CMA publishes updated retail mergers commentary


26 April 2017

The Competition and Markets Authority (“CMA”), the authority responsible for operating and enforcing the UK merger control regime, has published its updated Retail Mergers Commentary (“New Commentary”).1

The CMA commonly reviews retail mergers to see whether they are compatible with competition law. The review process is often complex, lengthy and can have a large impact on the final shape of a transaction.  For example, the recent Celesio / Sainsbury’s Pharmacy and Ladbrokes / Coral inquiries each lasted over 12 months2, and the latter was only approved by the CMA once the parties undertook to divest nearly 10% of the total number of stores which were the subject of the deal.

The CMA is continuing to monitor the retail sector closely and it is expected that it will carry out a detailed review of the proposed Tesco / Booker merger3, with particular scrutiny given to any overlap between Tesco’s One Stop shops and Booker’s retail franchises.

Considering the frequency and potential commercial impact of CMA reviews, the New Commentary provides a useful reminder of the methodologies the CMA has used in previous cases and those it may use in the future.

 

Key considerations for businesses

Although the New Commentary does not constitute binding ‘guidance’4 and does not set out a ‘one size fits all’ approach to assessing transactions it is possible to draw out from it a range of factors which businesses need to be aware of when structuring a retail merger.

The CMA’s cautious approach

The New Commentary makes it clear that the CMA will take a fluid, cautious approach to assessing whether a merger raises competition concerns; the CMA’s overarching aim is to ensure that all areas where a significant lessening of competition (“SLC”) could occur post-merger are identified.

Businesses should be aware that parameters and criteria of CMA assessment are liable to change during its review, based on the evidence available and the sector concerned, and in particular that it may re-examine areas which it has previously assessed as being unproblematic.

Assessment of local competition

In retail mergers the CMA will often focus its review on local areas in which the parties both have outlets. The CMA will first identify catchment areas around the target company’s stores which overlap with those of the acquirer and then assess whether post-merger a sufficient level of competition will be retained in those areas.

The New Commentary summarises themes which arise from the CMA’s previous local assessment reviews of retail mergers, in particular:

  • Catchment areas: the New Commentary confirms that the CMA will start its assessment by identifying geographic catchment areas which capture a sufficient percentage of sales or customers of a given outlet, usually 80%, but this percentage and the size of the catchment area can and will be adjusted on a case by case basis;
  • Filtering unproblematic areas: once catchment areas have been determined, the CMA will start to filter out unproblematic areas by assessing whether in any given area, post-merger, there will remain a sufficient variety of fascia or a sufficient number of outlets5 to avoid a SLC;
  • Weighting: when applying fascia or store count filters the CMA will assign greater or lesser weight to certain competitors or outlets based on the extent to which these constitute a competitive constraint;
  • Evidence: in conducting its assessment, the CMA will use the parties’ internal documents, information from competitors and consumers and survey results as evidence, and will also have recourse to qualitative and quantitative criteria (such as product range, store size, branding and opening hours).

Assessment of national competition

The New Commentary focuses on the CMA’s local competition assessment, but it does acknowledge that there may be competition concerns which are national in nature.  The New Commentary notes that the CMA has recently assessed two theories of harm in relation to such cases:

  • a loss of national competition not related to local competitive interactions, for example where the parties did not have regard to local levels of competition when bidding to offer a ‘best price’ nationally;
  • a loss of dynamic competition, where a merger results in one or both of the parties abandoning actual or potential plans for expansion into new locations.

Internal documents are key evidence

The New Commentary highlights the CMA’s increasing reliance on internal documents as evidence of who the parties’ effective competitors are, and how they segment and define a market. The CMA’s reliance on internal documents reflects an approach increasingly being taken by the European Commission and national regulators.

Businesses should exercise strict discipline in the creation of internal documents, even before a specific merger is contemplated, in the expectation that these documents will be closely reviewed by the CMA. The CMA is likely to be particularly interested in documents which assess or analyse the proposed merger in respect of competitive conditions, competitors (actual or potential), potential for sales growth or expansion, market conditions, or the parties’ market shares.

Producing replies to information requests can involve substantial costs and result in disruption to the business; additionally the deadlines for reply are often as short as one or two days. As such, businesses may wish to carry out preliminary analysis of internal documents prior to the CMA starting its review, so as to be on the front foot once information requests are received or to identify any potentially problematic documents ahead of time.

 

Commentary

The New Commentary provides a helpful summary of the approach the CMA has taken in recent retail merger cases. It is interesting to note that the original commentary published in 2011 had highlighted more fixed methodologies for assessing local competition and identifying unproblematic areas.6  The New Commentary confirms that the CMA has moved away from this approach, in favour of a more fluid cases-by-case assessment, tailored to the specific market in question.

Companies contemplating mergers should be aware that the approach taken in previous cases may not be followed in the future as the market and CMA practice has evolved. As a result, a competition risk assessment, particularly one involving local overlaps, will typically demand significant data analysis and time to complete.

 


 

1. See: https://www.gov.uk/government/publications/retail-mergers-commentary-cma62.  The New Commentary builds on and replaces the Commentary on Retail Mergers published in 2011, see https://www.gov.uk/government/publications/commentary-on-retail-mergers.

2. See here https://www.gov.uk/cma-cases/ladbrokes-coral-group-merger-inquiry and here https://www.gov.uk/cma-cases/celesio-sainsbury-s-pharmacy-business-merger-inquiry.

3. See here http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/TSCO/13108615.html.

4. The CMA notes that it will continue to have regard to the 2010 Merger Assessment Guidelines when investigating merger cases. See here https://www.gov.uk/government/publications/merger-assessment-guidelines.

5. Generally a fascia filter will be used in mergers where brand is found to be an important driver for customers, and a store count filter will be applied where brand is not considered very important or visible to customers.

6.  The filtering process described in the Commentary on Retail Mergers (2011) involved (i) applying a catchment area measure (geographic radius / distance to each outlet), (ii) applying an analysis criteria, usually fascia, to identify unproblematic areas (i.e. areas where the merger would not result in an SLC) , (iii) re-centering the catchment areas or flexing the catchment measure to confirm only unproblematic areas were filtered out.

Peter Harper, Partner
e: peterharper@eversheds-sutherland.com
t: +44 207 919 0646
Stephen Rose, Partner
e: stephenrose@eversheds-sutherland.com
t: +44 207 919 4785
Kate Newman, Partner
e: katenewman@eversheds-sutherland.com
t: +44 113 200 4467
Pawel Chmiel, Associate
e: pawelchmiel@eversheds-sutherland.com
t: +44 20 7919 0925