cement, in Anglo American/Lafarge.20 Market shares may also be conducted on the basis of the number of staff (e.g., dentists) or related equipment.21 In hospital mergers, market shares are often calculated based on the number of patients.22
19 See, e.g., Anticipated acquisition by Iron Mountain Incorporated of Recall Holdings Limited, CMA decision of 30 December 2015; Anticipated acquisition of W Corbett & Co (Galvanizing) Limited by Joseph Ash Limited, CMA decision of 25 June 2015 (where volume shares of galvanising services to external customers were considered); Anticipated acquisition by Motor Fuel Limited of 90 petrol stations from Shell Service Station Properties Limited, Shell U.K. Limited and GOGB Limited, CMA decision of 26 August 2015 (where volume shares of road fuel were considered); Anticipated acquisition by North Sea Midstream Partners Limited of certain assets of Total E&P UK Limited, CMA decision of 12 November 2015 (where the CMA considered shares of supply of gas throughput); Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015 (where the CMA considered shares of supply of prescriptions); Completed acquisition by Allflex of Cox Agri Limited, CMA decision of 7 May 2015, paras. 66 and 79; Completed acquisition by Atlantic SFDT SA of Woolamai Holdings Jersey Limited, CMA decision of 5 June 2015; Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015; Anglo American PLC and Lafarge S.A., a report on the anticipated construction materials joint venture between Anglo American PLC and Lafarge S.A, 1 May 2012 (where the theory of harm for coordinated effects in cement included an allegation of alignment on GB production share); volume (production) shares were also considered in the assessment of unilateral effects in relation to aggregates, ready mixed concrete and asphalt. See also, Breedon Aggregates and Aggregate Industries, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014, para. 6.69. 20 Ibid., para 37. 21 In Completed acquisition by Oasis Dental Care (Central) Limited of JDH Holdings Limited, CMA decision of 28 July 2014, market shares were assessed by the number of dentists and the number of chairs within a 6-9 mile radius centred on the Smiles’ practice in Towcester, for example. In the Tunbridge Wells area, on a 15 mile radius centred on Oasis’ practice in Sevenoaks, the CMA estimated that the parties had a combined share of delivered Units of Orthodontic Activity (UOA) of [30 to 40%], with an increment of [10 to 20%] and that the parties’ combined share of contracted UOAs would be [20 to 30%], with an increment of [0 to 10%] (in volume) (paras. 9 and 10). The CMA did not consider that there was a realistic prospect of an SLC in either area, based on this and other evidence it received. 22 Completed acquisition by Spire Healthcare Limited of certain assets and business of St Anthony’s Hospital in Surrey, CMA decision of 24 September, 2014, para. 10.
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(3)
Shares on other measures. In some cases, shares have been calculated based on a simple numerical headcount of the number of customers, number of stores,23 or bids won.24
(4)
Internal versus external sales. In Breedon/Aggregate Industries, the CC assessed market shares for aggregates on the basis of both including and excluding internal sales.25 The merging parties argued that this could penalise vertically integrated firms that primarily used their aggregates ‘internally’ (e.g., for ready-mixed concrete or asphalt production). Adding such volumes to their external sales would overstate the degree to which they competed to supply external customers.
(5)
Shares of new business won vs. installed base or ongoing customer revenue. In some cases, the dynamics of future competition are much better captured by the share of new business won than shares based on total revenues from installed base customers. For example, where a firm has a large installed base of customers locked-in to long term contracts, it may be of greater interest to assess its success in relation to new business opportunities. In Dollar/MEM, the OFT noted that, in that case, it was “a market that is growing significantly, with the value of loans trebling in the past three years, and it may be that shares of new business are better indicators of the effects of a merger than overall market shares.”26
(6)
Time period for share data. The default position is annual market shares for the previous calendar year, in some cases supplemented with year-to-date figures if the case in question is later in the current calendar year. That said, the longer the time period the better, since movements in shares over time may be informative as regards barriers to entry and expansion and competitive dynamics (e.g., leading firms losing share of time or losing the ‘top spot’ to new entrants).27 In ‘lumpy’ markets that are subject to infrequent and large customer contracts, it would be usual to calculate market shares by value over a 3- or 5-year period unless contracts are so infrequent that in extreme cases 7-
23
See, e.g., Anticipated acquisition by Booker Group plc of Musgrave Retail Partners GB Limited, CMA decision of 2 September 2015, para. 47. 24 See Anticipated joint venture between LINK Interchange Network Limited and Transaction Network Services (UK) Limited, OFT decision of 27 January 2005 (share of number of customer contracts; para. 17); G4S/Abbotshurst, supra, paras. 22, 25 (number of bids won, percentage of quotes won). 25 Breedon Aggregates and Aggregate Industries, A report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, CC decision of 9 April 2014, para. 6.54 and 6.69. 26 Anticipated acquisition of Purpose UK Holdings Limited, together with certain shares in the capital of MEM Holdings Limited, by Dollar Financial UK Limited, OFT decision of 4 March 2011, para. 38. 27 The Merger Notice makes clear that where shares of supply vary significantly from year to year the parties should provide data for several years.
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or 10-year period data may also be requested. Good examples of the Phase I consideration of lumpy markets include Carl Zeiss/Bio-Rad (specialist microscopes), Tetra Laval/Carlisle (cheese-making machines) and Capita/IBS (software to local councils). In rarer cases, the CMA may require shares of supply based on future projects where this is likely to impact significantly on the competitive assessment.28 (7)
Joint ventures. Where a firm owns a certain percentage of an entity, there are sometimes debates as to how to allocate share to that particular firm. For example, suppose that firm A owns 50% of a production site, which is a joint venture with another firm, B. Suppose further that A is merging with C in an undifferentiated market. The JV site has a 30% share and C’s site has a 20% share. In simple terms, if share of the JV site is allocated to A in line with its shareholding, the merged entity (A and C) would have a 35% share (15% + 20%), below the 40% threshold discussed above. However, if A’s share was treated (cautiously) as being 30%, then the combined share would be 50%, appearing more problematic. In this case, an important question is the extent to which firm A can influence the JV’s price (or non-price factors). If it can, then, post-merger, it may have an incentive to increase price at the JV site so as to divert some demand to C’s site (that incentive would not exist prior to the merger and it would not benefit firm B, so B’s incentive and ability to prevent a price rise at the JV site must also be assessed). Even where A has no influence on the JV site, it may (in theory at least) have an incentive to increase price at C’s site so as to divert some demand to the JV site, in which case firm A benefits in proportion to its profit share. In that sense, the higher A’s share in the JV, the greater the risk of price rises at site C. In other words, the most important issue is to establish how the merger impacts pricing incentives; allocating volumes or value in proportion to a shareholder’s stake does not necessarily give rise to a market share that is informative of post-merger incentives. However, such an approach may be a useful safeharbour. Specifically, in the example above, if the merger between A and C would not cause concern if A had full control of the JV site, then this should be sufficient to demonstrate that the merger is not harmful when A has a lesser degree of control and a smaller shareholding. These issues are discussed in greater detail in Chapter 12.29
28
See, e.g., Completed acquisition by Harman International Industries Inc. of the Bang & Olufsen A/S automotive audio assets, CMA decision of 4 September 2015, para. 78 (where the parties had a current share of supply of amplifiers for premium automotive audio systems to the current generation of cars produced by UK OEM customers of 90-100%. However, Harman had lost its contract with Jaguar Land Rover which accounted for all of Harman’s current sales to UK OEM and its share was expected to fall to 10-20%. 29 The OFT’s reference decision in Anglo-American/Johnston provides an account of the application of pro rata addition of the sales of the joint venture in proportion to the equity participations of its
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11.2.4 Interpreting Market Shares The Merger Assessment Guidelines caution that, when interpreting information on market shares and concentration, various factors may influence this assessment. The CMA may have regard to the following factors. (1)
Undifferentiated products. The Merger Assessment Guidelines state that market shares will be given the greatest weight in markets where products are undifferentiated. In such markets, where the market is defined to be the narrowest that satisfies the hypothetical monopolist test, combined shares below 40% may not cause substantial concern (in particular where there are at least four competing firms post-merger and barriers to expansion for the merging firms’ rivals are low).30
(2)
How widely the market is drawn. The Merger Assessment Guidelines observe that “a low combined market share on the narrowest market that satisfies the hypothetical monopolist test will be a better indicator of an absence of potential competition concerns than the same share on a market that is drawn more widely.”31 As discussed in Chapter 10, where the market is defined to be wider than the narrowest that satisfies the hypothetical monopolist test, the CMA may place less weight on market shares and, in particular, take into account the possibility that some firms within the relevant market may be weaker constraints on the merging parties than others within the same defined market. On the other hand, where the market has been defined very narrowly, in particular in cases of differentiated product markets, ‘out of market
parents, based on an analysis of economic incentives, rather than a legal analysis of which level of control (relevant only for jurisdictional purposes) the parents enjoyed over the joint venture; see Anticipated acquisition by Anglo American plc of Johnston Group plc, OFT decision of 29 September 2004, para. 17ff. 30 Merger Assessment Guidelines, para. 5.3.5. See also, Completed acquisition by Spire Healthcare Limited of certain assets and business of St Anthony’s Hospital in Surrey, CMA decision of 24 September 2014, para. 93 (where the CMA used a combined share below 40% with an increment below 10% as a screen to exclude overlaps with respect to a number of specialities); Anticipated merger of Ashford and St Peter’s Hospitals NHS Foundation Trust and Royal Surrey County Hospital NHS Foundation Trust, CMA decision of 18 February 2015, para. 128 (the CMA noted that the parties had a combined share exceeding 40% in all specialities that raised a concern); Anticipated acquisition by Greene King Plc of Spirit Pub Company Plc, CMA decision of 11 May 2015, para. 111 (where the CMA used a combined share of 35% with an increment of 5% as an initial filter for indicating possible competition concerns); Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015, para. 75 (where the CMA used a combined share of 40% with an increment of 10% as an initial filter for indicating possible competition concerns). 31 Merger Assessment Guidelines, para. 5.3.2. See also Anticipated acquisition by Unilever of Alberto Culver Company, OFT decision of 18 March 2011, paras. 60-62.
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constraints’ will often be taken into account. For example, where there are numerous local markets, sometimes the CMA will define an ‘effective competitor set’ for screening purposes and then, in the detailed assessment of markets that fail the screen, take into account competitors that were not in the original set. A popular expression of the preceding points is the ‘binary fallacy’ which the Merger Assessment Guidelines describe as follows: “An over-reliance on concentration measures to indicate changes in market power, in particular where products are differentiated, has been termed the ‘binary fallacy’: the assumption that all firms in the market exercise competitive constraints upon one another in proportion to their market shares, but that firms outside the market exercise no constraint at all.”32
(3)
The extent of supplier differentiation and variable profit margins. In differentiated markets, the Authorities may discriminate between two competitors (B and C, with the exact same market shares) in terms of weighting their significance as a constraint on A, if C is considered a closer competitor to A due to branding, quality, characteristics, geographic location or other evidence (e.g., surveys or entry event analysis). For example, if C (22% share) has a similar premium brand image to A (18%), whereas B (with a 40% share) is associated with low quality, then C (despite its smaller share) will be viewed to constrain A to a greater degree than B (the low quality brand) constrains A. The role of variable profit margins may be less obvious. At a ‘high level’ it might be argued that the higher are margins in an industry, the weaker are out of market constraints and so, all else equal, a 30% share might be considered more problematic in a high margin than a low margin industry. Further, in retail and branded product merger cases, margins are often combined with estimates of diversion ratios to generate price pressure tests (see Chapter 12). A combined share of 30% will be deemed more problematic, all else equal, when associated with a higher degree of upwards price pressure based on these tests.
(4)
Share fluctuations and market dynamism. The Merger Assessment Guidelines note that where there is evidence of turbulence in concentration, such as substantial movements in market shares over time, this may indicate intense dynamic competition, regardless of the static level of concentration in a market.33 For example, where the merging parties’ combined share had fluctuated between 20% and 60% in recent years (averaging 40%) this, all else
32
Footnote 63 of the Merger Assessment Guidelines. At para. 5.3.2. As also noted in the CMA guideline (originally published by the OFT), Assessment of Market Power (OFT415, December 2004): “The history of the market shares of all undertakings within the relevant market is often more informative than considering market shares at a single point in time, partly because such a snapshot might not reveal the dynamic nature of the market. For example, volatile market shares might indicate that undertakings constantly innovate to get ahead of each other, which is consistent with effective competition. Evidence that undertakings with low market shares have grown rapidly to attain relatively large market shares might suggest that barriers to expansion are low, particularly when such growth is observed for recent entrants” (paragraph 4.3). 33
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equal, would indicate that they faced more vibrant competition than the case where the parties’ combined share had remained constant at 40% over the same period. (See also the time period for market share data point, above, in respect of ‘lumpy’ market demand.) (5)
Merging firm is of declining competitive significance. The declining position of one of the merging parties (typically the target firm, but sometimes the acquirer firm) may signal that its future competitive significance is not captured by its current or historical market shares. Where substantiated, for example by internal documents or third party statements, this may amount to a stand-alone point on the (absence of) close competition between the parties going forward absent the merger, even if future decline in the firm’s competitive strength fails to meet the conditions required for a failing firm argument.34
11.3
The ‘Significant Competitor’ Set and ‘Fascia Counts’
The number of significant competitors remaining in the market post-merger is a basic measure of market concentration that is frequently used by the CMA. The group of ‘significant’ competitors is sometimes referred to as the ‘effective competitor set’. A count of such competitors is denoted a ‘fascia count’. This should be distinguished from a store count: in an area where there are, for example, two Sainsbury’s supermarkets and three Asda stores then although there are five stores, there are only two fascia.35 Having established the significant competitor set, screens may be conducted to rule out concern in areas where, post-merger, sufficient significant competitors remain. For example (and as discussed in more detail below), a screen frequently employed in the case of retail mergers is to find no concern where at least four significant competitors remain post-merger and to investigate further those areas where three or fewer remain. The idea of the significant competitor set, as the same suggests, is to identify rivals that are material constraints on the merging parties in all relevant cases (e.g., in all local areas where they face the merging parties). This set may be chosen based on precedent, documentary evidence (e.g., where one or both merging parties closely monitor certain rivals), survey evidence (although this might normally be targeted on areas which fail the initial screen), entry event analysis (i.e., which competitors have a marked impact on the turnover of one or both of the merging parties when they enter nearby), third 34
See also the Chapter 9 discussion on the counterfactual. See also Completed acquisition by Impress B.V. of Alcan Packaging Sutton Ltd, OFT decision of 4 November 2005 and Imerys Minerals Limited and Goonvean Limited, a report on the completed acquisition by Imerys Minerals Limited of the kaolin business of Goonvean Limited, 10 October 2013, paras. 22-25: in relation to the supply of kaolin for use in tableware, the CC noted that the merging parties were closest competitors but that there was not significant price competition pre-merger and that Goonvean was about to inform its customers of its intention to withdraw supply due to diminishing reserves in the near future, at which point its competitive constraint would quickly diminish. 35 For the purposes of a fascia assessment stores under common ownership are treated as a single fascia (even if branded differently). See Commentary on Retail Mergers, March 2011, note 2.
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party evidence (in particular customer feedback) and, normally in conjunction with other evidence, product characteristics (i.e., which rivals have a broadly similar offer to the merging parties in terms of price, quality, range and service).
11.3.1 Fascia Counts As noted above, the CMA regularly uses fascia count as an indicator of prima facie competition concerns, particularly in local retail mergers, often focusing its more indepth assessment on local areas in which the merger will result in a reduction in the number of competitors from four to three (or fewer). However, the Merger Assessment Guidelines note that counting the number of competitors or fascia does not take into account differences in market shares or the size distribution of firms.36 Such measures may not take into account other differentiating factors such as capacity and geographic location to the extent that they are not already captured in the choice of effective competitor set. Moreover, in differentiated product cases, it does not take account of the possibility that customers of each merging party, if faced with a post-merger price rise, might be more likely to divert to certain members of the effective competitor set than others (or even to competitors outside that set). A standard fascia count analysis treats those inside the ‘significant competitor set’ as equal to one fascia while those outside the set as worth zero. A fascia count approach is therefore subject to the critique that it (by design) suffers from the binary fallacy defined above. First, it could exclude important competitors that are constraints either individually or collectively. Secondly, it could include as constraints relatively weak players (e.g., imagine one merging party with a 45% market share, the other with a 40% and three rivals each with a 5% share; this is a ‘5 to 4’ on a fascia count basis but with a combined share of 85% (increment 40%) on a market share basis).37 One response is to define the significant competitor set so narrowly that its members are all sufficiently ‘close’ to the merging parties that their ‘whole fascia’ weighting is appropriate. Other constraints would then be assessed on a case-by-case basis with respect to each market that fails the screen (e.g., where the merger gives rise to a ‘4 to 3’ or ‘worse’).38 Another more recent development is to use ‘fractions of fascia’ where a fascia count is conducted but where different weights are afforded to each competitor
36
Merger Assessment Guidelines, para. 5.3.4. See, e.g., Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015, paras. 104-106, discussed further below. 38 See, e.g., Completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, CMA decision of 13 January 2015 (where the effective competitor set was restricted to significant suppliers of rigid paper packaging for food and all other forms of constraint were assessed as an out of market constraint); Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015 (where, contrary to the parties’ submissions including a consumer survey, the effective competitor set was restricted to national branded bowling operators and independent/boutique operators); Completed acquisition by BCA Marketplace plc of SMA Vehicle Remarketing Limited, CMA decision of 17 November 2015 (where the CMA restricted the effective competitor set to the supply of used vehicle auction services at physical auction sites). 37
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Concentration Measures and Screens
based on their product offer, their geographic position, or both. These were used in Poundland/99p and (in relation to a market share screen) Greene King/Spirit.39 Whilst not exhaustive, the following discussion covers many of the main distinctions raised in fascia count cases, typically in retail markets giving rise to overlaps in a number of local markets. Before that discussion, two further examples of the use of fascia counts are worth mentioning. First, the issue of inclusion/exclusion can also apply in upstream, intermediate markets or at a national level in retail cases. For example, when assessing the impact at a national level fringe competitors may be excluded (e.g., those with a national share below 5%)40 or where chains have fewer than a critical number of sites.41 Secondly, the Merger Assessment Guidelines note that the CMA may attach greater weight to the number of firms when considering coordinated effects.42 In these cases, which typically involve homogeneous products, the number of remaining competitors in the market post-merger is an important feature in respect of the competitors’ ability to coordinate.43 That said, coordinated effects tend to be a concern for the same fascia count reductions – 4 to 3 and 3 to 2 – as typically present in cases raising unilateral effects concerns.
11.3.2 Mergers of Large Full-Range Retailers or ‘Superstores’ The effective competitor set is normally defined to include only those retailers whose product, quality, range and service (“PQRS”) offering is sufficiently close to that of the merging parties. For example, where both merging parties exceed a certain size, it is possible that smaller retailers do not effectively constrain them (or at least are not 39 In Poundland/99p, in order to assess the distribution of the strength of local competition, and how that was affected by the merger, the CMA (at Phase II) conducted a weighted fascia count. Specifically, the CMA gave a product weighting to competitors according to whether they were: single price point (SPP) retailers (weighted 1) or specific value general merchandise (VGM); supermarket retailers (weighted 0.5); or other (weighted 0). The CMA further gave a distance weighting, multiplying the product weight by 1 if the competitor with within 0.5 miles of the centre site, by 0.5 if the competitor was within 0.5 and 1 mile of the centre site, and by zero otherwise. See Poundland and 99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015, para. 6.118. Greene King/Spirit is discussed below. Wet-led pubs were presumed to have the weight of one fifth of a dry-led pub when assessing the constraint on dry-led pubs, increasing the market size in some areas, thereby allowing the sites in question to be excluded by the 35% screening threshold adopted. 40 Completed acquisition by DS Smith plc of Linpac Containers Limited, OFT decision of 20 May 2004. Here, the OFT considered the case a reduction of 5 to 4 of main suppliers: there were five premerger suppliers with double-digit market shares (that is, four players with 10-15%, and one with 1520%); the CMA excluded for these purposes two fringe players with 0-5% market shares. For an example in relation to a local assessment, see the discussion of the ‘4 to 3’ screen in Anglo American/Lafarge, which applied only where the fourth player’s share was below 5%. 41 In Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014, the CMA stated: “The merger will result in a reduction in the number of national lowcost gym operators with more than 20 sites from four to three”, para. 5. 42 43
Ibid. See Chapter 12.
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sufficiently likely to constrain them for the purpose of a screen) because they offer an inferior range (e.g., as in grocery or DIY ‘shed’ mergers – see below) or an insufficient number of facilities and/or capacity (e.g., as in budget gyms).44 The best (and indeed the ‘classic’) example of the use of the effective competitor set arises in the case of grocery mergers. In this sector, the CC has identified asymmetric constraints based on store size, namely that large ‘one-stop’ stores with a very wide range of groceries on offer constrain smaller ‘mid-size’ stores (but mid-size stores do not constrain one-stop stores due to their narrower offer). Further, one-stop and midsize stores constrain convenience stores but the reverse is not the case. The CC came to this view on the basis of a number of factors, in particular its event analysis (e.g., that a ‘one-stop’ store’s turnover is reduced substantially when entry occurs, within a given distance, by another one-stop store but not when the new entrant’s offer is mid-sized or just convenience). As larger (e.g., ‘weekly shop’ or ‘one-stop’) grocery purchases at supermarkets are largely composed of a basket of goods from a wide range of dry and fresh grocery products, the Authorities excluded specialist food retailers (such as butchers, bakers, greengrocers, etc.) that offer only a small sub-set of the retail offer of a full-range supermarket. For example, the CC noted that the transactional costs of visiting even a ‘parade’ of specialist stores vs. the convenience of one-stop shopping at supermarkets mean that even a collection of individual shops is not a close substitute to a supermarket.45 Specifically, for the purpose of its initial screen, the Authorities have found (and the view has been re-stated in recent grocery mergers)46 the following: (1)
Large one-stop stores (over 1400 sqm): are a market to themselves, facing insufficient constraints from smaller stores to place them in the same product
44 Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014, para. 138. In this case, the CMA excluded from its effective competitor set: gyms charging more than £25 per month and £30 per month inside London (and required the contract on offer to be monthly as opposed to an average per month price for a longer term contract); gyms with fewer than 50 cardio vascular or resistance machines; and gyms with fewer than 500 members. 45 See CC, The supply of groceries in the UK market investigation (April 2008) at 4.83 note 1. See also, Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008, paras. 59 and 116. The OFT did not consider specialist retailers of a variety of home improvement products (plumbing, heating, bathroom, kitchen, tiles, etc) as sufficiently close substitutes to be included in the ‘one-stop’ market definition of do-it-yourself (DIY) home improvement, and instead defined a market for DIY sheds in Homebase/Focus DIY. In the latter case, DIY sheds included the four national chains – B&Q, Homebase, Travis Perkins/Wickes, and Focus DIY – but also a regional chain, Trago Mills, which was included in the effective competitor set in relation to an overlap in Bodmin, where a customer survey indicated that it (along with B&Q) were closer competitors to the target Focus store than was the acquirer’s Homebase store. 46 See, e.g., Anticipated acquisition by Netto Limited of three grocery stores from Co-operative Group Limited, CMA decision of 24 July 2015.
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Concentration Measures and Screens
market or competitor set; it follows that in a large store overlap case, the competitor set will comprise only large store rivals; (2)
Mid-range stores (over 280 sqm but less than 1400 sqm): are constrained by large stores and other mid-range stores, but not convenience stores; consequently, the competitor set in a mid-range store overlap will comprise large and mid-range store rivals;
(3)
Convenience stores (below 280 sqm): are constrained by large, mid-range and other convenience stores; accordingly, the competitor set in a convenience store overlap is all grocery stores regardless of size.47
However, even if a grocery supplier qualifies as a competitor on the basis of the store size metric set out above, it may be excluded on the grounds of limited product range. Whilst major retailers such as Asda, Morrison’s, Sainsbury, Tesco, Waitrose, Co-op (and Somerfield, pre-acquisition) and ‘symbol groups’48 have always qualified as a socalled ‘effective competitor’ in grocery mergers, and therefore been included in the competitor set in merger cases, it is illustrative to consider the examples of retailers that have been excluded from the competitor set in various cases: (1)
Limited Assortment Discounters (LADs), e.g., Aldi, Lidl and Netto, were not included by the CC in the effective competitor set in any of Safeway (2003), Somerfield (2005), or the Groceries market investigation (2008) (a non-merger inquiry that nonetheless has peculiar relevance to grocery merger analysis). Since then the importance of LADs as grocery retailers has increased substantially but it is nonetheless informative to consider the reasons (valid at the time in Somerfield) for their exclusion: (i) “the LADs offer less than 20% of the range of most other retailers”;49 (ii) entry impact analysis showed significantly smaller effects in taking away revenue from incumbent stores than the effect of entry by a major retailer; (iii) perceptions of differentiation amongst grocery retailers and LADs; and (iv) consumer survey evidence. Overall, as this was merely relevant to the first screen of CC analysis a conservative methodology was appropriate.50 LADs were excluded by the OFT in CGL/Somerfield,51 not least due to the scale of the case, but were – for obvious reasons – included in the first case of a full-range player
47
In terms of geographic market definition or “store catchment” area, the geographic market for large stores is 15-20 minute drive-time isochrones; for mid-range stores the range is 10-15 minutes; and for convenience stores, 5 minutes. 48 Such as Spar, Londis, Costcutter and Premier. 49 In Groceries, the relative ranges cited were “fewer than 1000 products” for LADs vs. “around 5,000 to 10,000 products” for large grocery retailers at stores in the same size range of 500 to 1,400 sqm. 50
Somerfield plc/Wm Morrison Supermarkets plc: a report on the acquisition by Somerfield plc of 115 stores from Wm Morrison Supermarkets plc, 2 September 2005, para. 6.43. 51 Anticipated acquisition by Co-operative Group Limited of Somerfield Limited, OFT decision of 20 October 2008.
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acquiring an entire national LAD chain, Asda/Netto.52 In all so-called Stage 2 analysis in grocery cases, diversion to all competitors is counted, irrespective of their fascia status at Stage 1 (see further, Section 12.2.10, below). (2)
Frozen-food retailers, i.e., Iceland and Farmfoods – Iceland, a frozen-food retailer that uses mid-range size stores, was included in the mid-range store competitor set in Safeway (2003) but excluded by the time of Somerfield/Morrison’s (2005) because the CC took the view that its competitive offering had changed in the interim. This is probably a result of the fact that this issue was marginal in Safeway (a large one-stop store case) and the CC felt that Iceland was not a sufficiently strong competitor when it focused more on mid-range stores.
(3)
Marks & Spencer (M&S) department stores with food courts and M&S Simply Food stores are a relatively distinct proposition: exclusively an ownlabel (and therefore more limited-range) grocery store but with premium product and service positioning and pricing and a strength in ready-meals. Despite having both large one-stop and mid-range stores, M&S was excluded from the competitor sets in Safeway and Somerfield. In the latter case, the CC took a similar view to the LADs in excluding M&S, referring to: (i) the entry impact of M&S and Simply Food being much less than that of a Tesco store (other rivals were not cited); (ii) M&S grocery products are ‘all own-brand’; (iii) M&S was mentioned as an alternative by about 1% of respondents at stores in areas where it was present; and (iv) the largest proportion of respondents naming it as an alternative was 8% and it was never in the top four alternatives.53 However, M&S had ‘made the grade’ by the time of the Groceries market investigation report of 2008. Despite an argument by Waitrose that M&S had insufficient product range to compete with large grocery retailers in stores of similar sizes, the CC responded that “M&S does carry the same broad product range as large retailers, but has fewer SKUs within each product category [as] it only stocks own-label products.”54 The CC also pointed to entry impact analysis as providing positive grounds for inclusion of M&S stores in the same product market – the CC’s entry analysis showed that M&S entry had a significant effect on an incumbent Sainsbury and (a statistically weak) effect on Asda and Tesco.55 M&S had also argued for its own inclusion and submitted its own entry impact analysis showing a negative effect on its revenues when an undisclosed competitor entered (though such evidence would only show that others constrained M&S, not vice versa). Compared with LADs, M&S was cited by the CC as having around 7,000 product lines (but only a single M&S brand per product segment,
52 Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 23 September 2010. 53 As above, para. 6.46(d). 54 55
Groceries at para. 4.77. As above, Table 4.5 at page 66.
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compared with up to six different versions of a product, and a much larger product range, at other large grocery retailers). (4)
Whole Foods. Despite its relatively small UK presence, Whole Foods is worth mentioning because the CC in its Groceries Provisional Findings had excluded Whole Foods but was persuaded ultimately to find that “in relation to new Whole Foods stores [of which at least 40 were planned] we agree that these should be included in the same product market as the stores of large grocery retailers provided that these stores carry a full range of grocery products.”56
11.3.3 Selected Other Cases In this section, a range of illustrative cases is provided to highlight a number of frequently occurring issues and how the CMA and its predecessors have dealt with them. This includes a recent CMA approach in relation to pubs (where, inter alia, the constraint of a wet-led pub on a dry led pub was considered to be one fifth of the constraint placed by another dry-led pub) and a number of cases where the CMA has assessed the extent to which generalist retailers constrained specialist retailers or independent retailers constrained chains. (1)
Budget gyms. In Pure Gym/The Gym, the CMA did not distinguish between public and private gyms or (at the local level) chains versus independents provided that the gyms in question met the other characteristics required of its effective competitor set.57
(2)
Tenpin bowling. In The Original Bowling Company/Bowlplex, the CMA included the supply of tenpin bowling facilities by independent/boutique operators in the product frame of reference but noted that some independent and boutique operators could be significantly differentiated from national branded operators such that the constraint that they impose on the parties would diminish as differentiation increases. This was taken into account in the competitive assessment (e.g., the Bloomsbury bowl in Bristol, despite being the nearest operator, was not viewed as a competitor due to its different service focus and smaller capacity).58 The merging parties stated that they monitored cinemas, since these were a substitute activity, and that entry by cinemas impacted on the turnover of bowling venues. However, the CMA’s response was to exclude such activities on the basis that bowling venues appeared to be constrained more by other bowling venues than alternative leisure activities such as cinemas.59
56
Groceries at para. 4.79. Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014, para. 130. 58 Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, paras. 23-27, 77. 59 Ibid., paras. 28-56. 57
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(3)
Branded national chains vs. independents. The Phase I approach has varied. Pharmacies and opticians are sectors in which a substantial proportion of UK outlets are independents rather than branded national chains. In the pharmacies sector, the CMA noted that the quality of independents varied markedly, in many cases not being effective competitors due to their small local market shares.60 In relation to opticians, Alliance Boots/Dolland & Aitchison,61 the OFT determined that the competitive set included independents. The OFT considered that a bright-line cut-off between national chains and independents was too arbitrary and found that the product and service offering in both types of outlet were very similar on the basis of the following factors:62 (i) all opticians need to fulfil the same basic requirements, offering the same services (e.g., eye-sight tests, and the supply and fitting of spectacles and contact lenses), a comparable range of products, and they operated from very similar outlets; (ii) all opticians need to be registered in order to practice; and (iii) all opticians must comply with the same set of criteria in order to secure an NHS contract. A third party argued that national chains should be considered separately as independents did not have the ‘scale’ necessary to compete with national chains. In response to this, the parties provided a “substantial body of evidence” showing that independents were a significant constraint, including evidence that they monitored the local product and service offering of independents and that they had undertaken local initiatives to respond to the competitive constraint coming from independents.63 The OFT found that another national chain also carried out similar market research and monitored the performance of local independent competitors. Including independents within the competitive set, there were no local areas in which the merger resulted in a fascia reduction from 4 to 3, and the merger was cleared unconditionally.
(4)
Travel agency. In the OFT’s fast-track reference of Thomas Cook/Co-op Travel JV, a key argument was that online travel booking options and competitors would constrain the parties’ traditional high-street travel agencies.64 Ultimately the internet was assessed as an out of market constraint. This issue (alongside a wider discussion of online markets) is discussed in Chapter 10.
(5)
Plumbing and heating suppliers. In Travis Perkins/BSS, the parties submitted that independent plumbing and heating (“P&H”) specialists were a constraint on national P&H specialists when taken together, but that the extent
60
Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015, paras. 72 and 104-106. See further below on screens. 61 Proposed joint venture between Alliance Boots Limited and Dolland & Aitchison Limited in relation to their respective optical businesses, OFT decision of 1 May 2009. 62 Alliance Boots/Dolland & Aitchison, supra, para. 20. 63 Ibid., para. 23. 64 Anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Cooperative Society Limited, OFT decision of 2 March 2011.
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of their competitive constraint varied.65 The parties argued that: (i) competitor opening impact analysis suggested that there was no significant difference in the impact of new entry by national or independent P&H specialists; (ii) their consumer survey indicated that 30-40% of Travis Perkins’ customers had also bought products from independent P&H specialists; (iii) Travis Perkins’ senior management had referred to the competitive threat posed by independents in internal and external presentations; and (iv) when deciding to open a new store, the parties assessed local competitors, including independents. However, the OFT’s investigation found that most independent P&H specialists, and four large customers, stated that independents did not provide a constraint on the merging parties, mainly because independents varied considerably in size, with differing ranges and possibly with no access to sales features, such as finance offers. Overall, therefore, the OFT considered that it had not received enough evidence to demonstrate that independents were in the same competitive set as national P&H specialists. However, the OFT recognised that the competitive constraint of independents varied by local area and in its assessment of several 4 to 3 areas, the OFT did not find that the merger gave rise to a realistic prospect of a substantial lessening of competition where, post-merger, the parties would compete against one other national P&H specialist and one independent. In relation to the independents in these areas, the OFT stated that its assessment had been based on “compelling evidence”.66 (6)
65
Nuts, seed and fruit. In Holland & Barrett/Julian Graves, whilst an older case, is of interest because of the OFT’s Phase I approach. First, the OFT segmented the problematic overlap in product portfolio to a subset of what the parties sold (i.e., sale of nuts, seeds and fruit (“NSF”)), finding no concerns in the other main area of vitamins, minerals and food supplements. Second, it focused on the sale of NSF via specialist health food stores, rather than via all retail channels.67 This conclusion was based on both qualitative considerations (i.e., supermarkets were not specialist health and natural food retailers; they differed in their ranges, locations and overall retail offers; and they typically did not monitor NSF prices of the parties) and quantitative critical loss analysis.68 Ultimately, the CC endorsed the NSF definition with respect to product portfolio but widened the market definition lens to include sales via all retail channels.69
Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 26 October 2010. 66 Ibid., para. 126. See further below for a discussion of the screening process in more detail. 67 Completed acquisition by NBTY Europe Limited of Julian Graves Limited, OFT decision of 24 March 2009. 68 Ibid, para. 38. 69 NBTY and Julian Graves, a report on the completed acquisition by NBTY Europe Limited of Julian Graves Limited, 20 August 2009.
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11.3.4 The 5 to 4 Screen for Multiple-Overlap Retail (and Others) Cases (a) Retail cases. Having identified the significant competitor set, and thereby the firms to be used for the purpose of a fascia count, the next step is to determine a threshold for which type of fascia reduction may matter. This permits the CMA to exclude quickly a (potentially large) number of areas from more detailed investigation.70 For example, where a merger involves the acquisition of a number of geographically dispersed retail outlets, in respect of which local market share data are not typically available, the Authorities will often use a local fascia count as an initial filter to rule out geographic areas from an in-depth horizontal effects analysis.71 The local geographic area in which the significant competitors are ‘counted’ is determined by precedent or, frequently, the 80% catchment area discussed in Chapter 10. The Merger Assessment Guidelines note that decisional practice suggests that Phase I assessments have not usually been concerned about mergers that reduce the number of firms in the market from five to four (or above).”72 A significant footnote to this statement is that the remaining firms in the market must be effective competitors. In other words, where the CMA is dealing with multiple local markets and is satisfied, based on precedent or on case-specific considerations, as to the ‘effective competitor’ set, then it tends to screen out 5 to 4 (or more) overlaps and focus on 4 to 3 overlaps and less (i.e., ‘worse’). For the purpose of conducting a fascia count, where the competitor set and the relevant catchment area are identified, the simplest approach is to ‘centre’ the catchment area on both parties’ stores and conduct the fascia count for each store. This is because even if centring on the target’s store does not give rise to a four to three (or ‘worse’), centring on the acquirer’s store in the same area may do so. However, in some cases (notably 70 Commentary on Retail Mergers, March 2011, para. 2.11, adds a caveat: “[p]articularly at the [phase I] stage, in some cases involving large numbers of overlaps an initial filter has been needed to help focus the data-gathering work on a manageable number of local areas. In some of these cases, however, there has been limited evidence available early on in the investigation to suggest how cautious or otherwise a given initial filter might be. In such cases the [CMA] has reserved the right, therefore, to reexamine local areas initially identified as unproblematic where evidence emerging later in the investigation suggests that the initial filter may not have been sufficiently cautious – for example, where evidence from third parties or consumer survey work suggests that the scope of the initial catchment area might have been too wide.” 71 Even in retail mergers that involve local geographic markets, where the transaction involves the acquisition of an entire retail chain, the CMA is unlikely to assess the fascia count in every local area. Practically speaking, the CMA does not have the ability to review in any detail dozens of local areas. In CGL/Somerfield (see further Section 12.2.10, below) the OFT processed a local assessment of an entire national chain, but as this was a grocery merger, the OFT was applying a well-established competitive assessment in terms of the local areas that raised competition concerns and those that did not. It did not undertake an initial filtering exercise and then carry out an in-depth assessment of dozens of local areas. See also Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015, in which the CMA was unable to assess individually all of the overlap areas created by the merger. 72 Merger Assessment Guidelines, para. 5.3.5.
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grocery mergers) the Authorities have required additional fascia screens based on demand centring as well as store centring. That said, in other cases, the Authorities have centred only on target stores and this would typically be the CMA’s starting point. An alternative approach to centring on every store of both parties is to consider all stores of one party and then identify any store of the other party that is close enough to be worth centring on as well. For example, if the relevant catchment area for both parties is a 10 minute drive-time, then centring on all the target’s stores plus any of the acquirer’s stores within a 20 minute drive-time of a target store would be sufficient to identify all situations where the parties lie in each other’s catchment areas (i.e., when they are within a 10 minute drive-time), as well as all cases where their catchment areas overlap even though the parties’ stores are not in each other’s catchment (i.e., where they are 10-20 minutes apart). In the latter case, it is possible that the parties are important competitors, if, for example, they draw an important share of their custom from the same geographic area because they are geographically the closest competitors. As noted above, supply (or store) centring is the most common way to conduct a fascia count (i.e., the centre of the isochrone (or radial) is a particular store and then the number of competing fascia are counted within the relevant drive time or distance). In contrast, demand centring asks the question: from a given customer location, what choice of fascia are there within a certain distance or drive time? For this reason, demand centring can be more informative on how the merger impacts on the customer at the centre.73 However, it may be a data or time consuming task if there are numerous customers on which to centre. In grocery mergers, the CMA may require both supply and demand centring. For example, in Netto/Co-op, the CMA indicated that two supply-centred and one demand centred ‘4 to 3’ screens were applied: (i) centring a ‘primary’ isochrone on each of the target (Co-op) stores to capture constraints from other stores of the same type and other relevant store types; (ii) centring on an ‘acquirer’ isochrone on any relevant Netto or Sainsbury’s stores identified as an overlap within the target store’s isochrones;74 and (iii) centred isochrones on all census output areas within the primary isochrone of the target store in question – this particular filter is failed where 10% or more of the population would see a reduction in fascia from four to three or fewer.75 The CMA has also considered so-called ‘maximum reach’ isochrones in several local retail cases. For example, in Netto/Co-op, the CMA calculated maximum reach isochrones to identify overlaps between the parties (and which the parties had not 73 In A report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, CC decision of 9 April 2014, demand centring was considered at a second stage, i.e., after the initial screen. The CC produced ‘heat maps’, identifying customer locations that would be subject to a reduction in suppliers from ‘6 to 5’ or ‘5 to 4’; ‘4 to 3’; or ‘3 to 2’ or ‘2 to 1’ (Appendix F). 74
Netto was a 50/50 JV with Sainsbury’s and so the CMA cautiously treated them as part of the same fascia. 75 Anticipated acquisition by Netto Limited of three grocery stores from Co-operative Group Limited, CMA decision of 25 February 2016, para. 33.
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provided in their notification).76 The basic principle behind these isochones is to apply a more conservative initial filter and consider as an overlap local areas in which the generally applied isochrones overlap, rather than where there is a competing store within this isochrones. Therefore, in Netto/Co-op, rather than simply considering all areas in which there was a Co-op store within, say, a 10 minute drive-time of a Sainsbury’s or Netto one-stop store (“OSS”), the CMA considered whether there was a Sainsbury’s or Netto OSS within a 20 minute drive-time of a Co-op OSS (i.e., where the Sainsbury’s/Netto and Co-op OSS isochrones would overlap). In The Original Bowling Company/Bowlplex, the CMA did not formally apply maximum reach isochrones but applied a modified version of this concept.77 In this case, the CMA identified a number of additional overlaps that had not initially been identified by the merging parties by using the largest drive-time distance of any overlap and applying that to all of the target’s stores. Therefore, instead of using an average drive-time of 25 minutes, the CMA applied a 40 minute drive-time, thereby identifying an additional nine overlaps. (b) Non-retail cases. The Authorities’ decisional-practice suggests that, whilst it is by no means a safe harbour, it is rare that concerns arise in non-retail markets where, on the CMA’s view, four or more effective competitors remain (i.e., 5 to 4 or more), even if in the Merger Assessment Guidelines this is limited to retail markets. However, the proposition that 5 to 4 (or more) are screened out is less likely to hold true in situations where: (1)
the CMA is unfamiliar with the market and the Authorities have not assessed this sector before;
(2)
some form of aggravating factor exists, such as where the merger brings together the two largest players and the remaining competitors are relatively small or capacity constrained or the merging parties are particularly close competitors;
(3)
there is only one locally-affected market, or a limited number, which will render the need to screen out any overlaps moot due to the ability to assess each market in detail at Phase I. Accordingly, and somewhat ironically, an overlap may receive scrutiny notwithstanding that it is arguably a 5 to 4 (or more) if it is the only overlap (or one of few) that a merger creates – even if it would have been screened out in the presence of many overlaps that were 4 to 3 or less.
76
Ibid., Annex A. Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 65. 77
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11.3.5 Examples of Fascia and Market Share Screens This section provides a selection of examples of screens that the CMA and its predecessors have employed, mainly at Phase I but with some Phase II examples as well. Both fascia screens and market share screens are discussed, sometimes both being used together. (a) Phase I demand- and supply-centred ‘4 to 3’ fascia counts. In grocery mergers (as discussed further below), the Authorities have applied several fascia count filters.78 Supply centring is the most common way to conduct a fascia count (i.e., the centre of the isochrone (or radial) is a particular store and then the number of competing fascia are counted within the relevant drive time or distance). Demand centring asks the question: from a given customer location, what choice of fascia are there within a certain distance or drive time? For this reason, demand centring can be more informative as to how the merger impacts on the customer at the centre. However, it may be a data or time-consuming task if there are numerous customers on which to centre. In grocery mergers, the CMA may require both supply and demand centring. For example, in Netto/Co-op, the CMA applied two supply-centred screens and one demand centred ‘4 to 3’ screen centring: (i) a ‘primary’ isochrone on each of the target (Coop) stores to capture constraints from other stores of the same type and other relevant store types; (ii) on an ‘acquirer’ isochrone on any relevant Netto or Sainsbury’s stores identified as an overlap within the target store’s isochrones;79 and (iii) isochrones on all census output areas within the primary isochrone of the target store in question – this particular filter was failed where 10% or more of the population would see a reduction in fascia from four to three or fewer.80 (b) Phase I store count share and increment (motivated by a 4 to 3 concept). In Greene King/Spirit, the CMA applied a primary filter in which dry-led pubs constrained other dry-led pubs, but wet-led pubs did not constrain dry-led pubs (the constraint was asymmetric since both dry-led and wet-led pubs were considered to constrain wet-led pubs).81 On the basis of this competitor set, the CMA applied a market share and increment screen (based on the shares of the number of pubs in the competitor set), creating a safe harbour where the parties had below 35% of the pub count or the merger resulted in less than a 5 percentage point increment.82 This threshold was motived by a ‘4 to 3’ filter.83
78
See, e.g., Anticipated acquisition by Co-operative Group Limited of Somerfield Limited, OFT decision of 20 October 2008. 79 Netto was a 50/50 JV with Sainsbury’s and so the CMA cautiously treated them as part of the same fascia. 80 Anticipated acquisition by Netto Limited of three grocery stores from Co-operative Group Limited, CMA decision of 24 July 2015. 81 Anticipated acquisition by Greene King plc of Spirit Pub Company plc, CMA Decision of 11 May 2015. 82 The CMA indicated that it used a more generous screen of 35% compared to 25% in earlier cases due to some evidence that restaurants and other forms of entertainment may constrain pubs. The CMA
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This led to 56 areas of potential concern and so the CMA applied a number of secondary screens. First, it treated wet-led pubs as being equal to 20% of a dry-led pub (i.e., five wet-led pubs equated to a dry-led pub) – this inflated the market size for the purpose of assessing the parties’ market shares in the dry-led segment, meaning that more areas met the market share screen. Secondly, it ruled out concerns where the parties were at least half an isochrone apart (with at least two pubs closer to the centre site). Thirdly, in central London, isochrones were flexed by plus/minus 30 seconds to see if the combined share fell under the 35% threshold. Finally, in two cases the CMA sought evidence on margins which indicated a GUPPI would not be greater than 10% which weighed in favour of the absence of an SLC.84 (c) Phase I screens in pharmacies. The pharmacy sector makes for an interesting study of Phase I approaches to screens. In Boots/UniChem, Boots was considered differentiated from traditional community pharmacies, such as those it was acquiring from UniChem, which was a factor that led the OFT to have nuanced concerns in relation to ‘3 to 2’ overlaps.85 Ultimately, it concluded that the reference test was met in relation to all ‘3 to 2’ areas but this was an issue of the scale and manageability of the case. The focus of its concern, had it been able to spend more time, were those asymmetric ‘3 to 2’ overlaps where the geographic proximity of the Boots and target pharmacy (i.e., in close proximity, even if one other fascia was within the 1-mile geographic market) made the overlaps ‘resemble’ 2 to 1 overlaps.86 In contrast, in a later case where the overlap was community pharmacy-on-community pharmacy, the OFT had greater concerns given the closer product positioning and symmetry between the merging parties, and applied a ‘3 to 2’ rule without any “hesitation.”87 More recently, the role of both the ‘3 to 2’ screen and the inclusion of independents in the effective competitor set at Phase I have been called into question by the CMA. In
also indicated that the 35% screen could be viewed as analogous to a ‘4 to 3’ merger in which postmerger shares were symmetric (i.e., 33%)., ibid., paras. 109-111. 83 The CMA noted that “assuming that market shares are symmetric, a four to three reduction in fascia (the fascia count threshold generally used when applying a filtering methodology) would give rise to a combined market share of 33% if the firms were symmetric after the merger. For the reasons set out above, the CMA believes that in the present case it is appropriate to apply a 35% combined pub share threshold. The CMA has used a 35% combined pub share with a 5% increment to determine the set of pubs failing the primary filter”. Ibid., para. 111. 84
The CMA also noted factors for including certain third party competitors: (a) the competitor is located close to the centroid pub; (b) the competitor offers the same or better facilities and amenities than the centroid pub (partly verified by TripAdvisor ratings where the third party is equal to or better than the review for the Parties); and (c) where the prices for beer, lager, burgers and chips, and fish and chips are no more than 10% more expensive than the Parties (ibid., para. 143). 85 Anticipated acquisition by Boots plc of Alliance UniChem plc, OFT decision of 6 February 2006. 86
See the witness statement of Simon Pritchard, Director of Mergers, contained in the CAT judgment relating to a third-party appeal of the Boots/UniChem case in Celesio v. OFT [2006] CAT 9. 87 Anticipated acquisition by Lloyds Pharmacy Limited of Independent Pharmacy Care Centres plc, OFT decision of 8 June 2007.
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Celesio (Lloyds)/Sainsbury’s Pharmacy, the CMA applied both a market share screen (using data not available in earlier pharmacy cases) and applied a ‘4 to 3’ (not ‘3 to 2’) screen (including both chain and independent pharmacies).88 However, in its competitive assessment, the CMA queried, based on the newly available share of supply data, whether independent pharmacies should be included in the effective competitor set for the purposes of applying the 4 to 3 screen. Specifically, the CMA noted that many areas that would have passed a ‘4 to 3’ screen gave rise to high market shares and increments (in part due to the inclusion of independents with market shares below 5%).89 The CMA also noted that it switched from a 35% combined share plus a 5% increment filter, which it used at the Issues Letter stage, to a 40% combined share plus 10% increment test in its reference decision. This perhaps indicates that the CMA considered the 35% plus 5% threshold was set at slightly too conservative a level given the differentiated nature of the parties’ competitive offering, although it is not clear that the CMA would necessarily apply the 40% plus 10% filter in future cases. (d) Phase I screen, 40% market share threshold, 10% increment. In Spire/St Anthony’s (with a focus on self-pay patients) the CMA applied a “cautious filter to exclude those specialties unlikely to raise competition concerns.” It filtered out those specialties with a combined overlap below 40% or an increment of less than 10%, noting that focusing on individual specialties takes into account some of the differentiation between fascia (i.e., consistent with the use of the 40% threshold for undifferentiated products).90 As noted above, this was also one of the filters used in Celesio/Sainsbury’s. (e) Phase I ‘4 to 3’ screen applied only to target stores, supplemented by further distance screens. In Travis Perkins/BSS, the OFT applied 10-mile radius
88 Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015. 89 Ibid., paras. 104-106. In relation to the screens themselves, the CMA used a 1 mile radius around each Lloyds store (though also considered supermarket pharmacies up to 6 miles away) and a 10 minute drive time to define the catchment area for Sainsbury’s stores in urban areas and a 15 minute drive time to define the catchment area for Sainsbury’s stores in rural areas. An overlap was identified if a Lloyds pharmacy was situated within a Sainsbury’s catchment area. The CMA applied the following filtering methodology to the overlap stores: (a) a ‘share of supply filter’ based on GP prescription data for each Lloyds and Sainsbury’s overlap store for which the share of supply information was available and produced a reliable filter outcome. This filter used a 40% or greater combined share of supply with an increment of at least 10%, and was applied to 572 of the overlap stores (407 Lloyds stores and 165 Sainsbury’s stores); (b) a 4-to-3 ‘fascia count filter’ was used for the remaining 139 Lloyds stores for which share of supply information was not available or did not produce a reliable outcome; and (c) a ‘share of store filter’ based on a 40% or greater combined share of stores with an increment of at least 10% was used for the remaining 52 Sainsbury’s stores for which share of supply information was not available or did not produce a reliable outcome (paras. 73-75). 90 Completed acquisition by Spire Healthcare Limited of certain assets and business of St Anthony’s Hospital in Surrey, CMA decision of 24 September, 2014, paras. 10 and 93, which states: “the CMA has focused on specialties in which post-merger the combined entity will have shares of supply by admissions of at least 40% and an increment of at least 10%” (emphasis added).
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catchment areas around each target store (and only on the target stores).91 This gave rise to 164 overlaps. By way of a preliminary filter, the OFT filtered out all of the 5 to 4 overlaps, or more, and narrowed its assessment to 4 to 3 overlaps, or worse (indicating a “relatively muted” concern in relation to ‘4 to 3’ areas). ‘2 to 1’ overlaps within a 5-mile radius were also identified, even where there would be four players in the 10 mile radial post-merger. A second step of the methodology assessed the ‘4 to 3’ areas and removed cases where the parties were more than 5 miles apart or at least two rival fascia (either national P&H chains or demonstrably strong independents) where within five miles of the parties.92 A detailed scrutiny of the remaining areas was then conducted (being a single ‘2 to 1’ area, 12 ‘3 to 2’ cases and 10 ‘4 to 3’ areas where the parties were particularly close geographic competitors). Strong independents were identified in three of the ‘4 to 3’ areas, leaving 20 areas where a realistic prospect of an SLC could not be ruled out.93 (f) Phase I ‘4 to 3’ screen plus diversion ratios. In Poundland/99p, the CMA created a filter for the purpose of assessing the numerous local areas in which the parties’ had stores within one mile of each other.94 This filter applied a standard 4 to 3 filter based on the competitors that the CMA had deemed to be effective.95 It then expanded on this basic filter by relying on evidence that was available from the parties’ consumer survey.96 The CMA explained that it applied cautious diversion ratio thresholds due to the lack of reliability of the consumer survey. Therefore, the filter applied to identify local overlapping areas that raised concerns was: (i) a 4 to 3 reduction or worse in effective competitors, except if the diversion ratio was less than 15%; and (ii) irrespective of the fascia reduction, where the diversion ratio between the parties was more than 25% in either direction.97 (g) Phase II ‘4 to 3’ and ‘3 to 2’ screens based on prior econometrics assessment (non-retail). In Anglo American/Lafarge, the CC used filters that combined information from its price-concentration analysis (PCA), which involved developing econometric models to determine the extent to which greater competition 91
Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 26 October
2010. 92 Ibid., paras. 122-126. Notes 40 and 41 are of interest where the OFT identifies that it could not conduct an IPR as it did not have survey evidence but if diversion patterns were symmetric, then an IPR with isoelastic demand would indicate concerns in ‘3 to 2’ or worse cases. In contrast, a ‘4 to 3’ would give rise to an IPR close to 5%. 30% diversion outside the effective competitor set was assumed for these calculations. 93
Ibid., paras. 127-135. Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015. 94
95 These were other single price point retailers (Poundworld) and value general merchandisers (e.g., B&M, Poundstretcher, Home Bargains, Bargain Buys, etc). 96
The CMA explained at paragraph 270 of its decision that it was unable to rely on the consumer survey alone given its concerns in relation to the survey’s reliability. 97 Poundland/99p, supra, para. 280. Note that paragraph 280 states that the diversion ratio in both directions needed to be above 25% but this is not the case (see para. 274).
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from rivals was associated with lower prices in local areas, with information on the reduction in the number of competitors in the area concerned.98 In relation to aggregates, the CC’s PCA did not give rise to a strong relation between concentration and price for certain types of aggregates (i.e., the CMA found a price effect of less than 0.5% per nearby plant or no price effect), consistent with the view that a reduction in the number of competitors would not lead to higher prices. For these grades, the CC applied a fascia count in which only ‘3 to 2’ or ‘2 to 1’ fascia reductions were considered problematic, unless there was a ‘4 to 3’ where the fourth player’s share below 5%.99 The CC argued that it could not use its PCA results to rule out concerns in relation to such fascia reductions because its PCA had few instances of local markets with just two or a single competitor, making it harder to use the PCA to draw inferences about those areas. For the two grades where a price effect was found (of about 1% or more), all overlaps were considered in further detail.100 A margin concentration analysis was used in Rank/Gala to assist in the development of screens.101 (h) Phase II ‘5 to 4’, ‘4 to 3’ and related market share screens (non-retail). In Breedon/Aggregate Industries, the CC explained that its choice of market share filters was consistent (under certain assumptions) with ‘5 to 4’ and ‘4 to 3’ screens.102 It argued that where firms are identical post-merger, a ‘5 to 4’ merger causes the merging parties to have a combined share of 25%, while a ‘4 to 3’ merger gives rise to a market share of 33%.103 The CC filtered out sites if they met any one of the following three 98 Anglo American PLC and Lafarge S.A., a report on the anticipated construction materials joint venture between Anglo American PLC and Lafarge S.A, 1 May 2012. 99 The screen therefore combined a fascia count, econometrics and market shares; this is somewhat complex for an initial screen and so would not be expected to be used frequently, at least at Phase I. 100 Ibid., paras. 6.8, 6.21-6.26. 101 The Rank Group plc/Gala Coral Group, a report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, 19 February 2013, paras. 7.41-7.42: “We used the following conservative filtering rules to identify areas where the acquisition could possibly raise competition concerns. The filtering rules drew on our assessment of the parties’ internal documents, the evidence from surveys and the econometric analysis. We identified areas where: (a) Rank and Gala casinos were within a 60-minute drive-time of each other so that customers located between the two casinos within 30 minutes’ drive-time of both casinos would have one fewer casino provider to choose from; and (b) post-merger: (i) Gala and/or Rank faced three or fewer additional casino (fascia) competitors within a 30-minute drive-time; or (ii) regardless of the number of local competitors, if the parties’ casinos were within a 10-minute drive-time of each other (reflecting the importance of geographical proximity on the intensity of competition between casinos). There is necessarily an element of judgement in setting filtering rules. However, criteria (b)(i) and (ii) are designed to reflect the fact that we have evidence showing that variations in the degree of competition within 30 minutes have an impact on turnover, promotions (as a proportion of turnover) and margins and that, in addition, there is evidence that the closer the competing casino the stronger is the constraint.” See also Section 12.7.4. 102 Breedon Aggregates and Aggregate Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014. 103 Ibid., para. 6.51. The CC adopted a cautious approach. If firms are identical pre-merger, a ‘5 to 4’ would give rise to a combined share of 40%, while a ‘4 to 3’ would give rise to 50% share (compared to the CC’s 25% and 33% shares). Given that the products in question were
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criteria: (i) if the post-transaction share of the parties was between 25% (inclusive) and 33% and there would remain four or more competitors in both of the defined catchment areas; (ii) if the post-transaction share of the parties was less than 25% and there would remain three or more competitors in both of the defined catchment areas; or (iii) if the post-transaction share of the parties was between 25% (inclusive) and 33% in one of the defined catchment areas, but less than 25% in the other defined catchment area and there would remain three or more competitors in one of defined catchment areas, but four or more in the other defined catchment area. It is interesting to contrast the CC’s approach in Breedon/Aggregate Industries (more cautious) with the CC’s approach in the same industry (Anglo American/Lafarge, described immediately above) two years beforehand.
11.3.6 Examples of Aggravating and Mitigating Factors Once the initial screens are completed, the CMA engages (time permitting) in a detailed assessment of each local area. In this case, the CMA may consider a number of factors that either increase or decrease the chance of an SLC being found. The following list summarises a number of features considered by the CMA in recent retail mergers such as TOBC/Bowlplex,104 Poundland/99p105 and Pure Gym/The Gym106 and notes parallels with non-retail merger cases, such as Breedon/Aggregate Industries.107 The list, therefore, is likely to be illustrative of the CMA approach. (1)
Diversion ratios. These will be based on consumer survey evidence. The higher the estimated diversion between the merging parties, the greater the risk that an SLC is found. Experience suggests that a diversion below 15% is often (but not always) regarded as not raising competition concerns, whilst a diversion above 25% is typically an aggravating factor.108 However, there are
undifferentiated, a less cautious approach would have been more consistent with the 40% market share threshold mentioned in the Merger Assessment Guidelines. 104 Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015. 105 Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015. 106
Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June
2014. 107 Breedon Aggregates and Aggregate Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014. 108 In Poundland/99p Stores, supra, paras. 271-274, the CMA stated at Phase I: “competition concerns would be unlikely to arise where there would be at least four competing fascia after the merger. Therefore, as a starting point, it notes that a diversion ratio of 25% would arise in a five to four merger between equal competitors.” The CMA adopted a 15% threshold as it was concerned that the survey evidence might understate the diversion ratio. However, the CMA has expressed concerns where diversion ratios have been lower than 25%, see Chapter 12.
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important exceptions to these ‘rules of thumb’ (see Sections 12.2.3(i) and 12.2.5). (2)
Price pressure tests. The most commonly used price pressure tests are indicative price rises (“IPRs”) and the Gross Upward Pricing Pressure Index (“GUPPI”). These combine estimates of diversion between the merging parties with estimates of each party’s mark up over variable costs (i.e., the gross variable margin). The greater the apparent upwards price pressure, the greater the risk that an SLC is found. A 5% threshold has often been employed for IPRs.109 In the case of GUPPIs, it is suggested that below 5% is usually safe, with 5-10% a grey area. The aggravating factor becomes stronger above 10%, although there is no clear threshold (see Chapter 12.2.5).
(3)
Local level market shares. Where data permit, it may be possible to calculate market shares within a particular market. As discussed above, the higher the combined share and increment resulting from a merger, the greater the risk of an SLC finding. In Booker/Makro, the evidence that customers spent only a low share of their requirements with the parties was used to demonstrate that in that area the parties faced other competitors, including those outside the CMA’s effective competitor set.110 Market shares were also employed (alongside a number of other factors, in the post initial filter assessment in Breedon/Aggregate Industries.111
(4)
Catchment overlaps. The greater the overlap between the catchment areas of the parties’ stores, the greater the aggravating factor.112
109
See, e.g., Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 22 December 2014, para. 61, where the CMA stated that “[i]n previous cases, the OFT has considered that IPRs above 5% are more likely to give rise to competition concerns. However, the CMA considers that these measures offer only a guide as to whether a merger may give rise to a realistic prospect of a SLC and cannot be viewed as a definite threshold below which no concerns would arise. In determining the level of estimated IPRs that the CMA is willing to accept in this case it has considered sensitivity testing around the estimated diversion ratios and the relative prices that Asda submitted to the CMA.” 110
Bookers Group plc/Makro Holding Limited, a report on the completed acquisition by Booker Group PLC of Makro Holding Limited, 19 April 2013, para. 8.62b. 111 CMA report in Breedon/Aggregate Industries, supra, para. 6.69. Other factors considered were: site location; distance between the respective sites; type of site; site production and/or sales volume; share of production by supplier; delivery destinations; and, for aggregates only, types of product produced/sold (primary or recycled) and proportions of internal and external sales. 112
In Completed acquisition by Spire Healthcare Limited of certain assets and business of St Anthony’s Hospital in Surrey, CMA decision of 24 September 2014, para.10, the CMA considered the extent to which each hospital’s patients were drawn from the same area on a speciality by specialty basis. This factor was also considered in Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015.
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(5)
Customer location. The CMA may consider the main source of demand for the merging parties’ stores to assess the extent to which most customers have sufficient choice of rivals post-merger (see above on demand-centring).113
(6)
Location of the parties. When the parties are located closest to each other in geographic terms, this is an aggravating factor.
(7)
The number and location of rivals. It is trite that the more rivals facing the merged firm post-merger the better the prospects for clearance. Likewise, the closer rivals are to the merging parties (in terms of easy access) the better; the CMA often places weight on the presence of strong rivals being located closer to each of the merging parties (or their customers) than the parties are to each other.114
(8)
Effectiveness of rivals. The CMA may consider whether rivals are capacity constrained or weaker than the merging parties (in terms of being smaller, offering fewer facilities or having poorer perceived quality or reputations). The presence of weaker rivals acts as an aggravating factor. The CMA may rely on evidence from customers, third parties, event analysis or surveys when assessing this issue.115
(9)
Outside market constraints. In some cases, the CMA will consider the competitive constraint imposed by competitors that it originally found to be outside the effective competitor set used for screening purposes.116
113
In CMA report in Breedon/Aggregate Industries, supra, after the initial screen, remaining sites were assessed in accordance with the proximity to key sources of demand. The CC also produced ‘heat maps’, identifying customer locations that would be subject to a reduction in suppliers from ‘6 to 5’ or ‘5 to 4’; ‘4 to 3’; or ‘3 to 2’ or ‘2 to 1’ (Appendix F). 114 Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc, OFT decision of 1 May 2009, paras. 48 to 51. 115 In Greene King/Spirit, the CMA stated that: “…the threshold for including additional competitors in a local area is high. There have been relatively few cases where the CMA or the OFT have taken account of the constraint imposed by additional fascia/sites outside of the primary filter without direct empirical evidence of that constraint (such as survey evidence in the relevant local area). In Co-operative/David Sands (one of the few such cases), the OFT noted that: ‘The OFT has assessed the additional competitors on the following characteristics: geographical proximity to the parties’ stores, product offering, store size (net sales area), opening hours, parking availability and association with a multi-store operator (such as a regional chain of stores). The parties provided a range of documentary evidence to inform the OFT’s assessment of competing fascia in these six local areas based on the above criteria.” The CMA went on to include a number of local competitors. See Anticipated acquisition by Greene King plc of Spirit Pub Company plc, para. 115, CMA decision of 11 May 2015. 116 See, e.g., Sonoco and Weidenhammer, a report on the completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, 3 July 2015, para. 7.179, where the CMA indicated that it considered the out of market competitors to be a competitive constraint for some but not all customers.
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(10)
Sector specific factors and precedent. For example, in petrol mergers the CMA usually considers whether the merging parties price mark each other’s sites; it may also adopt a different price pressure test threshold.117 In its fasttrack referral of Ladbrokes/Coral, the CMA largely adopted screens based on prior precedent.118
(11)
Documents on local competition. These may include which competitors the parties monitor in the location in question, and factors considered when considering opening (or closing) sites.
(12)
Evidence of new entry. The CMA would usually speak to the relevant third parties involved to reassure itself of the scale and timing of local entry, and that the location of the entrant would be sufficiently close to the parties (or their customers).119
(13)
Cumulative effect. Even where some constraints are weaker than others, the CMA may (rightly) take into account the combined impact of all of the above factors.120
11.4
OTHER CONCENTRATION MEASURES AND SCREENS 11.4.1 HHIs
The Herfindahl Hirshman Index (“HHI”) measures market concentration pre- and postmerger, and indicates a difference (the ‘delta’) between the two numbers. HHIs are calculated by adding together the squared values of the shares of all the competitors in a market. For example, in a market of five equally-sized competitors with shares of 20%, the pre-merger HHI is 2,000. A merger involving two of these competitors would give a 40% combined share and result in a post-merger HHI of 2,800 and a delta of 800. The maximum value for the HHI is 10,000 (i.e., where there is a monopoly). The chief value of HHIs over and above market shares, on which they are wholly based, is to emphasise (exaggerate) asymmetries by the device of squaring market shares. To capture how the merger changes the market structure (under this concentration measure), the change in the HHI, or the ‘delta’ is computed. The delta in a merger between a and b is 2ab, in other words, a merger combining a firm with 25% and a firm 117 See, e.g., Anticipated acquisition by MRH (GB) Limited of 78 service stations from Esso Petroleum Company Limited, CMA decision of 26 November 2015, paras. 54 and 64. 118 Anticipated merger between Ladbrokes plc and certain businesses of Gala Coral Group Limited, CMA decision of 11 January 2016, see paras. 55-59, where the CMA identified 798 local catchment areas where the merger would result in there being no other competing licensed betting offices (LBOs) or a reduction in the number of competing LBOs from three to two. 119 See, e.g., Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014, rejecting the parties’ arguments at paras. 162, 173, 182, 192 and acknowledging new entry would tip the balance from ‘4 to 3’ to ‘5 to 4’ in Leicester, para. 265. 120 Completed acquisition by Spire Healthcare Limited of certain assets and business of St Anthony’s Hospital in Surrey, CMA decision of 24 September 2014, para. 9.
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with 10% would produce a delta of 2 x 25 x 10 = 500 whilst a merger between firms having an 80% and 5% share is 2 x 80 x 5 = 800. As a practical matter, HHIs have relevance only in undifferentiated markets, because HHIs are no better than market shares in coping with closeness of competition considerations that may lead to market shares over- or under-stating unilateral effects concerns in differentiated markets. Further, in recent times, the CMA has focused on market shares to a far greater degree than HHIs. The Merger Assessment Guidelines adopt the European Commission HHI thresholds. In other words, if the post-merger HHIs are between 1,000 and 2,000 (a “concentrated market”) with a delta of below 250, or a merger with a post-merger HHI of more than 2,000 (“highly concentrated”) with a delta of below 150, absent special circumstances the merger is not likely to raise concerns.121 The Merger Assessment Guidelines state that the (EU-inspired) thresholds “may be most informative for mergers in a market where the product is undifferentiated and where competition between firms involves choosing what volume to supply to the market [i.e., Cournot competition]. In other cases the significance of these thresholds will be less.”122
11.4.2 Concentration Ratios Concentration ratios measure the aggregate market share of a small number of the largest competitors in a market. For example, suppose there are five firms in a market with shares: 50%, 20%, 15%, 10% and 5%. In this case the two firm concentration ratio is 70% (50% + 20%), while the four firm concentration ratio is 95% (50% + 20% + 15% + 10%). Concentration ratios are now a tool rarely referred to in the Authorities’ decisional practice.123 They may be referred to in discussions of coordinated effects, where a relevant questions is the share of the market covered by the alleged coordinating group.
11.4.3 The 30% Screen for Non-Horizontal Theories In respect of non-horizontal mergers, the Merger Assessment Guidelines do not set out a clear threshold under which mergers would be presumed not to raise competition concerns. It is noted that regard may be given to the thresholds in the European Commission’s guidelines on the assessment of non-horizontal mergers (i.e., that a market share for the merged firm of less than 30% will “not often” give the CMA cause for concern over input foreclosure).124 In practice, the Authorities have rarely found vertical concerns with shares below 40%, and the SLC cases discussed in Chapter 14 on non-horizontal mergers featured shares at the relevant level of the market at 40-50% or
121
Merger Assessment Guidelines, para. 5.3.5. See also EU Horizontal Merger Guidelines, para.
122
Merger Assessment Guidelines, para. 5.3.5. Concentration ratios were a feature of the OFT’s 2003 Substantive Assessment Guidelines, para.
20. 123
4.3. 124
Merger Assessment Guidelines, para. 5.3.5.
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more. Indeed, where the upstream market is undifferentiated, it seems anomalous to have a 40% threshold for a horizontal theory and a 30% threshold for non-horizontal theories, given the lower likelihood of harm arising from vertical mergers compared to horizontal mergers.
Chapter 12 UNILATERAL EFFECTS 12.1 Introduction 12.2 Unilateral Effects in Retail Markets 12.2.1 Unilateral Effects in the Setting of Textbook Models of Differentiated Products (a) The Bertrand model (b) Pre-merger equilibrium (c) Post-merger equilibrium (d) Upward pricing pressure (e) Illustrative price rises and GUPPIs (f) Other models of product differentiation (g) Dynamic responses ignored by static models of product differentiation 12.2.2 The Merger Assessment Guidelines 12.2.3 Closeness of Substitution and Related Theories of Harm (a) What is a close substitute? (b) Diversion ratios and other measures of ‘closeness’ (c) Market shares and site counts as a benchmark for closeness (d) Theories of harm in relation to ‘closest’ and ‘close enough’ competitors (e) Theories of harm with asymmetric substitution patterns (f) Theories of harm with cumulative constraints (g) Theories of harm associated with store acquisitions that do not remove a competitor (h) Diversion ratio screens 12.2.4 Variable Margins (a) Introduction (b) The Lerner condition (c) Calculation and use of margin data (d) Margin screens 12.2.5 Specific Price Pressure Indices and Tests
(a) (b) (c) (d) (e) (f)
12.2.6
(a) (b) (c)
(d) (e) (f)
Gross upward pricing pressure index Illustrative price rises with symmetric demand Upward pricing pressure Comparing intervention thresholds with GUPPI and IPRs Price pressure test thresholds in practice Measurement error, theoretical concerns and appropriate weight to place on price pressure tests Interacting National and Local Theories of Harm in Retail Cases With Local Overlaps Introduction Reduction in nationally set PQRS Cessation of national PQRS setting, giving rise to adverse local PQRS effects Store closure at the national level National concerns in Pure Gym/The Gym
National (and other) effects mitigating local PQRS concerns 12.3 Supplier Mergers in Intermediate and Undifferentiated Markets 12.3.1 Introduction 12.3.2 The Theory of Undifferentiated Products and Quantity Competition (a) The output reduction theory of harm (b) The Cournot model – competition in quantities with undifferentiated products (c) Illustrative price rises in a Cournot setting (d) Bertrand Edgeworth models of capacity constraints 12.3.3 Decisional Practice With Undifferentiated Product Markets (a) Theories of harm based on closeness of competition
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(b)
Theories of harm based on spare capacity
(d)
(c)
Theories of harm relating to switching costs
(e)
12.3.4 Markets With Bidding Processes and Auctions (a) Firms with identical products but different costs (b) Auctions, competitive tenders and uncertainty (c)
Product differentiation
12.3.5 Negotiated Prices 12.4 Mergers Impacting on Procurement Markets 12.4.1 Competitive Effects of Buyer Mergers (a) Merger Assessment Guidelines (b) Definitions of buyer power (c) Beneficial and harmful effects of buyer mergers (d)
‘Waterbed effects’, raising rivals’ costs and related theories of harm 12.4.2 The Authorities’ Decisional Practice (a) Travis Perkins/BSS (b) Stonegate/Deans (c) Waterstone’s/Ottakar’s (d) Nike/Umbro (e) Graphic/Benson (f) Mueller/Dairy Crest (g) Rank/Gala 12.5 The Elimination of a Potential Entrant 12.5.1 Introduction 12.5.2 The Authorities’ Decisional Practice 12.6 Unilateral Effects With Minority Shareholdings 12.6.1 The Economics of Minority Shareholdings 12.6.2 The Authorities’ Decisional Practice (a) Sky/ITV (b) Ryanair/Aer Lingus 12.7 Closeness of Substitution: Empirical Techniques and Tests 12.7.1 Customer Survey Evidence (a) Survey structure (b) Types of surveys, representativeness and choice of locations (c) Eliciting diversion ratios a ‘single store closure’ question
(f) (g) (h) (i) (j)
12.7.2 (a) (b) (c) (d) (e)
Eliciting diversion ratios via hypothetical price rise questions Rebasing diversion ratios to exclude within portfolio switching Margin of error Extrapolation of diversion ratios from surveys Selected issues in consumer survey design Stated preference versus actual switching evidence Suggested best practice for submissions of technical economic analysis from parties A Selective Note on Empirical Techniques Own and cross price elasticities of demand A simple demand system The Almost Ideal Demand System Logit form of discrete choice models Reduced form models
(f) Merger simulation (g) Best practice guidelines 12.7.3 Event Analysis (a) Promotions (b) Entry/exit (c) Temporary production outage 12.7.4 Price and Margin Concentration Studies (a) Introduction (b) Examples of PCA used by the Authorities (c) Margin concentration (d) The commentary on retail mergers (e) Comparing range and service quality in overlap and non-overlap areas 12.7.5 Bidding Data and Win/Loss Analysis (a) Tender processes (b) Econometric tests (c) Decisional practice 12.7.6 Inferences on Competition Amongst Manufacturers Drawn From Retail Level Data (a) Derived wholesaler demand and wholesaler pass-through (b) A bargaining context (c) Decisional practice
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INTRODUCTION
Horizontal mergers are those that occur at the same level of the supply chain (i.e., where two firms offering substitutable products (or services1) are brought under common ownership). Unilateral effects theories of harm capture the straightforward intuition that if the merging firms were important rivals to each other pre-merger, the removal of competition between them post-merger could allow the merged firm profitably to increase price (or reduce quality, range or service). Put simply, suppose that a manufacturer keeps its price low primarily because it is concerned that setting a higher price would mean ‘losing’ most of its customers to a rival. If the manufacturer then acquires its rival, the price rise is far more attractive than before; if customers switch to the former rival, they are no longer ‘lost’. The term unilateral effects captures the idea that the loss of competition between the merging firms may make it profitable for the merged firm to increase prices without the help of their competitors (i.e., even if other competitors do not change their prices or pricing strategies). In contrast, coordinated effects refer to the case in which the merged firm’s price rise is profitable only because one or more of its rivals ‘plays ball’ (e.g., the merged firm increases its price because of a prior understanding that its rivals will not undercut that higher price).2 Unilateral effects arising from horizontal mergers is the pre-eminent theory of harm in UK merger control. Concerns with respect to non-horizontal mergers are relatively rare and only one case to date has resulted in an SLC finding on the basis of a coordinated effects theory of harm.3 The vast majority of unilateral effects cases in UK merger control have been in differentiated product markets. A differentiated product market is one that contains goods that consumers view to be substitutable but not identical. For example, consumers might have several options for purchasing a morning coffee. However, each coffee shop option may appeal more or less to any given consumer due to differences in coffee beans used, pastries on offer, availability of seating, waiting times, ambience, the availability of a Wi-Fi connection and so on. Such price and non-price considerations (particularly in retail merger cases) are typically summarised as ‘PQRS’ factors (i.e., ‘price, quality, range and service’). In short, firms in differentiated product markets compete in terms of the PQRS proposition that they offer their customers. The theoretical concern with horizontal mergers in differentiated product markets is quite simple and best illustrated by an example. If two coffee shops come under common ownership, the CMA will ask whether PQRS factors are likely to be adversely affected: would prices rise, coffee quality decline, pastry selection narrow and baristas
1
For convenience the discussion will usually refer to products, although it should be understood to apply also to services. 2 A more precise definition of coordinated effects is provided in Chapter 13. 3 A report on the anticipated construction materials joint venture between Anglo American PLC and Lafarge S.A, CC decision of 1 May 2012.
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smile less frequently? Such ‘PQRS degradation’ is more likely when the four following conditions apply. (1)
The merging parties are ‘close’ competitors (e.g., very similar in terms of PQRS and location).
(2)
Nearly all rivals to the merging parties are relatively ‘distant’ in terms of their physical location (e.g., other coffee shops are too far away to be convenient for most consumers that purchase coffee from the merging parties) or relatively different in terms of their ‘offer’ (e.g., rivals are higher priced, have staler pastries, longer queues, fewer seats, grumpier staff and so on).
(3)
New entry by a coffee shop that matches (or betters) the merging parties’ offer both in terms of its PQRS offer and convenient location is unlikely to occur. This could be because no such entry is in the pipeline (i.e., already planned by a rival) or because such entry is unlikely to be induced in the event that the merged entity deteriorated its PQRS offer.
(4)
Customers are unlikely to have sufficient ‘buyer power’ to deter the merged entity from degrading its PQRS offer (e.g., consumers would not sponsor the entry of a new coffee shop in response to the merging parties charging more for their coffee and pastries).4
In retail mergers, in particularly at Phase I, the CMA focuses mainly on the first two factors above, namely how closely the merging parties compete and, if they do compete closely, whether there are sufficient alternative suppliers that are also ‘just as closely competing’.5 These issues have been described in detail in Chapter 11 on concentration measures and screens. This Chapter explains in greater detail the economic theory that underpins such screens. It also sets out the CMA’s (and its predecessors’) approach to ‘price pressure tests’ (i.e., the use of, inter alia, diversion ratios and margins in theoretical formulas for the purpose of assisting the CMA to assess the likelihood of an SLC). The key issues described above in relation to retail mergers are relevant not only when retailers sell to final consumers but also in the case of mergers at other levels of the supply chain. For example, whether the merging parties are raw material suppliers selling inputs to manufacturers, or manufacturers selling products to retailers, the same questions arise: “are the merging parties particularly close competitors; are there sufficiently strong rivals to the parties post-merger; is timely new entry (in the right area by the right type of competitor) likely; and can buyers exercise sufficient power to avoid their terms of supply being degraded as a result of the merger?”
4 Outside of retail markets, where customers are firms (as opposed to consumers) the exercise of buyer power is often more likely. See Section 12.3 below. 5 See Chapter 11 on screens. The CMA often defines an ‘effective competitor set’ of rivals competing sufficiently closely with the merged firm and then asks whether, post-merger, there would be at least three competitors of a sufficient size to prevent a price rise.
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Nonetheless, as the focus moves away from retail markets to those where the merging parties sell to other firms, there is greater scope to observe competition with undifferentiated products, bidding processes, and negotiation, that may intensify the degree of competition compared to that seen in retail markets. This chapter summarises the main economic theories that underpin merger assessment in all these areas, as well as leading examples from UK cases. This chapter also considers less common theories of harm associated with horizontal mergers. These include: (i) procurement theories of harm, where, in general, merger specific increases in buyer power (absent a contemporaneous increase in seller power) are seen as beneficial, in particular if they lead to lower variable costs for the merging parties – however, in some special cases, merging parties may have an incentive to restrict purchases they make or to procure in a way that causes their rivals to face higher costs; (ii) lost potential competition; and (iii) how acquisitions of minority stakes may aggravate or mitigate incentives to degrade PQRS. Finally, this Chapter provides a more detailed discussion of the main types of empirical evidence that the CMA employs to identify closeness of substitution (or competitive effects more generally), including consumer surveys, entry event analysis, price (or margin) concentration analysis, econometric estimates of price sensitivity and bidding data or win/loss analysis. This Chapter does not consider important dynamic features that may mitigate unilateral effects concerns, namely new entry and range extension, buyer power and efficiencies. These are discussed in Chapter 15.
12.2
UNILATERAL EFFECTS IN RETAIL MARKETS
The following analysis is focused on retail markets where differentiated products are sold to final consumers. This is an important starting point because the underlying economic theory influences substantially the CMA’s thinking (e.g., with respect to the CMA’s use of price pressure tests) and carries over in several important respects to other levels of the supply chain, in particular in relation to industries where products are differentiated and prices are not negotiated.
12.2.1 Unilateral Effects in the Setting of Textbook Models of Differentiated Products The Bertrand price-setting model is the most commonly employed textbook economic model for merger control theory, especially in retail market settings. Despite dating from the late 19th century, it continues to play a foundational role in merger analysis in differentiated markets and has had a considerable bearing on the Authorities’ decisional practice. This section seeks to explain the key intuition from that economic model by the use of simple examples. (a) The Bertrand model. The Bertrand differentiated markets model treats firms as price-setters that choose a price for their product (e.g., firms sell directly to consumers on, effectively, a take-it-or-leave-it basis) and determine or ‘post’ their prices simultaneously and just once (a so-called ‘one shot game’). There is one price associated with each differentiated product. The following highly stylised example sets out the key intuition of the Bertrand model. Imagine three hot dog stands run by Adam, Bobby and Carla in a sports stadium where each stand sells only a single product, a home-made jumbo hot dog, at the same price of £4.99. Importantly, each hot dog stall
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offers a different taste such that some consumers will prefer Adam’s Aberdeen Angus beef hot dogs, some Bobby’s Bavarian Bratwurst hot dogs, and others will prefer Carla’s Chipotle Chili hot dogs. Retailers (i.e., Adam, Bobby and Carla) choose their prices independently and at the same time.6 Consumers observe the available hot dog prices in the stadium and then decide whether to purchase from Adam, Bobby or Carla. (b) Pre-merger equilibrium. The notion of a pricing equilibrium can now be developed in the context of this example. Put simply, in equilibrium, no retailer has the incentive to change its price. Consider some switching patterns that might arise if, instead of charging £4.99, Adam charged £5.25 for his Aberdeen Angus beef hot dogs. Some customers who would have purchased from Adam at £4.99 would instead buy a cheaper bratwurst from Bobby, some would buy a cheaper chili dog from Carla, and some would conclude that, at £5.25, the price of Adam’s beef hot dogs in the stadium is too expensive and forego any hot dog purchase (i.e., ‘leave the market’ entirely). Similarly, if Adam had chosen a lower price relative to Bobby’s or Carla’s, then demand for Adam’s beef hot dogs would have been greater, driven by some ‘marginal’ consumers switching away from bratwurst or chilli dogs or ‘entering’ the market (e.g., finding it worthwhile to purchase a hot dog as opposed to no half-time snack or bringing their own snack). When prices are at their ‘equilibrium’ levels, each hot dog stand owner is in a situation where changing price is not profitable. Specifically, in equilibrium, if Adam increased his price by a small amount, whilst he would earn greater profits on retained volumes (i.e., loyal consumers who do not switch), he would also suffer just enough switching away from his hot dogs to make the price rise unprofitable. (c) Post-merger equilibrium. A merger can move the stadium hot dog stands to a new pricing equilibrium. Suppose that Adam buys out Bobby and becomes the owner of both the beef and the bratwurst hot dog stands for the new stadium season. If it was only ‘just’ unprofitable prior to the merger for Adam to increase the price of Aberdeen beef hot dogs, then the fact that some lost volumes would be re-captured via increased sales of bratwurst hot dogs post-merger may now make a price increase on Aberdeen beef hot dogs profitable. For example, suppose that the absolute margin on all the hot dogs is the same pre-merger at £2.00 per hot dog (i.e., at £4.99 Adam’s hot dogs have the same £2.00 mark up as Bobby’s). In this case, if Adam increases the price of Aberdeen beef hot dogs to £5.25, leaving the price of a bratwurst hot dog unchanged, he will not forego profit to the extent that customers who would have bought beef hot dogs at £4.99 switch to buying a bratwurst hot dog instead. So, post-merger Adam makes an extra 26p of margin on every retained Aberdeen beef hot dog sale by charging £5.25 rather than £4.99 per hot dog but also ‘recaptures’ some margin that would otherwise have been lost to Bobby, prior to the merger. It follows that even if setting the £5.25 price is still not profitable, it is certainly more profitable
6 This means that the hot dog stands cannot collude with each other and that no firm can choose its price after its rivals have chosen their price; in this example, assume the sports stadium’s rules for vendors are that they must each submit, confidentially, a price for their product to the stadium in advance of the opening day, and cannot change those prices for the remainder of the season.
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than it would have been absent the merger. This so-called ‘internalisation’ of lost sales means that the merger creates upwards pressure on prices (all other things being equal). The Bertrand model predicts that the prices of Aberdeen beef and bratwurst hot dogs will rise in this example unless there are substantial efficiency gains that lower the marginal cost of producing either Aberdeen beef or bratwurst hot dogs. If Aberdeen beef and bratwurst hot dogs do indeed rise, this will lead to higher prices of Carla’s chili dogs as well. This is explained as follows: the higher prices of Aberdeen beef and bratwurst hot dogs will induce some consumers to switch from Aberdeen beef and bratwurst to chili. The increase in demand for Carla’s chili dogs will mean that Carla will find it profitable to increase her price. So, in the post-merger equilibrium, all hot dogs in the stadium are more expensive (absent substantial efficiencies).7 (d) Upward pricing pressure. As a result of acquiring Bobby’s Bavarian Bratwurst stall, Adam will find it more profitable to increase the price of Aberdeen beef hot dogs: (i) the more that consumers who switch away from Aberdeen beef hot dogs purchase bratwurst hot dogs instead; (ii) the greater the mark up on bratwurst hot dogs; and (iii) the smaller any reductions in the marginal cost of producing beef hot dogs are that are caused by the merger (all else being equal). Suppose that Adam increases the price by 26p (i.e., from £4.99 to £5.25) and finds that 100 consumers switch away, reducing his sales of hot dogs by 100 units. If 50 of those lost consumers switch to purchasing bratwurst (i.e., 50% of lost volumes), the price rise is clearly more profitable than if only 10 of them switched (i.e., 10% of lost volumes). Put another way, the higher the diversion ratio from Aberdeen beef to bratwurst, the more profitable any price increase of beef hot dogs will be.8 The greater the absolute mark-up on bratwurst hot dogs, the more profitable it will be to increase the price of Aberdeen beef hot dogs. Suppose that Adam leaves the price of bratwurst unchanged but increases the price of beef hot dogs. As noted above, if the pre-merger mark-ups on Aberdeen beef and bratwurst hot dogs were both equal to £2.00, then, for every consumer that switches from Aberdeen beef to bratwurst, Adam loses £2.00 (from the lost sale of Aberdeen beef) and recaptures £2.00 (from the gained sale of bratwurst); Adam therefore becomes indifferent as to whether consumers switch between the two types of hot dogs (while he gains margin on retained sales of the Aberdeen beef hot dogs). On the other hand, if the margin earned on bratwurst were just 50p, then increasing the price of Aberdeen beef hot dogs would be far less attractive; even if a consumer switched from Aberdeen beef to bratwurst, Adam would lose £2.00 on the foregone beef sale but recapture only 50p on the extra bratwurst sale, thus being £1.50 worse off per lost sale. Conversely, if the margin on bratwurst were 7
Because all prices rise, but not due to coordinated behaviour, this is sometimes called a ‘multilateral effect’, although it is more usual to refer to this as a ‘unilateral effect’. 8
The diversion ratio from product A to product B, captures the share of lost volumes from product A (following a small price rise on product A) that are switched to product B. In this example, the diversion ratio from Aberdeen beef (A) to bratwurst (B) measures (following a small price rise on Aberdeen beef hot dogs) the percentage of lost volumes of Aberdeen beef hot dogs that are switched to bratwurst hot dogs.
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higher than Aberdeen beef hot dogs, at £2.50 per unit, Adam would actually be better off the more that his Aberdeen beef hot dog consumers migrate to the more profitable bratwurst product. This illustrates the concept of ‘the value of diverted sales’9 and the importance of the absolute and relative margins of the respective products brought under common control. Finally, imagine that the merger gives rise to an Aberdeen beef-specific procurement efficiency that means that Adam’s marginal cost of producing an Aberdeen beef hot dog falls by 50p. In this case, Adam is less likely to increase the price of Aberdeen beef hot dogs. The efficiency means that Adam’s mark up on Aberdeen beef hot dogs increases to £2.50. Prior to the merger if Adam lost a sale he would forego £2.00. After the merger, a lost sale means that Adam foregoes £2.50 – it thus harms profits more than before to lose a sale. By the same token, it is more attractive to gain a sale by lowering price.10 The preceding discussion underpins the notion of upwards pricing pressure (or UPP). The UPP approach pioneered by Professors Joe Farrell and Carl Shapiro is a close relative of the price pressure tests discussed in greater detail below. It can be summarised as follows.11 When firms A and B merge, a price rise for product A is more likely: (i) the higher the diversion ratio from A to B; (ii) the greater the absolute mark-up on product B; and (iii) the smaller is any reduction in the marginal cost of producing A that is caused by the merger.12 (e) Illustrative price rises and GUPPIs. UPP as set out by Farrell and Shapiro has not taken off in the UK due to the need to estimate a merger specific efficiency gain. However, price pressure tests that incorporate prices, mark-ups over variable cost and diversion ratios have been used by the CMA and its predecessors on numerous occasions. This began with the use of simple simulations, or so-called illustrative price rises (IPRs), in 2005 at the CC and in 2008 at the OFT. This practice has continued, albeit using modified versions of the tests, and now both IPRs and the ‘gross upward 9 The value of diverted sales is the percentage of lost volumes from product A that divert to product B, multiplied by the absolute mark-up on product B. 10 A similar assessment (in theory) helps inform whether or not there may be an incentive to increase the price of bratwurst hot dogs after the merger: all else equal, the incentive to increase the price of bratwurst dogs would be greater the more that lost bratwurst volumes divert to Aberdeen beef, the greater the absolute mark up on Aberdeen beef, and the lower is any merger specific efficiency on producing bratwurst dogs. 11 See Section 12.2.5 below and Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’, The B.E. Journal of Theoretical Economics: Policies and Perspectives, 10(1), 2010. 12 The framework can be adapted to take into minority shareholdings. If Adam buys a stake in Bobby’s stall (but not vice versa), but does not gain any ability to influence or control Bobby’s price, then Adam partially recaptures the value of any sales diverted to Bobby. For example, if the margin on Bobby’s bratwurst is £2.00 and Adam’s stake in Bobby’s stall is equal to 25%, then Adam recaptures 25% of £2.00 (i.e., £0.50) of any sale diverted to Bobby. This may make it attractive for Adam to increase his price. Bobby, on the other hand, with no stake in Adam’s stall, would not have an enhanced incentive to divert sales to Adam compared to the pre-merger equilibrium.
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pricing pressure index’ (GUPPI) are regularly used by the Authorities.13 The main inputs to an IPR and a GUPPI calculation are diversion ratios, prices and mark-ups over variable cost. The typical CMA approach to obtain estimates of a diversion ratio is to conduct (or have the merging parties conduct) a survey. For example, consumers that bought Aberdeen beef hot dogs would be asked what they would have done had they known, prior to the match, that Adam’s stall had been shut down for refurbishment (e.g., “purchase another hot dog, and, if so, from whom?” or “not purchase a hot dog”). Likewise, Bobby’s customers would be surveyed and asked what they would do had they known, prior to the match, that the bratwurst stall would not be available. Information on prices and margins would be obtained by requests for financial data sent to Adam and Bobby. The information would then be fed into a mathematical formula, producing a number that would be given some (and sometimes a lot of) weight in the assessment of competitive effects. Reducing real world price setting incentives to a number that emerges from a one line formula is an assumption-based simplification of reality – it is hard to believe that the ‘illustrative price rise’ is a good estimate of any likely post-merger price rise. Instead, these tests are better used as screens, ways to rank (alongside other evidence) products or geographic areas where concerns are more or less likely to arise, assisting the CMA to filter out products or areas not requiring further attention (see Section 12.2.5 below for a further discussion). Essentially, the CMA implicitly presumes that the Bertrand textbook model provides insight into pricing behaviour, in particular in retail mergers. The CMA presumes, in line with this model, that mergers are more likely to be harmful, all else equal: (i) the higher mark-ups are over variable costs on the merging parties’ products; and (ii) the higher diversion ratios are (from one merging party to the other). A rough intuition for this approach is as follows; where, prior to the merger, both merging parties earn high percentage margins, the implication may be that each firm does not face much competition (since, had competition been stronger, prices would have been forced down more closely to marginal cost). Further, where diversion ratios are also high, this indicates that – to the extent that one party did face competition prior to the merger – a substantial proportion of the total competition it faced was exerted by the other party to the merger. Therefore, so the argument might run, the merger is more likely to be harmful because it removes a substantial competitor to each of the merging parties in an environment where constraints on the merging parties were already weak. (f) Other models of product differentiation. The textbook Bertrand model is not the only model of product differentiation, even if it has the greatest influence on UK merger analysis. An unfortunate feature of the textbook Bertrand model is that firms compete only on price whereas, in practice, retailers compete also on non-price attributes such as quality, range and service (QRS) known in the UK collectively, together with price, as ‘PQRS’ or the ‘retail offer’ or ‘proposition’. Whilst models can be extended to consider more than one dimension of competition, such models
13
IPRs and GUPPIs are discussed in detail below at Section 12.2.5.
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nonetheless share with the Bertrand model the following key characteristics in relation to a merger of two firms, A and B:14 (i)
All else equal, the greater the degree of substitution between merging party A’s and merging party B’s products, the greater the likely adverse effect. Mergers between firms whose products are close substitutes are more harmful than mergers between firms whose products are distant substitutes; in other words, the less differentiated the merging firms are, the stronger the competitive constraint they presumptively exert on each other.15 As will be discussed further below, closeness of substitution can be measured (particularly in retail markets) by the diversion ratio.
(ii)
All else equal, the less the differentiation or ‘distance’ between the merging firms’ products and those of their rivals, the less likely a harmful effect. Where the merging parties sell closely substitutable products, the merger is less likely to give rise to harm if there are also other competitors selling products closely substitutable for each of the goods produced by the merging parties. In other words, mergers between closely competing firms are less problematic when the firms are not ‘uniquely’ closest competitors (uniquely close referring to the case where no third party’s product is, or could easily be, closely positioned to those of the merging firms, see further Section 12.2.3 below).
(iii)
Absent efficiencies, all horizontal mergers are predicted by ‘static’ models to lead to upward price effects. Textbook economic models predict that mergers that combine substitutable products give rise to higher prices unless there are substantial efficiency gains that reduce the marginal cost of production. If the merged firm were to set higher prices, other firms in the relevant market would (in the new equilibrium) set higher prices as well. These models are ‘static’ (i.e., they do not take into account the scope of the ‘dynamic’ effects discussed immediately below).
(g) Dynamic responses ignored by static models of product differentiation. The standard Bertrand model and similar textbook models typically do not capture: (i) the scope for other firms in the market to reposition their offer as closer competitors to the merged firm (Carla could start offering beef and bratwurst hot dogs as well as chilli dogs); (ii) the ease of new entry and expansion into ‘product and geographic space’ close to that occupied by the merging parties (the stadium might license a new entrant to set up a hot dog stall); (iii) the extent of buyer power (although this is rarely given credit in retail markets, as final consumers are unlikely to have the scope to act strategically through, say, sponsoring new entrants or engaging in self-supply); and (iv) 14
Models of product differentiation are summarised in chapter 6 of S. W. Davies and A. Majumdar, The development of targets for consumer savings arising from competition policy, OFT Economic Discussion Paper, June 2002. 15 This is a demand-side argument. In principle, two highly differentiated firms could still be strong constraints on each other due to being able to enter each other’s segments very easily (i.e., due to supply side responses being straightforward).
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counterfactual arguments about the future competitive significance of either merging party (Bobby, for example, could have been about to go bankrupt and close his stall). The Authorities routinely point out that it is essential to take into account all applicable dynamic competitive constraints in the analysis of horizontal mergers.
12.2.2 The Merger Assessment Guidelines The Merger Assessment Guidelines echo the logic of unilateral effects described in Section 12.2.1 above.16 Specifically, to assess whether a merger results in unilateral effects, the Merger Assessment Guidelines state that the Authorities will analyse any change in the merged firm’s pricing incentives as a result of bringing their differentiated products under common ownership or control.17 The Authorities will take into consideration the following factors when assessing the likelihood of unilateral effects:18 (1)
Closeness of substitution. The likelihood of unilateral effects is increased if the products of the merging firms are close substitutes because the merged firm is likely to recapture a greater proportion of lost sales as a result of an increase in price. The Merger Assessment Guidelines state that diversion ratios are a “useful indicator”19 of the ‘closeness’ of the merging parties’ products and the competitive constraint placed on product A by product B.
(2)
Variable profit margins. The likelihood of unilateral effects is increased if the variable profit margins of the merging parties’ products are high because the value of the sales recaptured will be higher.
(3)
Price sensitivity of customers. If customers are not sensitive to price increases, unilateral effects may be more likely because a price rise would not lead to many lost sales.20
(4)
Competitors’ responses. A price increase by the merging parties may result in a short-term response from competitors, which may include raising their own prices (which would be likely to make the merged firm’s price increase more profitable) or increasing capacity (which might allow customers to switch from the merged firm and dampen the merged firm’s incentive to increase price).21 More generally, where rivals do not have spare capacity,
16 17
Merger Assessment Guidelines, para. 5.4.6.
Ibid. 18 Ibid., para. 5.4.9. 19 Ibid. 20 This statement relates to the discussion of margins: where consumers are not price-sensitive, a profit-maximising firm will set a higher price and hence earn a higher margin over marginal cost premerger. In theory, this can make post-merger price rises more profitable in certain situations, e.g., where there is a high diversion ratio from the acquiring firm’s product to a high margin product of the acquired firm (see the discussion in Section 12.2.1 above). 21 Merger Assessment Guidelines, para. 5.4.11. This would appear to be a reference to Bertrand and Cournot textbook models. In the Bertrand model, firms set prices: if the merging parties increase price,
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they are less likely to be in a position to dampen any price rising effects of the merger.22 (5)
Significant competitor or limited choice of alternative suppliers. Unilateral effects are more likely when the merger eliminates a significant competitive force or when customers have a limited number of options in terms of switching.23
Whilst the Merger Assessment Guidelines do not address the use of price pressure tests explicitly, they state that “information gathered on these factors may be supplemented by other information and by calculations which can help the Authorities judge how likely it is that a price rise by the merged firm would be profitable”, referring to cases where price pressure tests were employed.24 Furthermore, the ‘Commentary on Retail Mergers’ does describe such tests as “simple quantitative indicators” that “measure the extent of the upward price pressure or, if an assumption is made about the degree to which this pressure is passed through to consumers, a measure of upward price movement.”25 The Commentary does not indicate how frequently such tests are likely to be used in retail cases, but experience suggests that they are used in most cases when margin and diversion ratio data are available.
12.2.3 Closeness of Substitution and Related Theories of Harm Of the five factors identified in the Merger Assessment Guidelines, the first, ‘closeness of substitution’, while apparently intuitive, is probably the most important and yet often discussed loosely or imprecisely. Such terminology therefore warrants being put into context.
demand spills over to their rivals, who also increase price. Recall the example in Section 12.2.1 above. If the price of Aberdeen beef and bratwurst hot dogs increase as a result of Adam’s acquisition of Bobby’s bratwurst stall, this could induce Carla to increase the price of her chili dogs. However, in the longer term, Carla might start selling beef and bratwurst hot dogs as well. In the Cournot model, firms are presumed to determine output; the market price is then determined by the total amount of output produced. Where the merged firm restricts output, that pushes up the market price (all else equal); this in turn induces other firms to increase output, mitigating to some degree the initial output restriction. More generally, if the merged firm’s rivals were expected to be increasing their available capacity substantially, the merger would be less likely to cause concern. Again, in the longer term, higher prices may induce new entry. 22 Spare capacity is discussed in detail in Sections 12.3.2 and 12.3.3 below. 23 Merger Assessment Guidelines, paras. 5.4.12 and 5.4.5. The significant competitive force could be a firm with a business model that is important to maintaining effective competition – such as an aggressive discounter – in which case the theory of harm would need to explain why the business model would not be continued post-merger. The term might also relate to a firm (e.g., a new entrant) that is expected to grow, in the near future, to be a stronger constraint. See Chapter 11 and the discussion on small increments. 24 25
Merger Assessment Guidelines, para. 5.4.10, emphasis added. Commentary on Retail Mergers, March 2011, OFT1305/CC2 com 2, para. 4.3.
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A horizontal merger is more likely to give rise to harmful unilateral effects: (i) the closer the competition between the merging parties; (ii) the fewer (and more distant) are any rivals to the parties post-merger; (iii) the lower the prospect of timely new entry (in the ‘right area’ by the ‘right type’ of competitor – i.e., to supply the customers targeted by both of the merging parties as effectively as each merging party); and (iv) the lower the scope for buyers to exercise sufficient power to avoid their terms of supply being degraded as a result of the merger. In practice, the fate of most mergers is determined by points (i) and (ii) above (i.e., factors that relate to closeness of competition). This section discusses this concept in detail, drawing on examples from recent CMA practice both with respect to retail mergers and other levels of the supply chain. (a) What is a close substitute? Where products A and B are substitutes, an increase in the price of A increases demand for product B (and vice versa). For example, if almonds and Brazil nuts are substitutes then, as the price of almonds goes up, some consumers should switch from almonds to purchasing Brazil nuts (so that the demand for Brazil nuts increases). Intuitively, the ‘closer’ product B is as a substitute for product A, the more the demand for B rises following a small increase in the price of A. For example, if a small increase in the price of almonds leads to 100 units being switched from almonds, of which 50 are switched to Brazil nuts and 30 are switched to cashew nuts, then Brazil nuts are a closer substitute to almonds than are cashews. The term ‘closeness of competition’ is often used interchangeably with ‘closeness of substitution’ to refer to the degree to which the products of the merging firms are substitutable. However, ‘closeness of competition’ may also refer to competitive strategies of the merging parties, for example, where both have a policy of targeting a similar customer base or both follow a similar innovation path. In and of itself, close substitution between the merging parties’ products is not a sufficient basis for ultimately raising concerns about unilateral effects, but it provides good reason for probing further to test the merits of any mitigating factors. (b) Diversion ratios and other measures of ‘closeness’. One ‘static’ way to measure closeness of substitution is by the diversion ratio, which measures the percentage of volumes (or value) lost from one product, the price of which has been raised, that are captured by another product.26 The greater the diversion ratio from A to B, the more that B is presumed to constrain A (i.e., the more that B is a substitute for 26 Suppose for example that if the price of A goes up by 10% (other things equal), 5% of A’s volumes are switched to product B and A’s sales volumes decline by 20% overall. The diversion ratio is then 5%/20% = 25% (i.e., one-quarter of the demand that is lost when the price of A is increased, is captured by B). The diversion ratio is usually discussed in terms of how volumes are switched in response to small changes in price. Alternatively, the diversion ratio might be measured in terms of lost value. So if firm A’s pre-merger price were £1, then the 10% price rise would cause £5 worth of sales (evaluated at the pre-merger price) to be switched to B, and £20 worth to be switched overall. In this case the diversion ratio is £5 / £20 = 25%. Where firms compete in quality, range and service as well as price, changes in these non-price features may cause switching to occur, allowing for an associated diversion ratio to be computed.
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A). In the example above, the diversion ratio from almonds to Brazil nuts was 50%, while it was 30% from almonds to cashews. In retail merger cases, consumer surveys have been the predominant source of measuring diversion ratios (and are discussed in detail in Section 12.7.1 below, including the issue of the appropriateness, or not, of the CMA practice of re-basing diversion ratios to exclude within portfolio switching).27 Closeness of substitution may also be assessed using: (i) entry event analysis (i.e., how new entry by a given firm impacts on the revenues or margin of another firm – the greater the impact, the greater the constraint placed by the entrant); (ii) econometric estimates of demand provided by the parties’ economists or conducted by the Authorities; (iii) estimates of how promotions of one product impact on others (e.g., if the merging party’s brand is discounted, to what extent does that impact on the other party’s volumes); (iv) documentary evidence (e.g., the CMA typically reviews the merging parties’ documents to assesses the extent to which they monitor and react to each other as opposed to other rivals); and (v) win/loss analysis (e.g., estimates of the share of lost bids won by the other party). Empirical estimates of closeness of substitution are discussed in Section 12.7 below. In relation to more dynamic considerations, as explained above, closeness of competition may refer to two firms adopting a similar business model or strategy to target a particular customer group. If each firm did so successfully, then (for that consumer group at least) this might be picked up by the diversion ratio between the two parties. If switching patterns were measured systematically (e.g., quarterly or annually), it may be possible to demonstrate that diversion ratios between the firms were persistently high. On the other hand, such data may not exist, or one of the firms may be a recent entrant. In that case, evidence from board documents may indicate that the recent entrant has a well-funded and clearly determined strategy of targeting the other party’s customers, a plan to do so within a short space of time (e.g., 1-2 years), and a history of having done so in other markets. In that case, such board documents would be likely to be viewed as important evidence of ‘closeness of competition’ with a good example being LOVEFiLM/Amazon (where evidence that the parties did not monitor each other closely and that the parties were concerned about imminent changes to the industry ‘trumped’ diversion ratio estimates pointing to close competition in the past).28
27
This is a technical point but may have important consequences for measuring diversion ratios. It is submitted (as explained in Section 12.7.1 below) that when a party owns brands A and B, and acquires brand C, the diversion ratio from A to C should not be calculated to exclude switching from A to B. 28 Anticipated acquisition of the online DVD rental subscription business of Amazon Inc. by LOVEFilm International Limited, OFT decision of 15 April 2008, para. 46. Inter alia, LOVEFiLM (LF) provided the OFT with monthly board reports, which contained an update on the competitive environment. These documents suggested to the OFT that: (i) LF did not seem to monitor Amazon more closely than other competitors; (ii) Amazon was viewed by LF as less of a competitive threat than other video content providers; (iii) Amazon’s competitive behaviour rarely appeared to give LF cause for concern and that there was no evidence that LF had responded to any of Amazon’s competitive behaviour; (iv) the diversion ratios overemphasised the closeness of competition between the parties
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(c) Market shares and site counts as a benchmark for closeness. In very many, if not all, cases, market shares – or a range of market shares based on different candidate markets – are calculated as a starting point for the analysis of competitive effects. As a benchmark for further discussion below, it is informative to consider the implication for substitution patterns if consumers switch in line with market shares, especially if another (superior) source of diversion ratios is unavailable. Where precision is not possible, it might still be safe to conclude, directionally, that diversion ratios are, at worst, no higher (or conversely, at best, no lower) than market shares would predict. To presume that switching is in line with market shares, is, in effect, to presume that the distribution of market shares is representative of both the ‘first choices’ (what consumers currently purchase) and the ‘second choices’ of marginal consumers (i.e., how those who switch, following a price rise on their preferred product, would reallocate their switched volumes). For example, suppose that A has a 40% market share and has three competitors: B, C and D, each of whom has a 20% market share. If substitution were in line with market shares, then any volumes switched from A to the rest of the market (i.e., B, C or D) will be presumed to be split equally among those products (since they all have the same market share). Therefore, if 30 units were switched from A to the rest of the market, 10 units would be presumed to go to B, 10 to C and 10 to D. Taking this one step further, diversion ratios might be inferred or ‘backed out’ from market shares. Under this approach, the diversion ratio from A, in the above example, to each of its three competitors is 33% (that is, 20/(100 - 40) = 20/60 = 33%).29 Estimating diversion ratios based on market shares was used in Optimax/Ultralase in areas where better evidence was not available.30 In Groupe Eurotunnel/SeaFrance, the
pre-merger; (v) online DVD rental (ODR) providers other than Amazon placed competitive pressure on LF; and (vi) LF continuously monitored the changes in strategy of a number of non-ODR rivals, including Virgin, Sky, BT and video-on-demand providers, with the documents providing commentary on how these activities were likely to impact on LF. See also Anticipated acquisition by Graphic Packaging International Limited of Benson Box Holdings Limited, CMA decision of 20 May 2014, where the CMA assessed documentary evidence on a small number of tenders and the number of times that the Benson was mentioned in Graphic’s documents, relative to other competitors (para. 58). 29 The calculation looks at the ‘rest of the market’ (i.e., 100% – A’s market share), as diversion, by definition, is away from A. In the above case, 60% of the market is ‘non-A’ market share, split in this case equally at one-third each between three firms with 20% each. Assuming no constraints from outside the market, each of B, C and D would, in a static view of the market, represent one-third of the total competitive constraints facing A. 30
A report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, 20 November 2013, para. 6.65: “As an alternative measure of the diversion ratios, we considered what the diversion would be if we had assumed that Ultralase’s customers were distributed among the remaining suppliers in proportion to their pre-merger market shares. We note that market shares do not necessarily reflect the extent to which the parties are close competitors, in particular in industries with differentiated products. However, given our concerns over the reliability of the customer survey we
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CC estimated diversion ratios based on market shares and presumed MFL’s share to be its targeted share as opposed to its actual share on the basis that MFL had only recently began operations and was expected to grow its share.31 The preceding approach presumes zero diversion to substitutes outside the market (unless a further assumption is made as to what such diversion would be). Ignoring diversion to the outside good may substantially overstate diversion ratios. For example, with 25% substitution outside the ABCD market, the diversion ratio from A to each of B, C or D would be 25%, not 33% (that is, if a price rise on A causes 100 volumes to be lost, 25 of these will leave the market and the remaining 75 would be split equally between B, C and D). Suppose that the available evidence indicated that there would be limited substitution outside the ABCD market. In this case, as explained above, market shares would predict the diversion ratio from A to B to be 33%. If evidence then demonstrated that the diversion ratio was likely to be less than 33% it could be said that B is a weaker or ‘more distant’ substitute than market shares would predict. Conversely, if quantitative (or qualitative) data indicated that switching from A to B were likely to exceed 33%, it might be concluded that B is a stronger or ‘closer’ substitute than market share data would predict.32 In Greene King/Spirit, a similar idea but based on site counts was used by the CMA to test whether certain categories of pubs achieved as much diversion (estimated by survey evidence) as would be expected based on their share of pubs in a given area.33 For example, if there were 10 ‘wet-led’ pubs and 11 ‘dry-led’ pubs in an area (i.e., pubs focussing more on drinks and food respectively), then diversion from any dry-led pub should be split equally between the 10 wet-led and remaining 10 dry-led pubs. If survey evidence confirmed this point, then diversion patterns would be in line with ‘expected’ diversion (i.e., what market share (based on pub numbers) would predict).34
considered whether our views on diversions would change significantly if diversions were in proportion to the pre-merger market shares”. 31 A report on the completed acquisition by Groupe Eurotunnel S.A. of certain assets of former SeaFrance S.A., 6 June 2013, para. 8.116. 32 When comparing diversion patterns with those predicted by market shares, and where the former are obtained from survey evidence, it is good practice to use the benchmark of market shares implied by the same survey (as opposed to market shares from other sources) so as to compare like-with-like. 33 Anticipated Acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015, para. 79. The CMA found that some categories of pubs receiving significantly less diversion than would have been expected if all categories of pubs competed equally when compared on a weighted one-to-one basis. On the basis of this evidence, the CMA did not believe that the results from its survey supported the inclusion of all pubs in the primary filter. 34
Ibid., para. 79. The CMA found that some categories of pubs receiving significantly less diversion than would have been expected if all categories of pubs competed equally when compared on a weighted one-to-one basis. On the basis of this evidence, the CMA did not believe that the results from its survey supported the inclusion of all pubs in the primary filter.
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The CMA sometimes uses market share implied diversion ratios to motivate the use of market share screens (see Chapter 11). For example, in Poundland/99p Stores, the CMA stated at Phase I: “The CMA considers that competition concerns would be unlikely to arise where there would be at least four competing fascia after the merger. Therefore, as a starting point, it notes that a diversion ratio of 25% would arise in a five to four merger between equal competitors.”35 This can be explained as follows. Suppose that there were five equal competitors, each with a 20% market share. If consumers switched away from one competitor but did not leave the market, then (presuming all other competitors to be equally good alternatives) the remaining four firms would each capture 25% of diverted custom.36 In the same case, at Phase II, the CMA applied a novel approach to estimate a national diversion ratio combining fascia count benchmarking, survey and econometric evidence.37 Turning to dynamic considerations, in some cases, firms with relatively small shares may be considered to punch substantially above their (market share) weight. For example, even though mergers are usually cleared where one party has a small market share, there are some cases where a ‘small increment’ can give rise to in-depth scrutiny by the CMA (as explained in Chapter 11). (d) Theories of harm in relation to ‘closest’ and ‘close enough’ competitors. Sometimes the merging parties’ products, A and B, are described with adjectives conveying relative closeness (e.g., products A and B are ‘particularly close’, ‘very close’ or ‘closest’ substitutes). If so, this implies that a representative consumer of A would view B to be a very good alternative to A. However, that same consumer would view C and D to be poorer (and potentially very poor) alternatives to product A. For example, returning to the hypothetical edible nuts example, suppose that switching patterns indicate that as a result of a small increase in the price of almonds, 100 units are switched from almonds in the following way: 50 units lost to Brazil nuts; 30 units to cashew nuts; 10 units to dry roasted peanuts, and 10 units to other nuts and healthy snacks. In this case, Brazil nuts are the closest competitor to almonds (the diversion ratio is 50%), cashews the second closest (30%), and dry roasted peanuts the third closest (10%). The marked difference in substitution patterns may permit the statement that “Brazil nuts are a ‘particularly close’ or the ‘closest’ substitute for almonds”. At one extreme the parties may be such good substitutes that no other rival comes close to offering a good alternative – in this scenario, the merger may be said to combine ‘uniquely’ close competitors. Such mergers are likely to give rise to a realistic prospect
35 Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015, para. 271. 36
In Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 26 October 2010, the OFT used fascia count benchmarks to compute a diversion ratio for a price pressure test. The OFT noted that in a ‘3-to-2’ scenario, with symmetry, diversion from one merging party to the other would be half of any diversion that remained in the market. In other words, if, following a price rise by one merging party, 30% of volumes left the market (leaving 70% within the market) then 35% would divert to the other party. 37 This is discussed in detail below at Section 12.2.6.
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of harm at Phase I, and a likely SLC at Phase II absent powerful arguments on timely product repositioning or new entry and/or countervailing buyer power.38 In some special cases, de minimis considerations may also apply.39 More generally, where the merging parties are closest competitors and where there are few remaining competitors post-merger (and buyer power or likely supply-side responses such as new entry are absent), mergers are likely to give rise to a realistic prospect of harm at Phase I. For example, in Reed Elsevier/Jordan Publishing the CMA identified “significant competition concerns” due to the merging parties being each other’s closest competitor within segments of the family law practice area, namely children’s law, matrimonial property law and family court reports.40 While diversion ratios were not calculated, the (same) concept of the ‘next best alternative’ was used to identify closeness of competition.41 Merging parties do not need to be closest competitors to cause concern. In the hypothetical nuts example above, suppose that the merger under consideration is between a supplier of almonds and a supplier of cashews (presuming there to be no other suppliers of these nuts). In this case, the merger does not remove the closest constraint on almonds. However, it removes the sizeable second-closest constraint and thus may still be ‘close enough’ to be a cause for initial concern, and further investigation, given the relatively high diversion ratio from almonds to cashews.42 This type of concern was raised in AG Barr/Britvic.43 Here, Pepsi, Tango and 7Up, which were distributed by Britvic, were not the closest substitutes to AG Barr’s IRN BRU 38 It should be noted that where new entry or product repositioning is straightforward then even if close substitutes produced by rivals do not currently exist, if rivals were to introduce them sufficiently quickly (following a small price rise by the merged firm), the merger may not cause concern. In terms of evidence, diversion ratios refer to switching to existing products. They will therefore overstate closeness of substitution in the event that close substitutes, not currently available, would soon become available. 39 See the discussion on the use of the de minimis exception to the duty to refer in Chapter 7. In Completed acquisition by Sheffield City Taxis Limited of certain assets and business of Mercury Taxis (Sheffield) Limited, CMA decision of 13 October 2015, the merging parties were found to be closest competitors as regards supply to tender customers (i.e., large bodies such as NHS Trusts and Sheffield City council). The CMA considered competition to be insufficient from (i) other private hire operators, due to their more limited scale, geographic coverage and/or different product offerings, or (ii) other transport providers, due to their typically more specialised and more expensive services. However, the case met the CMA’s de minimis criteria and was not referred to Phase II. See paras. 104 and 118. 40
Anticipated acquisition by Reed Elsevier (UK) Limited of Jordan Publishing Limited, CMA decision of 10 September 2015, para. 80. 41 Ibid., para. 59. 42
This is of course simply an expression of the general common sense point that an argument that another merger (AB) might be more anti-competitive than the one proposed (AC) is not a valid defence to the fact that the merger in question might result in a substantial lessening of competition. With the notable exception of the ‘no less anti-competitive purchaser’ limb of the exiting firm defence (see Chapter 7), each merger is judged on its own merits, not relative to the merits of other possible transactions. 43 Anticipated acquisition by A.G. Barr plc of Britvic plc, OFT decision of 13 February 2013.
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(which was Coca Cola). However, the CMA was concerned at Phase I that they were sufficiently close to give rise to a realistic prospect of harm.44 A similar point was made by the OFT in Unilever/Alberto Culver.45 The closer the parties compete, the greater the likely concern with the merger, all else equal. However, it should not be inferred that a merger of closest substitutes necessarily gives rise to harm. First, many other rivals might be almost as close such that sufficient post-merger competition remains.46 In Ericsson (Technicolor)/Creative (Red Bee Media)47 the CC appeared to consider the merging parties to be closest competitors to supply linear playout services to ITV, but found that, on balance, it was sufficiently likely that other competitors would reach the required technical level by the time of retendering (which was 5-10 years away).48 Secondly, if the diversion ratios between the merging parties are low enough, then a merger of closest competitors will not be problematic. In Poundland/99p Stores, large single price point retailers were considered to be the closest competitors to each other (i.e., Poundland, 99p Stores and Poundworld).49 In addition, the geographic location of the parties indicated that 99p Stores was located within one mile of Poundland more than any other competitor (although the reverse was not true), whilst a (non-nationally representative) survey indicated that the merging parties were closest competitors.50 Further, although other competitors were identified, these were not viewed to be as strong as single price point retailers (in fact, they were treated as being only half as strong for a given location).51 On the face of it, therefore, Poundland and 99p Stores were very close competitors and Poundland apparently the closest competitor to 99p Stores. However, the CMA’s estimated national diversion ratio between the parties was found to be sufficiently low so as not to cause concern. (The national diversion ratio from Poundland to 99p Stores was 10%, and from 99p Stores to Poundland, 21%. The weighted average diversion ratio was 13%). This permitted the CMA to exclude an SLC based on a national level degradation of PQRS factors. Further, the CMA did not
44
Ibid., para. 29. Anticipated acquisition by Unilever of Alberto Culver Company, OFT decision of 18 March 2011, para. 68. 45
46 Suppose that the diversion ratio from A to B is 20% and from A to C 16%, A to D 16%, A to E 16%, A to F 16% and A to G 16%. In this case, B is the closest competitor to A. However, products C-F are almost as close and cumulatively a considerable degree more important. 47 Telefonaktiebolaget LM Ericsson and Creative Broadcast Services Holdings (2) Limited, a report on the anticipated acquisition by Telefonaktiebolaget LM Ericsson of Creative Broadcast Services Holdings (2) Limited, 27 March 2014. 48
Ibid., para. 23. Poundland and 99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015, paras and. 6.78 and 6.85. 49
50 51
Ibid., paras. 4.15 and 6.144. Ibid., para. 6.139.
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consider that the merged entity would depart from setting PQRS factors nationally and so concluded that local price rises (or quality reductions) would not arise.52 Thirdly, even if the parties’ products are the closest substitutes, they may nonetheless be so distant that a merger would not materially impact on prices. For example, suppose there is a merger between two port operators that are the closest ports along the same stretch of coastline. Even though in geographical terms the two ports may be the ‘closest competitors’ it may be that they are so distant that they serve an entirely different demand base. If so, the merger would have no harmful effect despite the merging parties being closest competitors.53 Fourthly, a merger of closest competitors may not give rise to an SLC due to out of market constraints and buyer power. In Sonoco/Weidenhammer, the CMA identified the parties to be each other’s closest competitors at Phase I, noting further that the merging parties were the only bidders competing for the supply of composite cans for food products alongside evidence that customers had benefited from the competition between the merging parties through lower prices and higher quality service.54 At Phase II the merger was cleared on the basis that, while the CMA could not reject evidence that the parties were close competitors, the cumulative impact of out of market constraints (i.e., potential switching to alternative materials) and buyer power (e.g., sponsored new entry plus the scope to self-supply) meant that no SLC was likely.55
52 53
Ibid., paras. 6.145-6.146 and 14.
A related (but not the same) issue arose in SvitzerWijsmuller A/S and Adsteam Marine Ltd, a report on the proposed acquisition by SvitzerWijsmuller A/S of Adsteam Marine Ltd, 9 February 2007, para. 9. Each party was a monopolist provider in a number of ports (except for one port, Liverpool, where both operated and there was a divestment required). The CC investigated whether there may be actual competition between the services of the parties in different (closely located) ports. A key reason permitting the CC to rule out actual competition was that harbour towage costs accounted for a small percentage of total port calling costs, so price increases were unlikely to trigger switching (rather than the ports necessarily serving different demand bases as such as in the example in the main text). The main constraint on the parties was found to be potential entry. The case then hinged on whether each of the parties was uniquely well place to enter the other's ports. On this, the CC concluded that an operator in a port relatively nearby is not necessarily better placed to enter than another operator (e.g., from continental Europe) meaning that the parties were not closest competitors with respect to that dimension of competition. 54 Completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, CMA decision of 13 January 2015, paras. 129-130. 55 Sonoco and Weidenhammer, a report on the completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, 3 July 2015, paras. 1-31. In terms of out of market constraints, the CMA found no examples of customers switching due to prior price increases in the price of composite cans. The CMA also noted that the Parties could discriminate post-merger between those customers that could switch and those that could not switch. The CMA nonetheless concluded that a number of larger customers could constrain pricing in composite cans in the UK through the option of a switch to alternative forms of packaging noting recent decisions of some customers to switch away from composite cans, despite either a long history of using the format or previously expressed views that switching would not be appropriate; one larger customer had also threatened to
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Finally, in some cases a merger of closest competitors may not give rise to an SLC where one party would either exit or withdraw supply in the counterfactual.56 Since not all mergers of closest competitors cause concern, it follows that a merger of ‘close’ but not ‘closest’ competitors need not be problematic, in particular where there are at least three other ‘equally close or closer’ rivals. For example, in Paddy Power/Betfair, in relation to the supply of online fixed odds betting, the CMA assessed the parties’ customer surveys, internal marketing and strategy documents and third party responses, and found that the parties were not each other’s closest competitors. Whilst the CMA found the parties were “close” competitors, it concluded that there were a sufficient number of equally close (or closer) competitors for the merger not to give rise to a realistic prospect of an SLC.57 In retail mergers, the CMA regularly considers a number of factors that may make an SLC more or less likely in a particular local area. These have been discussed in detail in Chapter 11 but the main factors are summarised briefly for convenience here. Specifically, an SLC is less likely to be found in a local market where: (i) diversion ratios between the merging parties’ sites are low; (ii) price pressure tests do not indicate significant incentives to increase price (see further below at Section 12.2.5); (iii) the parties’ combined local market shares are low; and (iv) the parties’ catchment areas – and particular customer bases – do not substantially overlap (or, if they do, the areas of overlap are well served by a sufficient number of effective competitors, e.g., at least three rivals to the merging parties). The latter case, where the parties’ customer bases overlap but are also well served by other parties, is just another way of saying that whilst the parties may be ‘close’, they compete with sufficient other ‘close’, ‘closer’ or ‘almost as close’ competitors. Finally, whilst closeness of competition concerns may arise even when parties have relatively low shares but uniquely target the same group of customers, it is also the case that even when parties have relatively high shares, if they are relatively ‘distant’ competitors, an SLC concern may not arise. Put simply, the more distant the merging
switch to plastics and gained a substantial discount from the UK composite can supplier concerned. In relation to buyer power, the CMA concluded that, for some (but not all) customers, sponsored entry would be a credible alternative to the merged parties that could be considered timely, likely and sufficient, and that entry would likely to be large scale and benefit other buyers. Further, one customer had recently engaged in self-supply. Some customers were also insulated from price rises due to long term contracts. The overall impact of these cumulative constraints was deemed likely to be sufficient to prevent an SLC. 56 On the exiting firm defence, see Chapter 7. See also A report on the completed acquisition by Imerys Minerals Limited of the kaolin business of Goonvean Limited, CC decision of 10 October 2013, paras. 22-25: in relation to the supply of kaolin for use in tableware, the CC noted that the merging parties were closest competitors but that there was not significant price competition pre-merger and that Goonvean was about to inform its customers of its intention to withdraw supply due to diminishing reserves in the near future, at which point its competitive constraint would quickly diminish. 57 Anticipated merger of Betfair Group plc and Paddy Power plc, CMA decision of 17 December 2015, paras. 6 and 59.
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parties are (and the more closely competing their rivals are), the lower the likelihood of an SLC finding. For example, in Whittan/Apex the CMA found that, despite the relatively high combined shares of the parties in pallet racking (50-60%, increment 1020%), there was no realistic prospect of harm because of the high degree of commoditisation and the relatively few times the parties competed in tenders against each other.58 This meant that the parties were “not particularly close competitors.”59 In Micronclean/Guardline, whilst the combined share was high (80-90%), the increment was small (0-10%) and the merger was cleared at Phase I because Guardline was a small, capacity constrained, financially weak and ultimately ‘distant’ competitor that placed little constraint on Microclean.60 In an older case, InBev/Anheuser-Busch, relatively high shares of the merging parties (45-55%, increment 5-15%) were not found to be a concern on the basis of other branded lagers being sufficiently close competitors in the off-trade.61 (e) Theories of harm with asymmetric substitution patterns. ‘Symmetric’ substitution between products A and B means that A constrains B just as much as B constrains A. In terms of diversion ratios, this means that if the diversion ratio from A to B is 30%, then the diversion ratio from B to A is also 30%. However, constraints need not be symmetric and there is no a priori reason to think that in reality they would often be. In theory, for example, there is no reason to presume that diversion ratios are the same for the merging parties – they may instead be ‘asymmetric’. For example, consider a merger between firm A with a 50% market share and firm B with a 2% market share. Even if market shares are not perfect indicators of second choices, if – as in this example – market shares give a rough indication of second choices then, following a small increase in price, around half of B’s lost customers (that stay in the market) would switch to A, while only around 4% of A’s lost customers (that stay in the market) would switch to B. In this case, it would be inappropriate to assume symmetry of diversion ratios – A is clearly a stronger constraint on B than B is on A. Intuitively, the merger would not lead to substantially higher prices on A, but may do so for B.62
58
Anticipated acquisition by Whittan Intermediate Limited of Apex Linvar Limited, CMA decision of 8 January 2016, para. 59. 59 Ibid., paras. 77-78. 60
Completed acquisition by Micronclean Limited of Guardline Technology Limited, CMA decision of 3 July 2014, paras. 5-9. 61 Anticipated acquisition by InBev NV/SA of Anheuser-Busch Companies, Inc, OFT decision of 18 November 2008, paras. 69-75. 62 Historically, the Authorities have tended not to be overly concerned with mergers where the increment in market share was small, and the combined share is below 40%, see Chapter 11). One justification for this relates to asymmetric constraints. In the example above, the increment is 2 percentage points (A’s share is 50% and the increment is 2 percentage points arising from A’s merger with B). It might be argued that B does not constrain A (so A’s price will not go up substantially postmerger). Further, whilst A constrains B, even if B’s price would rise post-merger, the weighted average price rise caused by the merger would be small due to B’s low market share.
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In Asda/Netto, for example, the OFT viewed Asda as a substantial constraint on Netto whilst Netto was not a material – let alone substantial – constraint on Asda.63 In the same vein, in AG Barr/Britvic, the concern was whether ‘Britvic brands’ distributed by Britvic (Pepsi, Tango and 7Up) were collectively an important constraint on IRN BRU. However, IRN BRU was not deemed likely to constrain either Pepsi, Tango or 7Up.64 Where diversion ratios are incorporated in price pressure tests, the CMA regularly allows for asymmetric diversion by using a GUPPI test or an IPR that allows for nonsymmetric diversion patterns. This is discussed below in Section 12.2.5. (f) Theories of harm with cumulative constraints. Cumulative constraints refer to the collective effect of a combination of a number of different constraints. For example, where a merged firm owns a number of brands and acquires another, it is instructive to consider diversion from the acquired brand not only to each of the acquirer’s brands individually but also to all of them together. For example, as noted above, in AG Barr/Britvic, the Authorities considered diversion from IRN BRU to the Britvic brands as a whole.65 Similarly, just because one particular competitor is a relatively weak constraint on the merging parties, its combined effect, alongside other competitors may be sufficient to prevent an SLC. A low diversion ratio between the merging parties is the same as a high cumulative diversion ratio to other constraints. Cumulative constraints were explicitly acknowledged in Sonoco/Weidenhammer at Phase II (discussed above) and Spire/St Anthony’s in Phase I.66 (g) Theories of harm associated with store acquisitions that do not remove a competitor. In some cases, a retail chain will acquire a certain number of outlets from another chain, but leaving the latter as a competitor, post-merger. For example, suppose that, in a local area, chain store A has one outlet and chain store B has two outlets (B1 and B2). If A then purchases outlet B1, there are two effects: there is lost competition between A and B1 but there is ‘gained’ competition between B1 and B2. These two effects may have to be balanced. In the example here, the structure of the local market does not change pre- and post-merger (there are three outlets, two of which owned by one chain store). However, if outlets A and B1 were competing particularly 63 Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 23 September 2010. See further Section 12.2.10 (c), below. 64 AG Barr plc/Britvic plc, a report on the anticipated acquisition by AG BARR plc of Britvic plc by means of an all-share merger, 9 July 2013, para. 10. 65 Ibid. para. 10. Suppose that a firm owning brands A and B acquires a third brand, C. Diversion from A to C, B to C will be considered to assess whether C is an important constraint on either of A or B. In addition, diversion from C to A, C to B and C to either A or B will be calculated. Suppose, for example, that diversion from C to A were 12% and C to B 13%, these diversion ratios in themselves might be low enough not to cause individual concern. However, the combined effect is a diversion from C to either A or B of 25%, a more material amount. 66 See Sonoco and Weidenhammer, a report on the completed acquisition by Sonoco Products Company of Weidenhammer Packaging Group GmbH, 3 July 2015, para. 28 and Completed acquisition by Spire Healthcare Limited of certain assets and business of St Anthony’s Hospital in Surrey, CMA decision of 24 September, 2014, para. 9.
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closely (e.g., by being located next to each other), whilst B1 and B2 would not be strong competitors post-merger (e.g., by being located quite far away from each other) then there may be a net reduction in competition in that area if there is scope to set PQRS factors on a local basis (which may not be the case if the chain stores determine such factors at a national level). These issues arose in Asda/Co-op67 and Motor Fuel Limited/Shell.68 (h) Diversion ratio screens. Having explained that diversion ratios capture (at least in a static sense) the closeness of substitution between the merging parties, it is of interest to establish whether or not the CMA has any ‘rules of thumb’ which suggests that a diversion ratio (reliably measured) is too low to signify concern. It is submitted that a diversion ratio below 10% is unlikely to cause concern; a diversion ratio below 15% is frequently ‘safe’69 (in particular when there are similar diversion ratios to several other rivals) but not always so (in particular when there is greater diversion in the ‘other’ direction and/or ‘high’ margins such that the diversion ratio is not considered ‘alone’ but as part of a price pressure test).70 Diversion ratios above 25%
67
Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 22 December 2014, para. 60. 68 Anticipated acquisition by Motor Fuel Limited of 90 petrol stations from Shell Service Station Properties Limited, Shell U.K. Limited and GOGB Limited, CMA decision of 26 August, 2015, para. 67 (where Shell would remain in the area, meaning no change in the number of independent price setters). 69 In Somerfield/Morrison, a report on the acquisition by Somerfield plc of 115 stores from Wm Morrison Supermarkets plc, September 2005, para. 7.12, a 14.3% diversion ratio was deemed safe on the basis that if there were eight symmetric firms, each with a 12.5% share, then a merger of two firms would give rise to a 25% share (i.e., too low to cause concern based on the merger guidelines at the time, indicating combined shares below 25% were unlikely to be problematic). Diversion from one merging party to the other would be equal to 1/7 (i.e., 14.3% in that scenario). This threshold was established in 2005 and differs from that set out more recently at Phase I in Poundland (see above). However, the 14.3% threshold was referred to by the CMA in Anticipated Acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015 as a level which would not generally give rise to concern (see para. 134 and note 49). 70 In Reckitt Benckiser/K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015 (a Phase II case requiring a remedy), diversion ratios were considered alongside IPRs. The CMA’s estimate for the diversion ratio from Durex to K-Y was 14% and the diversion ratio from K-Y to Durex was 27%. To account for sampling errors, however, the CMA used confidence intervals for the diversion ratio estimates. The 95% confidence interval for diversion from Durex to K-Y is 9% to 19%, and from K-Y to Durex it is 19% to 35% (Appendix F, para. 4). See also Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 70(a) (high margins may cause concern with high diversion ratios) and paras. 80-81: “While the Parties do not appear to draw a substantial proportion of customers from the same area, diversion ratios between the Parties’ sites indicate that they compete closely: (a) Diversion from TOBC to Bowlplex is [10–20]%; (b) Diversion from Bowlplex to TOBC is [10–20]%. GUPPI calculations for both Bowlplex (7%) and TOBC (15%) indicate a significant incentive to increase prices post-Merger.”
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are likely to be an aggravating factor71 (unless they are associated with very small increments72).
12.2.4 Variable Margins (a) Introduction. An absolute margin refers to the value in pounds and pence. For example, if the cost of producing a good is £1.50 and the price is £2.50, the absolute margin is £1.00. The percentage margin is the absolute margin divided by price. In the above example, that is £1.00/£2.50, i.e., 40%. As a practical matter, the CMA typically seeks to obtain information on average variable cost to calculate a margin. Variable costs are those that change directly with output, e.g., if output increases then greater costs are incurred to supply additional units of the product in question. Price theory in economics is concerned with the marginal cost, which is the cost associated with supplying an additional unit of the product in question. Average variable cost is a commonly employed proxy for marginal cost: it is a good proxy when marginal cost is constant; it overstates (understates) marginal cost when marginal cost decreases (increases) with output. (b) The Lerner Condition. Textbook economic models typically predict that stronger price competition implies lower margins.73 Further, in the case of a single product firm (i.e., a firm selling just one product), there is a well-known relationship between a firm’s percentage gross margin and the price sensitivity (or ‘elasticity’) of its perceived demand.74 This is captured by the Lerner condition. The Lerner condition essentially states that a single product firm sets its percentage gross margin equal to the 71
In Poundland/99p Stores, the CMA stated at Phase I: “competition concerns would be unlikely to arise where there would be at least four competing fascia after the merger. Therefore, as a starting point, it notes that a diversion ratio of 25% would arise in a five to four merger between equal competitors.” The CMA adopted a 15% threshold as it was concerned that the survey evidence might understate the diversion ratio. See Anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 9 April 2015, paras. 271-274. However, the CMA has expressed concern where diversion ratios have been lower than 25%, see Chapter 12. 72 As explained above, if diversion is in line with market share, a merger between a firm with a 50% market share and a 1% market share would be associated with a high diversion ratio from the small firm to the large firm. However, that would not normally be viewed as problematic due to the small increment involved. 73 Intuitively, the less price sensitive a firm’s consumers are, the higher the price it will set. Further, consumers’ sensitivity to the price that one firm charges may depend on their choice of alternative suppliers – if one firm offers a high price, whilst suppliers of substitute products offer a substantially lower price, then consumers are more likely to switch away from the high-priced firm to lower-priced firms. 74 A firm’s own price elasticity of demand captures the percentage change in volumes arising from a (small) change in the firm’s own price. For example, if a single product firm increases its price by 1% and its volumes fall by 5%, the own-price elasticity of demand is ‘minus five’. Since a firm’s demand is expected to fall as its price increases, economists usually omit the ‘minus’; so in this example one would describe the own price elasticity of demand by its absolute value, i.e., five. The larger the absolute value of the own-price elasticity of demand, the more price sensitive the firm’s customers are likely to be.
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inverse of its own-price elasticity of demand. For example, if the gross margin is 50% then the elasticity of demand is two. Whilst the Merger Assessment Guidelines portray margins and demand elasticity as apparently discrete factors in unilateral effects analysis,75 in practice the Authorities consider these two factors linked by virtue of the Lerner condition. (c) Calculation and use of margin data. The Authorities generally consider that reasonable margin estimates can be obtained and put to use at Phase I. For example, the Authorities make the following comments on margin data: “Variable margins are made up of the sales of the relevant products which both parties supply less their variable costs. The Authorities considered that cost variability depended on the period over which the merging parties could change prices or other key competitive variables in response to change in competition. The decisions on how to derive variable margins were therefore made on a case-by-case basis. In general, if margins are high, unilateral effects are more likely to arise as a result of a merger. In Asda/Netto, for example, the OFT used one month as a reasonable period over which to assess variable margins. The OFT considered that over a month, a supermarket can change a number of variables including its staffing levels for particular shifts, levels of stock and pricing decisions. In Somerfield/Morrisons, the CC considered margins based on 'direct costs' including cost of sales, staff costs and distribution costs. In both cases, the Authorities used the merging parties’ management and financial accounts to derive the margins and considered how much scope there was for the supermarkets to vary their costs in response to changes in the competitive landscape. In some cases, a degree of judgement can be required to establish the right level of margins. This occurred in the Zipcar/Streetcar (car sharing) case as the market was growing at a fast rate. The CC therefore considered an array of margins based on different assumptions about the flexibility of the car fleet. In this case, it was particularly important to check the consistency of the estimate of elasticity with the estimate of margins: high margins typically indicate that customers are not price-sensitive and therefore that price elasticities are low. It is therefore incorrect to use both high margins and high elasticities in the same analysis because one is generally not consistent with the other. [i.e., the Lerner ‘inverse relationship’ condition is not satisfied].”76
Merging parties should therefore expect the Authorities to request their margin data in a substantial number of cases, and certainly in retail cases.77 Potential pitfalls associated with estimating margins are discussed at the end of the section on price pressure tests.
75 76
Merger Assessment Guidelines, para. 5.4.9(b). OFT and CC, Commentary on retail mergers, March 2011, OFT1035/CC2 com 2, paras. 4.13-
4.15. 77
In Thomas Cook/Co-operative Group/Midlands Co-operative Society, a report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, 16 August 2011, the CC sought to estimate margins econometrically (Appendix B, paras. 156-163). In A report on the completed acquisition by Groupe Eurotunnel S.A. of certain assets of former SeaFrance S.A., 6 June 2013, the CC considered that a small price increase by Eurotunnel would not cause sufficient diversion to MFL that would require a
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(d) Margin screens. The CMA does not appear to have any particular ‘rule of thumb’ for when margins are too low enough to cause concerns or high enough to be a material aggravating factor. Rather, margins appear to have their greatest impact on the competitive assessment when incorporated as part of price pressure tests, as discussed below.
12.2.5 Specific Price Pressure Indices and Tests Diversion ratios and margins are the key inputs for simple price pressure tests regularly employed by the CMA in retail merger cases.78 The Merger Assessment Guidelines state: “If the variable profit margins of the products of the merger firms are high, unilateral effects are more likely because the value of sales recaptured by the merged firm will be greater, making the price rise less costly.”79
The value of recaptured sales is explained as follows. Suppose that there are two retailers of garden equipment, Ade’s Spades (A) and Bernice’s Benches (B). If A increases his prices, he notices that he loses 100 consumers, 50 of which go to B. If A merges with B, then A may have a strong incentive to increase price, depending on how much of a mark-up B earns from her typical customer. Suppose, B’s mark-up (or ‘absolute margin’) is very low (£1), in this case A might not be very interested in increasing prices (diverting customers to B recaptures a mere £1 per customer). If B’s mark-up was very high (£250) then the price rise would be far more attractive (each customer diverted to B is worth £250). The value of diverted sales is simply the diversion ratio (here, 50%) multiplied by the mark-up. It estimates the value recaptured from a price rise that induces customers to leave the product in question. When B’s mark-up is £250, the value of recaptured sales is £125 (i.e., 50% x £250 = £125). On the other hand, when B’s mark-up is £1, the value of recaptured sales is just £0.50. This idea of ranking the possible harm caused by horizontal mergers according to the value of diverted sales can be taken one step further by conducting (slightly) more formal price pressure tests. These refer to the combination of data from the merging parties into a (usually) simple formula to predict (i) whether or not a merger is likely to cause a price rise (i.e., give rise to upwards pricing pressure) or (ii) whether the upwards pricing pressure is of a magnitude sufficiently high to merit further, detailed investigation. The main inputs to price pressure tests are the percentage gross margins of, and the diversion ratios between, the merging parties. There are two broadly related approaches to price pressure tests employed by the CMA (and its predecessors). The first is the gross upward pricing pressure index (“GUPPI”).
new vessel to be operated and so considered the relevant margin to be a ‘short run’ measure, para. 8.120. 78 These measures are also used for market definition when determining critical loss, see Chapter 10. 79 Merger Assessment Guidelines, para. 5.4.9(b).
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This was first used by the CC in Zipcar/Streetcar,80 and the OFT in Unilever/Alberto Culver,81 and is now regularly used by the CMA. The second is the illustrative price rise (“IPR”). This is essentially a simple merger simulation. It was first employed by the CC in 2005 in Somerfield as a one-off and was then employed regularly by the OFT from 2008, and now has been used in numerous cases by the CMA. It is important to emphasise that while IPRs by definition provide an estimated price rise these are “not 'predicted' price increases, but simply a relative measure of potential consumer harm arising from the reduction in competitive pressure”.82 These tests are discussed in turn. (a) Gross upward pricing pressure index. The gross upward pricing pressure index was introduced by Salop and Moresi (2009).83 This test has been adopted in the new US Horizontal Merger Guidelines84 and is the first price pressure test applied in a CC report since Somerfield in 2005.85 There are several variants of the test, as set out below, where the merging parties are denoted A and B and where the term ‘*’ refers to ‘multiplied by’. (i) GUPPI with symmetry in prices, margins and diversion ratios. When the two merging firms have the same marginal costs and set the same price (and by implication have an identical percentage gross margin) prior to the merger, and when the diversion ratio from A to B is the same as from B to A, the GUPPI is simply the multiplication of the diversion ratio by the percentage gross margin: GUPPI = D*M Advocates of this test might put forward the following intuition. First, if firms earn high percentage margins, they do not face ‘much’ competition. Secondly, the higher the diversion ratios between the merging parties, the more the parties compete with each other prior to the merger. So where the merger involves high margins and high diversion ratios, the implication is that each party currently faces weak competition and, to the extent that it does face competition, a substantial amount comes from the other party to the merger. Removing a key constraint on each party, given that other constraints on that party are weak, is a valid cause for concern.
80 Zipcar and Streetcar, a report on the completed merger between Zipcar, Inc and Streetcar Limited, 22 December 2010. 81 Anticipated acquisition by Unilever of the Alberto Culver Company, OFT decision of 18 March 2011. 82 Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 22 December 2014, para. 57 83 Steven C. Salop & Serge Moresi, Updating the Merger Guidelines: Comments (Nov. 9, 2009), http://www.ftc.gov/os/comments/horizontalmergerguides/545095-00032.pdf. 84
U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines (2010), Section 6.1. 85 Zipcar/Streetcar. Note, however, that diversion ratios and margins were used in critical loss analysis, and diversion ratios discussed extensively, in Sports Direct/JJB Sports.
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(ii) General formula for GUPPI. When symmetry does not apply, the GUPPI for product A is defined as: GUPPIA = [DAB * (PB – CB)] / PA with an equivalent expression for product B (i.e., the A and B terms are just swapped with each other). The preceding formula can be understood as follows. The GUPPI for product A is the diversion ratio from product A to product B (DAB) multiplied by the absolute mark up on product B (i.e., PB (the price of product B) less CB (the marginal cost of producing B). The result of this is divided by the price of product A (PA). The intuition for the top of the fraction, i.e., DAB multiplied by (PB – CB), has been explained earlier – it is the value of recaptured sales. Essentially, it is more profitable to increase the price of A: (i) the more that any lost volumes are switched to B (i.e., the greater the diversion ratio from A to B); and (ii) the greater the value of any unit switched to B (i.e., the greater the absolute mark up on B). Farrell and Shapiro set out an innovative way to think about the preceding term.86 Imagine that firm A and firm B are merged, such that there are two divisions (A and B). If division A were to lower its price by a small amount, it would harm profits earned by division B: volumes would be switched from B to A and each unit switched would reduce B’s profit by (PB – CB). So the term DAB * (PB – CB) captures the cannibalisation effect – the harm (or ‘cost’) to B caused by a small price reduction on A.87 In other words, this expression captures the ‘opportunity cost’ of a price reduction on product A, caused by the merger. It is ‘as if’ the merger has increased the marginal cost of producing A. It has not done so in reality, but the perceived cost of producing more of A is the harm caused to product B (i.e., the value of sales cannibalised). Using this terminology, one can now consider the bottom of the GUPPI expression. By dividing DAB * (PB – CB) by the price of A, one obtains a measure of the perceived increase in cost of selling one more unit of A as a percentage of A’s price. The higher the increase in marginal cost (as a percentage of A’s price), the greater the price rising impact of the merger. Put another way, GUPPI puts into context the magnitude of the reduction in the marginal cost of producing A required to offset the upwards pricing pressure (where ‘magnitude’ is expressed as a percentage of the price of A). The
86
Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’, The B.E. Journal of Theoretical Economics: Policies and Perspectives, 10(1), 2010. 87 Note that up to this point, diversion ratios have been expressed in terms of the impact of a price rise on A, causing switching to B. Equally, one can talk of a small price reduction on A, causing volumes to be gained from B. So (for small price changes) DAB means the proportion of total gained volumes that is captured from B, following a small price reduction on A.
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preceding version of the GUPPI has been used by the CC in Cineworld/City Screen (cinemas),88 and Booker/Makro (wholesale and cash & carry).89 Given that the merger increases the (perceived) cost of increasing the production of A, one can then consider the extent to which this is likely to be passed on to customers by the merging firm. This requires measuring (or assuming) a pass-through rate. Define ρA to be a firm-specific pass-through rate, i.e., by how much the price of A increases (in absolute terms) following an increase in the marginal cost of producing A (other things being equal). Thus, a rough estimate of the (absolute) price rise caused by the merger for product A is:90 ρA * DAB * (PB – CB) (iii) Approximate predicted price rises using GUPPI. Since the preceding expression provides an approximate (‘first order’) estimate for the absolute value of the price rise, dividing through by the price of A provides a first order estimate for the percentage price rise on product A caused by the merger:91
ρA * [DAB * (PB – CB)] / PA = ρA * GUPPIA
88 Completed acquisition by Cineworld plc of City Screen Limited, OFT decision of 30 April 2013, para. 57. See also A report on the completed acquisition by Cineworld Group plc of City Screen Limited, CC decision of 8 October 2013, Appendix F for a detailed discussion of the approach. 89 A report on the completed acquisition by Booker Group PLC of Makro Holding Limited, CC decision of 19 April 2013. See, for example, para. 8.63: “We noted that the GfK survey results were from low sample sizes in each local area. Therefore, whilst we calculated diversion ratios and GUPPI estimates as part of our analysis, we did not give these undue weight in our decision-making due to the low sample size at the local level. Rather, we used them as one of the factors taken into account when identifying local areas of potential concern, and then considered the alternatives available to customers in order to assess whether there might be an SLC in a local area.” 90 This is a simple or ‘first order’ approximation. In a full equilibrium model the price rise would probably not equal that given by the above expression when evaluated at the pre-merger pass-through rate; put another way, the choice of the appropriate pass-through rate is not straightforward. A detailed discussion of pass through is beyond the scope of this chapter; for a detailed analysis see part 4 of Conjectural Variations and Competition Policy: Theory and Empirical Techniques A Report for the OFT by RBB Economics October 2011, Adrian Majumdar, Benoît Durand, Chris Doyle and Alan Crawford; see also Sonia Jaffe and E. Glen Weyl, ‘Price Theory and Merger Guidelines’, CPI Antitrust Chronicle, March 2011(1). 91 It should be noted that this estimate for a price rise ‘holds constant’ many features and so is not an equilibrium relationship. For example, the price and cost of product B is held constant, as are reactions by rivals. These may all be different in the post-merger scenario. A more theoretically ‘precise’ prediction could be obtained by imposing more structure on the model (e.g., presuming a demand system and modelling responses by suppliers). However, given that such tests are merely approximations of incentives to increase price, the value of adding more complex structure open to debate.
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When GUPPI is considered in this context,92 the pass-through rate plays a central role.93 In the absence of other evidence, it has been suggested that a default pass-through rate of 50% could be assumed, this being the pass-through rate with a linear demand curve.94 If the analyst is willing to impose some very strong simplifying assumptions, namely symmetry of demand and costs, and a pass-through rate equal to 1, the approximation for the predicted price rise for product A (and product B) simplifies to: D*M (i.e., the diversion ratio between the parties multiplied by the percentage gross margin, which is assumed to be the same for both parties). The OFT discussed what pass-through rate to use in detail in Shell/Rontec, ultimately choosing 100% on the basis of the evidence considered in that case.95 The Authorities have also discussed combining GUPPI with estimates of pass-through at Phase I in Cineworld/City Screen, ultimately deciding not to adopt the approach.96 Pass through was also discussed in detail in Edmundson Electrical/Electric Center.97
92
Another context in which GUPPI may be used is in the delineation of the relevant market. If the formulation given above indicates that the merger would result in a price increase greater than a given SSNIP threshold, t, (where, say, t = 5%), then the firms A and B would be predicted to constitute a relevant market. In other words, if GUPPIA is greater than or equal to t / ρA, this is consistent with a narrow market comprising only the products of the two merging parties, if the same applies also for product B (i.e., if also GUPPIB is greater than or equal to t / ρB). However, the danger of defining markets in this way is that the process of market definition becomes more or less the same as the price pressure test measure and thereby adds no further information. On the other hand, a detailed consideration of demand-side and supply-side substitution might identify additional useful information that would not emerge if undue focus is placed on a price pressure test. 93 In theory, the pass-through rate is complex as it relates to the nature of the competitive interaction of the firm with its rivals, and technically depends on the shape of the demand curve. Pass-through rates can vary widely. In practice, however, it is not straightforward to estimate firm-specific passthrough rates accurately, especially given the time constraints that the Authorities face in Phase I. See ‘Cost pass-through: theory, measurement, and potential policy implications’ A Report prepared for the Office of Fair Trading RBB Economics, February 2014, Iestyn Williams, Benoît Durand and Adrian Majumdar (in particular section 1.7.2.1). 94 See, e.g., Joseph Farrell and Carl Shapiro, “Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition”, The B.E. Journal of Theoretical Economics: Policies and Perspectives, 10(1), 2010. 95 Anticipated acquisition by Shell UK Limited of 253 petrol stations from Consortium Rontec Investments LLP, OFT decision of 3 February 2012, paras. 89-97. 96 Completed acquisition by Cineworld plc of City Screen Limited, OFT decision of 30 April 2013, para. 56. In that context, the OFT noted that a GUPPI could be interpreted as an illustrative price rise if combined with a pass-through rate of 100 per cent. However, there is no reason to presume firmspecific pass-through rates to be so high (not least because such rates are, all else equal, lower than industry pass-through rates). See ‘Cost pass-through: theory, measurement, and potential policy implications’ A Report prepared for the Office of Fair Trading RBB Economics, February 2014, Iestyn Williams, Benoît Durand and Adrian Majumdar (in particular section 1.7.2.1). 97 Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT decision of 11 May 2012, paras. 143-148. The OFT found, for example, that 50% of staff costs were variable costs. The OFT also cautiously assumed that firm-specific pass-through would be 100%.
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(iv) Multi-product firm versions of GUPPI. The preceding discussion presumes that firms A and B sold just one product prior to the merger. However, if the acquiring firm owns brands F and G, while the acquired firm owns brands H and I, then in principle there are four GUPPI calculations (one for each product involved in the merger) and each of these must take into account that a price rise on one party’s product would cause switching to both of the other party’s products (given that F, G, H and I are all substitutes). For example, a price rise on product F would cause switching to both H and I, and thus there is a greater degree of ‘internalisation of lost volumes’ than would be the case if the rival owned just one product.98 GUPPIF = [DFH * (PH – CH)] / PF + [DFI * (PI – CI)] / PF Another way to express GUPPIF is as follows:99 (the value of sales diverted to product H) plus (the value of sales diverted to product I) revenues on volumes lost by product F
A similar GUPPI can be expressed for the other products, G, H and I.100 It should be noted that GUPPI is not an equilibrium relationship but an index. As Salop and Moresi state: “The GUPPI does not purport to be equal to the merger-induced equilibrium price increase. It is merely an index of the upward pricing incentive of the merged firm for each of its overlap products, holding the prices of other products at pre-merger levels and ignoring other factors”.101 (b) Illustrative price rises with symmetric demand. From a theoretical perspective, attempting to estimate merger price effects using GUPPI is necessarily limited by the fact that GUPPI (and UPP) are non-equilibrium (or ‘first order’) approaches. For example, GUPPI examines a change in the price of one product at a time, holding other prices (and costs) as given. It therefore ignores potentially important feedback effects between the merging firms’ two products. In order to gain a more theoretically consistent (albeit not necessarily more accurate) estimate of the impact of a merger on pricing incentives which accounts for such feedback effects, it is necessary to make more assumptions regarding the nature of oligopoly conduct and the structure of demand – in particular the shape of the demand 98 See, Anticipated acquisition by Unilever of Alberto Culver Company, OFT decision of 18 March 2011, para. 88, footnote 52. This was not a retail merger but a merger of suppliers of consumer goods to retailers. See also Anticipated acquisition by Shell UK Limited of 253 petrol stations from Consortium Rontec Investments LLP, OFT decision of 3 February 2012, para. 16. 99 Ibid., para. 88, footnote 51. 100
Jaffe and Weyl advocate a measure called Generalised Pricing Pressure (GePP), which substantially extends the UPP and GUPPI literature, including in relation to multi product firms. See part 4 of ‘Conjectural Variations and Competition Policy: Theory and Empirical Techniques’ A Report for the OFT by RBB Economics October 2011, Adrian Majumdar, Benoît Durand, Chris Doyle and Alan Crawford. 101 Steven C. Salop & Serge Moresi, Updating the Merger Guidelines: Comments (Nov. 9, 2009), available at http://www.ftc.gov/os/comments/horizontalmergerguides/545095-00032.pdf, page 20.
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curve. Having done so, the post-merger equilibrium can be derived and the associated price increase estimated. Such approaches are generally referred to as calculating an ‘illustrative price rise’, or IPR. The IPR approach, which follows the work of Carl Shapiro102 and Greg Werden,103 predates by over a decade the recent work by Joe Farrell and Shapiro on UPP.104 Shapiro provided simple formulae that, under certain strong assumptions (such as symmetry), estimate the percentage price increase that would result from a merger as a function of only the diversion ratio and the percentage gross margin. Such techniques amount to what is essentially ‘back-of-the-envelope’ merger simulation which (given various assumptions) predicts the price effects of a merger. Several variations on simple IPR expressions have been developed, depending on (for example) whether they: (i) employ linear or isoelastic demand curves;105 (ii) assume symmetry between the two merging firms in terms of demand curves, marginal cost and diversion ratios; (iii) allow for asymmetries on the latter variables; and (iv) factor in the presence of any merger-specific efficiencies.106 In the cases discussed below, the formulae presume that the merging firms sell just one product each. (i) IPRs with isoelastic demand, symmetry and no efficiencies. In order to obtain an IPR, numerous assumptions are required. In the earlier applications by the OFT of IPRs, symmetry was regularly presumed. It means that, in the case of a merger of two single product firms, A and B, the pre-merger equilibrium is characterised as follows: the price of A equals the price of B; the marginal cost of producing A and B is
102
Carl Shapiro, ‘Mergers with differentiated products’, 10(2) ANTITRUST (1996) pp. 23-30. Gregory J. Werden (1996), ‘A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products’, 44(4) Journal of Industrial Economics, pp. 409-413. 104 Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’, The B.E. Journal of Theoretical Economics: Policies and Perspectives, 10(1), 2010. 105 With linear demand, as the price increases, customers become more and more price sensitive and eventually stop purchasing the product entirely. With isoelastic demand, customers are equally price sensitive whatever the price. Suppose in the case of isoelastic demand that the price elasticity of demand is 2. In this case, if the price is £1, a price increase of 5% to £1.05 will lead to a 10% fall in volumes (i.e., 2 * 5%). If the price is £10 and increases to £10.50, this will also lead to a 10% fall in volumes. With linear demand, in contrast, if a 5% price rise leads to a 10% loss in volumes when the price is £1, then a 5% price rise when the price is £10 will lead to a substantially greater fall in volumes. In A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, 9 July 2013, Annex 6, para. 7, the CC set out a strong preference for the use of an IPR using linear demand, describing use of isoelastic demand (or GUPPI) as “extreme”. 106 Until Asda/Netto, the Authorities did not factor in efficiencies to their IPR formulae. However, in that case the OFT stated: “Having concluded on the cognisable cost savings in this case, the OFT incorporated these efficiency adjustments into the IPR calculation. In practice, this adjustment did not alter the overall number of SLCs found in this case” (para. 76). The OFT did not set out the formula that it used for the purpose of this IPR calculation. See Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT Decision of 23 September 2010. 103
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the same (and hence the percentage gross margins on both products are the same); and the diversion ratio from A to B is the same as that from B to A. In Asda/Co-op, the CMA stated that it “considers that symmetric IPRs are particularly relevant where there are no significant asymmetries between the merging parties (in terms of diversion ratios, variable margins and prices).”107 Under these conditions, the IPR formula is: IPRSI = D*M / (1 – M – D) where subscript “SI” reflects the key assumptions “Symmetry, Isoelastic demand”, D is the diversion ratio and M the percentage gross margin. The following points are noteworthy. First, the higher the IPR, the higher the percentage gross margin and the higher the diversion ratio. In qualitative terms, this is a similar outcome to a predicted price rise using GUPPI and assuming symmetry and a constant pass-through rate equal to 1. Secondly, in the case of the IPR formula, as M and D become quite large, the formula may predict unrealistic outcomes. The denominator is (1 – M – D). It is presumed to exceed zero but as it approaches zero (i.e., as M and D become larger and sum to almost unity), the IPR approaches infinity. For example, with a percentage gross margin of 20% and a diversion ratio of 30% the IPR is 12%. However, if the percentage gross margin is doubled (so that M = 40% and D remains the same at 30%), the IPR increases dramatically to 40%. If M then rose further to 60%, leaving D unchanged, the IPR would equal 180%. From a ‘reality check’ perspective, whilst margins of 60% and diversion ratios of 30% are plausible, post-merger price increases of 180% (e.g., a near tripling of the price from, say, £1.00 to £2.80) seem less so. This, to a large extent, reflects the nature of the isoelastic demand assumption which predicts higher price rises than other commonly employed demand assumptions, notably linear demand (see below).108 (ii) IPRs with linear demand, symmetry and no efficiencies. If the preceding assumptions are maintained, but demand is presumed to be linear rather than isoelastic, the formula for the IPR is as follows: IPRSL = D*M / [2*(1 – D)]
107 Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 22 December 2014, para. 58. See also Anticipated acquisition by Lincolnshire Co-operative Limited of a Budgens store in Holbeach, Lincolnshire, from Musgrave Retail Partners GB Limited, CMA decision of 18 December 2014, para. 37. 108 As noted above, as M plus D approaches unity, the expression for the illustrative price rise approaches infinity. This can be interpreted in two ways. First, one might argue that the formula is meaningless – when would a price rise ever be that high? Secondly, one might argue that the merging firms in this case would simply withdraw product A. (Withdrawing product A is just like imposing a price rise of infinity – in either case, no-one would purchase the product.) However, that might also be unrealistic in practice.
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where subscript “SL” reflects the key assumptions “Symmetry, Linear demand” and D and M are as before. As with the isoelastic version of the formula, the numerator is the diversion ratio multiplied by the percentage gross margin. However, predicted price rises are substantially lower when the linear version of the formula is employed. For example, with linear demand, a diversion ratio of 25% and a margin of 30%, the IPR is 5%; this compares to 17% under the assumption of isoelastic demand.109 (iii) IPRs with asymmetric demand. An advantage of assuming symmetry is that the formulae for IPRs are ‘elegant’. A disadvantage is that they may often be unrealistic. One way to allow for a little more flexibility is to allow for asymmetric diversion patterns. For example, in Reckitt Benckiser/K-Y brand, the CMA used the following asymmetric indicative price rise formula with linear demand, based on the model set out in Shapiro.110 IPRA = [MA * DBA * (DBA + DAB) + 2 DBA * MB (PB / PA)] / [4 − (DBA + DAB)2] In the above expressions, MA and MB are pre-merger percentage variable margins of products A and B respectively; DBA and DAB are the diversion ratios from B to A, and from A to B, respectively; PA and PB are the pre-merger prices of A and B. In the same case, the CMA also cited Hausman, Moresi and Rainey who demonstrate that (under certain conditions) the illustrative price increase on product A, assuming linear demand and allowing for asymmetries in prices, marginal costs and diversion ratios would be:111 IPRA = [DAB * (PB – CB) + DAB * DBA * (PA – CA)] / [2 * (1 – DAB * DBA) * PA] With asymmetric formulae, it is possible (indeed likely) that the IPR for one product will exceed that for the other. To put the two price rises in context, the (volume) weighted average price rise may be a useful statistic – this captures the intuition that higher prices are less likely to be harmful (from an overall customer perspective) where they are applied to a low volume product. In Asda/Netto, the OFT employed a formula for asymmetric isoelastic demand (although it did not provide the formula in its
109
With symmetry, linear demand and efficiencies, the formula for the IPR is as follows: IPRSLE = D*M / [2*(1 – D)] – [E*(1 – M)] / 2 where subscript “SLE” reflects the key assumptions “Symmetry, Linear demand, Efficiencies”, D and M are as before, and E refers to the percentage reduction in marginal cost caused by the merger (presumed to apply to both merging parties’ products). The greater the efficiencies, the smaller the predicted price rise; indeed, if efficiencies are large enough, price reductions could be implied by the above formula. See Richard Schmalensee, ‘Should New Merger Guidelines Give UPP Market Definition?’, Global Competition Review, December 2009. 110
Carl Shapiro, 2010, Unilateral Effects Calculations. Jerry Hausman, Serge Moresi and Mark Rainey, Unilateral Effects of Mergers with General Linear Demand, 19 September 2010, cited in A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, Appendix F, notes 4 and 5. To obtain this expression, the authors assume equal cross-price effects, meaning that if a £1 increase in the price of A increases B’s volumes by 50, then a £1 increase in the price of B would increase A’s volumes by 50 units as well. 111
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decision).112 More recently, the CMA employed an asymmetric isoelastic demand formulae in Asda/Co-op. 113 The use of the isoelastic demand assumption was stated to be “[c]onsistent with previous decisional practice”; the CMA noted that this was based on the belief that demand for groceries would not become more price sensitive as the price of groceries went up (i.e., in contrast, where consumers are more price sensitive at higher prices, linear demand is more appropriate).114 (c) Upward pricing pressure. The forerunner of GUPPI measures, as the name suggests, was the work by Farrell and Shapiro on upward pricing pressure (“UPP”). UPP is captured by an index that is meant to signal whether there is a net upward influence on price caused by a merger. For example, consider two single product firms, A and B. In its simplest form, UPP for firm A is: UPPA = DAB *(PB - CB) – EA*CA The DAB * (PB - CB) component of the preceding expression is recognisable from the discussion above in relation to GUPPI. Recall that this component can be interpreted as the increase in the ‘perceived marginal cost’ of selling an extra unit of product A (i.e., the additional cost being that selling more of A cannibalises some profit earned on B). The additional cost ‘increase’ may be offset by a cost reduction in the form of a standard efficiency gain. Herein lies the intuition of the final part of the UPP expression – EA * CA captures the merger specific reduction in firm A’s marginal cost.115 Under the assumption of symmetry in demand and cost, Farrell and Shapiro show that the UPP test can be simplified to: D* M / [1 – M] – E
112 See Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 23 September, 2010, para. 60: “Both the symmetric and asymmetric approaches to assessing IPRs require an assumption to be made about the shape of the demand curve faced by the merging parties. In line with previous cases and the absence of evidence to the contrary, and on a cautious basis, the OFT worked on the basis of ‘isoelastic’ demand for the purpose of calculating the IPRs in this case.” 113 Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 22 December 2014. 114 Ibid., paras. 57-61. It is also of interest that the CMA adjusted its IPR measure to account for the fact that there was not only a loss in competition (as Asda acquired Co-op stores) but also an offsetting gain (the acquired stores began to compete with non-acquired Co-op stores. 115 EA is the post-merger percentage reduction in marginal cost; CA is the pre-merger marginal cost. As with GUPPI, the UPP measure is a non-equilibrium approach – holding prices and costs constant on other products. Werden was the first to calculate the critical merger efficiencies to compensate for the loss of competition and to incorporate feedback effects (such as the impact of changes in the cost of production of other products as well as reactions by the parties’ rivals), see Gregory J. Werden (1996), ‘A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products’, 44(4) Journal of Industrial Economics, pp. 409-413.
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As before, D is the diversion ratio between the merging parties and M is the percentage gross margin (with D and M assumed to be common to both parties). In this case, if the value of the expression exceeds zero, there is upward pricing pressure. Whilst the approach of weighing up the increase in perceived marginal cost against a merger specific decrease in marginal cost is intuitive, it is also the feature that has limited the attraction to policy makers of the UPP test. Specifically, to conduct the UPP test (as set out above) requires either measuring efficiencies or awarding merged firms with a standard efficiency gain.116 (d) Comparing intervention thresholds with GUPPI and IPRs. The Authorities have employed IPRs and GUPPIs as a screen, whereby a threshold for the IPR, or GUPPI, is established below which intervention is less likely to occur. As with any screen, a critical issue is where to set the ‘threshold for concern’. For the purposes of this discussion, it is helpful to assume symmetry in demand and cost, as well as single product firms. This allows a straightforward comparison of implied intervention thresholds using IPRs with isoelastic and linear demand and GUPPI thresholds. Specifically, the following diagram sets out combinations of percentage gross margins and diversion ratios that lie on the intervention threshold.117 To the north east of each curve are combinations of percentage gross margins and diversion ratios that would give rise to further scrutiny by the Authorities (under the given screening rule). To the south west of each curve, intervention is unlikely (if the Authorities adopt the screening rule in question). The following then applies: (1)
Under an IPR screen of 5%, intervention is more likely when the Authorities base the IPR calculation on isoelastic demand, compared to linear demand. In other words, the ‘linear IPR’ curve (the darker full line) always lies to the north east of the ‘isoelastic IPR’ (the lighter full line).
(2)
Under a GUPPI threshold of 5% (the dotted line), the Authorities would be less interventionist compared to an ‘isoelastic IPR’ threshold of 5% but more interventionist compared to the use of a ‘linear IPR’ threshold of 5%, provided that the diversion ratio is below 50%. Thereafter, the GUPPI threshold of 5% is less interventionist than both IPR measures.
116 Farrell and Shapiro advocate the use of a simple default marginal efficiency credit, or ‘standard deduction’; in one example they use to illustrate this approach, an efficiency credit of 10% is adopted. Interpreted in a wider context, they argue that this standard deduction can be thought of as a threshold for gross upwards pricing pressure above which mergers are subject to further scrutiny. Comparing the UPP and IPR approaches to devising screening rules, the UPP approach can be seen as attractive in that it does not require the arbitrary presumption of the nature of demand. However, the need to award firms with a standard efficiency credit arguably introduces an element of arbitrariness that is no less than that involved in presuming the nature of demand. See Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’, The B.E. Journal of Theoretical Economics: Policies and Perspectives, 10(1), 2010. 117 This is based on: Dr. Amelia Fletcher, The Great GUPPI debate: Topical Issues, BIICL 9th Annual Merger Conference, The Law Society, London, 17 March 2011, slide 7.
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(3)
A GUPPI screen of 5% would be less permissive than a 10% screen (the dashed line lies above the dotted line).
(4)
The “GUPPI = 10%” curve can be thought of as a threshold not only for a pure GUPPI measure but also a GUPPI inspired predicted price rise. In the event that a firm-specific (absolute) pass-through rate of 50% is assumed, a 10% GUPPI corresponds to a 5% predicted price rise. By the same token, the “GUPPI = 5%” curve is equivalent to a GUPPI inspired predicted price rise with an assumed firm-specific pass-through rate of 100%.
The important point to take away here is that all screens give rise to different thresholds for intervention, yet each of them can be consistent with exactly the same ‘concept’, namely intervention when the predicted price rise is 5% or more. This gives rise to the potential for inconsistency in ‘intervention thresholds’ when the Authorities use different price pressure tests, and is discussed further below in Section 12.2.5f. Figure 1: Intervention thresholds with symmetric demand and cost 100%
Percentage Gross Margin
Linear IPR = 5% GUPPI = 5%
Isoelastic IPR = 5% GUPPI = 10%
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Intervent ion Less
0% 0%
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100%
Diversion Ratio (%)
One often cited critique of price pressure test thresholds is that, when combined with initial filters, there may be an inconsistency between the choice of filter (to screen out areas of concern) and diversion ratio thresholds (where a concern is found). For example, it would be surprising if the CMA were concerned with a merger where there were 5 equally close (‘symmetric’) competitors, as this would be a ‘5 to 4’ (whereas concern would not normally arise unless it was a ‘4 to 3’ (see Chapter 11). However, the implied diversion ratio from one merging party to the other, assuming a worst case scenario of no diversion outside the market, would be 25% (i.e., 1/4). In the areas that
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were not filtered out (e.g., in a ‘4 to 3’ area), a diversion ratio between the merging parties might be estimated to be 20% (below the ‘critical’ 25% level). If the merging parties’ percentage gross margins were 25% or more, then a GUPPI threshold of 5% would be triggered. Therein lies a potential inconsistency: the filter implies diversion ratios up to 25% to be fine, yet the GUPPI test implies the opposite. One possible answer to this puzzle is that the Authorities consider that there is some ‘additional’ element of competition that arises from having at least four competitors that is not captured in a simple price pressure test measure (since these measures tend to presume that only two firms compete by assuming away all other competitor reactions). (e) Price pressure test thresholds in practice. The CMA and its predecessors have considered price pressure tests a number of times, occasionally explicitly stating, and sometimes implicitly indicating, the threshold adopted for concern. Several examples are presented below. In Asda/Co-op, the CMA identifies a 5% threshold for use with IPRs, albeit with some caveats: “In previous cases [i.e., Asda/Netto], the OFT has considered that IPRs above 5% are more likely to give rise to competition concerns. However, the CMA considers that these measures offer only a guide as to whether a merger may give rise to a realistic prospect of a SLC and cannot be viewed as a definite threshold below which no concerns would arise. In determining the level of estimated IPRs that the CMA is willing to accept in this case it has considered sensitivity testing around the estimated diversion ratios and the relative prices that Asda submitted to the CMA.”118
While it might be argued that the 5% threshold is specific to grocery retailing, references to 5% have been made in other contexts.119 Broadly in line with the view that concerns may arise with IPRs above 5%, at Phase II, in Reckitt Benckiser/K-Y brand, where remedies were required, the CMA computed an IPR (based on linear demand) for Durex and K-Y personal lubricants in the range of 4.1%-11.8%, and 6.3%17.2% respectively (with almost all estimates being above 5%), depending on the assumptions about margins, diversions ratios and the relative cost price of the products.120 Even if a ‘soft’ 5% threshold is applied by the CMA, this still leaves open the choice of price pressure test. Using an IPR with isoelastic demand is less permissive (i.e., gives rise to greater scrutiny) than using linear demand. Likewise, using a GUPPI measure with a 5% threshold (or, equivalently, a GUPPI predicted price rise combined with a pass-through assumption of unity) is less permissive than a linear demand assumption for low and moderate diversion ratios. The Authorities have not been consistent in their 118 Anticipated acquisition by Asda Stores Limited of five grocery stores and three petrol filling stations from Co-operative Group Limited, CMA decision of 22 December 2014, para. 61. Similar wording is used in See also Anticipated acquisition by Lincolnshire Co-operative Limited of a Budgens store in Holbeach, Lincolnshire, from Musgrave Retail Partners GB Limited, CMA decision of 18 December 2014, para. 36. 119
Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 26 October 2010, para. 41. 120 A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, Appendix F, para. 13 and Annex 1.
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approach. Regarding the choice of demand curve, perhaps the strongest view in favour of the use of linear demand is set out in AG Barr/Britvic, where the CC stated as follows for the purpose of its IPR calculation: “We assume a linear demand curve in all the IPR results shown. This is a common assumption in IPR simulation—it is simple, plausible and conservative. The alternative assumption that is commonly made is a constant elasticity demand curve. This is usually made for mathematical convenience rather than any other reason. A linear demand curve will find IPRs that are lower than the constant elasticity case. A constant elasticity demand curve has the counterintuitive property that there is no price so high that demand falls to zero. A standard GUPPI calculation or the use of constant elasticities in a single-round version of the IPR model would double a similarly calculated IPR based on a linear demand curve, however, we consider this to be an extreme assumption.”121
Not long after this case, the CC used the standard GUPPI in Cineworld/City Screen. It is hard to discern the precise threshold employed in that case. However, it would appear that GUPPIs below 5% were not viewed to be problematic, while GUPPIs above 10% were typically viewed to be problematic. Within the apparent grey area (5-10%), other evidence would be important (e.g., if one of the cinemas had a GUPPI below 5% (above 10%) this would be a mitigating (aggravating) factor).122 It is possible that a slightly higher threshold was adopted in the light of the CC’s (Phase II) statement in AG Barr/Britvic that the use of a standard GUPPI might be “an extreme assumption.” In a more recent Phase I case, Greene King/Spirit, the CMA stated in relation to two areas that had failed its primary filter and subsequent local analysis: “The margins of the Kings Arms and the Travellers Joy indicate that the diversion ratios indicated by the Surveys are not likely to result in a GUPPI greater than 10%.”123 Whilst this suggests a 10% threshold for GUPPI at Phase I, in TOBC/Bowlplex a few
121 A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, 9 July 2013, Annex 6, para. 7. More recently, see A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, Appendix F, note 2, citing “counterintuitive” properties of isoelastic demand. 122 See A report on the completed acquisition by Cineworld Group plc of City Screen Limited, CC decision of 8 October 2013, Table 14 of Appendix F and, for examples, paras. 6.88, 6.107, 6.114 and 6.120. The CC stated that its GUPPI calculations for the Picturehouse and Cineworld cinemas were of a magnitude that suggested that the merger would create an incentive for the parties to increase prices at both cinemas, the incentive being greater at Picturehouse Cambridge (CC GUPPI = 13-15%) than Cineworld Cambridge (CC GUPPI = 5-6%). Edinburgh was not considered to be problematic on the basis of CC GUPPIs estimated to be 2% for Cineworld and 7% for Picturehouse. The GUPPIs for Picturehouse Greenwich appeared to be in the grey area “The GUPPIs for Picturehouse Greenwich [CC GUPPI = 7-10%] are of a magnitude that could give rise to concerns if supported by other evidence, while the GUPPI calculations for Cineworld Greenwich—The O2 [CC GUPPI = 1-2%] and Cineworld West India Quay [CC GUPPI = 0-2%] cinemas suggest that the merger would not materially change the incentives of the parties in this area. The GUPPI calculations suggest that Picturehouse Southampton [GUPPI = 11%] would have an incentive to increase prices following the merger, while for Cineworld Southampton the incentive would be limited [CC GUPPI = 2%] 123 Anticipated Acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015, para. 133.
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months later, the CMA appeared to have concerns with GUPPIs above 7% but not at 5%.124 That might at least suggest a threshold of 5% as a safe harbour. However, in a Phase I case post-dating the preceding two (but in line with earlier Phase I cases in the same industry, i.e., petrol retailing,125 the CMA found GUPPIs in the 0-5% range have been found to be problematic when accompanied by high diversion ratios. In MRH/Esso, the CMA stated: “Variable margins in this sector are low (typically around 5%), and therefore the GUPPIs estimated by the CMA are relatively low. In general, the CMA has observed that service stations compete strongly on price, with suppliers being well informed about the prices of their competitors and responding to price changes promptly. In this industry context, and if consistent with other factors […], the CMA believes that even moderate diversion ratios and relatively low GUPPIs could be indicative of an SLC. The CMA found no evidence that upward pricing pressure would be countervailed or mitigated by other factors (such as efficiencies or competitor repositioning).”126
Ultimately, the CMA appeared to place greater weight on diversion ratios, stating in one area of concern that it had “estimated a diversion ratio of [50–60]% from Esso City Service Station to MRH Girton Spar, and a relatively high GUPPI of [0–5]%”.127 It is submitted that a GUPPI of 0-5% is by no means “high” whereas a diversion ratio of 5060% is a reasonable cause for concern. In many respects, this brings out some difficulties with the price pressure test approach. Where variable margins are low, the threshold for concern might be lowered so as to capture cases where there are (very) high diversion ratios between the parties. However, if the threshold is shifted downwards when margins are low, why not shift the threshold upwards when margins are high so that mergers are not caught where diversion ratios are relatively low? Indeed, if diversion ratios are really the ultimate measure of closeness of competition, should the emphasis on margins be substantially
124
See Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015: “GUPPI calculations for both Bowlplex (10%) and TOBC (7%) indicate a significant incentive to increase prices post-Merger” (para. 91) indicate a significant incentive to increase prices post-Merger” (para. 91); “GUPPI calculations at 5% for each of Bowlplex and TOBC do not indicate a significant incentive to increase prices post-Merger” (para. 112). 125
Anticipated acquisition by Shell UK Limited of 253 petrol stations from Consortium Rontec Investments LLP, OFT decision of 3 February 2012, see para. 99 (areas where the diversion ratio exceed 40% were scrutinised), and, for example, para. 105: “Centered on TCS Swakeleys the GUPPI for this area calibrated as a potential price increase with 100 per cent pass through is [0-five] per cent. The diversion ratio from TCS Ickenham to Shell Swakeleys is [60-70] per cent, while from Shell Swakeleys to TCS Ickenham the diversion ratio is [50-60] per cent, therefore the OFT considers that there is a realistic prospect of a substantial lessening of competition with respect to the supply of retail fuel in this area.” 126 Anticipated acquisition by MRH (GB) Limited of 78 service stations from Esso Petroleum Company Limited, CMA decision of 26 November 2015, para. 54. 127 Ibid., para. 64.
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downplayed? (Other potential concerns with price pressure tests are described in the next section.) (f) Measurement error, theoretical concerns and appropriate weight to place on price pressure tests. There are a number of issues worth considering as regards the theory of price pressure tests, measuring an ‘economic’ margin (i.e., a mark-up over marginal cost, measuring diversion ratios, and combining them into a price pressure test). Some important ones are set out below. (1) Is the textbook economic model a valid simplification of reality? The textbook Bertrand model underpinning a large part of the focus on margins and diversion ratios is a theory that presumes firms know their own costs as well as their rivals’ costs; they then set prices, simultaneously (without negotiation),128 and then the game ends. This quite plainly does not describe everyday retail, intermediate or raw material supply markets. The textbook model nonetheless has some intuitively appealing characteristics: prices are higher when costs are higher and when consumers are less sensitive to price; and, perhaps most importantly, it permits the concept of closeness of competition to be measured via a diversion ratio (which in many cases seems more appropriate than by market shares). However, it is quite a leap to presume that the model itself applies well to any given merger, or equally well to all retail mergers, or indeed to other levels of the supply chain. The results should therefore be treated with caution. The CMA has considered some of these concerns and takes the view that IPRs are informative, even if not accurate, predictions of post-merger price rises.129
128
In A report on the completed acquisition by Groupe Eurotunnel S.A. of certain assets of former SeaFrance S.A., 6 June 2013, Appendix G, paras. 19-32, the CC conducted both an IPR (using linear demand and symmetry) and a GUPPI price pressure test. The CC argued that this was appropriate because prices were negotiated. However, while posted pricing is a key feature of the Bertrand model, negotiation is not because the Bertrand model presumes suppliers make ‘take-it-or-leave-it’ offers and so do not negotiate. The CC also assumed symmetry in diversion patterns when conducting its IPR analysis, despite Eurostar offering a premium service and having a substantially greater market share than MFL (i.e., factors indicating symmetry might not be a valid assumption). 129
For a discussion of the Bertrand model’s assumptions in an IPR context, see AG Barr plc/Britvic plc, a report on the anticipated acquisition by AG BARR plc of Britvic plc by means of an all-share merger, 9 July 2013, Appendix 6, para. 5. See also Reckitt Benckiser/K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, Appendix F, para. 14, where the CMA states: “We note that these results are only indicative and should not be interpreted as predictions of the actual price rise we would expect post-merger. As noted above, in our model we used consumer level data and did not take into account the negotiation between suppliers and retailers. In that sense, these results would reflect the price rise we would expect (absent supply-side responses or other countervailing factors) if the suppliers were posting retail prices. While this is not the case in the market, we consider that these results are indicative of the merger party’s incentive to try to increase cost prices post-merger, especially in light of the relationship between upstream and downstream prices which will lead to increases in retail prices. We also note that we have not taken into account supply-side responses such as new entry or repositioning of existing products, or exercising buyer power which could counter the incentive to increase prices. This [sic] potential countervailing factors are discussed separately”.
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(2) How do firms set their PQRS factors? This is the key question to understand and it is submitted that spending a good deal of time understanding price (and QRS) setting behaviour is of greater value than the same time spent on trying to estimate a margin over marginal cost. For example, it is helpful to understand whether there are any dynamic factors at play: do firms, for example, price low to invest in building up scale, and a customer base, or because of the fear of attracting new entry; do they flex prices regularly to promote their products; do they have a reputation to maintain with respect to their pricing offer (would Poundland increase prices to £1.05 for example), and so on? (3) What is the relevant measure of price or margin for a multi-product firm? In the case of retail store mergers, the ‘price’ is often treated to be a composite product – e.g., ‘the weekly shop’. Likewise, a margin might be an average margin for the store as a whole. However, these prices would typically be determined individually and it is not clear that simply rolling them up into one price and treating the retail store as the selling of a single product is a good assumption. Individual products are often priced to take into account promotions, seasonal issues, in-store complementarities (e.g., pricing low on some products to attract customers to the store and/or to purchase other goods), some products not being available throughout the year, and so on. (4) Over which period should the percentage margin be measured, and what costs are variable over the time period in question?130 On the one hand, it might be argued that the relevant measure is the marginal cost of production that relates to the current quantities produced by both parties, perhaps sensitivity tested against flexing output up or down by 5% or 10%.131 On the other hand, it might be argued that businesses might take a longer term view to their price setting and that their perceived marginal cost includes an element of fixed cost recovery (something that may or may not be supported by documentary evidence). Further, it is important to consider whether average variable cost is a good proxy for marginal cost (the latter being the relevant cost in theory). It is a good proxy if marginal cost is invariable with output. However, if marginal cost increases with output then average variable cost understates marginal cost (conversely, if marginal cost falls as output goes up, average variable cost overstates marginal cost).132
130
In general, the longer the time period under consideration, the greater the scope the firm has to vary its cost base. It may also be the case that the more products that are included in the calculation of the margin, the greater the scope to vary the cost base. For example, an overhead that might reasonably be treated as fixed when considering a single product line within a store that sells hundreds of products could become variable when considering the scope to vary the output of the whole store (the latter point being relevant where store-level margins are employed). 131 Some costs might be fixed over small changes in output but variable over larger changes. For example, where a firm reduces output by one unit there may be little point in varying the shift patterns of its workers. However, where output falls by a larger amount, it may be able to save certain staff costs by adopting a different mix of full-time and part-time work. 132 The CC and OFT Commentary on Retail Mergers, March 2011 states (at para. 4.13): “Variable margins are made up of the sales of the relevant products which both parties supply less their variable costs. The Authorities considered that cost variability depended on the period over which the merging
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(5) How sensitive are the results of a price pressure test to different measures of the margin? The inclusion or exclusion of certain costs may have a fundamental impact on the estimated margin. If the margin is calculated to be 50% when in fact the correct measure is 10% any price pressure test is far more likely to be ‘failed’. How is the turnover on shelf captured? Compare two similar sized products that generate the same return per square foot of shelf per year. One product is a high volume product that is purchased 5 times a week, sold at a mark-up of £1. The other is a low volume product, purchased only once a week, sold at a mark-up of £5. If both have a selling price of £10, it might look as if the slow moving product has a percentage margin five times greater than the fast moving product. However, if the margin is calculated on a return per square foot basis over the year (which may be how the store owner views returns), the margins on each would be the same. (6) Is there a risk that price pressure tests place too great a weight of evidence on closeness of competition that can be measured numerically? As discussed above, there are a number of ways to shed light on closeness of competition – a diversion ratio is just one of them. Further, only some of these measures (in particular surveys) give rise to a numerical estimate of a diversion ratio that can be used in a price pressure test. Nonetheless, other evidence on closeness of competition might be just as, or indeed, more robust, yet it might be given less weight because it does not fit neatly into a price pressure test.133 Even where numerical estimates are used, they are often subject to a wide margin of error and there are debates as to the correct way that diversion should be calculated (such as in relation to rebasing diversion ratios to exclude within portfolio switching).134 (7) What is the relevant threshold for concern? The Authorities have adapted their approach to using IPRs over the past decade. Whilst the theory has not changed, the use of the theory has. Different tests have come into fashion and then fallen out of vogue (e.g., treating ‘high’ margins and ‘high’ diversion ratios as a rebuttable presumption of harm in non-grocery mergers, a precedent created in LOVEFiLM/Amazon135 and Home Retail Group/Focus136 albeit with no definition of
parties could change prices or other key competitive variables in response to change in competition. The decisions on how to derive variable margins were therefore made on a case-by-case basis.” 133 For example, as explained in Section 12.2.6 below, in A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015, the CMA estimated an aggregate diversion ratio using a large number of assumptions. That diversion ratio was then used to compute an IPR. While the CMA acknowledged that the measure had to be treated with caution given the number of assumptions required to estimate the diversion ratio in the first place, it might be argued that the estimated diversion ratio was so ‘approximate’ that there was little additional value to combining this with a ‘back of the envelope’ IPR calculation. See para. 6.141b. 134 See Section 12.7.1 below. 135
Anticipated acquisition of the online DVD rental subscription business of Amazon Inc. by LOVEFilm International Limited, OFT decision of 15 April 2008. 136 Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd, OFT decision of 15 April 2008.
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‘high’ provided, and which is not reflected in the current Merger Assessment Guidelines, i.e., no such presumption exists today). As explained in 12.2.5(e) above, there is no clear threshold for what IPR is ‘high enough’ to cause concern, with, for example, the CMA willing to flex the threshold in cases where margins are low but diversion ratios are high. It is submitted that price pressure tests are best thought of as one measure to be weighed in the round with other evidence on the competitive effects of a horizontal merger and that a healthy regard to the problems with these indicators should be retained. Further, experience of discussing these matters with merging parties indicates that while business people normally understand the relevance of a diversion ratio as a measure of closeness of substitution, they are typically a lot less comfortable with the theoretical idea that their post-merger pricing incentives are closely related to the prediction of a price pressure test. These are static measures and do not take into account the scope for buyer power or supply side responses.
12.2.6 Interacting National and Local Theories of Harm in Retail Cases with Local Overlaps (a) Introduction. Mergers involving retail chains raise the prospect of horizontal effects when stores that previously competed within the same local area come under common ownership. This may reduce the choice available to local consumers, granting the merged entity greater freedom to charge higher prices or worsen its non-price (QRS) terms. An important matter is then to assess the level at which PQRS terms are decided. For example, the CMA may assess whether prices or indicators of QRS factors at local stores (such as margins, staffing levels, opening times, and range of products offered) vary in accordance with the number of nearby rivals, or are flexed in response to entry or exit. If so, the CMA will consider competitive effects at the local level. If not, or if there are some meaningful dimensions of competition that are set nationally, the CMA will consider the potential for harm at the national level.137 The intersection of local and national retail competition issues in merger cases has been addressed in several cases and is discussed in Chapter 3 of the Commentary on Retail Mergers. At that time, the Authorities had not concluded that a merger would facilitate price (or QRS) discrimination at a local market level when no localised policies were prevalent, pre-merger. The latter remains the case today, although CMA thinking has been set out in more detail on this matter in Poundland/99p Stores (also discussed in detail below). At the time of the Commentary on Retail Mergers, the Authorities had not concluded that a merger presented local overlaps giving rise to national effects; this is because problematic local overlaps were themselves subject to divestiture remedies, thereby removing the overlap, and leaving no incremental national concern. This reflects the idea that national strategies may be determined by the aggregate impact of local
137
Commentary on retail mergers, page 21.
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overlaps.138 For example, even if national shares appear low, if the merging parties overlap in most of their local markets, and if there are relatively few competitors in those overlap areas, the combined effect of lost local competition could give rise to a national effect (e.g., a change in national strategy). However, if those local ‘problem’ overlaps are rectified by divestments then the national concern should fall away. Accordingly, local overlaps have tended not to generate national concerns where there were no prima facie national concerns to begin with. The position is arguably less clear now, following the Phase I decision in Pure Gym/ The Gym (discussed below), where local divestments were not deemed sufficient by the CMA to address a national theory of harm.139 (b) Reduction in nationally set PQRS. Where one or more PQRS factors are determined nationally, the most obvious concern is that the merging parties might be important competitors at the national level and thus worsen their offer in relation to any factors set nationally, post-merger. Conceptually, this is no different from a local effect, it is just that the geographic area under consideration is wider. The usual factors are considered: are the merging parties close competitors; are their rivals relatively distant; is there scope for post-merger supply-side responses (such as new entry); and do buyers have sufficient strength to resist post-merger deterioration in their terms of supply? When assessing closeness of substitution at the national level, the concept of the diversion ratio still applies; it is measured at the national level. This (and closeness of substitution more generally) may, for example, be: (i) measured by surveying a nationally representative sample of consumers; (ii) inferred from measures of local overlap aggregated to the national level;140 (iii) estimated from consumer switching patterns available from consumer panels or databases with national coverage; (iv) inferred from a number of entry (or exit) events that either have national coverage or are sufficiently large in number to be likely to apply on a national level; (v) inferred from how frequently the parties overlap (e.g., the CMA might assess what proportion of a party’s stores face competition from the other party or what proportion are ‘4 to 3’ or worse areas); or (vi) inferred from ‘qualitative’ evidence such as board documents and information provided by customers and third parties.
138
See, e.g., Anticipated acquisition by Celesio AG of Sainsbury’s Supermarkets Limited UK Pharmacy Business, CMA decision of 11 December 2015, para. 45: “The CMA considers that competition in pharmacy retail supply to end consumers takes place locally given that demand is local. Although the key parameters of competition may be set at the local or the national level, any effect of the Merger on these parameters, whether local or national ones, depends on the competitive constraints removed or remaining at the local level. The CMA takes these effects into account in the competitive assessment. Therefore, the CMA has not found it necessary to define a national geographic frame of reference.” 139
Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June
2014. 140
See CC and OFT Commentary on Retail Mergers, March 2011 paras. 3.26 and 3.27, which refer to this approach being used in Sports Direct/JJB Sports and Holland & Barratt/Julian Graves.
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In Poundland/99p Stores, at Phase II, the CMA estimated an aggregate diversion ratio based on a bottom up approach. It estimated a weighted fascia count in local areas, inferred a local level diversion ratio from these measures, and then averaged these across all stores to estimate an ‘aggregate’ diversion ratio. These steps are explained as follows. First, the CMA gave a product weighting to competitors according to whether they were: (i) large single price point stores “SPPs” (weighted 1, applying for Poundland, 99p Stores and Poundworld)); (ii) specific value and general merchandise “VGM” and supermarket retailers, excluding convenience formats (weighted 0.5, applying for Home Bargains, B&M, Wilko, Bargain Buys, Tesco and Asda); or (iii) other retailers (weighted 0). The CMA further gave a distance weighting, multiplying the product weight by 1 if the competitor was within 0.5 miles of the centre site, by 0.5 if the competitor was within 0.5 and 1 mile of the centre site, and by zero otherwise. The two weights were multiplied together so a Poundworld site within 0.5 miles of a Poundland ‘centre site’ counted as a whole fascia, while Home Bargains within 0.5-1 mile of the centre site counted as 0.25 of a fascia. The choice of these weights was based on a combination of survey and econometric evidence. Secondly, diversion was presumed to be in line with the weightings described above. For example, suppose that the centre site was a Poundland store and within 0.5 miles of that centre site was a 99p store, a Poundworld store, and a B&M store; and within 0.5 and 1 mile from the centre site was a Home Bargains store. In this case, diversion from Poundland to other stores would be estimated to be in line with the weighting of those other stores. The total (non-Poundland) weights are: 99p (1); Poundworld (1); B&M (0.5); and Home Bargains (0.25). The diversion ratio to 99p would then be its own weight (1), divided by the sum of the non-Poundland weights (2.75), i.e. 1/2.75 = 36%. Thirdly, the CMA averaged the diversion ratios for all the stores of each of the Parties and adjusted this estimate downwards to take account of the proportion of customers that would divert ‘out of the market’, i.e., those who would choose to no longer make their purchase if their preferred retailer was not available (diversion to the outside good was 20% according to the survey). Using this methodology, the CMA estimated that the aggregate diversion ratio from Poundland to 99p was 10%, and from 99p to Poundland was 21%. The weighted average diversion ratio was 13%. (Results were found to be robust to sensitivity testing.) The CMA noted that the estimated diversion ratios implied that Poundland constrained 99p more than the reverse; the CMA gave more weight to the weighted average diversion ratio on the basis that 99p Stores would be rebranded as Poundland stores such that post-merger the scope for asymmetric PQRS flexing by brand would not exist.141 (c) Cessation of national PQRS setting, giving rise to local adverse PQRS effects. A second (and more theoretical) concern is that the merged entity might fundamentally change its business model, switching from setting PQRS factors
141
See A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015, Section 6.
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nationally to determining them on a store by store basis, in line with the degree of local competition. The Commentary on Retail Mergers envisages that this policy change might arise if the merged entity would gain more than it would lose from the logistical and reputational cost of doing so.142 However, the Commentary on Retail Mergers does not address how the tangible benefits of changing a national policy can be weighed against the intangible costs of doing so. This issue was addressed in Poundland/99p Stores at Phase II. The CMA assessed whether both the ability and the incentive to switch from national PQRS setting to local PQRS setting would occur (focusing on QRS matters, presumably on the basis that the reputational cost of local pricing was too great, given the store’s name, “Poundland”).143 In terms of ability, the CMA considered that varying range by store would not incur substantial incremental costs (since range was flexed by store size). The CMA also noted that there might be costs and complexity associated with inducing suppliers to bring out different types of SKUs matched to different competitive conditions (e.g., offering less value for money in areas where 99p stores no longer competed with Poundland stores), although did not consider them to be prohibitive. In terms of incentive, the CMA assessed the extent to which the merged entity caused an increase in the degree of local concentration. For example, if there was a substantial increase in the share of Poundland sites facing less competition than before (bearing in mind that 99p stores would be rebranded as Poundland sites), there might be an incentive to switch to local flexing in those areas. Put simply, if, pre-merger, 10% of areas were ‘monopoly’ areas and post-merger 50% of areas were ‘monopoly’ areas then it might be worth abandoning the national PQRS policy so as to charge higher prices in the monopoly areas. The CMA seemed to argue that if there was a fixed cost of switching from national to local pricing then the incentive to switch to local pricing would be driven by the absolute increase in areas where competition was reduced. On the other hand, if the costs of local flexing were incurred on a store by store basis (i.e., proportional to the number of stores) then a more relevant measure would be the change in the distribution of areas with low competition (i.e., whether the percentage of low competition areas increased substantially). Overall, the CMA found costs primarily to be incurred on a store basis and so considered how the distribution changed. The CMA concluded that the distribution of areas of low competition (i.e., weighted fascia count of 2 or below) was sufficiently similar pre- and post-merger for there to be no incentive for Poundland to flex PQRS on a local basis. (d) Store closure at the national level. In some cases, the merging parties plan to close stores post-merger (e.g., to benefit from cost savings). This theory of harm is not specific to national level mergers, although it might be more likely to cause concern where a large number of store closures are being considered. In Poundland/99p Stores, for example, the CMA considered the incentive to close stores. It found that the
142
See CC and OFT Commentary on Retail Mergers, March 2011 para. 3.23. 99p Stores were to be rebranded Poundland stores and so by implication that CMA did not consider a 1% price rise to be material. 143
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transaction would not be likely to result in material consumer harm because of the apparent lack of differentiation between the Parties’ offerings, including in particular the small distance between the Parties’ stores in overlap areas.144 (e) National concerns in Pure Gym/The Gym.145 This merger related to ‘budget gyms’ and was referred to Phase II (and then abandoned) on the basis of both local and national concerns. Despite prices being flexed locally, the CMA found a realistic prospect of an SLC because: at least some significant parameters of competition between the parties may have been determined nationally; post-merger the next largest budget gym operator would be less than 20% of the size of the merged firm measured by the number of gyms; and that a ‘4 to 3’ would arise in terms of the number of national low-cost gym operators with more than 20 sites. 146 On the one hand, there is nothing ‘novel’ about the case, since the CMA identified the prior existence of national parameters of competition. On the other hand, the ‘national’ features identified were arguably ‘soft’ (i.e., little more than centrally determined branding). Specifically, the parties were identified to have: a national pricing strategy (including a ‘price for life’) by which it was meant they had centrally determined parameters within which local prices were flexed; national aspects of QRS (e.g., a policy of 24/7 opening and offering large sites with lots of equipment); central decision-making as regards new site strategy; and a view that national branding and multi-site presence was important.147 The CMA stated that the parties overlapped in some 64% (Pure Gym) and 68% (The Gym) of their existing estates and that this would influence the degree to which the merging parties have an incentive to worsen their offer nationally. The CMA considered that the evidence available to it indicated that the parties were each other’s closest competitors in the majority of local areas where they overlapped, that diversion between them would be high, and this indicated, given the size of their respective networks, and the extent of their overlaps, that they may compete nationally as well as locally.148
144 Poundland/99p Stores, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, September 2015, paras. 6.127-6.129. 145 Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014. 146 Ibid., paras. 4 and 61. 147 Ibid. para. 42. See also the comment that: “The CMA also notes that both parties advertise many of these aspects of their offering on their home page, which covers all of their sites” at para. 43. 148 Ibid., paras. 65-66. The CMA seemed to place weight on the fact that it found a realistic prospect in the majority (14) of the 21 local areas where the parties overlapped for which the CMA carried out a detailed assessment. However, the CMA conducted a local assessment only in the areas where a reduction in competition might be more likely and so inferences from this selective sample cannot be applied more generally to the wider number of overlaps. It appears that this was what the CMA did because the SLC areas accounted for less than 64%-68% of the parties’ sites, the latter percentages being those highlighted by the CMA. Specifically, Pure Gym had 50 sites and The Gym 35 sites at the time of notification, meaning the SLC sites accounted for 28% of Pure Gym’s estate and 40% of The Gym’s estate (paras. 14 and 15).
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The CMA was also concerned about the scope for lost potential competition, noting that the merging parties were not only larger than their rivals but also had expansion plans that were materially more significant than those of other budget gym players, meaning that they would open a large number of new gyms in the near future. In some cases, the CMA was able to identify likely future overlaps. The CMA indicated that it did not have sufficient time to identify where other future overlaps set out in the parties’ expansion plans would arise and left open whether or not the test was met with respect to those sites.149 On the one hand, this can be presented as a pure local concern and it is submitted that this is the best way to view the decision. On the other hand, the CMA identified a national concern, namely that because the parties were opening gyms year on year, they might overlap in the near future somewhere in the UK (in that sense the concern being national).150 (f) National (and other) effects mitigating local PQRS concerns. Merging parties often argue that there can be no local concerns because of national pricing or because of the centralised setting of other non-price variables. These arguments have not found much success in the grocery sector, but were a material mitigating factor for the OFT in Home Retail Group/Focus DIY.151 In Sports Direct/JJB Sports, the CC concluded that the heavily national parameters of competition (whereby local PQRS factors were unaffected by the presence of the other party) and the remaining national presence of JJB Sports ‘trumped’ any localised concerns.152 On a related point, in Holland & Barratt/Julian Graves, the CC stated: “Both H&B and JG sold other products and any deterioration in quality or service would affect the other parts of the merged entity’s business (prior to the merger H&B and JG did not vary the range, quality or service of their NSF offerings between locations, despite facing limited NSF competition in some locations).”153
149
Ibid., paras. 7-8. See also Section 12.5.3 below. One question of interest is whether such a concern would give rise to a realistic prospect of an SLC. For example, there would have to be a sufficient likelihood that, absent the merger: (i) the parties would have opened sites close enough to each other to be major constraints on each other; and (ii) that there would be insufficient existing or potential competition from other rivals in those areas. Further, consideration would need to be given to whether the merger would slow expansion plans or in fact permit coverage of the UK to occur more quickly (which would occur if gyms were opened at the same rate but the parties avoided opening up close to each other and therefore spread out across the UK more quickly). 150
151 Completed acquisition by HJ Heinz of HP Foods Group, OFT decision of 26 October 2005. See further Section 12.2.7, below. 152
Sports Direct International plc and JJB Sports plc, a report on the acquisition by Sports Direct International plc of 31 stores from JJB Sports plc, 16 March 2010. 153 A report on the completed acquisition by NBTY Europe Limited of Julian Graves Limited, 20 August 2009, para. 7. See also para. 7.14.
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SUPPLIER MERGERS IN INTERMEDIATE AND UNDIFFERENTIATED MARKETS 12.3.1 Introduction
This section discusses issues that arise in relation to mergers between suppliers in intermediate markets and undifferentiated markets (i.e., markets in which suppliers sell to buyers that are not final consumers). The focus on the intermediate level and undifferentiated products in this section reflects two features. First, to the extent that the merger relates to two differentiated intermediate product suppliers, the relevant issues have by and large been addressed in Section 12.2. Secondly, it is more common to find examples of undifferentiated products at intermediate levels of the supply chain than at the retail level. The following scenarios are considered: (1)
Mergers where firms can be best thought of as competing in relation to quantities (or capacity). The main theory of harm in these cases is that there would be a substantial output reduction post-merger and that rivals would be capacity constrained thereby making it costly for them to replace that lost output causing prices to rise. This section also explains the intuition that underpins the Cournot model, a textbook model often employed to capture quantity competition where products are “homogeneous” or “undifferentiated”.154
(2)
Mergers in markets where informed buyers purchase via competitive tenders. In theory, where firms produce undifferentiated products, and where at least two firms will remain in the market without capacity constraints, then post-merger competition may be intense unless the merger brings together the two most efficient firms.155 However, with differentiated products, closeness of competition matters in a way similar to that discussed earlier in relation to retailed products. Mergers are more likely to be problematic when they bring together firms offering uniquely ‘close’ substitutes, for which the products produced by rivals are not (and would not soon be) good alternatives or the firms that are most likely to be the lowest cost producers.
(3)
Mergers where prices are negotiated. The key issue here relates to the impact of the merger on the buyer’s fallback option (e.g., its credible threat to switch to rival suppliers or sponsor new entry). This analysis has many parallels with the assessment of countervailing buyer power. If, prior to the merger, a typical buyer’s main bargaining leverage is a credible threat to switch from one of the merging parties to the other, the merger is more likely to harm competition.
154
Homogenous products are those that are identical (e.g., commodities), although in practice it may be reasonable to extend this to products that customers consider nearly identical. 155 Competition to supply broadly identical goods need not be very intense as is explained in the following section.
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12.3.2 The Theory of Undifferentiated Products and Quantity Competition This section provides a brief introduction to the economic theory of unilateral effects with differentiated products. The terms ‘homogeneous’ and ‘undifferentiated’ refer to products (or services) that are (nearly) identical from the purchaser’s point of view. In procurement auctions, competition among suppliers of undifferentiated products can be intense, even where there are few suppliers. However, undifferentiated products need not imply intense competition. Competition may be weakened by, for example, the following factors: (i) capacity constraints, which limit firms’ short-run ability to expand and also weaken their incentives to increase output or to lower price (due to the high cost of expanding capacity to meet increased demand); (ii) information asymmetries or consumer disengagement, which create search costs (e.g., where customers are not aware of (or inclined to look for) lower priced products that are available or, due to pricing complexity, find it too difficult to calculate whether other options are a better deal); (iii) switching costs (e.g., where customers face perceived or actual costs of switching suppliers even if the goods are, in principle, identical); (iv) location (e.g., physically identical goods are not perfectly substitutable when they are found at different locations which are costly to access); and (v) tacit or explicit collusion (discussed in Chapter 13). A theory of harm often associated with undifferentiated products (although valid also for certain differentiated product settings) is that a merged firm would unilaterally restrict output, thereby leading to higher prices. For example, consider a market where customers choose among identical products available from various suppliers and there is a market price paid by all customers that is determined primarily by the quantity of product available relative to demand for that product. This situation may arise in certain commodity markets where firms cannot vary their levels of output quickly such that excess demand or supply leads to price adjustments (to clear the market) as opposed to quantity adjustments. That is to say, if there is a period of high demand, firms would not be in a position to expand rapidly and so prices would rise and potentially remain high for a considerable period of time as output levels adjust. In these types of markets, a standard theory of harm would be that a merger leads to a reduction in output (or capacity) that causes a substantial price rise because capacityconstrained rivals face substantial expansion costs. As with mergers involving differentiated products, potentially harmful effects may be mitigated by dynamic responses such as new entry or strategic actions by powerful buyers to self-supply or sponsor new entry and expansion by rival suppliers. (a) The output reduction theory of harm. A standard theory of harm in markets where firms compete in quantities (or capacity) is that the merger is likely to result in a reduction in output that causes a material price rise because rivals face substantial costs of expanding capacity and prices are determined primarily by total output produced in a given period. For example, suppose that, as a result of the merger, the merged firm gains a number of new plants, some of which are less efficient than the others. In principle, it might find it profitable to close down an inefficient plant (or fail to open new plants) if doing so would drive up the market price substantially. The merged firm
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would give up the profits it made on the plant it closed down (or failed to open). However, all the other plants that remain open would benefit from the higher price. This theory of harm is more likely to be a concern when: (i) a small output reduction by the merged firm generates a relatively large increase in price (e.g., because it is very costly for rivals to expand, or enter, to plug the gap created by the output reduction); (ii) reducing output does not either harm the ability of the merged firm to benefit from scale economies or involve substantial costs associated with varying the level of production; (iii) the merged firm has some plants that are only marginally profitable (since by closing these down, output can be reduced without forgoing substantial profit); or (iv) the merged firm has numerous infra-marginal plants that would benefit from a price rise.156 (b) The Cournot model – competition in quantities with undifferentiated products. The Cournot model is a popular textbook model used to assess mergers where firms compete in relation to quantities (or capacities). The model is usually employed with homogenous (i.e., undifferentiated) products, although it can be extended to allow for product differentiation. The textbook Cournot model assumes that each firm chooses to produce a certain quantity of a homogeneous product and that all firms place their output on the market at the same time. There is a single ‘market’ price, which ‘clears’ the market for the total amount of output produced by all competing firms.157 In equilibrium, all firms will make positive profits. Two 156 Marginal and infra-marginal plant considerations have arisen in electricity generation markets. Prior to the New Electricity Trading Arrangements coming into force in 2001, the wholesale price of electricity in the UK was determined by an electricity pool. The pool was like an auction, in which National Grid selected the cheapest bids and offers to ensure electricity demand and supply was in balance. Roughly speaking, firms placed bids regarding a total amount of electricity they were willing to supply (or purchase) and a price at which that output would be supplied (or purchased). The bids were then ranked in order of price, denoting the merit order. National Grid would draw on lower priced electricity before higher priced electricity in order to meet demand, with the market price being determined by the highest accepted offer or so-called ‘marginal plant’. An electricity producer could, in theory, drive up the market price by withdrawing flexible capacity so that a less efficient firm was required to operate in order to balance supply and demand. That would drive up the market price and allow the firm that withdrew capacity to generate higher returns on the infra-marginal plant(s) that it continued to operate. Thus a merger that increased the portfolio of generating capacity that a firm held (and gave it greater scope to withdraw flexible capacity) might create the incentive to withdraw capacity to push up the market price. For a similar theory of harm, see Case No COMP/M.5224, EDF/British Energy, Commission decision of 22 December 2008, para. 25. Note that in the case the model is not a Cournot game because firms do not simply place quantity on the market but also announce a price at which they are willing to supply that quantity. However, the intuition still applies that a merger may increase incentives to reduce output so as to drive up the price. (Models of supply function equilibria provide a technical treatment of situations where firms announce both price and quantity and where demand is equilibrated by a third party. See Stephen Martin, Advanced Industrial Economics (2001), for a non-technical treatment. 157 Although in most real world cases the idea that firms choose quantity but not price may appear unrealistic, Cournot results can be obtained where firms choose capacity and then compete on price, taking that capacity as given. Similarly, if firms purchase their inputs in advance (and thereby predetermine their total capacity) and then compete on price, Cournot results may be obtained. See J
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intuitively appealing features of the Cournot model are that: (i) firms with lower costs have higher market shares and higher margins; and (ii) if all firms have an identical cost structure, the more firms there are, the closer prices are to the marginal cost. In the simplest version of the Cournot model, a merger is modelled as a reduction in the number of firms (i.e., one firm is ‘destroyed’). Consequently, the merged firm reduces output compared to the total produced by the merging parties when they were independent. In the post-merger equilibrium, the non-merging parties increase output a little but not by enough to offset the reduction in output by the merged firm.158 Overall output falls and so price rises. However, in this setting, such post-merger price rises are often found to be unprofitable (in theory) due to the unrealistic assumption that a firm is ‘destroyed’ post-merger. This is because the increase in revenues generated from a market wide increase in prices would not be sufficient to offset the loss of revenues associated with an output reduction. To make the analysis more realistic, the Cournot model can be adjusted to allow other firms to face substantial costs of increasing capacity. This means that when the merged firm reduces output, non-merging parties find it less attractive to increase output and so the overall price rise is higher (and so the merger is more profitable). Further, mergers can be modelled so that a firm is not ‘destroyed’ but its assets remain in the market and can be used more productively (e.g., synergies can be created, such as those that substantially lower the marginal cost of production and thereby increase the incentive to lower price).159 Taking these
Tirole, The Theory of Industrial Organisation (1988), Boston: MIT Press, Chapter 4, for a technical discussion. Quantity setting behaviour can also be motivated where market prices adjust more quickly than quantities (e.g., due to there being substantial costs involved when output levels are changed materially). Arguably the Cournot assumption was appropriate in relation to the Pan Fish ASA and Marine Harvest NV Merger Inquiry, Competition Commission report of 18 December 2006. The Competition Commission report notes: “We considered whether the merger, in removing a significant competitor, would enable the merging parties to raise prices for salmon farmed and sold in the EEA. Because salmon, once put to sea, have to be harvested, and the spot market for salmon serves to clear the market, the merging parties would have to be able to restrict the supply of fish in order to cause market prices to increase” (para. 8.3). In other words, output was largely pre-determined and then prices were cleared on a spot market, consistent with a Cournot model. Indeed, the merging parties presented a simulation model based on Cournot behaviour (see para. 8.47). 158 In most versions of the Cournot model, A’s best response to a reduction in B’s output is to increase output. This is called “strategic substitutability”. In contrast, in the Bertrand model, the strategic variable is price (i.e., firms choose what price to charge instead of what quantity to produce). In these models, A’s best response to an increase in B’s price is usually to increase price as well. This is called “strategic complementarity”. See Bulow et al. Multimarket oligopoly: strategic substitutes and strategic complements, (1985), Journal of Political Economy. 159 See for example S. Salant, S. Switzer and R. Reynolds, Losses from Horizontal Merger: the Effects of an Exogenous Change in Industry Structure on Cournot–Nash Equilibrium (1983), Quarterly Journal of Economics, 98(2): 185–199 and J. Farrell and C. Shapiro, Horizontal Mergers: An Equilibrium Analysis (1990), American Economic Review, 80(1):107-126 for Cournot models. The key points of these papers are summarised in S. Davies and A. Majumdar, The Development of Targets for Consumer Savings Arising from Competition Policy, (2002), OFT Economic Discussion Paper 4, at Chapter 6.
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modifications of the Cournot model into account, it can be shown that profitable mergers in a Cournot setting lead to an increase in price unless they are accompanied by substantial synergies.160 In a structural (market share based) analysis, the Cournot model can be used to motivate the use of an HHI screen. In theory, increases in the HHI can be shown to lead to price rises in simple Cournot models, although the direct relationship need not hold in more realistic Cournot settings.161 (c) Illustrative price rises in a Cournot setting. For a short period of time the OFT employed illustrative price rises (IPR) in relation to undifferentiated markets, although recently these appear to be out of vogue and so are not reported here.162 The main IPR tests are those used in differentiated markets, as set out in detail in Section 12.2.5 above. (d) Bertrand Edgeworth models of capacity constraints. While to the authors’ knowledge the CMA has not relied on this model yet, it is worth highlighting a few key points from the Bertrand-Edgeworth (BE) model which analyses price competition in a homogenous goods market between firms that face capacity constraints. BE models predict that firms can make positive profits despite price competition with homogenous goods as a result of capacity constraints. In the absence of capacity constraints, if firms sell identical products, compete on price and have the same level of marginal cost, they will compete down to marginal cost and make zero profit. This is described in the standard Bertrand model as applied to undifferentiated products. However, if capacity constraints exist, this need not happen. Consider a simple example. Suppose that market demand is 100 units. Two identical firms (A and B) have 160 For a general treatment of Cournot mergers, see J. Farrell and C. Shapiro, Horizontal Mergers: An Equilibrium Analysis (1990), American Economic Review, 80(1): 107-126, who define a synergy to mean that for a total amount of capital, K, owned by the two merging firms, the merged firm can produce a given level of output at a lower total cost than could the merging firms acting independently (irrespective of how K is allocated between those independent firms). 161 The Authorities state in relation to the use of HHI screens: “These thresholds may be most informative for mergers in a market where the product is undifferentiated and where competition between firms involves firms choosing what volume to supply to the market. In other cases the significance of these thresholds will be less” (Merger Assessment Guidelines, para. 5.3.5). As set out in Chapter 11, experience suggests that the HHI is not a concentration measure relied on to any material degree by the CMA. 162 See, for example, Anticipated acquisition by Kingspan Group plc of CRH Insulation Europe, a division of CRH plc, OFT decision of 13 April 2011 where the OFT criticised the parties’ use of Cournot IPRs that the OFT itself had used in earlier cases. This seemed to mark the end of such tests. For further details of Cournot IPRs and their use by the OFT see: Anticipated acquisition by RMIG Limited of Ash & Lacy Perforators Limited, OFT decision of 26 August 2009 (paras. 47-48); Anticipated acquisition by Prince Mineral Limited of castle Colours Limited, OFT decision of 9 May 2009, paragraph 35 and footnote 3; and Anticipated acquisition by Vitacress 2008 Limited of Van Heyningen Brothers Limited from Humber Growers Limited, OFT decision of 27 October 2010, para. 28 footnote 7.
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constant marginal cost equal to zero but can produce only 70 units each. In this case, pricing at marginal cost cannot be an equilibrium. If firm A priced at zero (i.e., marginal cost) then it could sell only 70 units, leaving firm B as the monopoly seller of the remaining 30. Firm B would then want to charge a price higher than cost. So, given that firm A prices at zero, it cannot be the best response of firm B also to price at zero. Furthermore, if firm B priced above zero, then firm A would have scope to increase its price from zero to just below B’s price without losing sales. As such, equilibrium at zero pricing does not arise (instead, a range within which prices may lie arises). In the preceding example, with a third identical firm in the market, an equilibrium with price equal to marginal cost would arise. This is because if A sold all its units at a price equal to zero, then B could not exercise monopoly power over the residual amount due to competition it faces from the third firm, whose capacity would be sufficient to supply the entirety of the outstanding 30 units. This discussion provides the rough intuition behind the BE model. The price range predicted by the BE model depends on a number of factors related to the market structure, including the number of firms, their capacity (a firm with higher capacity is more able to undercut profitably), their marginal costs (a firm with a lower marginal cost will have a larger incentive to undercut), product differentiation (the more differentiated the products are, the less firms compete with each other and therefore the less the outcome depends on capacity), the demand in the market (the higher the demand, the higher the maximal price in the range can be), and price sensitivity of demand. As a general rule, the more firms there are in the market, for a given total capacity in the market, the more competitive outcomes will be predicted by the model. Similarly, the more capacity firms have, for a given number of firms, the more competitive the outcome will become.
12.3.3 Decisional Practice With Undifferentiated Product Markets This section highlights standard theories of harm in relation to undifferentiated product markets. In undifferentiated product markets, the parties and their competitors offer largely similar products meaning that closeness of substitution at the product level is less important (compared to differentiated product markets). However, the concept of closeness of competition remains important because firms may still be differentiated by their locations or costs of production. In relative terms, issues to do with capacity and switching costs may be given greater prominence in undifferentiated product markets, although these factors are also relevant when assessing mergers with differentiated products.163
163 See, Merger Assessment Guidelines, para. 5.4.11: “competing suppliers may not have the capacity to meet demand from some customers who would like to switch in response to the price rise; this may also make the price rise more profitable than otherwise”. See also, for example, Completed acquisition by Diageo plc of United Spirits Limited, OFT decision of 25 November 2013, at para. 85 where the OFT noted that capacity constraints and the opportunity cost of switching whisky sales away from other countries to the UK mean that “the competitive constraints imposed by third-party brands may therefore be limited.”
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(a) Theories of harm based on closeness of competition. Even if the merging parties offer the same product as their rivals, they may nonetheless have scope to be differentiated by some other important factor that impacts on their competitive strength (e.g., costs and location vis-à-vis customers). For this reason, the concepts of closeness of competition described above in Section 12.2.3 carry over. For example, if the merging parties are the lowest cost firms or the only two firms located close to a key customer base, it may be that they are ‘closest competitors’. If their rivals are higher cost or located a considerable distance away from customers, then rivals are weaker constraints (despite offering the same product) and so the merger is more likely to be harmful. (b) Theories of harm based on spare capacity. A merger is more likely to cause concern where the merging parties have substantial spare capacity and their rivals have limited spare capacity. This can be explained in two ways. First, if the cost of selling more is directly related to the degree of spare capacity, then the merging parties will be low cost firms (due to their spare capacity) whilst their rivals will be high cost firms (being capacity constrained), and so the merger brings together ‘particularly close’ competitors. Secondly, the constraint that prevents a merging party increasing its price (either directly or indirectly by withdrawing output) is the fear that so doing would cause substantial switching to a rival. If the only rival with spare capacity to serve those lost customers is the other merging party then, post-merger, the price rise is more likely to be profitable (since fewer customers will be lost as a result of the price rise). Capacity withdrawal theories of harm have been considered in a number of other cases, including Knauf/Superglass,164 Celsa Steel,165 and Stericycle/Cliniserve.166 On the other hand, if one or both of the merging parties are capacity constrained, this may limit the constraint they place on each other, in particular if other rivals in the relevant market have substantial spare capacity and that spare capacity is not temporary (e.g., not a short term feature of a downturn).167
164 A report on the proposed acquisition of Superglass Insulation Limited by Knauf Insulation Limited, November 2004. 165 Completed acquisitions by Celsa Steel Service (UK) Limited of the manufacturing and reinforcement divisions of BRC Limited, Express Reinforcements Limited, and The ROM Group, OFT decision of 20 February 2009. 166 Anticipated acquisition by SRCL Limited of Cliniserve Holdings Limited, OFT decision of 22 December 2008. 167 See Completed acquisition by Micronclean Limited of Guardline Technology Limited, CMA decision of 3 July 2014, paras. 5-9. While the combined share was large (80-90%), the increment was small (0-10%). The merger was cleared at Phase I because Guardline was a small supplier that placed little constraint on Microclean. Further, the CMA considered that Guardline was constrained by capacity issues and its future ability to improve its offer and expand its capacity was compounded by its financial position; the main rival, on the other hand, Fishers was expanding, being in the advanced stage of opening a new distribution hub. The CMA notes that several Micronclean customers did not consider that Guardline met their requirements in terms of materials, technology and capacity. Overall, on the basis of evidence available, the CMA considers that pre-merger Guardline was a weak constraint on Micronclean.
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Relative levels of spare capacity have been considered in a number of mergers. For example, in RMIG/Ash & Lacy the OFT stated: “[i]n markets where the products are relatively undifferentiated, such as the supply of perforated metal under consideration in this case, the extent of capacity constraints amongst rivals can have an important impact on the ability and incentive of the merged entity to raise prices by reducing output. If rivals have spare capacity, they will find it optimal to increase their output in the face of an attempted price increase, and thereby dampen the price rise. The precise degree to which this happens depends on the extent of rivals’ spare capacity relative to the incremental market share gained by the merged firm. If rivals are working at full (or near full) capacity, then little dampening may be possible. Conversely, if rivals have substantial spare capacity, then more dampening may be possible.”168
More recently, in Lafarge/TBP, the CMA stated: “Where spare capacity of competing firms is high it may be difficult for the parties’ to raise prices or otherwise degrade their competitive offering as customers could easily switch their screed requirements to other suppliers who are not constrained by capacity issues and can easily supply the required volumes demanded. This is particularly the case where the products that firms offer are broadly homogenous and capacity is a key factor in the overall prices charged by suppliers.”169
In this case, spare capacity was an important reason for the absence of a realistic prospect of an SLC in relation to the supply of screed and bagged aggregates.170 In Breedon/Aggregate Industries, the CC noted that, with respect to the supply of aggregates at Tom’s Forest and Craigenlow, while the combined shares exceeded 33%, there were no competitive concerns due a number of factors, including: (i) the shares of production of recycled aggregates in the defined catchment areas that the CC had calculated were likely to be underestimated; (ii) Breedon tended to sell more of its production to its downstream operation than its competitors did in the Aberdeen area; and (iii) the products that Breedon supplied to external customers were largely undifferentiated and there was likely to be enough spare capacity in the local area for competitors to respond to a price rise.171 In Epwin/Latium, which concerned the supply of PVC roofline and window-trim products in the UK, the CC considered a bargaining framework, examining three factors which would impact on customer negotiation strength: the degree of differentiation; the ease of switching costs; and spare capacity of the parties’ rivals.
168 Anticipated acquisition by RMIG Limited of Ash & Lacy Perforators Limited, OFT decision of 26 August 2009, para. 43. 169 Completed acquisition by Lafarge Tarmac Holdings Limited of Tarmac Building Products Limited, CMA decision of 9 April 2014, para. 94. 170
Ibid., paras. 4 and 6. Breedon Aggregates and Aggregate Industries UK, a report on the completed acquisition by Breedon Aggregates Limited of certain Scottish assets of Aggregate Industries UK Limited, 9 April 2014, paras. 6.113-6.114. 171
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The CC found the products to be undifferentiated and switching to be relatively straightforward.172 Turning to spare capacity, the CC considered that in the specification segment (supply to large customers), competitors to the parties had sufficient spare capacity such that they could serve all top ten national house builders, were they to switch away from Epwin/Latium. Regarding, the trade segment, smaller independent stockists buying relatively low volumes would have a number of alternative suppliers with spare capacity post-merger. The CC also found that the largest stockist chain would potentially be able to switch supply for all of its trade customers from the merged parties. Whilst the CC found that the spare capacity of the merged parties’ competitors would not be sufficient to meet demand in the unlikely scenario that all of Epwin/ Latium’s customers across both segments wanted to change supplier simultaneously, the CC considered that there was nonetheless sufficient spare capacity to permit customers a credible threat to switch.173 (c) Theories of harm relating to switching costs. Where a substantial share of the merging parties’ customers can switch easily between the merging parties but face substantial costs of switching to other rivals, a merger is more likely to be harmful (since pre-merger, the main constraint on one party increasing price would be the fear of losing sales to the other party). On the other hand, where customers could switch easily to several rival firms following a post-merger price rise, SLC concerns are less likely. For example, in Kingspan/CRH the parties overlapped in the manufacture and supply of polyisocyanurate (“PIR”) foam insulation products in the UK.174 The merger brought together the first and third largest players in the UK market, resulting in a combined market share of 35-45% by sales value. The parties’ share of capacity was considerably higher at 50-60%. The OFT noted that PIR is generally supplied through a tendering process, which third parties indicated was normally on an annual basis. Customers tended to multi-source and switching was relatively straightforward as the balance of supply could be switched between two or more different suppliers without ceasing to be a customer of any supplier. The majority of customers stated that they would switch or consider switching in the event of a 5-10% price rise by their current PIR supplier. Competitors also confirmed that this was likely. Third parties also stated that there were generally a range of suppliers that submitted tenders in negotiations. Some third parties commented that the merger would inevitably reduce the number of submitting
172
A report on the completed acquisition by Epwin Holdings Limited of Latium Building Products Holdings Limited, CET Glass Processors Holdings Limited and Building Plastics Holdings Limited, CC decision of 13 November 2012, para. 11. 173 Ibid., paras. 12-15. The CC also found ‘swing capacity’ to be an additional constraint (i.e., the scope to expand capacity by reallocating production lines currently used to produce other PVC extruded products outside the market, such as rainwater products), para. 16. 174 Anticipated acquisition by Kingspan Group plc of CRH Insulation Europe, a division of CRH plc, OFT decision of 13 April 2011.
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bids; but believed that sufficient choice of suppliers remained post-merger. Importantly, switching between the parties appeared to be limited. The OFT noted that the parties’ share of spare capacity was higher than their market share, at around 60-80%. The OFT therefore considered whether rivals had sufficient spare capacity to offset the parties’ incentives to restrict output post-merger. The OFT analysed the extent of spare capacity against current demand conditions and against a hypothetical ‘high demand’ scenario to satisfy itself that levels of spare capacity were not a result of short term cyclical demand fluctuations. The OFT found that, against any reasonable demand scenario, rivals were likely to have sufficient spare capacity to constrain the parties post-merger. The OFT concluded that “the degree of switching of suppliers, and multi sourcing by customers, and the number of effective competitors, all of whom have substantial excess capacity and consequently the potential ability to expand, suggests an absence of competition concerns.”175
12.3.4 Markets With Bidding Processes and Auctions When firms are identical (with undifferentiated products and the same costs) and when they compete on price with full information (i.e., each firm knows its rival to be identical and hence knows both its own and its rivals cost), economic theory predicts that (absent collusion and absent capacity constraints) market outcomes will be very competitive, even with just two players. An easy way to think about this is to imagine two identical firms engaging in a bidding process (e.g., a procurement auction) to supply a particular customer. Suppose that the cost of supplying the order is w and that two firms, A and B, take turns to bid in a descending price auction. If firm A offers a price above w, then B’s best response is to undercut A’s price by a tiny amount. But if B undercuts A with a price above w, A’s best response is to undercut B. In turn, B would wish to undercut A, and so on until the price is ‘competed’ down to w.176 In theory, and with full information (i.e., where there is no uncertainty regarding the level of the bid required to win the auction) an identical outcome would arise in a sealed-bid auction (e.g., where firms submit a secret bid and have no opportunity to vary that bid) or where firms announce prices simultaneously (and just once) and then have to stick to those announced prices.177 In other words, even where there is no scope to observe a rival’s price and then undercut, each firm might still choose to set a price equal to w, fearing that its rival would also set price equal to cost. Put another way, ‘competing down to w’ can be seen as a rational thought process as opposed to a process that actually occurs in practice, given that suppliers are very well informed about each other’s costs. For this reason, it is sometimes claimed that two competitors are
175 176
Ibid., para. 57.
The descending price auction could represent the auction mechanism itself or a rational thought process (see further below). 177 For a more detailed discussion, see P Klemperer, Bidding Markets (2005), Competition Commission Occasional Paper, London.
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sufficient for competition. That is to say, in this very special case, so long as there are at least two firms post-merger, competition is not affected by an increase in concentration. In Alpha/LSG (airline catering) drawing on Klemperer (2005), the CC stated that an ideal bidding market (i.e., one most likely to give competitive outcomes) is characterized by the following structural features: “(a) competition is ‘winner takes all’ so that each supplier wins all or none of the order; has identified a number of criteria he considers to be necessary to satisfy the ‘typical definition of an ideal “bidding market”’. These criteria include: (b) competition is ‘lumpy’ so that each contest is large relative to a supplier’s total sales in a period so that there is an element of ‘bet your company’ in any contest; (c) competition begins afresh for each contract and for each customer such that when contests are repeated there is no lock in by which the outcome of one contest determines another; (d) entry of new suppliers into the market is easy; and (e) a ‘bidding system’ or ‘bidding process’ is involved.”178 Conditions for an ‘ideal’ bidding market have also been discussed in Mueller/Dairy Crest.179 Whilst arguments by the merging parties in relation to the existence of ideal bidding markets are rarely accepted in full, it is often acknowledged that tender processes may intensify competition. For example, in Platinum/Malcolm, the CMA stated: “the widespread use of competitive tenders in the industrial coating sector facilitates customer switching and reduces the possibility that the Merger may give rise to unilateral effects.”180 Likewise, in Ericsson (Technicolor)/Creative (Red Bee Media) (discussed below) the bidding process was seen as providing an opportunity for customers to mitigate any impact that the loss of a competitor might have on rivalry.181 In Alpha/LSG, relating to airline catering, the CC considered that while the conditions were not ‘ideal’ such that two players were sufficient for effective competition, “it may be possible to reach competitive outcomes with few bidders (but more than two), especially where the set of bidders includes companies with differentiated product offerings.”182
178 A report on the proposed joint venture between Alpha Flight Group Limited and LSG Lufthansa Service Holding AG, 14 March 2012, Appendix D, para. 1. The latter expands on Capita and IBS, a report on the completed acquisition by Capita Group plc of IBS OPENSystems plc, CC decision of 4 June 2009, para. 9.18, where ideal bidding markets were also discussed. See also, Stericycle, Inc and Ecowaste Southwest Limited, a report on the completed acquisition by Stericycle, Inc of Ecowaste Southwest Limited 21 March 2012, para. 7.102. 179
See also Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015, paras. 207-210. 180 Anticipated acquisition by Platinum Equity, LLC of Malcolm Enamellers Limited, CMA decision of 9 November 2015, para. 5. It should be noted that the parties were relatively distant competitors and so bidding processes were not key to the merger being cleared. 181 Telefonaktiebolaget LM Ericsson and Creative Broadcast Services, a report on the anticipated acquisition by Telefonaktiebolaget LM Ericsson of Creative Broadcast Services Holdings (2) Limited, 27 March 2014, para. 23. 182 A report on the proposed joint venture between Alpha Flight Group Limited and LSG Lufthansa Service Holding AG, 14 March 2012, para. 7.5.
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(a) Firms with identical products but different costs. By a similar logic to that set out above, where firms have the same product but different costs (and full information), the price is ‘competed down’ to the cost of the second most efficient firm. To see why, imagine once again that there is an auction process where the price keeps falling until all but one firm drops out. Once the penultimate firm exits, there is only one firm left (i.e., the winner of the auction). But the penultimate firm drops out when it fails to cover its costs. So the winning price equals the cost of the second most efficient rival. It follows that a merger of the two lowest cost firms is likely to be harmful because the second lowest cost firm exerts a competitive constraint on the lowest cost firm that ultimately wins the bid. However, a merger that did not involve the most efficient and next most efficient firm would not lead to higher prices (in this simple model). In practice, however, the efficiency ranking of firms may differ according to the history of bids or the nature of the contract for which they have bid. For example, suppose that there are three firms, A, B and C. If Firm A were always the most efficient firm and Firm C always the least efficient, then an AC merger would not impact on price. However, Firm B might have a lower cost than Firm C most of the time but not when Firm B is close to full capacity (e.g., through having won a recent tender for a large project) or where the customer is located closer to C than B. In the latter case, although B would be the ‘closest competitor’ to A most of the time, C would nonetheless be a competitive constraint on A sometimes (i.e., when B is close to full capacity). Under these circumstances, a merger between A and C might therefore be deemed problematic. This issue was considered in Tradebe/Sita, which related to the treatment of healthcare risk waste.183 The CC focused on an area of 50 miles around Birmingham, in which there were, in effect, only three competitors pre-merger: SRCL, Tradebe and Sita. Contracts were determined by competitive tenders. The CC modelled competition as if suppliers had full information about each other’s costs (which comprised mainly transport and waste treatment costs) and assessed the extent to which there were likely to be contracts to supply NHS customers for which Tradebe and Sita would have the lowest and second-lowest costs of supply.184 In this case, the CC’s main measure of costs was average costs, on the basis that contracts were long term and the bid price would have to cover fixed costs as well as variable costs.185 The CC found that “before the merger SRCL would win 13 out of 15 customers, and come second where it does not win. We did not identify any cases where Tradebe HRW and Sita HRW were the two most
183
Tradebe Environmental Services Limited and Sita UK Limited, a report on the joint venture, Tradebe Healthcare (Holdings) Limited, between Tradebe Environmental Services Limited and Sita UK Limited, relating to the healthcare risk waste sector, 28 March 2014. 184 In essence, pricing was modelled as if there were a second price auction with full information. In these cases (discussed further below), firms bid their cost of supply and the winner (with the lowest bid) pays the price of the runner up (with the second lowest bid). Since bids are determined by cost, the winner pays a price equal to the cost of the runner up. 185 Ibid., paras. 6.80-6.83.
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competitive bidders.”186 The CC then ‘reality checked’ its conclusions to certain cases where the facts did not meet its assumptions (e.g., consortia purchases and occasional pricing below average cost), concluding that its approach provided “a reasonably accurate representation of competition in this area.” 187 Since the parties were not expected to be the lowest and second-lowest cost bidders, the merger was not expected to lead to an adverse price effect (despite being a ‘3 to 2’ about which the CC would normally be “extremely concerned”).188 An important mitigating factor in this case were merger specific, rivalry enhancing efficiencies which would be passed on to a substantial degree to customers.189 The CC accepted that the merger would lower the parties’ average costs and that this would lead to lower prices. First, in the cases where SRCL would have the lowest cost, it would have to set a lower price to outbid the runner-up (or it might be displaced by the more efficient merged firm in which case price would fall to equal SRCL’s cost). Secondly, price reductions would be possible even when SRCL would have come second pre-merger. In theory, with full-information on costs, the merger would have no price effect in that case. However, if, in practice, there was some cost uncertainty pre-merger then the reduction in the merged firm’s costs could lead to lower prices if either it, or SRCL, would be induced to bid more aggressively.190 (b) Auctions, competitive tenders and uncertainty. Customers may procure using auctions (or equivalent mechanisms). A first-price auction is one where the winner submits the lowest bid and pays that bid. A second-price auction is where the winner submits the lowest bid but pays the amount bid by the runner-up. Formal tender processes (where a supplier submits a bid, is unware of others’ bids, and cannot change its bid once submitted) are like first-price sealed-bid auctions. Some informal tenders can be thought of as similar to second-price sealed-bid auctions (e.g., where the customer asks suppliers for a quote and then tries to negotiate down the price further by playing off suppliers’ bids against each other, but where each supplier cannot verify the bid of the other191).192
186 187
Ibid., paras. 6.74 - 6.88.
Ibid., para. 6.89. Ibid., para. 16. Mitigating factors here were the strength of SRCL and the merger-specific efficiencies. 189 Ibid., para. 17. 190 Ibid., para. 6.95. 191 If the bids could be verified, the auction would be akin to an open descending price auction (i.e., where suppliers undercut each other with lower and lower prices until there is only one left willing to supply). 192 When it is assumed that uncertainty regarding the bid necessary to win the auction comes from differences in the costs of serving the contract, bidders have ‘independent private values’ of winning the auction. In this setting, second-price sealed-bid and open ascending auctions are strategically equivalent. Consequently, it does not matter whether informal negotiations are modelled in terms of open-bid or closed-bid formats. If bidders are also symmetric (valuations of all bidders follow the same distribution) then, by the Revenue Equivalence Theorem, first-price and second-price auctions yield the same outcomes on average. However, with asymmetric bidders, the Revenue Equivalence Theorem no longer applies and different auction formats lead to different market outcomes. 188
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With these thoughts in mind, it is useful to summarise a few key points from auction theory.193 It is assumed that uncertainty regarding the bid necessary to win the auction comes from differences in the costs of serving the contract (i.e., supplier A does not know supplier B’s costs).194 Pre-merger, suppliers will weigh up the benefit of a higher bid (i.e., greater profits if they win) with the lower chance of winning. Post-merger, the merged firm has a higher chance of winning (since there are fewer bidders) and so has an incentive to raise its price. However, there is also a type of moderating efficiency effect: the merged firm has ‘two chances of winning instead of one’ (e.g., it can serve a contract using the assets of either of the merging parties, making it more likely that it will win the contract). Realising this, non-merging parties bid more aggressively which dampens the impact of the merger (i.e., they now have to try harder to win the contract). Further, and importantly, when uncertainty is limited, then the impact of the merger (and indeed the auction mechanism) will be limited; competition will approach the ‘ideal’ situation of Bertrand competition under posted-prices. In a second-price auction, the ‘optimum’ strategy is for a supplier to bid its cost. The rough intuition is that given everyone else’s bid, each supplier wants to maximise its chance of winning (by setting the lowest price it can) without incurring the risk of winning at a loss making price, which would occur if it made a below-cost bid. Therefore, both pre- and postmerger, all suppliers continue to bid their cost. A ‘harmful’ effect arises only if, absent the merger, the merging parties would have had the lowest and second lowest costs to serve a given contract. In that case, post-merger, the price at which the tender is awarded becomes the third-lowest cost (instead of the second). Thus, if the merging parties were particularly low cost firms, the merger is more likely to give rise to an adverse price effect than if they were very rarely the lowest and second lowest cost firms in relation to any particular contract. The narrower the cost distribution, the smaller the merger effects. Put differently, in cases where the merging parties are the lowest and second-lowest cost producers, if the third-lowest cost producer has a cost very close to the least efficient of the merging parties, the price impact would be very small. Uncertainty in auctions has been considered by the Authorities in Mueller/Dairy Crest195 and in Tradebe/Sita196 (discussed above).
193 The discussion follows a note prepared by Arina Nikandrova, summarising Dalkir et al. (2000), Mergers in symmetric and asymmetric noncooperative auction markets: the effects on prices and efficiency, International Journal of Industrial Organization Vol.18, pp.383–413; and Waehrer and Perry (2003), The effects of mergers in open-auction markets, RAND Journal of Economics, Vol. 34( 2), pp. 287–304. 194 This contrasts to a ‘common value’ setting where suppliers have different the value of winning the contract for any given costs of serving it. 195 Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015, para. 209 (iii): “Given the insecurity about other bidders’ costs and bidding strategies, a reduction in the number of credible bidders increases the probability of winning the tender/tender lot. The CMA considers that unilateral effects may arise simply where the Merger significantly increases the perceived probability of either the merged entity or any of its competitors winning the tender process at a given price. When submitting a bid, suppliers in a bidding market face a trade-off between expected profits and the probability of winning the tender process. A higher probability due to a reduced number of bidders may induce bidders to make a less attractive (but more profitable) bid.”
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(c) Product differentiation. Where products are differentiated, the issue of ‘closeness of competition’ is not simply a matter of whether the two merging parties are the closest competitors in terms of being the most efficient firms. There is also the issue of whether there is a substantial group of purchasers whose requirements are best met by the merging firms and not well served by other suppliers. So, while bidding processes can intensify competition through establishing a framework where there are several bidders for each contract, with differentiated products it remains important to identify whether the merging parties are ‘uniquely’ close competitors for a substantial share of (forthcoming) contracts put out to tender and whether rivals have the incentive and ability to introduce new products rapidly to compete with those currently offered by the merging parties. Where markets have competitive tenders, win/loss data is frequently requested by the Authorities to assess the extent to which the parties are closely competing. Where parties record the outcomes of tenders which they have bid for and won or lost, such ‘win/loss data’ may demonstrate, for example: how often one merging party is the runner-up when the other party wins the tender; how often one merging party is present when the other party bids and, if so, the extent to which there are other bidders as well; whether the merging parties are frequently the last two (or last few) at the tender stage; whether the presence of one party at a tender causes the other party to bid lower on a systematic basis (using econometric techniques); how often bids are lost to new entrants or a ‘competitive fringe’; and the minimum number of bidders required for effective competition. An illustrative example is provided below; further discussion of relevant evidence and the Authorities’ decisional practice is set out in Section 12.7.5. In Ericsson (Technicolor)/Creative (Red Bee Media) (which involved the provision of linear playout services to broadcasters) long term contracts were awarded as part of a competitive tender.197 The CC was concerned that BBC and ITV had particularly complex playout requirements meaning that Red Bee Media (BBC’s supplier) and Technicolor (ITV’s supplier) might be particularly close competitors unless other providers could match that degree of complexity at the point when contracts were retendered. The CC stated that if the parties were closest competitors the merger effects would be more serious, although harm could still arise if the merger removed a significant constraint.198 The CC indicated that the bidding process provided “an opportunity for customers to mitigate any impact that the loss of a competitor might have on this rivalry. The extent to which this might occur will depend on whether other competitors are motivated to compete for a contract, whether they can
196 A report on the joint venture, Tradebe Healthcare (Holdings) Limited, between Tradebe Environmental Services Limited and Sita UK Limited, relating to the healthcare risk waste sector, CC decision of 28 March 2014. 197
Telefonaktiebolaget LM Ericsson of Creative Broadcast Services, a report on the anticipated acquisition by Telefonaktiebolaget LM Ericsson of Creative Broadcast Services Holdings (2) Limited, 27 March 2014. 198 Ibid., para. 22.
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reach the same level as the lost bidder, and how much effect the customer can have on the quality of these other bids (as perceived by the incumbent).”199 The CC’s findings were as follows. In the case of the BBC, the majority of the CC panel found that the nature of the competitive process and the potential for other competitors to exert the same level of competitive constraint as Technicolor made it likely that there would be little adverse effect on the BBC. In the case of ITV, it was considered that if the contract were to be retendered in the near future, competitive rivalry would be weakened.200 However, “taking into account the significant uncertainty about the state of the market when the extended contract is due to expire in [a further five to ten years] – including the potential for significant changes in technology and for significant developments in the market during the lengthy intervening period – the likelihood of such a disadvantage was remote.”201 With respect to other customers, the CC found: the playout requirements to be less complex (meaning a wider choice of suppliers) and the tender date to be far into the future when competitive conditions would be uncertain (Channel 4); an unconcerned customer with choice of several suppliers and the scope for self-supply (Channel 5); and the choice of at least three credible suppliers post-merger (dedicated sports broadcasters).202
12.3.5 Negotiated Prices Intermediate prices are often negotiated between buyers and sellers. Whilst there are many models of negotiation in theory, the following concepts are often employed to establish the outcome (or the range of possible outcomes): (1)
The buyer’s fallback option – this refers to the payoff for the buyer, if it fails to strike the deal with its supplier.
(2)
The supplier’s fallback option – this refers to the supplier’s payoff if it fails to strike a deal with the buyer.
(3)
The sharing rule – this refers to how any ‘surplus’ or ‘bargaining pie’ created from striking a deal is split between the parties.
Consider a situation where suppliers A, B and C compete to sell to a buyer, R. In simple terms, a supplier merger between Firm A and Firm B harms the buying party if (i) it deteriorates the buyer’s fallback options (e.g., because prior to the merger the buyer’s negotiation strength over A is determined to a large part by the credible threat to switch to B, and vice versa); (ii) the supplier’s fall back option is improved (e.g., because the merged firm obtains better terms of supply when dealing with other buyers such that the incremental benefit of dealing with R is reduced); or (iii) the merger somehow improves the sharing rule in favour of the merged firm. The preceding three points may be inter-related, although, in practice, the focus would often be on the first.
199 200 201 202
Ibid., para. 23. Ibid., para. 26. Ibid., para. 29. Ibid., paras. 30-34.
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Where firms A, B and C sell undifferentiated products (e.g., they compete to provide ‘white label’ or weakly branded products to a retailer) then it may be that, post-merger, R would retain a credible threat to switch to C if the merged firm AB sought to increase prices or otherwise deteriorate the terms of supply, and if C had sufficient spare capacity. However, where A and B are close substitutes, with C being relatively distant, the merger is more likely to be harmful. In the latter case, the AB merger would substantially weaken R’s fall back option (unless there was sufficient scope for new entry and/or product repositioning by C).203 In essence, therefore, the analysis of closeness of competition is similar to that associated with retail mergers with the important exception that in intermediate markets buyers are most likely to be in a position to exercise countervailing buyer power. In the context of negotiation with undifferentiated products, see Epwin/Latium (discussed in the Section 12.3.3).204 In the context of negotiated prices with differentiated products, see Global/GMG, concerning the merger of two radio stations.205 More generally, in intermediate markets, the competitive effects of a supplier merger are often closely linked to the assessment of countervailing buyer power, since the latter is usually assessed in relation to the negotiation strength of a buyer vis-à-vis its sellers or the buyer’s ability to intensify competition through the use of effective competitive tenders. Buyer power (e.g., the ability to make credible threats to switch to rival suppliers, sponsor new entry or alter the way they procure so as to intensify competition among their suppliers) is discussed further in Chapter 15. Even where some buyers are strong enough to prevent a post-merger degradation in terms of supply, the CMA would typically be concerned if there were other buyers that would suffer. This was the case, for example, in FMC Corporation/ISP Holdings.206 203
In some cases, negotiated prices can be considered as a type of informal tender process where (see Section 12.3.4 above). Further, in some bargaining models, so-called ‘efficient bargains’, suppliers set a wholesale price at marginal cost and negotiate over a fixed fee element. Since theoretical models predict that changes in fixed costs should have no bearing on a firm’s short run pricing decisions (provided that the fixed cost increase does not induce the downstream firm to stop producing) an AB merger that left wholesale prices paid by R unchanged but increased the fixed fee paid by R should have no impact on R’s customers. In such cases, there are no (short run) price effects, raising the interesting question of whether the Authorities should be neutral to shifts of profit within the supply chain that have no material impact on consumers. 204 A report on the completed acquisition by Epwin Holdings Limited of Latium Building Products Holdings Limited, CET Glass Processors Holdings Limited and Building Plastics Holdings Limited, 13 November 2012. 205 A report on the completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited, 21 May 2013, e.g., para. 6.22; see also the discussion of price concentration analysis below in Section 12.7.4. 206
Anticipated acquisition by FMC corporation of the alginates business of ISP holdings (U.K.) Limited, OFT decision of 7 August 2008. FMC’s main customer was deemed to have sufficient countervailing buyer power to offset the potential adverse effects it may experience from the merger, but the OFT found that this would not protect smaller customers from suffering as a result of the anticipated acquisition. The OFT consequently found that the transaction may result in an SLC in relation to the supply of alginates for anti-reflux products. However, the OFT concluded that the value
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The impact of a merger on the negotiating strength on customers was considered explicitly in Cucina Acquisition/Fresh Holdings, where national customers were asked whether the merger would impact on their negotiating positions and the large majority indicated that it would not.207 In Reckitt Benckiser/K-Y brand,208 the CMA was also told by retailers that they had buyer power but the CMA did not attach much weight to this on the basis that retailers had not resisted an attempt by Reckitt Benckiser to implement a recent price increase.209 Also in the context of differentiated brands, the CC considered retailer bargaining strength by trying to estimate whether manufacturers or retailers gained the largest share of the difference between the retail price and the cost of producing the carbonated soft drink in question. 210 Finally, it is noted that although the focus of margin-and-diversion ratio analysis, and their use in price pressure tests, has been concentrated in retail markets and is not based on theory that relates to negotiated price setting, the Authorities have used them in relation to intermediate markets that relate to branded goods, as explained in Section 12.2.5 above (see, for example, AG Barr/Britvic and Reckitt Benckiser/K-Y brand).211
12.4
MERGERS IMPACTING ON PROCUREMENT MARKETS
In respect of some mergers, there may be a concern that a horizontal merger might give rise to harmful buyer power effects.212 This (very rare) concern is considered in this section, with a discussion of mergers in intermediate markets, where the merging firms procure inputs from upstream suppliers and then on-sell products, incorporating those inputs, in the downstream market. For example, a merger between two grocery retailers
of sales affected by the merger was sufficiently small for the case to be exempted from reference under the de minimis exception. 207 Anticipated acquisition by Cucina Acquisition (UK) Limited of certain assets of Fresh Holdings Limited, CMA decision of 16 February 2016. Here the CMA stated: “In general, customers with negotiating strength may be more able to resist a potential worsening of price or non-price aspects of the Parties’ offering arising as a result of a merger than those without negotiating strength.” See paras. 110-113. The finding was in line with the CMA’s view that the parties were differentiated to a considerable extent in terms of their proposition, as supported by their tender data (para. 5). 208 A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, CMA decision of 12 August 2015, paras. 18 and 10.29-10.30. 209 Ibid., para. 18. 210 A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, 9 July 2013, Appendix D. 211 For a discussion of the Bertrand model’s assumptions in an IPR context, see A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, 9 July 2013, Appendix 6, para. 5. See also A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, Appendix F, para. 14. 212 This section draws heavily on RBB, The Competitive Effects of Buyer Groups (2007), Economic Discussion Paper, a report prepared for the OFT by RBB Economics, which provides a detailed discussion of the competitive effects of buyer groups – and related references, much of which carries over to the analysis of buyer mergers.
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may involve buyer power considerations (e.g., are there harmful effects likely to arise due to retailers having greater buyer power vis-à-vis their suppliers?) and more standard market power issues (e.g., would the merger harm consumers as a result of higher prices or lower QRS when grocery retailers sell to final consumers?). The discussion of how retail mergers have been assessed has been covered above. This section therefore focuses on potential harmful effects that may arise through the exertion of buyer power. We refer to the merging firm acting as a buyer as the “merging buyer”. In particular, this section sets out: (i) definitions of buyer power (including the monopsony concern the CMA has called “demand withholding”); (ii) beneficial buyer power effects; (iii) “waterbed effects”, raising rivals’ costs and related theories of harm and buyer mergers; (iv) other theories of harm; and (v) a concluding remark on buyer mergers. e of how the parties behave). hlighting that these theories of harm are rare. As stated, example, in Poundland/99p Stores: “In general, the CMA would regard an improvement in the negotiating strength of the merging parties as beneficial to customers if enough competition remains in the downstream market, so that lower prices or quality improvements that would be negotiated are passed on to customers.”213
12.4.1 Competitive Effects of Buyer Mergers a) Merger Assessment Guidelines. The Authorities state: “Where the merger firms purchase the same products, the merged firm may enjoy greater buyer power (or monopsony power) than the merger firms could previously exert individually. In many cases, an increase in buyer power is not likely to give rise to unilateral effects; and some of the benefits to the firm from its greater buyer power may be passed on to the merged firm’s customers. One circumstance in which unilateral effects may arise from increased buyer power is when: the merged firm has an incentive to lower the amount it purchases so as to reduce the purchase price it pays (known as ‘demand withholding’); and the merged firm also has sufficient market power over its customers so that, as it reduces the quantity sold to them in the market, it can increase the price at which it sells to them. Buyer power may also lead to suppliers having lower incentives to invest in new products and processes.”214 (b) Definitions of buyer power. By way of ground clearing, it is helpful to contrast “buyer power” and “market power”. Competition authorities typically refer to market power as the ability of a seller profitably to sustain prices above competitive levels (or to sustain quality or innovation below competitive levels). By contrast, buyer power refers to the ability of a purchaser to influence the price that it pays for an input through acting strategically (e.g., through having recourse to credible threats to switch suppliers or sponsor new entry). Alternative definitions of buyer power are discussed below. (i) Bargaining power. Buyer power is often considered in a bargaining (or negotiation) framework. First, in negotiated deals the terms of supply will depend on
213
A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015, para. 6.95. 214 Merger Assessment Guidelines, paras. 5.4.19-5.4.21, footnote omitted.
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the bargaining strength of each side. This captures the extreme cases where either the supplier or the buyer is so powerful that it can make a ‘take it or leave it’ offer, as well as intermediate cases where both parties have some degree of bargaining power. Second, a bargaining approach allows for a rich discussion in which a powerful buyer can: generate efficiencies which increase the size of the bargaining pie; act strategically to improve its bargaining strength (this could be through improving the profit sharing rule, improving the buyer’s fallback option or deteriorating the supplier’s fallback option); or act strategically to influence the behaviour of the supplier in a way that harms competition (a less desirable way for a powerful buyer to increase the size of the available bargaining pie). (ii) Monopsony power and demand withholding. An alternative definition of buyer power is ‘monopsony power’. The monopsony model relies on a situation where purchasing more units drives up the market price of an input. The textbook scenario presumes that a single buyer purchases from atomistic suppliers. Competition among suppliers is presumed to be ‘perfect’ such that the market price for the input price equals marginal cost, i.e., the cost of producing the last unit purchased. If the industry supply curve slopes upwards (e.g., because as more units are produced, the marginal cost of production increases) then as the single buyer purchases another unit, it bids up the price of all units (i.e., the ‘market price’). This means that purchasing an extra unit generates an increase in expenditure that exceeds the supplier’s marginal cost of production because the buyer must also pay more on all the other units it purchases. This drives a wedge between the buyer’s perceived marginal cost and the true marginal cost of supplying the buyer. In turn, this causes an incentive to reduce purchases (and hence output in the buyer’s downstream market) compared to a situation where buyers are atomistic.215 The monopsony story may break down where buyers contract with their suppliers on an individual basis because there is not a market price. This makes it less likely that the buyer bids up the input price by purchasing more. Further, in negotiations, purchasing more units may often allow a buyer to obtain lower prices on all units – i.e., the opposite of the monopsony situation. For example, where a buyer purchases more units this may allow a supplier to benefit from certain scale economies, which in turn may induce the supplier to offer discounts for bulk buying. The OFT considered a version of a monopsony theory of harm in Travis Perkins/BSS, which was called “demand withholding”.216 (iii) Substantial buyer power. In most competition cases, buyer power is analysed in the context of competitive constraints (i.e., whether the buyer’s side of the market is able to resist attempts by a firm to raise (quality adjusted) prices). It is important to distinguish between the degree of buyer power necessary to act as a competitive constraint and the higher degree of power required to give rise to the prospect of harm 215
Atomistic buyers would be so small in relation to the market that they would not take into account the fact that buying an additional unit bids up the price. 216 See Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 11 November 2010, paras. 177-181, discussed further below.
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to upstream competition. The term “substantial buyer power” is used here to mean the ability of the merged firm (although not necessarily the incentive) to harm competition among its suppliers. The key to substantial buyer power is how dependent important suppliers are on the buyer in question. In order to have substantial buyer power, it is likely that the merged buyer would, to a considerable extent, be able to dictate industry terms of supply. Substantial buyer power is likely to require both of the following conditions to apply. First, the merged buyer would gain (or enhance) a credible threat to switch purchases to alternative suppliers, sponsor new entry, or self-supply without incurring substantial sunk costs. Secondly, the merged buyer would become (or strengthen its position as) the ‘gateway’ to a downstream market, for example, because a failure to deal with the merged firm would mean that the supplier must access end customers through highly inferior sales channels, or the supplier forgoes substantial economies of scale or network effects. Indicators that a merged buyer is the ‘gateway’ to the downstream market might be that: (i) its purchases account for a large share of purchases in the relevant upstream market as a whole, or in an important sales channel (where sales channels are highly differentiated); (ii) sufficient barriers to entry and expansion exist in the downstream market to prevent upstream suppliers circumventing the merged buyer by sponsoring alternative distributors and distribution channels or by forward integration; or (iii) other buyers (or buyer groups) operating in the upstream market are substantially smaller than the merged buyer. In the following discussion it will be argued that unless a merger creates substantial buyer power, it is unlikely that there is a credible buyer power theory of harm to competition. (c) Beneficial and harmful effects of buyer mergers. The OFT states that: “In general, buyer power is beneficial in two circumstances: when there are large efficiency gains that result from the factors (e.g., size) that give the buyer its power and these are passed on to the final consumers (e.g., through downstream competition), and when it exerts downward pressure on a supplier’s prices and the lower prices are passed on to the final consumer”.217 Where buyer mergers generate procurement efficiencies that lower the marginal cost of production in the downstream market and also have no impact on reducing competition in the downstream market, sufficient pass through to consumers is likely. However, where efficiencies in procurement come at the expense of a reduction of downstream competition, it is unlikely that the efficiencies would be deemed sufficient to offset the anticompetitive effects of the merger. Efficiencies are rarely accepted by the Authorities as sufficient to offset concerns in relation to a substantial lessening of competition.218
217
OFT, Competition Act Guidelines, Assessment of Market Power, (2004a), para. 6.4. In Anticipated acquisition by Asda Stores Limited of Netto Foodstores Limited, OFT decision of 20 October 2010, the OFT considered efficiency claims put forward by the parties. Some (but not all) were considered to be verifiable, merger specific and timely; such efficiencies were incorporated in the OFT’s calculations of illustrative price rises. However, efficiencies were not found to be of a scale sufficient to offset the overall number of SLCs found (see paras. 65-76). See also the discussion of A 218
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Buyer power theories of harm in relation to mergers are uncommon, although they have been raised in some important high profile mergers. Where buyer power is employed by merging firms to benefit from better terms of supply, this would usually be seen as a pro-competitive feature of a merger (other things being equal), in particular where the buyer secures reductions in its variable production costs. It is only in some very special cases that obtaining better terms of supply gives rise to plausible anti-competitive effects. To identify harmful effects on the procurement market, the theory of harm would need to address the following question: why would a merging buyer harm competition among its suppliers? In general, it would have the ability to do so only in the special case that it has substantial buyer power. Moreover, it would have the incentive to do so only when its rivals are disproportionately harmed such that they become substantially weaker competitors to the merged firm in the downstream market. (d) “Waterbed effects”, raising rivals’ costs and related theories of harm. It is sometimes alleged that a merged buyer would harm upstream competition so as to harm its rivals (i.e., firms with which the merged buyer competes in the downstream market). The main theories of harm can be summarised as follows: raising rivals’ costs, reducing rivals’ benefits and “waterbed effects” (the latter being a special version of raising rivals’ costs).219 First, a merged buyer may deteriorate the terms of supply for rival buyers by raising the input costs of other buyers – known as raising rivals’ costs – or by adopting strategies to reduce benefits available to rivals. For example, if the merger created the situation where the merged buyer could (and would) raise rival buyers’ costs by striking a (near) exclusive supply deal with the supplier of a key input, it might ensure that rival buyers obtain no (or insufficient) access to that input. Another way to raise rivals’ costs would be to bid up the price of an important input – this could be attractive where rival buyers are more dependent on that input than the merged buyer. Further, a merged buyer could, for example, reduce rivals’ benefits by inducing a supplier to adopt a technology, quality level or means of delivery more favourable to the merging parties and less favourable to rival buyers. If, as a result of any of the strategies above, rival firms become substantially weaker competitive constraints in the downstream market, this may enhance the ability of the merged buyer to charge higher prices (for a given quality) in the downstream market and thereby harm end customers.220 However, the following principles are important to bear in mind when considering these theories. First, merged buyers generally do not
report on the joint venture, Tradebe Healthcare (Holdings) Limited, between Tradebe Environmental Services Limited and Sita UK Limited, relating to the healthcare risk waste sector, CC decision of 28 March 2014, at Section 12.3.4 above. 219
See RBB, The Competitive Effects of Buyer Groups (2007), Economic Discussion Paper, a report prepared for the OFT by RBB Economics, for more details and other theories of harm which related to bringing buyers together in a buyer group and thus which may also relate to mergers. 220 The discussion assumes that the merged buyer is not integrated with any suppliers in the upstream market, although there are similarities with input foreclosure theories (e.g., raising rivals’ purchasing costs) and customer foreclosure theories (e.g., denying rivals scale economies). Vertical issues are discussed in Chapter 13.
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have an incentive to harm upstream competition because that would harm their own interests. This is a fundamental point. Cost-raising strategies are credible causes for concern primarily where: (i) rival buyers suffer substantially greater harm than that incurred by the merged buyer; and (ii) profitability in the downstream market is determined more by relative levels of costs (i.e., the merged buyer’s input price relative to its rivals’ input prices) than absolute levels of cost. Secondly, where the merged buyer secures better terms of supply, theories of harm are much less likely to give rise to harm to end customers. The preceding point is best explained in relation to the “waterbed effect” theory. This is the idea that a merged buyer secures lower prices for itself (as a result of the merger) and this causes other buyers to pay higher input prices. Whilst waterbed effects have been asserted in some dated merger cases, the difficulty with finding support for waterbed theories is twofold.221 First, if a supplier could profitably charge ‘weak buyers’ higher prices, why is it not already doing so? Secondly, if the merged buyer obtains lower prices from a supplier, then (other things being equal) it becomes more competitive in the downstream market. As a result, it would win sales from – and hence reduce input demand placed by – rival buyers. As demand from rival buyers declines, the supplier would often have a reduced incentive and ability to charge them more than before. Nevertheless, waterbed effects may occur in certain circumstances. The key is to explain why rival buyers would suffer worse terms of supply as their purchases of inputs decline. In theory, such an effect could arise: (i) where rival buyers offer suppliers less scope to benefit from scale economies and thereby receive higher (cost reflective) prices; or (ii) where, post-merger, rival buyers have a weaker credible threat to switch to rival suppliers (allowing an incumbent supplier to charge them more than before).222 Waterbed effects (if feasible) are less likely to be harmful than other theories of raising rivals’ costs because the merged buyer’s lower input price may ultimately benefit end customers. Put another way, the cost lowering effect for the merged buyer (i.e., the efficiency) may dominate the cost raising effect for rival firms.
12.4.2 The Authorities’ Decisional Practice (a) Travis Perkins/BSS. In Travis Perkins/BSS, the OFT considered whether a merger between these two suppliers of building materials would, inter alia, lead to an 221 The CC countenanced waterbed effects in mergers in the grocery and private health care sectors. See, British United Provident Association Limited and Community Hospitals Group plc: a report on the proposed merger; and British United Provident Association Limited, Salomon International LLC and Community Hospitals Group plc; and Salomon International LLC and Community Hospitals Group plc: a report on the existing mergers, CC decision of 7 December 2000, para. 2.180 b; and Safeway plc and Asda Group Limited (owned by Wal-Mart Stores Inc); Wm Morrison Supermarkets PLC; J Sainsbury plc; and Tesco plc: A report on the mergers in contemplation, CC decision of 26 September 2003, para. 2.218. 222 P. W. Dobson and R. Inderst, Differential Buyer Power and the Waterbed Effect: Do Strong Buyers Benefit or Harm Consumers? (2007), European Competition Law Review, Vol. 28 (2007); Majumdar, A, Waterbed Effects, ‘Gatekeepers’ and Buyer Mergers (2006), CCP Working Paper No 05-7.
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SLC as a result of the merged firm’s behaviour as a buyer; the theories of harm considered were demand withholding and waterbed effects.223 The OFT examined the overlap between the parties in the retail supply of plumbing and heating (P&H) products224 through their national P&H specialist chains. The anti-competitive buyer power theories of harm considered principally related to the supply of boilers to the P&H specialist chains. The OFT considered whether demand holding was a credible theory of harm. The OFT did not consider there to be a realistic prospect of this alleged effect. The evidence did not suggest that the parties were large enough in relation to the purchasing market and the evidence did not suggest that purchasing more would drive up the input price.225 The OFT also considered whether a harmful waterbed effect was likely in this case. It stated as follows: “Under the waterbed effect argument, any additional discount generated by the enhanced buying power of the merged firm allows it to reduce prices and attract additional business. Some of that increased business comes at the expense of the merged firm’s competitors (some may come from growing the market, however...). Their scale of activity is therefore reduced. This may reduce the discount that they obtain from their suppliers and/or make them less able to enjoy economies of scale. If so, then this ‘waterbed effect’ may give rise to competition concerns if the merged firm’s retail competitors are already sufficiently ‘squeezed’ that they exit the market or otherwise cut back their operations. This reduces the competitive pressure on the merged firm, potentially more than offsetting any pro-competitive effects of its buyer power. The waterbed effect in this case therefore depends on four factors. First, the extent to which discounts depend on scale. Secondly, whether any scale-dependent discounts apply ‘at the margin’ to prices, so that discounts affect retailers’ incremental costs, which in turn affect the prices they charge. Thirdly, whether there are economies of scale in retailing and fourthly, whether the merged firm’s rivals are much smaller and/or operating under much lower margins (that is they are squeezed). Even if so, any waterbed effect must still be weighed against any pro-competitive effects of buyer power.”
The OFT considered each of these factors and found insufficient evidence of a realistic prospect of a harmful waterbed effect.226 (b) Stonegate/Deans. This merger related to two major suppliers of shell and processed eggs. The merged firm was active at almost all levels of the shell and processed egg supply chain. The parties negotiated a series of contracts with egg producers and egg packers, and also entered into supply agreements with major
223 Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 11 November 2010. 224 These include: baths and sanitary ware, accessories, brassware, rainwater and soil goods, showers and fittings, tubes and fittings, water mains and waste pipes, boilers, electrics storage heating, room heaters, fires, radiators, fireplaces, water heaters, air conditioning units and heating controls and pumps. 225 Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 11 November 2010, paras. 177-181. 226 Ibid., paras. 167-169.
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retailers.227 Whilst the CC considered that the merged entity would secure a better input price through a demand withholding strategy, it did not consider that this would be passed on to customers (i.e., retailers) due to an increase in downstream market power also caused by the merger. The CC took the view that the buying power of the merged entity might also lead to exit, less innovation and foreclosure of new entrants in the upstream market, even if that might not be in the merging firms’ interests. In the upstream market, the CC found that increased bargaining power of the merged firm versus egg producers (due to its high share of supply to the downstream retail market) would result in an SLC in the procurement of shell eggs. In particular, the strong buyer power of the merged firm would enable it to procure eggs from producers on more favourable terms from the perspective of the merged entity (and hence less favourable terms from a supplier perspective), for example by reducing prices paid to producers, failing to pass any increases in price from retailers upwards to upstream egg producers or to bundle egg purchases with other upstream inputs such as animal feed, pullets or spent hen facilities. Lower prices would be of benefit to consumers if any reductions in price would be passed on. However, the CC did not believe this to be the case; lower prices were expected to reduce the quantity of eggs produced, resulting in higher prices for retailers and ultimately final consumers. The CC also considered that lower prices secured by the parties would, in the longer term, induce the exit of marginal producers and reduce incentives to invest for the others. The CC also took the view that the merged entity could jeopardize the position of other suppliers and/or limit the opportunities for entry by long term contracts with producers, or in other ways, for example, by pricing policies, price discrimination or own-branding of eggs. The CC shared the concern expressed by some parties that the merged entity could be in a position to influence wider industry developments through its strong position on trade associations, noting “although it is more difficult to establish an expectation that this would occur as a result of the merger.”228 In the downstream market for supply to retailers and other egg customers the share of the merged firm was 60-70% for shell eggs and more than 50% for liquid eggs. In the supply of shell eggs to retail customers, the CC found that the parties were strong competitors; the majority of switching by retailers in the last five years took place between Stonegate and Deans. Further, the ability of retailers to switch suppliers was dependent on the availability of surplus eggs. Although the parties argued that when a supplier lost a contract they would need to dispose of surplus eggs on the spot market, competing suppliers suggested that they could not bid for new retail contracts on the assumption that surplus eggs would be available. Moreover, the CC concluded that competing suppliers would need to expand significantly and rapidly for retailers to view them as a credible alternative to the parties and, due to the shortage of shell eggs to
227
Clifford Kent Holdings Limited and Deans Food Group Limited, a report on the completed merger of Clifford Kent Holdings Limited, parent company of Stonegate Farmers Limited, and Deans Food Group Limited, 20 April 2007. 228 Ibid, para. 6.101.
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pack, such expansion was unlikely to be sufficient to offset the loss of competition between the parties. (c) Waterstone’s/Ottakar’s. In Waterstone’s/Ottakar’s (a merger of two chains of book retailers), third parties claimed that the merged buyer would demand more similar supply terms leading to reduced upstream product variety, diversity and innovation (e.g., books published).229 The merging parties argued that this theory of harm would not be feasible because the merged firm would not have an incentive to harm upstream product variety and diversity where these features are valued highly by end customers. The merging parties argued, inter alia, that whilst Waterstone’s might have a different view as regards the optimum product mix to offer its customers compared to Ottakar’s, so long as the downstream process of competition was not harmed, a strong incentive would remain to deliver a range and variety of books valued by consumers. Range was a key criterion valued by consumers and so failure to offer a good range would lead to switching to rival booksellers. The parties also argued that publishers would continue to have an incentive to publish good books and that there were many alternative outlets and sales channels through which such books could be sold. The CC ultimately concluded that the merger would not harm competition as regards the procurement of books, implicitly accepting the parties’ arguments.230 (d) Nike/Umbro. This merger considered, inter alia, the parties’ positions as acquirers of the right to sell replica kit, and whether or not the merger would weaken competition amongst purchasers at a bidding round, thereby leaving football clubs with worse sponsorship deals.231 In this case, the OFT did not take the view that a better purchasing deal for the parties could be pro-competitive (leading to lower costs of supplying replica kit). Instead, the OFT considered the impact on funds raised by football clubs. The OFT also considered the impact of the merger on the supply of replica kit to retailers, defining the market at the wholesale level more widely than the narrow retail market that had been established by earlier precedent. In its examination of the potential anti-competitive effects of this merger, the OFT considered one procurement theory of harm (i.e., bidding for rights to provide financial sponsorship to clubs and national teams in return for the exclusive rights to produce and supply approved replica football kit). The OFT investigation considered two potential effects of the proposed merger: participation effects and information effects. Participation effects were expected to arise where bidders changed their behaviour (and bid less competitively) or where there were fewer bidders from which to elicit bids. Information effects occur when bidders are able to share information on the underlying value of the tender resulting in lower bids overall. The latter effects were not considered in detail by the OFT as football clubs did not operate a formal bidding process.
229 HMV Group plc and Ottakar’s plc, Proposed acquisition of Ottakar’s plc by HMV Group plc through Waterstone’s Booksellers Ltd, 12 May 2006. 230 231
Ibid., para. 5.107-5.111. Anticipated acquisition by Nike, Inc of Umbro plc, OFT decision of 6 February 2008.
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To examine the potential for participation effects, the OFT analysed bidding data supplied by the parties. These data showed that the parties were not closest competitors as they bid against other firms at least as often as they bid against each other. The bidding data also revealed that football clubs did not receive significantly worse sponsorship deals when there were fewer bidders and that football clubs enjoyed the upper hand in the process because sponsorship deals were often loss-making for kit suppliers once the cost of servicing the deal was accounted for. The OFT found that, post-merger, football clubs could credibly switch to alternative sponsors if they were offered worse terms by the parties or they could even self-supply.232 (e) Graphic/Benson. The merging parties were “converters” that overlapped with respect to the supply of folding carton-board packaging to manufacturers in the food, beverage and non-food sectors.233 Two third parties raised concerns that the merger may cause smaller converters to exit the market. One specifically referred to the possibility that the merging parties might be able to better negotiate input prices from the carton-board mills as the contributing factor to its exit. Another referred to the possibility that the merged firm would be given sole supply from an upstream supplier resulting in availability issues for other converters. The CMA noted the potential to obtain more favourable pricing from carton-board mills but that it might not occur due to the parties’ share of carton-board purchases (estimated to be around 15-25%) and because Graphic itself supplied raw carton-board, potentially reducing the amount of external purchases made by the parties. The CMA rejected the prospect of a harmful “waterbed effect”. While the text is heavily redacted, one reason may be that parties’ suppliers did not offer material volume rebates (which would mean little scope for the merging parties to gain lower prices, as well as little scope for smaller buyers to suffer worse prices if they lost share to the merged firm). Further, in a number of cases, the parties submitted that they did not control their input prices which were in fact negotiated between the raw material input supplier and the end customer. The CMA also found that a demand withholding effect would not occur. (f) Mueller/Dairy Crest. One area of overlap considered in this case was in relation to the procurement of raw milk, where the CMA considered a demand withholding
232
The only other theory of harm considered in detail was a non-procurement theory of harm, regarding the supply of replica football kit. The OFT therefore found that the relevant market could be defined as the supply of all replica football kit because retailers may view different kits as substitutes for the same shelf space. Market share data indicated that the parties were the first and third largest replica football kit suppliers, with a combined share of 40-60%. However, sales of replica football kits were directly linked to sponsorship deals and were potentially also affected by the success and recent profile of the football club in question, resulting in large fluctuations in market share over a short period of time. Furthermore, market shares for Umbro were overstated as they included sales of England football kits which were deemed complementary to, rather than substitutable for, sales of club football kits. In addition, the OFT found no evidence that the parties were particularly close competitors. The OFT therefore cleared the anticipated acquisition. 233 Anticipated acquisition by Graphic Packaging International Limited of Benson Box Holdings Limited, CMA decision of 20 May 2014.
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theory.234 No realistic prospect of an SLC was found on the basis that: (i) in the area of interest (i.e., the area around Severnside dairy), although the merging parties had a share of purchases of 30-40%, there were sufficient other sources of demand to which farmers could switch; (ii) in many cases national multiples (e.g., large supermarket chains) determined the price of raw milk, as opposed to the merging parties; and (iii) farmer associations were not concerned about the merger’s impact on raw milk procurement. (g) Rank/Gala.235 In this case, the CC assessed whether the merged casino operator could obtain exclusivity from its suppliers of slot machines. This possibility was ruled out on the basis that Rank had neither the ability nor incentive to pursue such a strategy. The merged firm would have to pay too much compensation to its main supplier to secure exclusivity, because it did not account for a sufficiently large share of that supplier’s demand. Exclusivity on slot machines might not cause customers to switch to the merged firm, since only 20% of customers played them on their last visit to a casino. New entry appeared feasible and recent entry had occurred.236
12.5
THE ELIMINATION OF A POTENTIAL ENTRANT 12.5.1 Introduction
A merger can result in a substantial lessening of competition as a result of eliminating a potential competitor. The Authorities distinguish between two main types of entry that are relevant to an assessment of unilateral effects: actual potential entry and perceived potential entry. Actual potential entrants are those that have the ability and incentive to enter the market but for the merger and would either be eliminated by the merger (because they were a merging party) or would be prevented from entering the market as a result of the merger (e.g., because they were sponsored entrants). The Authorities state: “[s]uch ‘actual potential competition’ is a constraint only if and when entry occurs.”237 By contrast, perceived potential entry may constrain competitive behaviour in a market even before any such entry has taken place. In other words, the mere threat of entry poses some competitive constraint on market incumbents. Unlike actual potential competition, perceived potential competition poses a competitive constraint pre-merger. As the Authorities state: “the merger may remove a firm which is not in the market, but which nevertheless imposes an existing constraint because of the threat that it would enter if existing firms in the market raised their prices. A constraint from such
234
Anticipated acquisition by Muller UK & Ireland Group LLP of the dairies operations of Dairy Crest Group plc, CMA decision of 12 June 2015, paras. 174-186. 235 The Rank Group Plc/Gala Coral Group, a report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, 19 February 2013. 236 237
Ibid., para. 7.198. Merger Assessment Guidelines, para. 5.4.14.
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‘perceived potential competition’ may arise even though the Authorities do not believe that entry would actually occur.”238 Both of these theories of potential competition could apply in the same merger, as a transaction could, in principle, eliminate both the existing constraint posed by the threat of entry (perceived potential entry) and the potential for increased actual competition post-entry (actual potential entry).239 In the case of actual potential competition, suppose that firms A and B are merging but B does not currently compete with A. Rather, B is a potential entrant to A’s market (and potentially vice versa, although for convenience we discuss the impact of B entering A’s market). In this case, the theory of harm may be that the merger causes a price rise relative to the counterfactual where B enters as an independent entity. In this case, the following issues may be important. First, it may be instructive to conduct a thought experiment whereby (forthcoming) product B is assumed to have already entered A’s market. One can then conduct a standard unilateral effects analysis, for example, assessing the closeness of substitution between products A and B (although there are likely to be greater data limitations as B would not have yet entered A’s UK market).240 If product A already faces strong competition, the loss of new entry by product B does not matter. Secondly, in order to assess the importance of B as a constraint on A, it is informative to weigh up how likely new entry would have been absent the merger. If there is only a low probability that B would have entered the market with a product that would have competed closely with A’s product(s), then the loss of B is less likely to give rise to an SLC. Thirdly, even if existing competition is weak and new entry by B relatively likely, it may be that other potential competitors would still constrain the merged entity. For example, even if, absent the merger, B would enter the market to compete with A, it may be that other new entrants are likely and that they would also be important constraints on A and B. In pharmaceutical mergers, for example, product B might be thought of as a pipeline generic drug (due to enter the market) and product A an originator (or generic) drug with which the generic would compete.241 See also the discussion of Pure Gym/The Gym below. Turning to perceived potential entry, the Authorities state: “[a] firm is more likely to provide a constraint as a perceived potential competitor if its entry can take place without incurring any substantial sunk costs, and if it can happen within a year, though 238
Ibid., para. 5.4.16.
239
See, e.g., Completed acquisition by Air France finance S.A.S./City Jet Ltd of VLM Airlines N.V., OFT decision of 9 May 2008, paras. 106 and 107. 240
Evidence from other comparable markets (e.g., where B has entered A’s market in another country) may nonetheless be informative. 241 Overlapping pipelines were considered in Anticipated acquisition by Actavis UK Limited of Auden Mckenzie Holdings Ltd, CMA decision of 21 May 2015.
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the Authorities’ assessment in any case will take account of the particular aspects of the market in question.”242 Another way to think about this is that the potential entrant has capacity that already could be switched rapidly to the relevant market, and would be switched to the relevant market in the event of a small price rise (e.g., its capacity could reasonably be included in the relevant market for the purpose of calculating market shares due to the ease of supply side substitution).243 The Authorities define a perceived potential entrant to be already constraining the other party to the merger. The standard unilateral effects analysis is thus required. If A is the acquiring firm in the relevant market, while B is the acquired perceived potential entrant, the strength of the constraint that B places on A must be established. For example, relevant questions include: would B introduce a close substitute to A’s product(s); if so, are there sufficient other close substitutes for A and B’s products to prevent prices rising; or is there sufficient scope for buyer power or supply side responses (e.g., the existence of other perceived potential entrants – see Svitzer/Adsteam below) to constrain the merged entity sufficiently?
12.5.2 The Authorities’ Decisional Practice Mergers involving the elimination of actual or perceived potential competition are relatively rare. However, the Authorities have considered these issues in the following cases: (1)
In BT/EE, the CMA rejected unilateral effects arising from the loss of potential competition on the basis that pre-merger, the retail mobile market was competitive, with close competition among the four MNOs (of which EE was one) and with limited additional competition from the mobile virtual network operators (MVNOs), of which BT was one.244 The CMA considered that the additional competitive impact in the supply of retail mobile that BT would have brought to bear as an MVNO, absent the merger, would have been limited.
(2)
In Pure Gym/The Gym,245 the CMA was concerned about the scope for lost potential competition. It noted that the merging parties were not only larger than their rivals but also had expansion plans that were materially more significant than those of other budget gym players, meaning that they would open a large number of new gyms in the near future. The CMA found that there was a realistic prospect of an SLC in respect of four local areas where one party operated and the other party had firm plans to enter in the short-term (Sheffield, Manchester East, Wolverhampton and Cardiff). The CMA went on
242 243 244
Merger Assessment Guidelines, para. 5.4.17. See Chapter 10 for a discussion of supply side substitution.
BT Group plc/EE Limited, a report on the anticipated acquisition by BT Group plc of EE Limited, 15 January 2016, para. 16. 245 Anticipated combination of Pure Gym Limited and The Gym Limited, CMA decision of 26 June 2014.
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further to state: “In light of the closeness of competition between the parties at a national and local level, the past conduct on entry, the dynamic character of competition in the budget gyms sector and the parties’ significant expansion plans, the CMA considers (but has not concluded) that the test may also be met in respect of a number of further areas set out in the parties’ expansion plans, which it is not possible to exhaustively identify in the context of a phase 1 investigation.”246 In short, the CMA was concerned that there might be other areas, not yet identified, where the parties would overlap in the near future and not face sufficient existing or potential competition. (3)
In AkzoNobel/Metlac, which related to the supply of metal packaging coatings, the CC found that in the beer and beverage segment, the merger would remove Metlac as both an active and a potential competitor (in the latter case because Metlac was becoming qualified to supply customers with additional products).247 The CC therefore prohibited the transaction.248
(4)
In Princes/Premier, the OFT considered various food markets included that for ambient meatballs.249 Premier had a 70-80% market share, but Princes was not active in this area. However, there was (presumably) evidence in Princes’ internal documents indicating that it was considering entry.250 The OFT then considered whether the Princes would be likely to enter, absent the merger, and whether such entry would lead to greater competition. Whilst the OFT found that entry by Princes would lead to greater competition, Princes provided evidence that there were two other strong branded competitors as well as competition from own label meatballs, and that Princes was not particularly well placed to be an entrant, let alone uniquely well placed. The OFT did not therefore consider that the merger gave rise to a realistic prospect of an SLC on the basis of unilateral effects from the elimination of actual potential competition in the supply of ambient meatballs.251
(5)
In Air France/VLM, VLM was the only operator providing a direct service from London City (“LCY”) to Rotterdam (“RTM”) and there was no direct overlap between the parties.252 However, the OFT assessed whether the merger would result in the removal of Air France as a potential entrant onto this route, thereby removing a pre-merger competitive constraint. In determining whether Air France should be considered as an actual potential
246
Ibid., para. 8. See also the discussion of national theories of harm, above in Section 12.2.6. A report on the anticipated acquisition by Akzo Nobel N.V. of Metlac Holding S.r.l., CC decision of 21 December 2012. 247
248
Ibid, paras. 76 and 80. See also Section 12.6 on minority shareholdings below. Anticipated acquisition by Princes Limited of the canning business of Premier Foods Group Limited, OFT decision of 22 June 2011. 250 Ibid., para. 129. 251 Ibid., paras. 132-137. 252 Completed acquisition by Air France finance S.A.S/City Jet Ltd of VLM Airlines N.V., OFT decision of 9 May 2008. 249
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Unilateral Effects
entrant, the OFT assessed the likelihood of Air France’s entry onto the route in absolute terms and the extent to which Air France could be said to be uniquely placed to enter the route (in comparison with other carriers). In terms of Air France’s likelihood of entering the LCY-RTM route, the OFT was aware of only one piece of documentary evidence mentioning Air France’s interest in entering this route (which was merely one internal e-mail). Even in the event that Air France was interested in entering the route, the OFT noted that LCY was capacity constrained during peak periods (in which slots would be essential for business services). Entry was therefore unlikely in the short-term. In addition, the OFT noted that, whilst entry on this route might be attractive, Air France had not chosen to do so by the time of the merger. In this regard, a large customer of VLM had informed the OFT that it had unsuccessfully attempted to sponsor entry onto this route for two years prior to the merger, but had been unsuccessful. In terms of Air France’s relative likelihood of entry, the OFT considered that Air France could not be considered uniquely wellplaced to enter this route, and, in fact, was less well-placed than BA, which had considerably more slots at LCY, potentially giving it the ability to flex its slots to accommodate other services. As regards perceived potential entry, the OFT considered that VLM would have been aware of the lack of slot availability and that the likelihood of Air France’s entry was low. Accordingly, the OFT concluded that any constraint that Air France imposed on VLM was sufficiently weak that its removal could not be said to result in a substantial lessening of competition. (6)
253
Svitzer/Adsteam, the CC considered potential competition between Svitzer and Adsteam in the supply of harbour towage services at a number of UK ports.253 Given the high fixed costs of the harbour towage business, any entry strategy could only be viable if a sufficient number of customers could be secured so as to benefit from economies of scale. This could be achieved by displacing the incumbent entirely or by ‘cherry-picking’ certain key customers who had the ability to confer minimum viable scale on the entrant’s operation. The CC accepted that either strategy might involve entry being sponsored by a group of customers, since many customers identified the threat of sponsoring new entry as an important source of bargaining power. In order to determine whether or not the threat of customers sponsoring new entry in the event of a price rise was credible, the parties undertook an in-depth investigation of the viability of entry in each port in which they operated. This was conducted both from the point of view of an entrant with similar costs to the incumbent in each port (i.e., Svitzer or Adsteam) and from the point of view of an entrant that could achieve lower costs by employing a non-unionised crew. This analysis showed that in the event that ‘cherry-picking’ entry occurred, the effect of loss of business volume to the incumbent meant that its average unit costs would increase significantly, making its business unprofitable. This strongly indicated that the threat of losing even a relatively small proportion of
SvitzerWijsmuller A/S and Adsteam Marine Ltd, a report on the proposed acquisition by SvitzerWijsmuller A/S of Adsteam Marine Ltd, 9 February 2007.
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business was likely to provide an effective constraint on the incumbent’s behaviour. On the basis of this analysis, and other evidence submitted by the parties, the CC concluded that Adsteam could not be considered a potential entrant into Svitzer’s ports, but that Svitzer could be considered a potential entrant to Adsteam’s ports (i.e., the merger would remove ‘perceived potential competition’ from Svitzer). However, Svitzer was by no means unique in this respect. There were a number of well-known international towage operators with existing business relationships with Adsteam’s customers, and with substantial expertise in the provision of harbour towage services, that could also be considered as potential entrants to the relevant ports. The threat of entry by these operators would continue to exert a constraint on the prices and service quality of the merged entity. The CC therefore concluded that the merger did not eliminate potential competition. (7)
In Heinz/HP, whilst the parties did not overlap in the supply of brown sauce, the OFT considered whether the merger would nevertheless result in a substantial lessening of competition in the retail sector in respect of brown sauce as a result of the removal of a competitive constraint.254 In this regard, there was evidence that Heinz tomato ketchup exerted a competitive constraint on HP sauce. In addition, the OFT considered that Heinz was a credible entrant into the brown sauce segment and was particularly well-placed to enter this segment given that it already had a brown sauce offering in the food service sector, it had an established reputation and perceived expertise in the sauce sector. Moreover, Heinz considered itself to be a credible entrant and had in the past considered the possibility of entry into this segment. On the basis of these factors, the OFT found that the merger resulted in a substantial lessening of competition in the brown sauce segment.
(8)
In Bucher/Johnston, Johnston’s market share of various road sweeper markets in the UK ranged from 40-50% to 70-85%, to which the increment of Bucher, the acquirer, was only 1-5% and 5-10%.255 However, Bucher was the market leader in Europe and there was credible evidence of its potential expansion into the UK and consequent threat to Johnston’s incumbency. The OFT’s decision notes that “the proposed merger would combine the market leader in the UK with its biggest EU competitor and – as evidenced by Bucher’s and Johnston’s own internal documentation – a potential competitor in the UK in the near future.”256
254
Anticipated acquisition by HJ Heinz of HP Foods Group, OFT decision of 26 October 2005. Completed acquisition by Bucher Industries AG of Johnston Sweepers Limited, OFT decision of 6 April 2005. 256 Ibid., para. 47. 255
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Unilateral Effects
12.6
UNILATERAL EFFECTS WITH MINORITY SHAREHOLDINGS
The theory of unilateral effects in horizontal mergers applies not only when one firm acquires or fully integrates with another but also where one firm takes a minority stake in another. Such acquisitions qualify as a relevant merger situation where the purchaser has acquired at least material influence over a target firm.257 However, from an economic perspective, there are some important differences in incentives which link closely to the size of the stake and the degree of control obtained.
12.6.1 The Economics of Minority Shareholdings In situations where Firm A takes a minority stake in Firm B without having the ability to influence Firm B’s pricing (or other) strategy, unilateral effects are less likely to arise, although cannot be ruled out without some prior analysis. This is best explained by comparing the acquisition by Firm A of: (i) a 100% controlling stake; and (ii) a minority non-controlling stake in Firm B. Recall the discussion in Section 12.2.3 above, which described how unilateral effects arise because when Firm A acquires 100% of Firm B, Firm A may have the incentive to increase its price. This is because prior to the merger, any customers switching to Firm B were ‘lost’, whereas this is not the case post-merger. By the same token, there would be an incentive for Firm A to increase the price of Firm B’s product, since any customer diverting from Firm B to Firm A would not be lost. The case where Firm A acquires a minority (i.e., less than 50%) stake in Firm B without control is different. Taking the preceding points in reverse order, because Firm A has no influence on the price set by Firm B, it has no ability to increase price so as to divert customers from Firm B to Firm A. The focus of concern would not, therefore, be that Firm B’s price would increase.258 Turning to the incentive for Firm A to increase its price, so doing means that even if customers switch to Firm B, the majority of their volume is ‘lost’. For example, if Firm A had a 25% stake in Firm B, it is ‘as if’ Firm A loses 75% of any custom switched to Firm B. Put another way, if the diversion ratio from A to B is 40%, but three-quarters of that volume can be thought of as ‘lost’ due to the minority stake, then it is ‘as if’ the diversion ratio is just 10%. Therefore, the incentive for Firm A to increase price is far smaller than when it ‘recaptures’ 100% of the value of any custom switched to Firm B (but greater than the case in which all
257
See Chapter 2 for a detailed explanation of material influence. In theory, B’s price might increase if A’s price were increased. The point is that focusing on the absence of an incentive for A to increase its price is sufficient. 258
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custom switched to Firm B is ‘lost’ entirely).259 In summary, partial shareholdings without control are far less of a concern than a full merger.260
12.6.2 The Authorities’ Decisional Practice (a) Sky/ITV. This was the first case under the Enterprise Act in which the OFT and the CC had considered unilateral effects in the context of an acquisition of material influence.261 In particular, Sky’s acquisition of only a 17.9% shareholding in ITV placed this very much at the lower end of the material influence spectrum and the merging parties strongly resisted through the proceedings that material influence had in fact been acquired.262 The OFT recognised that its analysis of such a shareholding would need to take into consideration that only material influence was being acquired, stating: “[i]n the context of the substantive assessment, the OFT takes the view that, it is not appropriate to treat the acquisition of material influence as equivalent to the acquisition of full control (de facto or de jure).”263 Nevertheless, the OFT considered that Sky may be expected to have a closer relationship with ITV than would otherwise have been the case and that the mechanisms by which Sky might be able to apply leverage to ITV’s decision-making included: (1)
blocking unrelated special resolutions, calling extraordinary general meetings (“EGMs”) and putting forward resolutions;
(2)
ceasing to be a “supportive shareholder” by, for example, publicly voicing criticism of and opposition to the ITV board and its strategic decisions;
(3)
choosing not to offer, withdrawing from, or worsening the terms of, any cooperative arrangements with ITV;
(4)
seeking to block strategic initiatives (either on its own or by lobbying for the support of other shareholders).264
259 There may also be some practical concerns that Firm A would not wish to divert custom to Firm B because, absent control over Firm B, it would not have influence over how the profit from those diverted customers was invested or redistributed back to Firm A. 260
For completeness, it is noted that in theory, if Firm A takes a tiny stake in Firm B but obtains full control, it may have the incentive to harm competition substantially. Specifically, suppose that Firm A takes a 1% stake in Firm B but, somehow, secures full control of Firm B, which produces a close substitute. Firm A could then shut down Firm B (without a material loss of profit, since it was only entitled to a 1% share of Firm B’s profit) and then gain substantially from any of Firm B’s customers that divert to Firm A. 261 Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc, Report to the Secretary of State for Trade and Industry, 27 April 2007. 262 See Section 2.4.4(b) for detailed discussion of the OFT’s material influence assessment in this case. 263 264
Ibid., para. 63. Ibid., para. 105.
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Unilateral Effects
In relation to these mechanisms, the OFT’s theory of harm was that Sky’s stake could reduce strategic rivalry between itself, a very strong competitor in certain pay TV markets, and ITV, which was the leading commercial free-to-air television broadcaster. The OFT considered that this could manifest itself in two ways. First, by way of the actual or threatened exercise of veto power on ITV corporate matters relevant to its strategic competitive direction. This concern arose from Sky’s potential ability to veto, frustrate or, at a minimum, critically delay actions that ITV had an incentive to pursue in its own interests but which might conflict with those of Sky. Secondly, it arose from a dampening effect on ITV’s incentives to engage in aggressive strategic rivalry with Sky. The OFT considered that this in part derived from the “common sense notion” that management of a company has a disincentive to engage in strategic competitive behaviour against its largest shareholder. At the extreme, the OFT considered that this could result in a tacit (or potentially explicit) understanding that ITV would not “attack” Sky’s position in pay TV.265 At Phase II, the CC’s main concerns were in relation to future funding for ITV and a potential lessening of competition in the all-TV market (i.e., free to air (“FTA”) and pay TV). In relation to ITV’s funding, the CC found that ITV’s financial position was such that in order to raise substantial funding for a major strategic project, it would be likely to need equity funding.266 Given the dynamic environment in which ITV operated, the CC considered it likely that the board would need to make major investments over the next two to three years and that a non-pre-emptive rights issue would be the only feasible or efficient funding mechanism for some investments.267 This would require a special resolution that Sky was able to block, thereby limited ITV’s ability to raise funds, ruling out some strategic options and affecting its ability to compete in the market for all-TV. The CC also found that, given the competitive constraint of the FTA offer on Sky’s services, and the importance of ITV within the FTA offer, Sky would have an incentive to influence ITV’s strategy in such a way as to minimise the constraint it offered to Sky.268 Therefore, the CC considered it likely that Sky would exercise its ability to influence ITV’s strategy so as to substantially lessen competition.269 (b) Ryanair/Aer Lingus. By July 2008, Ryanair had acquired a 29.8% shareholding in Aer Lingus.270 In relation to this acquisition, the OFT considered four theories of harm: (i) Aer Lingus had been or may be a weakened competitor, either directly through the use of the shareholding or indirectly through the existence of the shareholding: (ii) Ryanair may have had reduced incentives to compete against Aer
265
Ibid., para. 106. Acquisition by British Sky Broadcasting Group Plc of 17.9 per cent of the Shares in ITV Plc, Report sent to Secretary of State (BERR), 14 December 2007, para. 4.100. 267 Ibid., para. 4.102. 268 Ibid., para. 4.103. 266
269 270
Ibid. See Chapter 2, section 2.4.4(a) for a detailed assessment.
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Lingus; (iii) Aer Lingus may have had reduced incentives to compete against Ryanair; and (iv) tacit coordination may have been created or strengthened.271 Rather unusually, Ryanair’s share acquisitions had taken place around four years before the OFT’s investigation. Therefore, the OFT had access to evidence of events that had occurred since these acquisitions. However, the OFT was keen to emphasise two points. First, the OFT was still only required to show that the merger has resulted or may result in a substantial lessening of competition (“SLC”). It was not necessary for the OFT to show that an SLC had already occurred simply because the transaction had completed four years prior to the investigation. It was sufficient, for the reference threshold to be met, that the OFT had reasonable grounds to believe that an SLC may be expected to result from the merger going forward. Secondly, Ryanair had been involved in some form of merger control proceeding at all times since the acquisition. Therefore, the OFT could not exclude the possibility that Ryanair could have adapted its behaviour in the knowledge that the OFT might begin an investigation subsequent to the Commission’s proceedings. (i) Aer Lingus as a Weakened Competitor. The OFT examined the possibility that Ryanair could weaken the competitive constraint it faced from Aer Lingus by using its shareholding to worsen Aer Lingus’ competitive offering or otherwise diminish Aer Lingus as a competitor and whether Aer Lingus could be weakened by the mere existence of Ryanair’s shareholding. (a) Direct weakening of Aer Lingus. Ryanair submitted that this theory of harm could not be maintained since the vast majority of resolutions over the last five years could have had no conceivable impact on Aer Lingus’ commercial strategy. It argued that there could only be an impact on the competitiveness of Aer Lingus if relevant decisions required a shareholder vote and Ryanair could block those decisions with its shareholding. Ryanair highlighted the fact that it would have been unable to block the only resolution in the last five years that it believed concerned Aer Lingus’ commercial strategy (a $2.4 billion aircraft order). The OFT did not accept this view of the potential for Ryanair’s shareholding to affect Aer Lingus and considered that there were several ways in which this could be achieved. (1)
271
Special resolutions. Ryanair’s ability to block special resolutions enabled it to: (i) restrict Aer Lingus’ access to finance; (ii) influence the use of different types of finance and alter their relative cost to Aer Lingus; (iii) control the extent to which Aer Lingus could purchase its own shares; (iv) effect the determination of the price range for the re-issue of treasury shares off-market and the feasibility of re-issuing treasury shares; (v) effect and veto the terms of certain cross-border mergers; and (vi) block changes to the characteristics of the company, including a re-branding. Aer Lingus highlighted the issue of it being unable to waive pre-emption rights, which would give it increased
Completed acquisition by Ryanair Holdings plc of a minority interest in Aer Lingus Group plc, OFT decision of 15 June 2012, para. 132.
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Unilateral Effects
flexibility to raise funds – and was something that Ryanair had done at its 2011 AGM. (2)
Effective voting share. Ryanair’s effective voting share gave it the ability to block a disposal by Aer Lingus of Heathrow slots. Aer Lingus provided an example whereby it attempted to exchange a Heathrow slot with another airline when it was setting up a base at Gatwick Airport in 2009, for which it required slots. This option was ultimately not pursued as Aer Lingus believed that Ryanair would have blocked the arrangement. These slots are extremely valuable with a single slot pair being worth around £30-50 million in 2012.
(3)
Ordinary resolutions. Aer Lingus provided several examples of Ryanair attempting to interfere with its commercial policy, including Ryanair: (i) attempting to disrupt Aer Lingus’ exit from the Shannon/Heathrow route and reallocate capacity to Belfast; (ii) opposing Aer Lingus’ £2.4 billion acquisition of aircraft in 2008; and (iii) attempting to force Aer Lingus to surrender its lease at Hangar 6 at Dublin airport in 2010, which could have significantly increased Aer Lingus’ cost base. All of these examples of interference were considered to cause a distraction to management time. Whilst Ryanair was ultimately unsuccessful in its efforts, the OFT noted that it was very close, on the basis of effective voter turnout, to achieving an outright majority at Aer Lingus’ most recent AGM – it required around an additional 2.9% of issued share capital or around 4% of the effective vote.
As a result of these strategies, the OFT considered that Ryanair could reduce Aer Lingus’ flexibility to operate different routes into and out of London. For example, if Aer Lingus wanted to transfer more capacity out of Heathrow into Gatwick to compete more directly against Ryanair, Ryanair could block the disposal of Heathrow slots and affect Aer Lingus’ ability to compete against it. The OFT considered that the effect of these types of restrictions may be felt on both overlap and non-overlap routes and that freed from such constraints Aer Lingus might be a more active competitor. On this basis alone, the OFT considered that the test for reference was met.272 (b) Indirect effect of Aer Lingus. The OFT considered that the mere existence of Ryanair’s shareholding might have impeded Aer Lingus’ commercial/strategic options. This could manifest itself in deterring other airlines from acquiring or investing significantly in Aer Lingus.273 The OFT noted both a UK merger control case and an EU abuse of dominance case in which this theory of harm had been considered.274 Third parties also indicated that this might be the case, with one describing Ryanair’s shareholding as a “poison pill”. Aer Lingus put it to the OFT that Ryanair had the ability to act as a “gatekeeper” to Aer Lingus by putting off potential 272 273
Ibid., para. 176.
Ibid., para. 178. Stora Kopparbergs AB/Swedish Match NV, and Stora Kopparbergs Bergslags AB/The Gillette Company: a report of the merger situations, March 1992 and Cases IV/33.440, WarnerLambert/Gillette and Others, and IV/33.486, BIC/Gillette and Others, 10 November 1992. 274
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buyers (by blocking schemes of arrangement and/or being a disruptive shareholder) who might constitute a greater threat to Ryanair. The OFT also noted that the threat of takeover provides an incentive to management to be as efficient as possible and helps align the interests of managers and shareholders. Managerial discipline may worsen as the threat of takeover decreases. Therefore, the OFT was concerned that Ryanair’s shareholding impeded or removed this effect. As regards the effect on competition that might result from this, if another airline acquired or merged with Aer Lingus, it might be able to compete more strongly against Ryanair. In this scenario, Ryanair’s shareholding might weaken Aer Lingus as a competitor. In relation to the likelihood of such an event, the OFT noted the significant amount of consolidation that has occurred in the aviation industry and that there might be a minimum efficient scale in the industry which might be significantly higher than Aer Lingus’. In addition, many of the strategic options around an acquisition or merger might require shareholder approval, including by special resolution, giving Ryanair the potential to block them. Aer Lingus might also become less efficient as a result of the decreased likelihood of a takeover and might therefore compete less effectively on routes where it overlaps with Ryanair. It might also affect management’s willingness to enter routes on which there is currently no overlap with Ryanair but on which Aer Lingus is the most likely entrant. On this basis, the OFT considered the reference test to be met. (ii) Ryanair’s reduced incentives to compete. The essence of this theory of harm is that Ryanair could unilaterally deteriorate its competitive offering below that which would be offered in the absence of its minority shareholding in Aer Lingus. In the event that Ryanair lost customers as a result of this deterioration, some of these customers would divert to Aer Lingus, in which case Ryanair would re-capture a proportion of the value of those lost customers that divert to Aer Lingus. The competitive variables that Ryanair could flex included price, levels of investment, capacity, range of routes, entry and exit decisions, and quality of service.275 Ryanair argued that the intense competitive interaction between the two companies since its acquisition of the minority shareholding disproves this theory of harm. In particular it highlighted internal documents, press releases, advertising and a history of dealings between the parties which indicated aggressive competition between the companies. In addition, Ryanair submitted, inter alia, that it did not have the necessary information, such as Aer Lingus’ profit margins on overlapping routes, to pursue such a strategy should it want to do so. Without such information, Ryanair argued that it could not ascertain the incremental profit impact of diminishing its own competitive offering. The OFT accepted that Ryanair was operating with information constraints but considered that this was not substantially different from ordinary competitors in the market place who would not have access to information such as costs, volumes, pricing structures, profits. Moreover, the OFT did not consider it necessary for Ryanair to have full access to, or transparency over, Aer Lingus’ profit margins in order to develop its
275
Completed acquisition by Ryanair Holdings plc of a minority interest in Aer Lingus Group plc, OFT decision of 15 June 2012, para. 203.
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optimal pricing strategy (although the OFT did not explain how Ryanair might have achieved such an “optimal” pricing strategy without such information). Ryanair also argued that it had limited ability to appropriate any of the incremental profits that Aer Lingus benefited from as it had no control over Aer Lingus. In addition, Aer Lingus had not historically paid dividends to its shareholders – although Ryanair had made several requests for it to do so. This policy was set to change from 2012 at which point Ryanair would have benefited. The effect of any reduction in Ryanair’s competitive offering could have occurred on overlapping routes where Ryanair and Aer Lingus represented a significant share of passengers and where the diversion ratio would be greatest. On this basis, the OFT considered the test for reference to be met in relation to this theory of harm. (iii) Aer Lingus’ reduced incentives to compete. The basis of this theory of harm was that if Aer Lingus were to diminish its competitive offering, Ryanair would benefit from the additional profit margin that it would gain on Aer Lingus’ retained passengers (assuming a dividend was paid) as well as from those passengers that switched away from Aer Lingus to Ryanair, which, given the duopoly routes between the parties, was likely to be high. Therefore, Ryanair had an incentive to encourage Aer Lingus to diminish its competitive offering. The OFT noted a reduced competitive constraint being offered by Aer Lingus since Ryanair’s acquisition and a shift in its business model away from competing head-to-head with Ryanair on price. Aer Lingus had also exited from direct competition with Ryanair on a number of routes between the UK and Ireland. However, the OFT did not find it necessary to conclude on this theory of harm, given its findings in relation to the other theories of harm. (iv) Coordinated Effects. The OFT assessed the possibility for the minority shareholding to give rise to coordinated effects.276 In this regard, the OFT noted that the existence of significant structural links between firms in a market, such as crossshareholdings, might assist in reaching and monitoring the terms of coordination. In this case, the OFT considered that such a cross-shareholding could reduce Ryanair’s incentives to deviate from, and to punish deviations from, a coordinated outcome, and to facilitate the sharing of information between the parties. In relation to incentives to deviate, the benefits to Ryanair of coordination through its minority shareholding were increased, any deviation from a coordinated outcome would be less profitable for Ryanair, and punishment of Aer Lingus would be less beneficial to Ryanair. Ryanair submitted that as its cost base was lower than Aer Lingus’, it would always have an incentive to deviate as it could profitably price below Aer Lingus’ marginal cost. The OFT acknowledged that Ryanair had an incentive to deviate but considered that this failed to take into consideration the acquisition of the minority shareholding. Ryanair had an incentive to deviate prior to the acquisition, but the OFT considered that the effect of the shareholding, by linking the profitability of Ryanair to Aer Lingus, reduced this incentive. A coordinated outcome would result in larger joint profits. Indeed, the OFT also noted that it was Ryanair’s incentives to deviate that changed as a
276
Ibid., paras. 254 et seq.
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result of the acquisition, given that it had a greater ability and incentive to deviate absent the transaction. In relation to the sharing of information, the OFT considered that Ryanair’s shareholding might facilitate this and provide a forum through which the management of the firms could communicate, thereby increasing the ability to determine a focal point, monitor deviations and detect punishment from a coordinated outcome.277 In this regard, Aer Lingus provided several examples of Ryanair attempting to obtain commercially-sensitive information from Aer Lingus, on intentions regarding fuel surcharges and expectations in relation to future yields, that could facilitate coordination. The OFT also considered that by virtue of Ryanair’s shareholding the exchange of information might be increased as a result of meetings with Aer Lingus management, the potential for Aer Lingus’ management to adapt to the shareholding and to pursue tacit coordination, and the fact that Ryanair could ultimately obtain a seat on Aer Lingus’ board. At Phase II, the CC focused on Ryanair’s incentives to use its influence to weaken Aer Lingus’ effectiveness as a competitor and the various mechanisms through which Ryanair’s shareholding might influence the commercial policies and strategies available to Aer Lingus.278 In this regard, the CC specifically addressed the issue of its burden of proof in relation to material influence cases. Ryanair had argued that the CC had an “exceptionally heavy burden of proof” in this case because of the European Commission’s decision in relation to Ryanair’s full bid, the fact that Ryanair had only acquired a minority shareholding, and the time that had passed since this acquisition.279 The CC disagreed stating that “the fact that the case concerns a minority shareholding rather than full control does not alter the burden of proof.”280 In relation to Ryanair’s incentives, the CC found that the parties were close competitors, with both airlines’ actions having a significant impact on each other, and, on many routes, the parties were the only operators present. As a result, the CC considered that this closeness of competition implied that Ryanair would be likely to benefit significantly from a weakening of Aer Lingus’ effectiveness as a rival, as passengers diverting away from Aer Lingus would be likely to use Ryanair’s services.281 However, the CC recognised that as a partial owner of Aer Lingus, Ryanair would also have a financial interest in it. Accordingly, Ryanair would not be expected to take every action that would weaken Aer Lingus’ effectiveness as a competitor, without considering the cost to itself. Rather, the CC considered that Ryanair would
277
Ibid., para. 270.
278
Ryanair Holdings plc and Aer Lingus Group plc, a report on the completed acquisition by Ryanair Holdings plc of a minority shareholding in Aer Lingus Group plc, 28 August 2013, para. 7.12. 279 Ibid., para. 7.14. 280 281
Ibid. Ibid., para. 7.17.
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use its influence in a way that best served its interests as both a shareholder and a competitor.282 In relation to the mechanisms that Ryanair might employ to affect Aer Lingus’ commercial policy and strategy, the CC considered whether Ryanair would: (1)
affect Aer Lingus’ ability to participate in a combination with another airline;
(2)
hamper Aer Lingus’ ability to issue shares to raise capital;
(3)
influence Aer Lingus’ ability to manage effectively its portfolio of slots at London Heathrow;
(4)
influence Aer Lingus’ commercial policy and strategy by giving Ryanair the deciding vote in an ordinary resolution; and
(5)
allow Ryanair to raise Aer Lingus’ management costs or impede its management from concentrating on Aer Lingus’ commercial policy.283
The CC concluded that Ryanair would be able to employ one or more of these mechanisms, effectively resulting in a substantial lessening of competition. In particular, the CC found that Ryanair could use its minority shareholding to prevent or impede Aer Lingus from being acquired by, merging with, entering into a joint venture with or acquiring another airline.284 The CC identified a number of ways in which this could manifest itself, including Ryanair’s minority shareholding acting as a deterrent to other airlines considering a combination with Aer Lingus, or by allowing Ryanair to block a special resolution, which could restrict Aer Lingus’ ability to issue shares (which might be required for a corporate transaction or to optimise its capital structure). Absent Ryanair’s shareholding, the CC concluded that it was likely that Aer Lingus would have been involved in the trend of consolidation observed across the airline industry, which had the potential to provide significant benefits to Aer Lingus by increasing its scale and reducing its unit costs, thereby enabling it to become a stronger and more effective competitor against Ryanair.285 In addition, the CC found that Ryanair’s shareholding could impede Aer Lingus’ ability to manage effectively its slot portfolio at Heathrow, which could restrict it from optimising its route network and timetable across London airports.286 The CC considered that it was likely that it would continue to be in Aer Lingus’ commercial interests to adjust its existing slot portfolio and that Ryanair would have an incentive to prevent or impede such changes where they were likely to strengthen Aer Lingus and enable it to compete more effectively against Ryanair.
282
Ibid., para. 7.18. Ibid., para. 7.23. 284 Ibid., para. 7.178. 283
285 286
Ibid. Ibid., para. 7.180.
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12.7
551
CLOSENESS OF SUBSTITUTION: EMPIRICAL TECHNIQUES AND TESTS
Having set out above the importance of the closeness of substitution in theory, this section describes many possible ways to assess closeness of substitution in practice. As before, ‘products’ are referred to for convenience – the techniques apply also for the analysis of closeness of substitution of competing services. The following issues are discussed in this section: (1)
A discussion of the use of survey evidence to assess closeness of substitution and, in particular, diversion ratios.
(2)
A selective note on empirical techniques, including measuring own and cross price elasticities using econometric techniques.
(3)
Using examples of price promotions, entry events and other ‘impacts’ to assess closeness of competition.
(4)
Price concentration and margin concentration studies.
(5)
Analysis of bidding and win/loss data.
(6)
Issues in inferring wholesale switching behaviour from consumer level data.
12.7.1 Customer Survey Evidence Customer surveys are frequently employed to elicit information on previous behaviour (e.g., past switching) and possible future behaviour (e.g., switching responses to hypothetical price rises or store closures). In particular, consumer surveys have been employed in numerous retail mergers to estimate the diversion ratios between brands of the merging parties.287 This section describes some issues that arise when designing and interpreting survey evidence on closeness of substitution, focusing in particular on the use of survey evidence in retail mergers.288 (a) Survey structure. A typical survey might be structured as follows. First, there are screening questions to ensure that the person meets some predetermined criteria. Second, the ‘main survey’ questions are asked (e.g., on purchasing and switching behaviour). Finally some demographic questions on age, sex, income and other factors are posed, to permit the analyst to test for representativeness. (b) Types of surveys, representativeness and choice of locations. There are many types of surveys – exit, telephone, online or a combination thereof. Each type may 287
Competition Commission and OFT, Commentary on Retail Mergers, (2011) para. 4.12. Survey evidence on switching is also available from household panels, although often such evidence is not explicitly linked to switching following price changes. See, for example, Completed acquisition by Diageo plc of United Spirits Limited, OFT decision of 25 November 2013, paras. 89-91. 288
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have pros and cons in terms of cost, timing, the ability to obtain a representative sample and the risk of biased responses. In order to place weight on survey results, the CMA will wish to be sufficiently confident that the results are representative. For example, the age, sex or income distribution of the survey respondents can be checked against that known to shop at each of the merging parties. If need be, results may be rescaled to give appropriate weight to certain ‘under-represented’ demographics. In Poundland/99p Stores,289 at Phase II the CMA carried out face-to-face interviews in 15 local areas with 5,459 customers of the Parties as they were leaving either a Poundland or 99p store (obtaining a minimum of 150 responses per location). The 15 areas were chosen from the 80 areas where Phase I (local) SLCs could not be ruled out. The areas were also chosen with a view to obtaining a broad mix of competitors, expected diversion ratios, urban/non-urban locations and distance between the Parties. The survey was therefore informative as regards the local areas surveyed and considered to shed light on constraints placed by certain types of retailers; however, it was not representative on a national basis (being focused on areas of high concentration). Participation in the survey was not incentivised. The survey response rate was 32%.290 In the same case at Phase I, the CMA had criticised the representativeness of the merging parties’ online survey on the following grounds. First, the survey was issued by printing an invitation to complete an online survey on till receipts and cards handed to those leaving the shop (with a free iPad offered as an incentive). Although there were 60,000 respondents (i.e., a very large sample size), this reflected only 0.3% of the total number of receipts printed. According to the merging parties, accounting for repeat shoppers raised this figure to 1%, but this was still deemed too low to eliminate non-response bias. The CMA stated that it is cautious of giving weight to surveys with a response rate of less than 5% due to response bias potential. Secondly, the CMA noted that while the merging parties had conducted a telephone survey (with 402 respondents) in order to validate the results of the initial online survey, the estimated diversion ratios were higher from the telephone survey, and the demographics were substantially different too. The CMA interpreted this to reflect non-response bias in the online survey. Put another way, the CMA considered that the 289
A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015. See in particular Appendix D which provides an interesting discussion of a number of potential problems that may have impacted on both the parties’ and the CMA’s surveys. 290 Ibid., paras. 2-3 and 12. The objectives of the survey were to: (a) understand some of the characteristics of Poundland and 99p customers, such as their demographic information; (b) identify the appropriate area over which competition took place between relevant retailers by understanding the time customers took to travel to the store, where they travelled from and whether visiting either Poundland or 99p was the main reason for their journey; (c) understand the shopping behaviour of Poundland and 99p customers, such as how often they used the stores and their reasons for shopping there; (d) test the validity of Poundland’s survey, specifically the extent to which diversion ratios estimated from Poundland’s survey may have suffered from bias; and (e) measure the extent and nature of diversion from Poundland or 99p in the event that the branch visited and all the retailer’s other branches were closed for several months for refurbishment.
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non-respondents were not ‘random’ but rather systematically likely to be a certain type of consumer. This may have been borne out by the CMA’s Phase II exit survey which found that 21% of the merging parties’ customers (much higher than the national average of 12%) reported that they never went online; these customers would not therefore respond to an invitation to complete an online survey. The CMA inferred that its own survey was likely to be more accurate than the merging parties’ surveys, in particular as regards estimated diversion ratios, although it noted that there was no way of reliably benchmarking the demographic profile of Poundland and 99p Store customers.291 In contrast, in Greene King/Spirit,292 the CMA did place weight on an online survey with a relatively low response rate, using the survey for assessing the effective competitor set both in terms of product and geography and its local area analysis. In TOBC/Bowlplex, the CMA queried the representativeness of the telephone survey (e.g., whether a sufficient share of walk-in customers were captured) although ultimately placed weight on it, noting features that meant that diversion ratios might be understated (including that respondents might have overstated diversion to the outside good, see the discussion of framing effects below).293 In Celesio/Sainsbury’s Pharmacy, the aim was not to achieve representativeness as such but to obtain sufficient information to test potential filtering methodologies, given the large number of overlaps in question.294 It is submitted that an exit survey does not ‘trump’ an online survey, just because an exit survey is conducted in store. There are a number of features that may cause bias in an exit survey, including that fact that asking consumers questions when exiting a retail store may prime them to give lower weight to online options that they would have used. It is important to have a good idea of the true underlying distribution of shoppers 291
Ibid., Appendix D, paras. 12, 19-26 and 29. Anticipated Acquisition by Greene King plc of Spirit Pub Company plc, CMA decision of 11 May 2015, see, for example, para. 78: the Parties selected the 40 pubs at which to conduct the survey in order to have groups of pubs at different points on a market concentration scale and focused on pubs along the scale which had the highest number of guest records in order to maximise the chance of getting a statistically robust sample. Whilst this may have biased the selection of pubs towards larger sites, the CMA noted that it did not receive any evidence suggesting that competitive dynamics vary significantly between small and large pubs. 293 Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 36. 294 Research into merger between Celesio and Sainsbury’s Pharmacy Report prepared for: Competition & Markets Authority, DJS Research, February 2016. The areas were selected to include areas where no information was available on implied diversion ratios. In addition, a disproportionate number of areas with a high concentration of the parties’ pharmacies were selected to be surveyed. The aim was to choose areas where parties were likely to be close competitors, whilst still selecting some areas where they were not expected to compete closely. Interviews were completed at 32 stores across 16 areas chosen by the CMA. At least 100 responses were obtained and the response rate was unusually high at 53% compared to other retail exit surveys. At the time of writing, this Phase II investigation was not finished. 292
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(i.e., their age, gender, income, etc) and then assess the extent to which the survey is (or can be rescaled to be) representative. The use of a combination of exit and online surveys may assist in that scaling exercise or as a way to sensitivity check (or provide a range for) the diversion ratios of interest. (c) Eliciting diversion ratios via a ‘single store closure’ question. The Authorities have used several ‘diversion questions’ in order to attempt to elicit a diversion ratio. The most commonly employed question is the ‘single store closure’ question (the term ‘single store’ is used as the hypothetical closure relates only to the store at which the consumer shopped), which is posed along the lines of: “If you had known before you set out today that [merging party’s store] was closed for several months for refurbishment, what would you have done instead? (1) Bought all of the items somewhere else; (2) bought some of the items somewhere else; (3) not bought any of the items.”295 Where consumers indicate that, as a result of the store closure, they would instead have purchased somewhere else (options (1) and (2) above), they are asked to identify their next best alternative (e.g., a rival store or online site). Where consumers indicate that they would have not purchased the good at all (option (3)), they are deemed to choose the ‘outside good’. For example, consider a hypothetical supermarket merger. If a large percentage of customers (or customer spend296) of supermarket A respond that they would shop at a nearby supermarket B, were supermarket A’s store to close, this would give an indication that (in this locality at least) firm B is a close substitute to firm A. It should be noted, however, that a store closure is, in effect, an ‘infinite’ price increase, i.e., a price rise to which all consumers (both marginal and infra-marginal) would be expected to respond. If the theory of harm is that the merger would give rise to a small price rise (as opposed to a store closure) then the survey responses may not adequately reflect the behaviour of marginal consumers (i.e., those who would respond to a small increase in price).297 This would be the case if there was good reason to believe that 295 On phrasing the diversion ratio question, see, for example, The Rank Group Plc/Gala Coral Group, a report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, CC decision of 19 February 2013, Appendix C, para. 30, identifying how the question should reflect the actual time and circumstances when the respondent took the decision to visit the site in question. 296 The diversion ratio can be based on the number of consumers who switch or the amount of spend that would be switched. 297 In A report on the anticipated acquisition by Sportech plc of the Vernons football pools business from Ladbrokes plc, CC decision of 11 October 2007, the Competition Commission considered this point. When discussing one of the several available surveys, it noted: “GfK survey asked respondents what they would do if their main operator was no longer available; 24% said that they would play with another pools operator. Swift 2 asked a similar question and found that [around 30]% (Littlewoods customers) and [around 30]% (Vernons customers) would play with another pools operator. The diversion ratios implied by these results probably overstate the extent of substitutability between Littlewoods and Vernons, as a proportion of customers will be avid or inert players of the pools, and while they may be willing to move to another operator if their current provider ceases to offer a service,
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infra-marginal consumers would behave differently to marginal consumers.298 On the other hand, if there is no good reason to expect the rankings of alternative stores to vary systematically between more or less price (or quality) sensitive consumers, the response of the average consumer could be a reasonable proxy for the response of the marginal consumer.299 (d) Eliciting diversion ratios via hypothetical price rise questions. In theory, instead of asking a single store closure question, respondents could instead be asked about how they would respond to a hypothetical price rise at that store: “had you known before you set out today that the price(s) of the item(s) you purchased would have been 5% greater than they were today, what would you have done instead?”300 The Authorities have tended to avoid asking this ‘5%’ question fearing that many consumers have difficulty answering questions that require them to calculate percentages in their heads. For example, consider a merger of two retail book stores; suppose that, having purchased a book for £6.95 at store A, a consumer is asked: “would you have purchased that book if it had been 5% more expensive?” In this case, the consumer has to work out 5% of £6.95 (i.e., about £0.35), add this amount back to £6.95 (i.e., about £7.30), and then assess whether or not the purchase would have been made. For many respondents this could be difficult to do on the spot. As an alternative, consumers could have been asked if they would have bought the book if it had been £0.35 more expensive – that avoids asking about a percentage price rise. However, depending on which book was purchased, the implied percentage rise could be quite different: £0.35 implies a 10% rise if the book cost £3.50, or just a 2% rise if the book cost £15.99.301 So if the aim is to elicit responses to a small percentage price
they are less likely to switch in response to a worsening in terms...” Annex F. 298 To see how the reactions of marginal consumers may differ from the average consumer, note the following example. Suppose that supermarket A targets higher income consumers with a combination of higher price, higher quality groceries. If store A closed, most of its former consumers might switch to another nearby store, B, with a similar price-quality proposition. However, if prices rose by a small amount, the most price sensitive consumers might leave store A, and, if so, they may go to a supermarket C, that is more price-focused. Alternatively, if quality at store A fell by a small amount, the marginal consumer might be a different type (one that is more quality-focused). In principle, these consumers might switch to store D where quality is the main selling point. 299 See A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015, Appendix D, para. 12g and Joint OFT and CC, Good practice in the design and presentation of consumer survey evidence in merger inquiries, p33, footnote 5. 300 See A report on the completed acquisition by Cineworld Group plc of City Screen Limited, CMA Decision of 8 October 2013, Appendix D, where survey questions elicited diversion based on both hypothetical price changes and store closures. 301 This problem is potentially greater where consumers purchase a wide range of different products, as in the case of groceries. In this case, there is no clearly identifiable product for which to apply a price rise.
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rise, asking about a given pecuniary increment may be appropriate only where products entail a very similar level of expenditure. (e) Rebasing diversion ratios to exclude within portfolio switching. It is “standard CMA practice [to exclude] own party diversion from the denominator of the diversion ratio calculation”.302 It is submitted, however, that this is inappropriate in the case of calculating a diversion ratio for a single store (or for a single brand). The intuition is as follows. Suppose that there are two stores in the same chain – A1 and A2. Suppose further that if store A1 was closed, 94% of consumers would switch to store A2 (in the same chain), whilst only 3% would switch to rival store B, 1% to rival store C, 1% to rival store D and the remaining 1% would ‘leave’ the market. Here, whilst store B captures 50% of switching that does not go to store A2, store B is a very weak constraint on store A1. If the diversion ratio is rebased to exclude ‘own party diversion’ (i.e., to exclude switching from A1 to A2) then the estimated diversion ratio from A1 to store B increases from 3% to 50% and so is grossly overstated. In some cases, rather than rebase the diversion ratio, the CMA asks a further question to consumers who indicated that they would switch to another store of the merging party. Specifically, they are asked to imagine a situation where all of the merging parties’ stores were closed. This is similar to rebasing the diversion ratio. In the example above, if those who stated A2 to be the next best alternative to A1 where then asked which store they would choose if A2 were not available, it may be that 50% of them would say store B. However, as above, this would not be a true measure of the diversion ratio; on the contrary, it would substantially inflate it.303
302
A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015, Appendix D, para. 15. This approach was also taken in, for example, Completed acquisition by Edmundson Electrical Limited of Electric Center, OFT Decision of 11 May 2012, note 44; Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, note 16 and, in relation to brands, AG Barr/Britvic at Phase I but not Phase II (as is discussed below). See also A report on the completed acquisition by Cineworld Group plc of City Screen Limited, CMA Decision of 8 October 2013, Appendix D, para. 15. 303 See, e.g., Reckitt Benckiser/K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015, 12 August 2015, para. 27 et seq. The CMA denoted consumers to be ‘infra-marginal’ if, when a K-Y brand was unavailable, would switch to another K-Y brand. It rebased diversion ratios to exclude such ‘own party diversion’ and denoting the resulting estimates to be diversion ratios for ‘marginal’ consumers. The CMA then asked another question to ‘infra-marginal’ consumers, forcing them to switch away (i.e., K-Y users were not permitted to choose another K-Y brand). The CMA combined the responses from ‘infra marginal’ and ‘marginal’ consumers to produce another set of diversion ratios. An argument can be made that the CMA relied on inflated diversion ratios in this case due to the use of rebasing diversion ratios; in the same way that rebasing inflates diversion ratios for a single store, it can be argued to have the same effect when the concern relates to a single retail channel (as was the case here). In Celesio/Sainsbury’s Pharmacy, respondents were also asked not only what they would do if their preferred pharmacy was permanently closed but also what they would do if (for Lloyds/Sainsbury’s users respectively) all Lloyds/Sainsbury’s pharmacies were closed (Research into merger between Celesio and Sainsbury’s Pharmacy Report prepared for: Competition & Markets Authority, DJS Research, February 2016; at the time of writing, this Phase II investigation was ongoing).
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In essence this issue arose in AG Barr/Britvic.304 In this case, the Authorities focused on the incentive to increase the price of IRN BRU, owned by AG Barr. AG Barr also owned other brands of soft drinks, including Tizer. At Phase I, when estimating a diversion ratio from IRN BRU to other drinks, the OFT did not treat diversion to other AG Barr brands as lost volumes (i.e., it rebased diversion ratios to exclude such switching, analogous to ignoring diversion to store A2 in the example above). The merging parties argued that this was erroneous and unduly inflated the estimated diversion ratio (and included a mathematical proof of their claim); at Phase II the CC agreed with the merging parties and included ‘own party diversion’ as part of lost volumes when measuring the diversion ratio.305 (f) Margin of error. It is helpful to understand the margin of error around the survey estimate for the diversion ratio. One cause of error (other than any possible bias created by the way the survey is designed) comes from having a small sample size. Broadly speaking, the smaller the sample size of those who state they would switch, the less reliable the implied diversion ratios. To deal with this issue, statistical techniques may be employed to establish a ‘confidence interval’ around an estimate. That is to say, rather than thinking of the survey as providing a ‘true’ diversion ratio, the analyst may instead claim that the data obtained indicate that the diversion ratio is most likely to lie within a certain range. The CMA would be expected to use a 95% confidence interval, meaning that there is only a 5% probability that the true sample statistic lies outside the range provided.306 The survey company commissioned to undertake the survey may, if asked, provide such information. Alternatively, the following formula may be used to construct a confidence interval. First, define N to be the sample size and P to be the probability estimated from that sample (the ‘sample statistic’). For example, if there are 100 respondents who say that they would purchase from another store if they had known, before setting out, that their preferred store (Store A) was closed then N = 100. Further, if 20 of those respondents state that their next best alternative store is Store B, then P = 20% (i.e., 20/100). Second, check that N and P meet the two requirements to use this formula in question: N*P ≥ 10 and N*(1 – P) ≥ 10. That is satisfied in this example because N*P = 20 and N*(1 – P) = 80. Third, calculate the ‘standard error’, S, as follows: S = √(P*(1 – P)/N). In this example, this is √(20*80/100) and so S = 4. Fourth, choose a ‘multiplier’ for the standard error which matches the preferred confidence level. For 90%, use 1.65; for 95% use 1.96; and for 99% use 2.58. Finally, multiply S by the confidence level multiplier; this gives the margin for error around the sample statistic. So, in this case, at the 95% confidence level, the margin for error is equal to the sample statistic (20%) plus or minus (1.96*S =7.84). It can be said “with 304 AG Barr plc/Britvic plc, a report on the anticipated acquisition by AG BARR plc of Britvic plc by means of an all-share merger, 9 July 2013. 305 The CC stated: “The theory expects diversion ratios to be measured over products, not over firms, and we therefore agreed with the parties in their main submission and chose the first measure, with no rebasing of the denominator.” Ibid., Annex 5, para. 7. 306 See, e.g., Reckitt Benckiser/K-Y brand, a report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, 12 August 2015, Appendix F, note 1.
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95% confidence” that the diversion ratio from A to B lies between 12.16 and 27.84. All else equal, as the sample size increases, the margin for error becomes smaller. (g) Extrapolation of diversion ratios from surveys. In Thomas Cook/Cooperative,307 the CC calculated diversion ratios in the areas where it had undertaken surveys. It then estimated a logit model; diversion ratios were estimated as a function of other travel agents present in the local area and other local characteristics (such as population and unemployment). This model was then used to predict diversion ratios for particular stores and/or areas of interest.308 (h) Selected issues in consumer survey design. It is important that survey questions are constructed carefully so as to be easy to understand, unambiguous and free from bias. There is no scope here to go through all aspects of optimal survey design, however, some of the more common issues that may arise in consumer surveys used in a merger setting are noted below. (Where time and budget permit, it is good practice to use a pilot survey to identify potential problems with the survey design.)309 (1)
The ordering of questions can lead to systematic biases in responses.310 For example, in TOBC/Bowlplex, the CMA was concerned that presenting respondents with a list of ‘outside option’ alternatives shortly before being asked a diversion question, and not reading out these alternatives in a random order, introduced the following bias risks: (a) the alternative leisure options question may have conditioned respondents to think about a number of leisure activities ahead of the diversion question, potentially biasing the diversion results; and (b) the alternative leisure options question may have biased respondents toward the alternatives identified first in the list (i.e., cinemas, meal out, pub/drinks).311
(2)
Responses can be sensitive to the use of the language in the question. For example, compare: (i) “Had you known today, before you set out, that this book store had been closed, would you have looked for this book in another store? If so, where?” and (ii) “Had you known today, before you set out, that this book store had been closed, would you have looked for this book somewhere else? If so, where?” In the first case, the respondent is prompted to think of “another store” (potentially leading to the internet being understated
307 Thomas Cook/Co-operative Group/Midlands Co-operative merger inquiry, a report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, 16 August 2011. 308
Ibid., Appendix B, para. 141 and paras. 147-155. This section draws in part on Good practice in the design and presentation of consumer survey evidence in merger inquiries, March 2011, OFT1230/CC2com1, which provides greater detail on the Authorities’ view on good practice techniques. 310 The Authorities state that substantive questions should be ordered to match as closely as possible the sequence of the purchase decision being investigated – usually being easiest for the respondent if matters of fact are probed first, then matters of behaviour, then preference, then attitude. Ibid., para. 3.25. 311 Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 39. 309
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as an alternative). In contrast, the second formulation of the question is more neutral.312 (3)
Questions should not be confusing or difficult to answer accurately. In Poundland/99p Stores, the CMA criticised the merging parties’ survey for its question design. Rather than asking whether an individual would divert their basket of goods as an aggregate, the parties asked where they would divert each individual item in their basket and to which rival. This was deemed by the CMA to be potentially confusing, and this confusion would reduce the accuracy of the calculated diversion ratios.313 In Optimax/Ultralase, the CC was concerned that questions might be hard to answer accurately due to the nature of the purchase and the fact that the merger had been already completed.314 In Rank/Gala, the CC considered it problematic to identify the right question to identify how casino customers would respond to a small worsening of the overall offer.315
(4)
In relation to questions on diversion patterns, the Authorities state: “Questions asking about diversion options for a product or service should be designed and tested to ensure that they provide response scales that cover all possible options, sometimes by including and analysing an “Other (please specify)” option. If the aim of the survey is to estimate the proportions of sales revenue that would divert to various options in a hypothetical situation, it will be important to ask consumers about the most recent, or the typical, values of the
312
A similar issue arose in Thomas Cook/Co-operative Group/Midlands Co-operative merger inquiry, a report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, 16 August 2011, para. 9.25. 313 Poundland and 99p, a report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, 18 September 2015, Appendix D, para. 27. 314 A report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, CC decision of 20 November 2013. See, for example, para 6.57, which states: “(a) We excluded customers who purchased services after the merger but some existing Ultralase customers were likely to have diverted to Optimax for aftercare when their clinic was shut (many Ultralase clinics were closed following the merger). This would have increased their awareness of Optimax’s brand and therefore may have biased their response to the diversion question. (b) Many respondents (almost 50 per cent) said that they would have gone to another supplier but did not know which one. This makes reliable diversion ratios difficult to calculate. (c) The surveyed sample covered customers who received treatment before the merger (November 2012). Given the time since the treatment and the hypothetical nature of the question, responses may not reliably reflect customers’ views at the time the decision over the supplier was made. (d) Suppliers’ names in this industry are often similar one to another (e.g. Ultralase, Optilase, Visualase) and this may create confusion among customers, especially when they are asked to remember which alternative suppliers they considered, (but ultimately did not use) several months before. Although we tried to address these issues through careful design of the customer survey we recognize the diversions calculated from the survey are still problematic.” 315 A report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, CC decision of 19 February 2013, Appendix C, paras. 19-25.
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purchases they have made”.316 An important point here is to allow the respondent the option not to purchase or to ‘leave’ the market. (5)
Where respondents are given a set of options from which to choose (e.g., to identify what sellers consumers view to be alternatives to those of the merging parties), it can be important to randomise the order in which they are presented. For example, in the context of a phone or a person to person interview, responses can be sensitive to the ordering of the options read out to them. People tend to remember the last items on the list, a problem often referred to as the ‘recency effect’.317 This might lead to different answers depending on how options are ordered, which may create a systematic bias unless the ordering is randomised.318
(6)
Whether a question is closed response (so that the respondent chooses the response from a set of options) or open response can affect results in a substantive way. For example, asking consumers how much prices would have to increase before they would switch might give rise to substantially different answers than asking them whether a price rise of 5%, 10% or 15% would induce them to switch.319
(7)
The CMA considers that including the option to say “don’t know” is good practice.320 Diversion ratios will normally be rescaled to assume that “don’t
316
Ibid., para. 3.40. In contrast, where questions are presented visually (as in online questionnaires) and people can consider response choices at their own pace, they are more likely to click on the first response option presented, and then move on to the next question. This problem is referred to as the ‘primacy effect’. These effects might lead to different answers depending on how options are ordered, which may create a systematic bias unless the ordering is randomised. 317
318
As noted above, the CMA criticised the parties’ survey, inter alia, for failing to randomise prompts in Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015, para. 39. 319 For example, in one academic study, two groups of respondents, who had previously responded that they would be willing to pay more for gasoline if they knew it would improve the environment, were then asked how much more they would be willing to spend. One group was asked the closed series of questions: “Would you be willing to pay an extra 20 cents (per gallon of gas)? Would you be willing to pay an extra 50 cents (per gallon of gas)? Would you be willing to pay an extra dollar (per gallon of gas)?” The other group were asked the open question: “How much extra would you be willing to pay per gallon of gasoline?” The mean responses of the “open” group were significantly higher than those of the “closed” group. See Helmstetter and Murphy, How much would you be willing to pay for gasoline? Depends on how you ask (2002), Survey Research Newsletter, Volume 33, No. 3. 320 ‘Good practice in the design and presentation of consumer survey evidence in merger inquiries’, March 2011, OFT1230/CC2com1, para. 3.30. In A report on the completed merger between Zipcar, Inc and Streetcar Limited, Competition Commission decision 22 December 2010, Annex H, the CC stated: “When it comes to distributing the ‘don’t know’ answers across the rest of the sample, we chose to replicate the proportion of the other categories. However, we acknowledge that this is an assumption and that, in reality, the members who responded ‘don’t know’ could divert to alternatives to their current car clubs in proportions which do not mirror the response distribution of those members who
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know” answers are distributed in the same way as other responses. For example, suppose there are 110 respondents to the store closure diversion question. If 30 would divert to the outside good, 50 to store B, 20 to store C, while 10 indicate that they do not know what they would do, then the diversion ratio to store B is estimated to be 50% (i.e., 50/(30+50+20). (8)
Where questions about price increases are framed in terms of increases based on actual prices the size of the hypothetical price increase may be over or under stated. For example, the following question: “how would you respond to a 10% price increase in product x from £1 to £1.10?” where product x costs between 50p and £1 can be criticised as exaggerating the size of the hypothetical price increase.321
(9)
Response options, if designed carelessly, may turn out to be unrealistic. For example, a previous survey in a merger inquiry asking how consumers would respond to a 10% price increase in a product included the option: spend the same amount of money but purchase fewer items. This option, however, was deemed to be infeasible as the product almost always retailed in a small number of large pre-packed units. Consequently, the evidence provided was deemed to be unreliable.322
(10)
Surveys can be designed to build in ‘reality checks’, whereby questions are included to assess the internal consistency of responses (for example questions on hypothetical purchasing behaviour can be checked against questions on previous purchasing decisions).
(i) Stated preference versus actual switching evidence. Whilst survey evidence may be effective at eliciting useful information on prior switching (e.g., the existence of, and reasons for, switching that has already taken place), it may suffer from the problem that the ‘diversion ratio question’ is that it is hypothetical: consumers may not in practice do what they say they would do in response to a hypothetical question. For this reason, in some cases the Authorities have indicated that econometric evidence has been useful to supplement survey evidence (as in AG Barr/Britvic, discussed below323).
provided a specific answer (i.e., not a ‘don’t know’ answer). Since we can only speculate about these alternative proportions and since any other treatment could make the diversion ratio larger or smaller, we considered that our assumption of proportional distribution of ‘don’t know’ responses on the basis of the existing survey responses was a reasonable one.” See also a similar treatment of “prefer not to say” responses, in A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, CMA Decision of 12 August 2015, para. 32. 321
Good practice in the design and presentation of consumer survey evidence in merger inquiries, March 2011, OFT1230/CC2com1, Box 3.16 (adapted from that example) 322
Ibid., Box 3.18. In relation to the parties’ survey, the CC stated: “Our reservations about the survey were the following: (a) Panel recruitment may have led to coverage bias. (b) Quota sampling may have exacerbated biases. (c) The memory-based question was subject to imperfect recall. (d) The hypothetical ‘non-availability’ of the product question is not directly related to the question of 323
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In Global/GMG, the CC downplayed evidence from an earlier Ofcom survey on the basis that it might suffer from ‘hypothetical bias’, namely that “a consumer may indicate a willingness in principle to spend money or change behaviour, which does not reflect their likely real response to the situation described.”324 (j) Suggested best practice for submissions of technical economic analysis from parties. At the outset, it is worth stating that the CMA prefers the merging parties to consult with it prior to commissioning a survey. Where the CMA has had a chance to comment on the survey questions and methodology, it is more likely to place weight on the results. This may also prevent situations occurring where having conducted a survey that is not satisfactory from the CMA’s perspective, the scope for further surveys has been hindered.325 Where surveys are commissioned for the purpose of the merger inquiry (and indeed where survey evidence is presented that has been conducted in the normal course of business) the CC guidance understood to have been adopted by the CMA states:326 “Parties sometimes submit evidence which relies on surveys—for example, the percentages of customers who hold particular opinions. When the CC is to rely on survey evidence prepared or commissioned by the parties, as well as needing to see the precise questions that have been asked, it will also require additional supporting information and submissions should include the following: Description of the research process: A short statement of the purpose of the survey and the brief given to the research team, describing the members of the team that managed
interest—which is reactions to a price rise. (e) The diversion ratios are based on reported preferences rather than revealed preferences. These are common caveats to survey-based methods of estimating diversion ratios, and we acknowledge that the survey provides useful evidence. Our goal in the econometrics was to add a new source of evidence based on revealed preferences.” A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, CC decision of 9 July 2013, Appendix 5, paras. 2-3. 324 A report on the completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited, CC decision of 21 May 2013, para. 5.36. 325 In A report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, CC decision of 19 February 2013, the CC noted that prior surveys prevented the CC conducting meaningful surveys in the same area, stating: “as these surveys were conducted recently ([by the parties] at the OFT stage), this meant that the CC could not survey the same casinos in an effective way (for example, if it wanted to ask a different set of questions or similar, but differently framed, questions). This is for the following reasons: The parties’ surveys had effectively ‘creamed off’ those respondents who were most available or prepared to participate in research. A subsequent CC survey interview with similar questions was likely to irritate respondents who had already given their opinions on this topic very recently. We considered that this may reduce the response rate and may introduce a bias in the responses. If a subsequent CC survey covered only those who did not take part in the parties’ surveys, the ability to obtain a representative sample would have likely to have been affected.” (Appendix C, para. 5). 326 See Competition Commission, Suggested best practice for submissions of technical economic analysis from parties to the Competition Commission (2009) paras. 25-26.
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the research, including their roles in the team and their affiliations, and the timeline of the research project, including fieldwork. Description of the sample and research process: A short description of the sampling design and research methodology, which should cover: (i) how respondents were selected and approached, including which quotas were used and how they were determined and implemented, the locations and timing of fieldwork and the rationale for such choices; (ii) the methods used to collect data and the rationale, if any, for these methods; (iii) a short description of the final sample that was achieved, including counts of the numbers not responding or excluded by category, and a comparison of the characteristics of the sample with those of the population from which the sample was drawn (e.g., age, social grade); (iv) Research input materials, including the question script containing the questions with any pre-coded responses, code-frames used to categorize verbatim answers, and supplementary instructions or materials given to respondents, fieldworkers or interviewers where these are not obvious from the question script. Description of output: Research output materials, including any original presentation files or reports arising from the research; any tables of results used either to generate the presentation files or reports; and any tables of results otherwise being used by the party as evidence. Where tables or charts report weighted results, parties should provide counts of unweighted responses and detail of weights used. In addition, where the Competition Commission believes that the survey may contain further evidence that would be of value to its inquiry, the Competition Commission may require the party to submit further information from the survey. In doing so, the Competition Commission will wish to respect the professional code of the Market Research Society regarding any assurances provided to respondents (such as assurances of confidentiality or anonymity at the time of interview).”
12.7.2 A Selective Note on Empirical Techniques This section provides a brief description of certain topics that may arise as part of a merger assessment, in particular as regards the measurement of closeness of substitution. The two ‘take-away’ messages are as follows. First, when econometric analysis is used to estimate switching behaviour, normally ‘simplifying assumptions’ will be required. It is incumbent on the parties (and, it is submitted, the CMA as well) to make clear why such simplifying assumptions are appropriate and, where possible to sensitivity test them. Second, where the merging parties submit econometric evidence, they should be willing to submit their underlying raw data and processing codes such that the CMA can replicate and sensitivity test the results. (a) Own and cross price elasticities of demand. The details of demand estimation are beyond the scope of this Chapter, although some selective insights are presented which seek to explain intuitively some concepts often encountered with demand estimation.
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Definition of own price elasticity of demand. The price elasticity of demand measures the percentage change in output that arises following a small change in price (e.g., 1%). The own price elasticity of demand for product A measures the percentage change in A’s quantity following a small change in A’s price. Denote this EAA. For example, if A’s price increases by 1%, and A’s demand falls by 5%, the own price elasticity, EAA, is equal to -5 (i.e., “minus 5”). In practice, it is often taken as given that higher prices for a product lead to lower volumes sold of that same product and so own price elasticities are referred to by omitting the minus sign (i.e., just 5 in the above example); this is termed the ‘absolute value’ of the elasticity. Definition of cross price elasticity of demand. The cross price elasticity of demand is the percentage change in product B’s volume following a small change in A’s price. Denote this EAB (where we have used the subscript AB to mean impact of A’s price change on B’s volume). Thus if a 1% change in the price of A leads to a 3% increase in B’s volume, then the cross price elasticity of demand, EAB, equals 3. Where products are substitutes, cross price elasticities are positive. Diversion ratio in elasticity form. The diversion ratio from A to B (i.e., the percentage of A’s lost volumes that are diverted to B following a small increase in A’s price) can be denoted DAB. It is expressed as follows, where QA refers to the quantity sold of product A and QB the quantity sold of product B: DAB = (EAB * QB) / (EAA * QA) (b) A simple demand system. One method of estimating own and cross price elasticities is to specify a form of demand and then, given that form of demand, consider the implications for the relationship between the quantity sold of (say) product A and the price of A and the prices of any other potential substitute products. For example, one might presume the following: QA = α10 KA – α11 PA + α12 PB + ε1 This says that demand for A, which is denoted QA, increases the larger are any ‘demand shifters’, denoted by K, (i.e., factors which shift the demand curve outwards at every point such as consumer income or the quality of product A), the lower is the price of A, PA, and the higher is the price of substitute product B, PB. The alpha terms (i.e., α10, α11, and α12) are known as ‘coefficients’; they are unknown parameters to be estimated. The final term is the ‘error’ – a factor that impacts on demand that is not observed by the analyst. Likewise, demand for product B is: QB = α20 KB + α21 PA – α22 PB + ε2 The preceding example has just two products A and B. In order to identify own and cross price elasticities for products A and B there are four coefficients of interest (α11, α21, α21 and α22). In principle, however, there may be many products – for example, with 10 substitute products there are potentially 10*10=100 elasticities to estimate.
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To overcome this issue, and estimate the relevant elasticities, the analyst needs either an extremely rich dataset or to make assumptions that restrict the number of coefficients to be estimated. Econometric models use economic theory to inform these assumptions. The implication is that the value of the estimated elasticities will only then be as good as the assumptions that underpin them. This does not rule out demand estimation as a useful tool – it simply points to the analyst setting out clearly why the chosen ‘simplifying assumptions’ are reasonable. The next sections discuss two types of model that may be used in the context of merger analysis. (c) The Almost Ideal Demand System. When assessing branded products mergers where data are available on consumer purchasing patterns, the Authorities have sometimes assessed estimates of closeness of competition based on the so-called ‘Almost Ideal Demand System’ (AIDS).327 The AIDS model provides a relatively flexible framework for posing questions to understand how closely merging parties’ brands compete.328 The key steps that should be taken when implementing an AIDS model can be summarised as follows. First, choose a ‘product set’ that contains the merging parties’ brands of concern and those brands that may reasonably be viewed as substitutes. (The choice of product set can be controversial and can influence the results.329) Second, use price and volume data combined with some theoretical assumptions about consumer preferences to estimate how consumers allocate their spending between products within that set as relative prices change over time (controlling for other factors) and use those patterns of substitution to infer own- and cross-price elasticities and hence diversion ratio estimates. Third, consider and attempt to quantify the extent to which a price rise for brands within the product set may cause expenditure to leak to other brands outside the product set in question (known as diversion to the ‘outside good’). Where significant leakage may occur, diversion ratios initially calculated within the product set analysed should be down-weighted accordingly. In AG Barr/Britvic, the CC also took the view that whilst the survey evidence on diversion ratios was overall “helpful” to its understanding of the market, it was not sufficient on its own to give an accurate view of diversion, hence the need for econometric analysis.330 The CC employed an AIDS model to estimate the diversion 327
See Deaton, A., and Muellbauer, J., An Almost Ideal Demand System (1980), American Economic Review, 70, 312-336. 328
As the CC stated in A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, CC decision of 9 July 2013, Appendix C, para. 10: “[t]he AIDS system has two main desirable properties. First, even if the actual demand framework does not constitute an AIDS system, it is nevertheless likely to be adequately approximated by an AIDS system… Second, the AIDS system can be derived by aggregating the demands of individual consumers. The AIDS system can therefore be used to estimate demand for a ‘representative consumer’ using aggregated data.” 329
In AG Barr/Britvic, the CC incorporated all SKUs of brands with at least a 1 per cent share of total CSD value sales in 2011 in its estimations. (Ibid., para. 14, which also explains other assumptions made in the estimation process.) 330 Ibid., para. 6.30.
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ratio from AG Barr’s IRN BRU to Britvic distributed brands. The CC identified certain ‘reality checks’ to assess the robustness of its model, namely that: (a) all own-price elasticities are negative and statistically significant; (b) there are relatively low ratios of (statistically significant) negative to (statistically significant) positive cross-price elasticities; and (c) substitution effects are present where one would expect them a priori (positive and statistically significant cross-price elasticities between Pepsi and Coca-Cola (and vice versa)).331 Ultimately, the CC found that the econometric evidence indicated no post-merger incentive to increase price. In Diageo/United Spirits,332 the OFT conducted its own AIDS model; this was relatively unusual in that the Authorities rarely conduct their own econometric modelling at Phase I. One feature of interest is that the OFT assumed that substitution patterns were symmetric while the merging parties disputed this, claiming substitution patterns were asymmetric and that taking this feature into account materially impacted on the outcome of the AIDS model.333 In ABF/Dorset334, the merging parties presented an AIDS model to demonstrate that the estimated diversion ratios between the merging parties were low, suggesting that they were not particularly close competitors, and that both the merging parties competed more closely with other brands and with private label products than with each other. The CMA (at Phase I) discussed the results in some detail noting that even though the estimates related to consumer level data, the results were, in principle, relevant for understanding closeness of competition at the wholesale level.335 The CMA also set out: (i) a preference for allowing for retailer heterogeneity in the specifications; (ii) the need for the AIDS model to pass the basic ‘reality checks’ set out in AG Barr/Britvic, namely that in most cases the estimated coefficients are the ‘right sign’ (i.e., cross price elasticities are positive and own price elasticities are negative); and (iii) a concern about endogeneity bias.336 Ultimately, because other evidence pointed to the absence of a competition concern, the CMA did not have to decide how much weight to place on the econometric model of the merging parties.337 (d) Logit form of discrete choice models. In a discrete choice model, consumers purchase just one product (or brand) from a choice set containing several or many other 331 332
Ibid., Appendix C, para. 25. Completed acquisition by Diageo plc of United Spirits Limited, OFT decision of 25 November
2013. 333 Ibid., note 34. See also RBB Brief 47 Drink deriving: estimating substitution patterns for hard and soft drinks, June 2014. 334 Anticipated acquisition by Associated British Foods plc of Dorset Cereals Limited, CMA reference decision of 6 October 2014. 335
Ibid., para. 83. Ibid., paras. 83-99. The CMA noted that (unlike in the case of its analysis in AG Barr/Britvic) endogeneity bias may arise where prices were flexed to in response to the level of demand (and so could not be considered ‘exogenous’ or ‘pre-determined’ for the purpose of the regression), para. 98. 337 An AIDS model was also employed by the merging parties in Anticipated acquisition by InBev NV/SA of Anheuser-Busch Companies, Inc, OFT decision of 12 December 2008. See note 26. 336
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brands. Some relatively common forms of discrete models employed that are tractable enough to be employed over the course of a merger investigation are the logit model and the nested logit model. In such models, the analyst presumes that ‘utility’ or ‘happiness’ is gained from the consumption of certain non-price characteristics embodied in the various products available. Utility is lost when income is spent, i.e., higher prices mean greater lost utility. Consumers choose whichever product offers the best value taking into account all characteristics offered, including the price (which counts as a negative factor). In essence, consumer utility is measured as a weighted index of characteristics including the price. For example, a consumer weighing up which of two restaurants to choose might score them on cleanliness, comfort, quality, atmosphere, genre, and price. If the analyst can observe all those ‘characteristics’ of restaurants, he or she would ideally like to know is what weights consumers allocate to each of these factors and thus how they make their individual choices. In the above example, ideally each consumer’s choice of restaurant would be observed; in practice, however, only the aggregate choice of consumers, e.g., as embodied in market shares, is usually available. The logit and nested logit models allow the analyst to estimate own and cross price elasticities from information on market shares and product characteristics (including price). This makes these models relatively easy to work with. However, such ‘tractability’ requires making some restrictive assumptions. For example, in the logit model, the estimation technique forces consumers to divert to other goods in proportion to their market shares. So if the aim is to estimate own and cross price elasticities as a more ‘sophisticated’ approach than market share analysis, logit models do not advance matters very far. Nonetheless, logit models can provide useful information on how customers value different product attributes, which can in turn be informative about the degree of substitutability between products (the logit model was used by the CC to forecast diversion ratios in non-sampled areas in Thomas Cook/Co-operative).338 The nested logit offers greater (albeit limited) flexibility over substitution patterns. Roughly speaking, in terms of estimating demand, the analyst decides which products are more likely to be close substitutes for each other. Such products are allocated to the same group or ‘nest’. The estimation technique allows for some substitution across nests but the main competitive interaction would be within the nest. Moreover, to the extent that, following a price rise, a consumer diverts to another product within the same nest, diversion occurs in line with the within nest market shares.339 To give an example, suppose the analyst is estimating demand for eating in restaurants. All Italian 338 A report on the anticipated travel business joint venture between Thomas Cook Group plc, the Co-operative Group Limited and the Midlands Co-operative Society Limited, CC Decision of 16 August 2011, Appendix B, para. 141 and paras. 147-155. 339 As Verboven and Ivaldi in Quantifying the effects from horizontal mergers in European competition policy (2005), International Journal of Industrial Organization 23, pp. 669-691, put it in their discussion of the use of the nested logit technique in relation to Volvo-Scania, a European merger of two manufacturers of trucks: “When the price of one product increases by 1%, it increases the demand for the other products within the same segment [i.e., nest] by an equal percentage, whereas it increases the demand for products in a different segment by a lower percentage” (p. 689).
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restaurants may be put in one nest and all Indian restaurants in a different nest. The modelling assumption would then mean that following a price rise at one Italian restaurant: (i) most consumers who switch from that restaurant to another would switch to a different Italian restaurant; and (ii) the latter restaurants will each gain consumers in proportion to their share of the Italian restaurant segment. Finally, the analyst must also define an ‘outside’ good, to which consumers might switch if prices of ‘inside’ goods increase. (So, in the restaurant example, the outside good might be ‘eating at home’.) The nest structure and size of outside good adopted can have a major bearing on the estimated switching patterns and so it is good practice to sensitivity test different approaches.340 (e) Reduced form models. The AIDS and logit family of models are examples of ‘structural’ models. By assuming a specific form of demand, the analyst may make a direct inference about the estimated coefficients, i.e., they can be interpreted as elasticities or can be used to derive elasticities. In contrast, the event studies and priceconcentration models discussed below are ‘reduced form’ models. The meaning of the estimated coefficients are typically harder to interpret precisely because they are not usually underpinned by an economic model. Nonetheless, such models are more frequently used by the CMA than demand estimation, in particular to rank constraints, as discussed in the next sections. (f) Merger simulation. With the exception of IPRs which can be thought of as ‘back of the envelope’ simulations (see Section 12.2.5), the Authorities do not appear to use merger simulation exercises. For that reason the technique is discussed only briefly. Merger simulation usually employs theoretical tools to model the nature of competition before the merger (typically the Bertrand model discussed in Section 12.2.1) and then combines those tools with empirical data to predict the post-merger outcome. Simulation may be used as a screening device, a way to predict competitive effects of a merger, and a tool for analysing efficiencies and divestments. Merger simulation can be helpful in forcing analysts to state clearly the assumptions that underpin their arguments. By the same token, however, if those assumptions fail to match reality (as may be the case due to the difficulty of condensing all relevant aspects of merger analysis into a single theoretical model) then merger simulation may offer spurious precision. Put another way, the simulated price rise is only as good as the underlying data and the assumptions (the same applies, therefore, for IPRs). When the model is sensitive to the choice of assumptions and those assumptions cannot be verified empirically, this raises concern for the robustness of the analysis. To avoid this danger, it is good practice for practitioners to subject their analyses to sensitivity and reality checks (e.g., showing that the model is effective at predicting observed pre-merger outcomes), in particular because simulation analysis can be highly sensitive to the assumptions adopted. In practice, simulation would normally be used as 340 More general models allow for greater flexibility in substitution patterns but often this greater flexibility comes at a cost in terms of required data and computational difficulties. See, for example, Berry, S., Levinsohn, J. and Pakes, A., Automobile Prices in Market Equilibrium, Econometrica, Vol. 63, No. 4 (Jul., 1995), pp. 841-890.
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a complement to other empirical techniques: it is unlikely that simulation alone would (or should) be decisive in analysing the competitive effects of a merger.341 (g) Best practice guidelines. Roughly speaking, the easiest models to work with in terms of data and computational requirements are often the ones with the most restrictions on the parameter values. These factors do not mean that empirical techniques are non-probative; however, they will affect how much weight can be placed on the analytical results derived from these techniques. Best practice would be to identify the strengths and weaknesses of any particular analysis and explain why the weaknesses should not invalidate the results (e.g., through trying different approaches and sensitivity testing). In that regard, drawing on the Authorities’ “suggested best practice for submissions of technical economic analysis from parties to the Competition Commission” sets out some helpful guidance.342 Are the data collected meaningful? Often a substantial amount of time is spent ‘cleaning’ a dataset, e.g., ensuring that the data has been coded accurately and that it truly captures what it purports to measure.343 For example, sometimes the concept of the ‘price’ is not straightforward. Often price is calculated on an average revenue basis (i.e., revenues generated divided by volumes sold). However, where firms sell many products (or many different grades of a similar product) the average revenue per product sold may differ according to the mix of products considered. When comparing prices (e.g., across regions), care should be taken to minimise such ‘product mix’ effects and to ensure like-for-like comparisons (or at least to show why any bias from product mix effects is likely to be small). Further, the products chosen should be representative (i.e., those that are important to customers, that generate a substantial share of revenues in the relevant market(s) and whose prices are controlled by the firm in question – and thus informative of how the parties behave).344 Is there enough variation in the important variables to identify an effect? Identifying relationships between variables requires variation in the relevant data. For example, if the issue is the extent to which the presence of competitor A impacts on competitor B, the analyst needs examples of where A and B are sold together in the 341 For an accessible exposition of the benefits of merger simulation from two pioneers of simulation techniques, see G. J. Werden and L. M. Froeb, Calibrated Economic Models Add Focus, Accuracy and Persuasiveness to Merger Analysis (2002), The Pros and Cons of Merger Control, Swedish Competition Authority. For a more critical view, see Walker, ‘The Potential for Significant Inaccuracies in Merger Simulation Models’ (2005), Journal of Competition Law and Economics, 1, pp. 473-496. 342 Competition Commission, Suggested best practice for submissions of technical economic analysis from parties to the Competition Commission (2009). This section also draws on P. Davis and Garcés, E., Quantitative Techniques for Competition and Antitrust Analysis (2009), p. 254. 343 Having received technical economic analysis, the CMA may ask (at short notice) for the raw data and the cleaning process (e.g., the annotated code used to clean the dataset). The CMA would expect to be able to replicate the results of the analysis, including how the data are cleaned – for example, because ‘dropping’ certain variables may have a material impact on the results and so the motivation for their exclusion may be important to provide. 344 See also the discussion below on measuring how a merger may impact on range and service.
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same area and examples where B is sold but A is not present. Variation may occur: (i) across markets (cross sectional), e.g., where A and B overlap in some areas but do not in others; (ii) within one market across time (time series), e.g., where – after a period of time – A enters B’s market (or A exits B’s market); or (iii) across and within markets (panel data). For the purpose of merger analysis we are more likely to be faced with the choice of cross sectional or panel data.345 Is a meaningful economic relationship identified and is the identified relationship causal? The aim is to identify a meaningful causal link (e.g., from the presence of product A to the price of B) and then assess the strength of that link – demonstrating it to be robust. If there are factors (such as common cost and demand shocks) which determine both variables of interest simultaneously (and if these cannot be controlled for adequately), then the results are less reliable absent a convincing explanation for why any ‘simultaneity bias’ would be small. It may also be possible to comment on the likely direction of the bias. This can be useful where, for example, the bias makes it more likely that a certain effect will be found and yet no effect is found. There are also other technical issues that econometric techniques must address.346 Do the results pass robustness and reality checks? Given the above potential problems, results will be more convincing where they are robust to reasonable sensitivity checks (e.g., as regards how data are measured and the ‘control’ variables 345 Where there is substantial variation in (say) market structure across different areas but few instances of entry and exit (i.e., little variation of market structure over time), a cross sectional approach may be preferred. However, where there is sufficient variation of market structure across time, the panel approach may be better suited to strip out unobserved impacts on prices in each local market that remain constant over time (so-called “fixed effects”). 346 Technical issues are beyond the scope of this review but are covered in standard econometric textbooks. In this regard, the best practice guidelines provide a non-exhaustive list of common issues that may arise and that would need to be addressed, namely: “(a) The economic concept of ‘identification’ – that is to explain if and how the model can identify the economic impacts that are being measured, separated from other factors and events. For example, an analysis of spending on a product before and after some event should be able to identify the impact of that event, separated from other factors that may have changed at the same time; or, when comparing levels of prices in different geographic areas, it should be able to identify whether this is due to the factor being considered, or some other factor that is often correlated with it. (b) The choice of ‘instrumental variables’. Sometimes, it may be preferable to use an alternative ‘instrument’ to substitute for the actual variable of interest, as a solution to certain econometric problems. However, in these cases, parties should explain why particular instruments have been chosen and consider the robustness of such choices. (c) A common econometric method involves the estimation of reduced-form equations (e.g., reduced-form price equations), as opposed to structural equations that are directly derived from a formal economic model. However, the specifications of a reduced-form equation are best understood with an understanding of the underlying structural parameters. It will sometimes be difficult but, where possible, submissions relying on this type of modelling approach should provide the motivation for the econometric specification of a reduced-form equation. (d) Omitted variables can be a common source of bias in econometric models. Where relevant and possible, submissions should include a consideration of what omitted variables there might be and the possible consequences their omission could have for the matter at hand.” CC, Suggested best practice for submissions of technical economic analysis from parties to the Competition Commission (2009), para. 15.
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employed). Further, if similar qualitative results are found when alternative empirical approaches are taken (e.g., if several different types of empirical test indicate that A and B are close substitutes), then the results are more convincing. Finally, econometrics is guided by economic theory, which in turn must be consistent with the facts of the given industry. Empirical tests (whether econometrics based or more simple) should complement the qualitative analysis and make assumptions that are consistent with both economic theory and the documentary and other evidence gathered on the market in which the merging firms are active. Is the identified effect economically significant, even if statistically significant? Just because a relationship identified does not appear to be pure chance (i.e., it is statistically significant) does not mean that it is meaningful in an economic sense. For example, it may be that the effect of interest identified is robust, e.g., it may be fairly clear that the presence of A impacts on B’s price. However, it may also be that the impact is consistently found to be so small that the implied loss of competition by the merger is of no material concern (i.e., the economic significance of the effect is not material). Submitting an economic report. Turning to how these results should be presented to the authorities the CC identifies three general principles to follow: “Clarity and transparency. Submissions should not only present clearly the results and conclusions of the economic analysis undertaken, but they should also clearly state the methodology used, the assumptions made in reaching results, the justification for the methodology and the assumptions, and the robustness of the results to any assumptions made. Submissions should be understandable to non-economists, and CC economists should be able to determine how the analysis enables the parties’ economic experts to reach the submitted conclusions. Completeness. Submissions should contain a complete description of the analysis undertaken. All relevant assumptions should be discussed and choice of techniques explained. Relevant econometric output, diagnostic tests and checks for robustness should be included. Where references to academic literature have been made, these should also be cited. The CC should be able to understand fully both the results and the economic theory and modelling that are generating those results, without having to seek more information from the submitting party. Replication of results. In a number of cases, the CC will want to replicate the results of the analysis that has been submitted. This means that parties should be prepared to respond to a CC request, at very short notice, for all relevant computer code and data files necessary for the CC’s economists to reproduce the results presented in the parties’ submission. This will include the raw and the cleaned data and the programs for obtaining the latter from the former.” 347
347
Competition Commission, Suggested best practice for submissions of technical economic analysis from parties to the Competition Commission (2009), paras. 5-8.
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The CC also advises that a non-technical executive summary (consistent with the rest of the report) should be made available for non-economists.
12.7.3 Event analysis Event or ‘impact’ analysis uses past ‘shocks’ in an industry to gain insights into the form of substitution patterns. Impact analysis can be used to determine the closeness of substitution between a set of products in a given market.348 In some cases where the shocks are truly exogenous and give rise to a clear control group (not affected by the shock)349 and a treatment group (affected by the shock), the analyst can compare the impact of the shock by comparing outcomes of the treatment group relative to the control group. Some examples are discussed below. (a) Promotions. Special promotions sometimes provide information on switching. For example, suppose a pub chain observed that every time its premium lager was on a special price promotion, it sold fewer units of premium ales while its sales of stout were unaffected. Taken at face value, this evidence might indicate that, in terms of ranking, premium ales are a closer substitute for premium lagers than are stouts (although further evidence would be required before such a conclusion could be firmly drawn – namely the need to control for other ‘confounding factors’ that might have given rise to the observed outcomes). In the above hypothetical example, it would be important to account for other factors that impact on sales of premium lager, premium ales and stouts during the control and treatment periods. That is to say, an inference that premium ales and premium lagers are close substitutes would be more compelling if: (i) the prices of premium ales and stout were unchanged throughout both the control and treatment periods; and (ii) there were no seasonal effects, no other promotions and no production issues that might have (a) reduced sales of premium ales or increased sales of stout during the treatment period or (b) increased sales of premium ales or reduced sales of stout during the control period.350 In order to ‘control’ for the many other factors that may influence prices and quantities, the CMA might prefer to use econometric techniques to assess evidence of switching in relation to promotions. Examples include the AIDS models described above, as well as Reckitt 348
It can also be used to examine substitutability between products at the stage of market definition. The control could be the affected market before the shock occurred or a very similar market that was unaffected by the shock. 350 The following quote from the OFT is illustrative of typical concerns that Authorities have had with promotions analysis: “At face value, the parties' analysis supports their submission that they are not close competitors. However, the weight the OFT can place on it is limited due to a number of weaknesses in the approach. It is only based on one 'promotional event' at each supermarket and does not fully control for the price changes of other brands or any other factors that may have affected demand during the time period. Other 'promotional events' (including different definitions of what such an event is) may lead to different results, thereby reducing the robustness of a single one.” This led the OFT to conduct an AIDS model. See Completed acquisition by Diageo plc of United Spirits Limited, OFT decision of 25 November 2013, para. 95. 349
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Benckiser/K-Y brand where the CMA’s results were inconclusive.351 Where the impact of promotions is based on consumer behaviour but the merger relates to manufacturers selling to retailers, the CMA would be expected to consider the extent to which consumer demand is a good proxy for retailer demand.352 (b) Entry/exit. Another popular test is to examine how prices (or turnover) are affected by entry (this could be entry of a new product, not necessarily a new firm) and exit. Ideally, entry by one merging party would be observed in the other’s market. For example, where retail stores operate in numerous local areas, it can be informative to assess the degree to which entry by one of B’s stores impacts on one of A’s stores. If B’s entry has the greatest impact on A (compared to the impact of entry by each of rivals C, D and E), it might be inferred that B constrains A more than C, D or E constrain A (other things being equal). For example, B’s entry might lead to a substantially greater reduction in A’s store level price, turnover or margin than entry by other stores, all else equal.353 It may also be found that entry by E does not have a material impact on A’s turnover such that it is not treated to be an effective competitor. These techniques are also used to assess the relevant geographic market. For example, it can be tested whether B’s entry impacts on A’s turnover materially when entry occurs within (say) a drive-time of 5, 10 or 15 minutes or within a distance of 0.5 miles, 1 mile, and so on. Testing for the impact of entry or exit can also be conducted using econometric techniques which seek to control for other influences on the variable of interest, e.g., to check that any reduction in turnover post-entry is best explained by the entry event itself as opposed to other factors (and is akin to the presence regressions discussed below in Section 12.7.4). In some cases, the merging parties may have a model that they use in the normal course of business to assess the impact of entry. For example, if entry occurs close to a ‘treatment’ store, then that store’s turnover may be compared against a ‘control group’ of matched stores. Such stores, for example, might be of a similar size, have the same prices, offer the same range of products (marketed in the same way) and be located in a similar area in terms of local demographics. In that case a ‘difference-in-difference’ assessment can be made.354
351 A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, CMA Decision of 12 August 2015, Appendix E. 352 See Section 12.7.6. 353 As the Authorities note in their commentary on retail mergers: “The CC conducted entry analysis in a number of cases. For instance, in Waterstone’s/Ottakar’s (books), Holland & Barrett/Julian Graves (nuts, seeds and dried fruits (NSF)), and Sports Direct/JJB (sports equipment), the CC found that entry by one of the merging parties in an area where the other had been incumbent had a stronger impact on the incumbent store’s revenues than entry by any other competitor.” See Commentary on retail mergers, 17 March 2011, para. 3.21. 354 For example, suppose that the treatment store’s turnover averages 100 per week prior to entry whilst the control group’s average turnover for the same period is 120 per week, i.e., the difference is 20. If the treatment store’s turnover per week averages 80 after the entry event, whilst it averages 110 for the control group, then the difference between the two increases to 30. It is then assessed whether this decline in turnover relative to the control group (i.e., the difference in the difference) is statistically significant.
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This ‘ranking’ approach to entry and exit events was used in Poundland/99p Stores,355 for example. As noted above, this evidence (along with survey evidence), permitted the CMA to weight different constraints: the entry of large SPPs was found to have the greatest impact on the parties’ turnover; smaller effects were found to certain supermarkets and VGM retailers, leading the CMA to include them as a constraint but weight them as weaker constraints compared to other large SPPs. The CMA conducted a similar exercise to assess how close entry (or exit) had to be in order to have an impact, determining the relevant market to be 1 mile around a site and noting a greater impact within 0.5 miles of that site.356 In TOBC/Bowlplex,357 the CMA employed econometric techniques to assess whether the impact of a cinema opening on the parties’ revenues was as strong as the impact of a rival bowling operator. The CMA did not find an association between the entry or exit of cinemas and the merging parties’ revenues. However, the CMA found that the exit of tenpin bowling centres located within a 15 minute drive-time of the parties’ sites was associated with higher revenues. No other statistically significant effect was found in relation to the entry or exit of tenpin bowling centres. The CMA noted that its analysis did not control for all possible factors and therefore this result should not be interpreted as conclusive evidence that cinemas do not compete with tenpin bowling centres. However, the CMA noted its findings to be consistent with the internal documents of the merging parties, which presumably indicated that cinemas were not as strong a constraint on the parties as other bowling venues.358 (c) Temporary production outage. Suppose a supermarket closed down for one month for refurbishment or due to an unexpected event (i.e., a ‘shock’ to the normal conditions of competition). In that case, it would be informative to assess where consumers that used to purchase in that supermarket purchased their groceries instead. In essence, this is a ‘real life’ test of the ‘store closure’ diversion question often asked in surveys (see Section 12.7.1 above). For example, in Groupe Eurotunnel/SeaFrance, the CC assessed diversion as a result of exit and two temporary outages: exit by SeaFrance; a strike by SeaFrance; and a fire in the Eurotunnel, to assess which other companies gained the lost volumes of the affected firm.359
12.7.4 Price and Margin Concentration Studies (a) Introduction. Price concentration analysis (PCA) and margin concentration studies seek to estimate the impact of concentration on prices or margins, after having controlled for other influences that may affect prices and margins. The techniques may 355
A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015, para. 4.10 et seq. 356 Ibid., Appendix E. 357 Anticipated acquisition by The Original Bowling Company Ltd of Bowlplex Ltd, CMA decision of 17 August 2015. 358 Ibid., paras. 49-51. 359 A report on the completed acquisition by Groupe Eurotunnel S.A. of certain assets of former SeaFrance S.A., CC decision of 6 June 2013, paras. 7.22-7.24.
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help to answer the following types of questions. First, are higher prices or margins associated with higher concentration (e.g., as the number of competitors declines, the market shares of the leading firms increase, or the HHI rises)? If not, it might then be inferred that a merger giving rise to an increase in concentration will not be harmful (or at least will not be harmful so long as concentration does not increase beyond a certain point). This can be useful for identifying screens. For example, if robust analyses indicated that prices or margins did not rise when the number of firms fell from ‘6 to 5’, ‘5 to 4’, or ‘4 to 3’, then the Authorities might be concerned only where the merger gives rise to a ‘3 to 2’ or worse scenario, and worry about ‘4 to 3’ scenarios only where (say) the specific features of any local market point to a reason to investigate further. Secondly, rather than focus on concentration in itself, it can be more informative to assess whether one merging party’s prices or margins is impacted by the presence of the other merging party (controlling for other factors, including the presence of other competitors). Various competitors can be ranked by testing how their presence near to a merging party impacts on the latter’s price. For example, if merging party A is observed to set 5% lower prices when rival B is present and 10% lower prices when rival C is present (all else equal), then C would constrain A more than would B. The concept is similar to that discussed in relation to entry and exit analysis above. It may be useful for identifying closeness of competition as well as which parties to include in the effective competitor set. Thirdly, PCA and margin concentration studies can be used to test the relevant market. For example, if the presence of one merging party on the other party’s turnover fades after a point (e.g., beyond a certain distance or drive-time), then this may assist defining the boundaries of the relevant geographic market. Fourthly, if it is found that prices or margins do not vary to any material degree across local areas, it might be inferred that PQRS factors are determined on a national basis. While there is no scope to discuss in detail the correct technical implementation of these econometric approaches, the following points are worth highlighting. These techniques measure an average relationship between price (or margin) and concentration; they are not well suited for estimating the impact of a merger in any particular individual area, the characteristics of which may differ from the ‘average’.360 Further, the models can be sensitive to how ‘concentration’ is measured, as well as the inclusion of outliers in the data. For example, in the context of a retail merger, there should be many independent local geographic markets in which concentration differs. How the local market is measured may impact on the measure of concentration (e.g., the number of competitors may be affected by the size of the local market) and so it is important to sensitivity test the results and ideally back up the assumptions with other information (e.g., based on documents or other evidence on catchment area size). There are a number of technical matters that need to be assessed in order for the results to be ‘pass their econometrics MOT’. These include the need to have: a large enough 360 PCA and margin concentration models are ‘reduced form’ regressions. This means that the estimated coefficient on concentration may be hard to link back to a theoretical ‘structural’ model, making its precise interpretation more difficult.
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Unilateral Effects
sample size; sufficient variation in the data to estimate the impact of changes in concentration; a rich set of demand and cost ‘control’ variables; and a way to address the issue of ‘endogeneity’, e.g., the problem that a firm’s price may determine the observed level of concentration making it harder to understand how concentration causes price.361 Finally, when presenting these techniques to the CMA during phase I, the analysis is more likely to be given weight if the CMA receives it during the prenotification process to permit sufficient time for sensitivity testing.362 (b) Examples PCA used by the Authorities. In Anglo American / Lafarge, the CC used price concentration analysis (PCA) for screening purposes to assess the impact on price of the number of competitors in aggregates.363 For some grades, the CC found a price effect of less than 0.5 per cent per nearby plant or no price effect at all. The CC noted that this was consistent with the view that a reduction in the number of competitors would not lead to higher price in relation to the range of market structures covered by its sample. Specifically, there were few instances of local markets with 2 suppliers or fewer. Therefore, inferences could not be drawn about the impact of ‘3 to 2’ or a ‘2 to 1’ fascia reduction. The CC therefore adopted a screen in which ‘4 to 3’ scenarios were considered unlikely to raise concern (unless the smallest rival in the market had a share below 5%, making the area look more like a ‘3 to 2’). For the two grades where a price effect was found (of about 1% or more), the CC considered the areas in further detail.364 In Cineworld/City Screen, inter alia, the CC sought to test closeness of competition by assessing whether the effect of Picturehouse’s presence on Cineworld prices was greater than that of other cinemas.365 However, due to the small sample size, the CC was unable to distinguish between two possibilities: either Picturehouse’s impact was the same as that of other cinemas, or Picturehouse did not have an effect on Cineworld prices at all. The CC also noted that PCA necessarily measures average effects (e.g., the average impact on price as a result of removing a competitor) and so may not be reflective of the competitive conditions in any individual area screened out for concern.
361 One important reason why high concentration might not be associated with higher prices is where firms with low costs charge low prices and thereby have high shares due to their greater efficiency. Likewise, a firm with higher quality may gain more customers and have a higher price meaning that high concentration will be associated with high prices if quality is not appropriately controlled for. These examples of (i) a two-way relationship between prices and concentration and (ii) omitted variables that determine both prices and concentration are factors that may create an ‘endogeneity’ problem, making it harder to obtain robust results. For a technical discussion of possible biases caused by endogeneity, see Evans et al, Endogeneity in the Concentration-Price Relationship: Causes Consequences and Cures (1993), Journal of Industrial Economics, Vol. 41 No. 4 p.431-438. 362 Completed acquisition of Avanta Serviced Office Group plc by Regus plc, CMA decision of 18 November 2015, paras. 23-24. 363 A report on the anticipated construction materials joint venture between Anglo American PLC and Lafarge S.A, CC decision of 1 May 2012, para. 23. See also Chapter 11. 364 Ibid., paras. 6.8, 6.21-6.26. See Chapter 11 on screens. 365 A report on the completed acquisition by Cineworld Group plc of City Screen Limited, CC decision of 8 October 2013, para. 6.54.
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In Optimax/Ultralase (suppliers of refractive eye surgery services), PCA was employed to test the effective competitor set as well as the relevant geographic market.366 In the former case, the CC assessed whether the number of smaller competitors (after controlling for the presence of large competitors) had an impact on the price. The CC’s analysis suggested a weak competitive constraint between the three large chains (of which the merging parties were two), but found no evidence that the presence of other smaller competitors had an effect on the parties’ prices. In the latter case, the CC found a negative (but weak367) relationship between price and concentration within a 45minute catchment area but no evidence that competitors located more than 45 minutes away from the parties’ clinics exerted a competitive constraint. In Global/GMG, concerning the merger of two radio stations, the CC used PCA to inform its hypothesis that, in an environment where advertisers negotiated a price (cost per thousand impacts for radio advertising outside of annual contracts), the price would be higher where the alternatives to each party were fewer or weaker.368 Attempting to capture these alternatives to the parties with measures of concentration, the CC used company share (i.e., a merging party’s share of listening hours) and the HHI (found not to be significant). The CC concluded that, despite data limitations, there was sufficient evidence of a positive relationship between the company share and the prices advertisers pay. While the CC considered the analysis to be informative, it recognized that care should be taken in applying the results to the potential effects of the merger on individual local areas. In Avanta/Regus, where the parties overlapped with respect to the supply of serviced office space, meeting rooms and virtual offices in local areas in central London and Reading, the CMA rejected the parties’ econometric approach which sought to demonstrate that a prior acquisition had not led to higher prices and margins. The CMA stated that it could not verify that the results were sufficiently robust. This was a function both of the difficulty of stress-testing complex econometric analysis within the phase 1 timetable and certain empirical problems, including that the results did not stand up to sensitivity testing. The CMA noted that it would have been better if the evidence had been provided during pre-notification instead of at “an advanced stage of the investigation”.369 (c) Margin concentration. Margin concentration analysis is analogous to PCA. The question of interest is whether lower concentration (or the presence of the other merging party) leads to lower margins. As with all these techniques, it is important to 366 A report on the completed acquisition by Optimax Clinics Limited of Ultralase Limited, CC decision of 20 November 2013. See paras. 4.19, 6.12 and 6.21, as well as Appendix D. 367 The CC noted that while this result was statistically significant, its significance was sensitive to the inclusion of a particular clinic. The result was, however, found to be robust and not sensitive to outliers when only the most popular type of treatment was evaluated. Ibid., 4.19. 368
A report on the completed acquisition by Global Radio Holdings Limited of GMG Radio Holdings Limited, CC decision of 21 May 2013, Appendix I, paras. 2-3 and 69. 369 Completed acquisition of Avanta Serviced Office Group plc by Regus plc, CMA decision of 18 November 2015, paras. 23, 24 and 104.
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control for common demand and supply shocks that may impact on the variable of interest, as well as endogeneity bias.370 The relationship between margins and concentration has been considered by the UK Authorities, most notably in their market investigation of the grocery sector.371 In that case, prices were set nationally and so price concentration tests would not be meaningful. The idea was that if intense local competition (proxied by low concentration) meant that firms spent more on offering better QRS factors, then lower margins should be associated with lower concentration (as the CC ultimately found).372 However, margin concentration analysis can be affected by certain pitfalls. First, where firms are efficient, they may enjoy higher margins and higher market shares (due to their greater efficiency). In this case, high margins are correlated with high shares but are not indicative of the exploitation of market power – in fact, quite the reverse. Secondly, another possible problem is that a firm with market power in a concentrated market may be subject to a weaker incentive to reduce its costs. If so, higher costs and hence lower margins could be associated with higher concentration. Neither issue necessarily rules out the use of margin concentration analysis (e.g., where the firm investigated has a similar level of efficiency across all the markets being compared, or where reasonable controls for cost efficiency can be employed). In Booker/Makro, the CC conducted a margin concentration analysis.373 The CC found that the presence of additional local competitors had a limited effect on overall store margins. The CC inferred this to mean that some local dimensions to competition existed. The CC further assessed how concentration affected variable profit margins of Booker’s stores based on a 30-minute isochrone around each Booker store. It found that the higher the number of competing fascias that a Booker store faced, the lower was its variable profit margin, but that the profit gain of reducing the number of local cash-and-carry fascias was small. As with the discussion above, the CC did not consider that the results could be used to simulate meaningfully the effects of the merger on price in specific areas. This was because the estimated effect of higher concentration represents an average effect across all areas, while the effect of the merger would depend on the characteristics of each local area, including the competitive conditions. 370 In Travis Perkins/BSS, a merger involving two chains selling plumbing and heating products, the OFT asked the parties to provide a margin-concentration analysis which considered the correlation of store level margins and the presence of certain types of competitors. The OFT sought to control for the impact of common demand shocks and seasonal effects by considering store level margins relative to the national average margin. The idea seemed to be that if common demand shocks are more or less nationwide, then store level margins would be affected in a very similar way to the overall national margin shocks such as the recession or seasonal effects. See Anticipated acquisition by Travis Perkins plc of the BSS Group plc, OFT decision of 11 November 2010, para 59. 371 See Appendix 4.4 of The supply of groceries in the UK market investigation, Competition Commission, 30 April 2008. 372
The measurement of margins is not straightforward and the appropriate margin differs from industry to industry. See section 12.2.4 above. 373 A report on the completed acquisition by Booker Group PLC of Makro Holding Limited, CC decision of 19 April 2013, paras. 7.36 and 8.42-8.44.
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In Rank/Gala, relating to casinos, a margin concentration analysis was used in the development of a screen to identify areas for further assessment where (i) Gala and/or Rank faced three or fewer additional casino (fascia) competitors within a 30 minute drive-time; or (ii) regardless of the number of local competitors, if the parties’ casinos were within a 10minute drive-time of each other. The CC’s basis for this rule was its finding that the competitive constraint faced by a casino was stronger the closer it was to a competing casino and that the number of local competitors affected a casino’s margins, and that the effect was not found beyond a 30 minute drive-time.374 In Poundland/99p Stores, the merging parties argued that margins did not vary materially per store, in line with the view that (pre-merger at least) QRS factors were determined on a national basis. This was confirmed by the CMA at Phase II.375 (d) The commentary on retail mergers. In its commentary on retail mergers, the OFT states in relation to price and margin concentration analysis: “Using price (or margin) concentration analyses the CC has considered whether prices or margins are higher in areas which face less local competition. For instance, in catchment areas where the merging parties’ stores face only one other competitor, the merging parties may offer a worse service (higher prices and/or lower service quality) than if they were facing a larger number of competitors. Even with uniform national pricing, a reduction in other aspects of the retail offer in response to a lack of local competitive constraint would tend to lower a given store’s costs and therefore increase its profit margins at store level. For instance, in Somerfield/Morrisons (supermarkets), the CC found that although both parties had national pricing policies, Somerfield’s policy had tiered pricing, leading to variation in local prices. The CC’s margin concentration analysis showed a statistically significant relationship between Somerfield’s margins and the degree of market concentration in rural areas. In Sports Direct/JJB (sports equipment), the CC carried out a local margin concentration analysis to examine whether Sports Direct varied any aspects of its retail offer on a local basis, and if so, whether these variations were related to the presence of a nearby JJB store. Since Sports Direct had a national pricing policy, the CC considered other aspects of the retail offer that might vary on a local basis, such as store staffing levels, stock deliveries, store opening hours, store maintenance and refurbishment, and stock shortages. The CC did not find a relationship between the degree of competition and local variation of the retail offer.” 376
(e) Comparing range and service quality in overlap and non-overlap areas. The preceding tests need not be applied only in terms of prices or margins. Where appropriate data on range and service are available, the same type of test can be conducted. For example, in a dated, yet informative case, the merger of two UK book 374
A report on the anticipated acquisition by The Rank Group Plc of Gala Casinos Limited, CC decision of 19 February 2013, paras. 7.41-7.42. In addition to margins, the CC also considered promotional spend and salary costs as a proportion of turnover (Appendix G). 375 A report on the anticipated acquisition by Poundland Group plc of 99p Stores Limited, CMA decision of 18 September 2015, para. 6.36. See also A report on the acquisition by Sports Direct International plc of 31 stores from JJB Sports plc, CC decision of 16 March 2010 (discussed below in section 12.7.4d). 376 Commentary on retail mergers, 17 March 2011.
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chains (Waterstones and Ottakar’s), the UK CC considered not only whether the merger would impact on price, but also whether there would be a reduction in the range of books and service quality offered. Data were available to conduct a test which compared range in overlap and non-overlap areas. The merging parties were able to show that there was no evidence of a statistically significant uplift in range when the other party was present.377 A similar exercise was conducted for service quality. A difficulty here, however, was how to measure service quality. A good indicator must be: measurable; valued by consumers and representative of the retailer’s approach to offering service more generally; and under the control of the merging party in question. The CC considered a variety of measures, including number of staff, experience of staff, opening hours, refits and refurbishments and book signings. Staff experience was a good indicator. First, it was measurable (the parties could identify staff experience by staff grades). Secondly, it was valued by consumers (in surveys, consumers ranked knowledgeable staff as a key feature attracting them to a book seller) and hence it was not unreasonable to infer that behaviour as regards this key variable was indicative of behaviour as regards other measures of service quality valued by consumers. Finally, staff experience was under the control of the merging parties (they had the ability to determine whether to place more knowledgeable staff in overlap areas to meet increased competition). The CC found no evidence that the merging parties had higher staff grades in overlap areas. In contrast, the merging parties argued that book signings were an example of a poor indicator. While there was some evidence that book signings were more common in overlap areas, this could be discounted for several reasons. First, consumers did not rank book signings highly as a reason for choosing a particular book seller. Secondly, the largest book signings were determined by publishers and not book retailers (i.e., they were not under the control of the merging parties). Thirdly, publishers would understandably target book signings in high demand areas. Since such high demand areas were more likely to be able to support two book chains, this potentially gave rise to a spurious association between book signings and overlap areas. The CC also found some evidence of greater refurbishments in overlap areas (although the parties argued that these were not caused by local competition). Taking all the evidence on range and service quality together, the CC concluded that the merger would not give rise to an adverse impact on range and service quality.378
12.7.5 Bidding Data and Win/Loss Analysis The Authorities often ask for ‘win/loss’ data collected by the parties. This may provide evidence on churn (how often customers switch between suppliers) as well as closeness 377
See Proposed acquisition of Ottakar’s plc by HMV Group plc through Waterstone’s Booksellers Ltd, Competition Commission decision of 12 May 2006. Waterstone’s also presented evidence on a range of synergies. 378 The CC rejected all other theories of harm and cleared the merger without conditions.
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of substitution. For example, in some industries parties record when they win (and lose) a particular project or tender and from whom the project was won (or to whom they believe the project was lost). Further, some companies employ research companies to interview a representative sample of switchers to identify why they left (or joined) and to whom they went (or from whom they came). Such data, when recorded systematically, accurately, and with good coverage of the parties’ activities in the relevant market(s), may be highly informative of which firms compete most closely with the merging firms. However, in some cases the parties’ records are patchy, e.g., not systematically recorded. In that case, it may be that less weight can be placed on the data.379 (a) Tender processes. Win/loss analysis is often undertaken in those markets in which competition between suppliers takes the form of bidding for contracts placed by customers, and where both the winning bidder and others who bid can be identified. For example, if the two merging parties (A and B) constrain each other to a considerable degree, it may be that when A wins a bid, B is typically the runner up. If that were the case, it is more likely that the post-merger entity could raise prices (absent any product repositioning or new entry on the part of the remaining suppliers). This links directly to the theory discussed in Section 12.3.4 on bidding processes.380 More generally, the CMA may, inter alia, be interested in the following information to assess closeness of competition: (1)
Details about the contracts for which each merging party bid (e.g., customer name, value of contract, volume of contract, length of contract, value of bids made (including for rivals, where known), who else bid, who won, and name of incumbent (for re-tendered contracts), reason for winning, reason for losing, number of rounds in the bidding process).
(2)
The percentage of bids made in which both parties bid and there were fewer than three other bidders (i.e., an implied ‘4 to 3’ post-merger).
(3)
The percentage of bids won in which both parties bid and there were fewer than three other bidders (i.e., an implied ‘4 to 3’ post-merger).
379
It may be that some data are recorded systematically, e.g., wins and losses for large customers, such that a meaningful analysis of switching for a certain customer group remains informative. For example, if the merging parties were large firms and the question of whether small firms could compete for large customers arose, win/loss data might identify whether the merging parties ever lost large contracts to small firms (and, if so, how regularly). 380
In a market characterised by a bidding process, market shares may be poor indicators of market power. For example, if bids are infrequent and contracts large, a high market share might represent the fact that one firm has won a large tender for which competition was intense. A more important issue then may be the extent to which the parties constrain each other when bidding for new contracts (or those that come up for re-tender).
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(4)
The percentage of occasions that both parties made it to the final round of bidding (if relevant).
(5)
Examples of new entrants or smaller suppliers winning important contracts (e.g., to assess the ease of entry or the breadth of the effective competitor set).
The preceding discussion does not seek to suggest that a ‘4 to 3’ in terms of bids is necessarily a problem; rather that with 4 effective bidders post-merger, the CMA is less likely to be concerned.381 Further, in the context of a bidding process, three (and in some special cases two) rivals can be sufficient for effective competition. Moreover, it may also be straightforward for the customer to invite new suppliers to the bidding process. It may be of interest also to assess whether incumbents are typically best-placed to regain contracts which are retendered. However, where one of the parties is an incumbent, this does not imply a competition concern; the relevant issue is whether the other party is particularly well-suited to displace that incumbent, while other suppliers are not. (b) Econometric tests. Where the win/loss data set is rich enough, it may be possible to test whether the presence of the other party in the bid (or the number of bidders) has a material impact on the price bid. If a study shows that, after controlling for other factors that determine price (such as the size of the contract, the identity and the number of bidders, the specific tender requirements, and so on) each merging party offers a materially lower price whenever the other merging party participates in the bid (compared to the price offered in those tenders in which the other party does not participate), then this would indicate that the merging parties exert an important competitive constraint on one another. This would in turn suggest that, absent any supply side response such as repositioning or entry by competitors, the proposed merger might be expected to lead to a post-merger price increase.382 Alternatively, if the studies were to show that the variation in the prices offered by each merging party is largely unaffected (after controlling for other factors that affect price) by the presence of the other merging party, this would indicate that there is nothing unique about the competitive constraint the two firms exert on one another and that, therefore, the proposed merger would be less likely to give rise to significant unilateral effects. In essence, this is a form of price concentration analysis, discussed above. (c) Decisional practice. Bidding data has also been used to assess closeness of competition in numerous cases, as in the case of Ericsson (Technicolor)/Creative (Red Bee Media383 and Tradebe/Sita384 (discussed above in Section 12.3.4) and the following 381
See Chapter 11 on screens. That said, it would still be important to assess how often the parties actually bid against each other. Even if where A bids against B, A’s price is lower, it may be that this occurrence is too rare – or covers too small a share of bids – to be of great concern. 383 A report on the anticipated acquisition by Telefonaktiebolaget LM Ericsson of Creative Broadcast Services Holdings (2) Limited, CC decision of 27 March 2014. 382
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examples. In example, Safenet Inc/nCipher385 bidding data indicated that the parties were the closest competitors, regularly being the last two suppliers at the tender stage. In Capita/IBS,386 the parties were found to compete closely and the merger was referred to the CC largely on the basis of bidding data. In Multi Packaging Solutions/Presentation Products,387 whilst the bidding data were not complete and did not cover the scope for switching outside the bidding process, it nonetheless provided “relatively little evidence of the Parties competing for the same orders, especially relative to other competitors, suggesting that whilst they are competing, they may not be each other’s closest competitors”.388 Bidding also demonstrated the absence of a material overlap in Metokote/Malcolm, where the CMA also stated that: “the widespread use of competitive tenders in the industrial coating sector facilitates customer switching and reduces the possibility that the Merger may give rise to unilateral effects”. 389 In AkzoNobel/Metlac, win/loss data were assessed; there were relatively few cases to assess and the proportion of demand covered was low although the CC found “some evidence” of competition between the merging parties in the B&B and FCG markets, as well as evidence that smaller buyers participated and won bids in the FCG market.390
12.7.6 Inferences on Competition Amongst Manufacturers Drawn From Retail Level Data In cases involving mergers of manufacturers selling to retailers, sometimes evidence is provided that because consumers switch between competing brands A and B, then retailers must also be well placed to switch between those same brands. There are no general rules regarding the appropriateness of using results from retail-level data as a proxy for the competition that occurs at the wholesale level, but it should instead be
384 A report on the joint venture, Tradebe Healthcare (Holdings) Limited, between Tradebe Environmental Services Limited and Sita UK Limited, relating to the healthcare risk waste sector, CC decision of 28 March 2014. 385
Anticipated acquisition by Safenet Inc of nCipher plc, OFT decision of 21 April 2006. Capita and IBS, a report on the completed acquisition by Capita Group plc of IBS OPENSystems plc, 4 June 2009. 387 Anticipated acquisition by Multi Packaging Solutions UK Limited of Presentation Products Group Limited, CMA decision of 26 February 2015. 386
388
Ibid., para. 73. Anticipated acquisition by Platinum Equity, LLC of Malcolm Enamellers Limited, CMA decision of 9 November 2015, para. 5. See also paras. 53-54: the CMA assessed bidding data and identified only four customers (out of more than 50 in total) which were common to the merging parties in 2014. The common customers accounted for 10% of Malcolm’s 2014 revenue, 6% of Metokote’s 2014 revenue, and 8% of the parties’ combined 2014 revenue. Further the CMA found that Malcolm had not bid unsuccessfully for work from any of Metokote’s current customers, and that Metokote had bid unsuccessfully for only one of Malcolm’s customers. The customer in question represented less than [0–5]% of Malcolm’s 2014 revenue. 390 A report on the anticipated acquisition by Akzo Nobel N.V. of Metlac Holding S.r.l., CC decision of 21 December 2012, Appendix H, paras. 42-43. 389
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assessed on a case-by-case basis, taking care to understand the nature of competition between manufacturers and retailers. (a) Derived wholesaler demand and wholesaler pass-through. A starting point for considering the validity of using retail-level results to make direct inferences at the wholesale level is to consider ‘derived demand’. Put simply, the quantity a retailer demands from a manufacturer is the quantity that the retailer in question is able to sell to consumers, which itself depends on consumers’ demand for that product. Thus, if consumers are very willing to switch between product A and product B, a manufacturer of product A may also face price-sensitive retailers provided that an increase in the wholesale price of A induces the retailer to pass on the higher prices (to some degree) to consumers, who in turn switch to product B. The pass through elasticity may be important – it captures how a 1% change in the wholesale price translates into a percentage change in the retail price. To see how the pass through elasticity may link consumer and retailer responses note the following examples. First, suppose that if there is a 1% rise in the retail price of a good, then there is a 2% loss of retail volumes. Further, suppose that a 1% increase in the wholesale price is associated with a 1% increase in the retail price (i.e., a pass through elasticity of unity). In this case, under some specific conditions,391 the elasticity of demand at the retail level exactly reflects the elasticity of demand at the wholesale level and therefore retail-level switching results are equivalent to those that would be obtained at the wholesale level. To see this, note the following chain of events: a 1% increase in wholesale price leads to a 1% increase in the retail price. In turn, that gives rise to a 2% fall in retail volumes, and hence a 2% fall in the retailer’s demand for the manufacturer’s product (assuming that a fixed number of the manufacturer’s products make up each unit of the retailed product).392 However, if a 1% increase in the wholesale price is associated with only a 0.5% increase in the retail price, then the wholesale level elasticity of demand is one half of the retail level elasticity of demand. In that case, switching patterns at wholesale level are not equivalent to those that would be obtained at the retail level. In short, knowing
391 The wholesale price must be the only marginal cost, such that a 1% increase in the wholesale price equals a 1% increase in marginal cost. If not, account must be taken of the impact of an increase in the wholesale price on marginal cost. For example, if a 1% increase in the wholesale price leads to a 0.8% increase in marginal cost, then the retail price increases by 0.8% (if the pass through elasticity is equal to unity). 392 The logic is easiest to follow if there is a one-for-one relationship between the number of units sold by the retailer and those sold by the manufacturer. If not, the analysis is modified accordingly (although it may make no difference when we think in percentage terms). For example, suppose that five units of the manufactured good always make up one unit of the retailed good and that the retailer sells 100 units, so that the manufacturer sells 500 units to the retailer. A 2% fall in retail volumes is then a loss of two retail units and hence 10 manufactured units (i.e., also a 2% reduction in demand for the manufactured units).
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the relationship between the wholesale price and the retail price changes is important before it can be understood how retail price sensitivity impacts on manufacturers.393 In practice, there is not always a direct link between the wholesale price and the retail price due to the nature of manufacturers’ contracts. Retail prices may, for example, change far more frequently than wholesale prices, e.g., the latter may be determined on the basis of annual contracts. Retail prices may also be affected by regular deep discounts or loss-leading at the retail level (which are often not funded by reductions in the wholesale price, but by fixed payments by manufacturers to retailers in return for contractual retail commitments). Further, the true wholesale price may be non-linear, i.e., not simply a price per unit but affected by end of quarter or end of year rebates, potentially depending on purchases of other products from the same manufacturer (i.e., bundled rebates). (b) A bargaining context. Manufacturer mergers often raise the issue of whether retailers have buyer power in a bargaining context. For example, if a buyer has a credible threat to switch away from a manufacturer in the event that the manufacturer attempts to increase the wholesale price (or otherwise impair the terms of supply), it may be that there are many examples of such switching taking place. In this regard, previous examples of de-stocking (e.g., periods where certain stock keeping units (SKUs) have been (largely) dropped) could be important evidence. Actual switching by the retailer may well be picked up in consumer level data in the sense that specialist market reports which set out what retailers have sold to consumers in any given week or month would identify whether or not a manufacturer’s product was available or not. Thus, switching by retailers can sometimes be observed where there are sudden drops in volumes sold of certain products (as may be the case where a retailer removes a product from some, but not all, of its stores) or the entire removal of certain SKUs.394 Where a product (or product SKU) is substantially de-listed, it may well be informative to assess the product that took its place on the shelf – e.g., another competing manufacturer brand, a competing retailer private label, or even a product from an entirely different product category (e.g., because scarce shelf space was temporarily
393
The preceding discussion demonstrated that in a (very) special case where a 1% change in the wholesale price is always associated with a 1% change in retail prices, the retail level elasticity of demand equals the wholesale level elasticity of demand. However, in theory, the wholesale price would be expected to impact on the retail margin in a more complex way (as opposed to there being a fixed percentage relationship). This is because the wholesale price impacts on the retailer’s cost (it is just one element of the retailer’s marginal cost) and hence on the retailer’s price. Further, the retailer’s price is related to its marginal cost in a way that varies with: (i) the retailer’s cost function (i.e., the technology determining its marginal cost); (ii) the nature of the retailer’s demand; and (iii) the degree of competition faced by the retailer. To come to a precise view here on how retail level demand impacts on manufacturer level demand thus requires making assumptions about the nature of cost and demand and the degree of competition. 394 Sharp drops in volume could also be explained by other substitute products being heavily promoted. It would be important to verify what caused the drop in volumes.
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allocated to an alternative high margin, fast moving consumer goods).395 In particular, it is important to assess whether one merging party’s product is de-listed and replaced by a product sold by the other party to the merger (and, if so, how often this occurs). Similarly, in the context where manufacturers and retailers negotiate, consumer purchasing data may be important not so much for measuring precise demand elasticities at the downstream level but more in relation to corroborating the buying strength of retailers. For example, suppose the two merging firms produce, respectively, product A and product B. Evidence that consumers do not have strong brand loyalty for the products A and B would be important to help back up the claim that a threat to de-stock (certain SKUs of) product A or B is credible; a retailer is less likely to de-list a SKU if so doing would alienate its consumers because they have a particular affinity to that brand and would potentially switch to another store as a result. The relative absence of brand loyalty can be demonstrated by consumers switching substantially away from product A and B in response to price rises (or to promotions of competing products). However, if retail level data indicate products A and B to be particularly close substitutes this (while consistent with buyer power before an AB merger) may point to the absence of buyer power after the merger unless the retailer has a sufficient choice of alternative, equally close substitutes. Of course, the whole point of a threat to switch is that the buyer does not need to switch in order to obtain better terms – so the preceding types of example may not be available. However, the buyer may have switched in recent times to establish the credibility of its threat.396
395 Retailers can be substantially more or less price sensitive than consumers. For example, first suppose that retailers change price on a weekly basis, while wholesalers change price on an annual basis. Weekly changes in demand arising from various store level promotions may overstate the sensitivity of demand relevant for a wholesaler who takes a longer term view (e.g., due to its annual contract with the retailer). Secondly, consider a different example. Suppose that there is room to stock only one product on the shelf and the retailer is choosing between two highly differentiated products that would generate the same financial return. From the consumers’ point of view, the elasticity of demand for each of the individual products could be quite low. However, from the wholesaler’s point of view, the price elasticity could be very high because competition for the scarce shelf space is intense. See Hosken et al., Demand System Estimation and its Application to Horizontal Merger Analysis (2002), for further details. 396 If a retailer has not switched regularly, it may nonetheless have threatened to do so, so as to obtain better terms of supply. These instances may be backed up by documentary evidence prepared in the normal course of business. If retailer buying strength is growing over time (perhaps due to retailers improving their scope for self-supply or raising the profile of their own label products), then contracts may be regularly updated on terms that are more favourable to the retailer (e.g., the retailer negotiates larger or more regular contributions to retailer discounts). This could be shown by a decline in margins over time that cannot be explained by other features that impact on manufacturer margins.
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(c) Decisional practice. In Unilever/Alberto Culver,397 the OFT considered evidence on closeness of substitution gathered at the consumer level (retailers selling to consumers) to infer switching patterns at the wholesale level (manufacturers selling to retailers). The OFT considered the issue of whether switching at the wholesale level was likely to exceed that at the retail level, noting the following in relations to bar soaps: (i) the parties argued that retailer's incentives would be to adjust the prices of all the soap brands it stocks in response to a unilateral price rise by one of the suppliers, according to the parties, implying wholesale diversion ratios lower than retail diversion ratios and a larger diversion to 'outside goods'; and (ii) the parties compete for retailers' shelf-space not only against other bar soap suppliers but also suppliers in other product categories and pricing at the wholesale level is non-linear so retailers may respond to price changes in a broader variety of ways than consumers (for example, by shifting shelf space allocation to other product categories). The OFT accepted that there are reasons that may point to diversion at the wholesale level being lower than that at the retail level but noted that wholesale switching can exceed retail switching. The OFT provided the following example: “For example, suppose there are three brands A, B and C. Two retailers stock the primary brand, A, and each stocks an additional secondary brand, either B or C. If one stocks B and the other stocks C, and consumers tend to shop within a single retail outlet, the diversion between brands B and C at the retail level will be very low. However, for the retailer at the wholesale level, brands B and C are closest competitors and diversion between them may be significant. Similarly, consumers make a binary decision to buy a (pack of) bar soap, or not to buy it. So an individual consumer's switching behaviour is total, not partial. However, a retailer can alter the number of facings that it gives a product (partial substitution) without delisting it (total substitution). This may make wholesale diversion greater than retail diversion, all else equal.” The OFT concluded that switching information was a reasonable proxy for diversion between brands at the wholesale level but remained “mindful of its limitations”. More recently, consumer level survey evidence has been used to inform closeness of substitution at the manufacturing level (including in relation to IPR calculations) in AG Barr/Britvic and Reckitt Benckiser/K-Y brand.398 In the latter case, the CMA noted that while the survey focused on consumer switching rather than diversion of retailers between the parties, evidence from retailers suggested that consumer behaviour in this market, and in particular, consumers’ awareness of and the marketing behind different brands strongly influenced retailers’ choice of the products they stock. The parties’ views were found to be consistent with this. The CMA also noted that although its switching estimates did not take into account retailer negotiation, retailers would passthrough higher prices set by the merging parties as higher retail prices, and hence that 397
See Anticipated acquisition by Unilever of Alberto Culver Company, 5 April 2011, paras. 81-83 and note 48 to para. 83. 398 For a discussion of the Bertrand model’s assumptions in an IPR context, see A report on the anticipated acquisition by AG BARR p.l.c. of Britvic plc by means of an all-share merger, CC decision of 9 July 2013, Appendix 6, para. 5. See also A report on the anticipated acquisition by Reckitt Benckiser Group plc of the K-Y brand in the UK, Appendix F, paras. 10-14.
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data on consumer behaviour and the calculated diversion ratios would be informative for assessing the closeness of competition between the merger parties’ brands and the incentive of the merged entity to try to increase the wholesale price, post-merger.
Chapter 13 COORDINATED EFFECTS 13.1 Introduction 13.2 The Economics of Coordination 13.2.1 The Economics of Collusion – Outline of the Basic Model 13.2.2 The Economics of Collusion – Key Concepts (a) Explicit versus tacit collusion (b) The economic definition of collusion is not the same as the legal definition (c) How do firms determine the collusive price? (d) How do firms choose a punishment strategy? (e) Explicit communication does not make collusion inevitable 13.3 The Necessary Conditions for Coordination 13.3.1 Alignment (a) Number of competitors (b) Degree of complexity in the market (c) Structural links (d) Terms of coordination 13.3.2 Internal Stability (a) Factors relevant to internal sustainability (b) Number of competitors
13.1
(c) (d) (e)
Transparency Punishment strategies Symmetry of market shares and cost structures (f) Prior evidence of coordination 13.3.3 External Stability 13.3.4 Effect of a Merger on the Scope for Coordination (a) Types of coordinated effects (b) How might a merger make collusion more sustainable or more harmful? 13.4 The Authorities’ Decisional Practice 13.4.1 DS Smith/LINPAC (a) Merger overview (b) OFT decision (c) CC decision 13.4.2 Wienerberger/Baggeridge (a) Merger overview (b) OFT decision (c) CC decision 13.4.3 Anglo American/Lafarge (a) Merger overview (b) OFT decision (c) CC decision
INTRODUCTION
Coordinated effects arise where a merger makes existing collusion more harmful or makes collusion substantially more likely to occur (where it is not already occurring).1 The Merger Assessment Guidelines state that “[a] merger may give rise to an SLC through coordinated effects. Coordinated effects may arise when firms operating in the same relevant market recognise that they are mutually interdependent and that they can 1 This chapter refers to the terms ‘coordination’ and ‘collusion’ interchangeably. The term ‘collusion’ should not be interpreted to necessarily mean an infringement of Article 101 (TFEU) or the Chapter I Prohibition of the Competition Act.
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reach a more profitable outcome if they coordinate to limit their rivalry.”2 The Guidelines note that coordination amongst competitors may take different forms. Most often, the goal of coordinated behaviour will be to achieve higher prices than the coordinating parties would be able to achieve in a more competitive market. However, in addition to higher prices, coordination can in principle be used to affect other competitive variables, including reducing output, limiting/preventing new capacity, dividing markets geographically or by type of customer, or by allocating contracts amongst themselves in bidding competitions.3 However, it is not necessary for competitors to coordinate in respect of all of these parameters, or even on more than one parameter, for a merger potentially to result in a substantial lessening of competition.4 Coordinated effects cases are relatively rare. Under the Enterprise Act, only a small number of mergers have been referred to Phase II on the basis of coordinated effects (and most of these cases were also referred on the basis of unilateral effects).5 Furthermore, to date, no merger has been prohibited,6 and only two mergers have been subjected to remedies on the basis of coordinated effects.7 Since the creation of the CMA, no merger has been found to result in a substantial lessening of competition on the basis of coordinated effects.
13.2
THE ECONOMICS OF COORDINATION
Coordinated effects are a matter of how a merger enhances or changes the prospects of coordination. Therefore, it is important to understand what coordination means. This section provides a brief introduction to some of the key principles from the perspective of economic theory. As will be discussed in greater detail below, there are three 2 3
Merger Assessment Guidelines, para. 5.5.1. Ibid., para. 5.5.2.
4
Ibid. To date, the only mergers to be referred to Phase II solely on the basis of coordinated effects are Completed acquisition by DS Smith plc of LINPAC Containers Limited, OFT decision of 20 May 2004 and Anticipated acquisition by Wienerberger Finance Service BV of Baggeridge Brick plc, OFT decision of 11 December 2006. 6 In Anticipated acquisition by Robert Wiseman Dairies plc of the fresh milk business of Scottish Milk Dairies Limited, OFT decision of 19 October 2005, the OFT referred the merger to the CC primarily on the grounds of coordinated effects, but also on the grounds of unilateral effects. The merger was then abandoned following its reference. Consequently, this case may be seen as being equivalent to enforcement action on the basis of coordinated effects. 5
7 Completed acquisition by Aggregate Industries Limited of Foster Yeoman Limited, OFT decision of 20 November 2006. Following the OFT’s Phase I investigation, Aggregate Industries committed to divest its shareholding in the Harlow Coated Stone joint venture to remedy the OFT’s coordinated effects concerns resulting from the merger in the Hertford area. See also Anglo American PLC and Lafarge S.A., a report on the anticipated construction materials joint venture between Anglo American PLC and Lafarge S.A., 1 May 2012. The CC found an SLC in bulk cement on the basis of coordinated effects and noted that, even absent the increase in cement concentration, the addition of a large number of ready mix (RMX) concrete sites to Lafarge would substantially enhance coordination among cement producers. The parties therefore had to divest a cement plant and a large number of RMX sites to resolve a coordination concern as regards the supply of bulk cement.
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necessary conditions for collusion: (i) alignment; (ii) internal stability; and (iii) external stability. Economic models typically take as given that firms can align on a collusive strategy (i.e., arrive at an understanding on both the terms of collusion and any punishment strategy or profit sharing mechanism required to underpin it). The textbook models of collusion instead focus on ‘internal stability’ (i.e., that members of the colluding group have a sufficient incentive to forgo the gains from deviating from the collusive strategy) due to the fear of being detected and punished. These models typically take external stability as a given (i.e., that there are insufficient constraints from firms outside the colluding group, new entrants or powerful buyers to undermine collusion).
13.2.1 The Economics of Collusion – Outline of the Basic Model Economists generally think about collusion as arising from repeated interaction amongst firms. In this setting, a collusive outcome occurs where firms depart from what would be a profit-maximising strategy in the short-term because they fear that pursuing shortterm gain would give rise to punishment in later time periods. If collusion is sustainable, each firm would expect to earn greater profits from sticking to the collusive agreement than deviating from the agreement and then facing some form of punishment. For example, suppose that two firms, A and B, have agreed to allow firm A to win a sealed-bid tender for 100 units at a price per unit of £10 (the customer’s maximum willingness to pay) and then share equally firm A’s resulting profit. Suppose that both firms can produce the required product equally well for £5 per unit. If the customer goes out to tender, and if firm A bids £10, then – if A wins the project – its total profit is £500. Firm A would then give £250 to firm B. However, if firm B expects firm A to bid at £10, firm B could do better by charging £9. Firm B would then supply the customer 100 units, making a margin of £4 on each sale, generating £400 in profit. This exceeds the £250 that it would get from letting firm A win at a price of £10. Therefore, in the short-term, firm B has a strong incentive to undercut the agreed price. If the customer is likely to require 100 units on a regular basis (e.g., every year) and indefinitely, then firm A has scope to make collusion sustainable through its ability to punish firm B. For example, having observed that firm B cheated, firm A can revert to a strategy of bidding a price of £5 every year that the customer goes out to tender. In this case, although firm B would earn £400 in the first year, it would then earn nothing in all subsequent years during the ‘punishment phase’. Suppose that firm A can credibly commit to the following pricing strategy: price at £10 if B has never cheated or price at £5 if B has ever cheated. Firm B must then weigh up whether cheating will be profitable or not. In order for firm B to find collusion profitable, the present value of the payoff from cheating plus the associated pay-off during the punishment phase must be less than the present value of the pay-off from sticking to the collusive strategy. Formally, firm B will collude if: £400