UK Merger Insights: 2023 No.1

Here are links to some of the most insightful merger control articles I’ve come across so far this year:

1.

In this article Scott Sher discusses a number of matters that are highly pertinent in the UK as well as in the US, the focus of the piece.

2.

Will pressure on disposable incomes affect the CMA’s priorities in terms of which mergers it looks at?

James Baker and colleagues look at this question here.

3.

What can we learn from the two fast-track CMA Phase 2 remedy cases to date?

Sofia Platzer and colleagues take a look here.

4.

The future of merger remedies.

In this piece John Davies reports on the main themes of a recent conference on the subject

5.

The first year of the National Security and Investment Act

Kate Kelliher and Marc Israel review what happened in 2022. Link here.


Please feel free to add a comment or press the ‘like’ button if you’d like more of these occasional round-ups.

Late Exit Pass

The CMA’s recently-published Phase 1 decision on the Korean Air Lines/Asiana Airlines merger includes interesting discussion on the way in which arguments unfolded as to whether that the target would exit if the merger did not proceed.

The merging parties’ initial submission was that, in the absence of the merger, Asiana would be a substantially weaker competitor.

According to the decision write-up the parties only later argued that the criteria for the ‘exiting firm’ test are met, an argument that the CMA rejected.

In the parties’ response to the CMA’s issues letter, they indicated that they had not made this argument earlier because the CMA had indicated that it would be highly unlikely to accept such a counterfactual in Phase 1.

The CMA said that the fact that the Parties only submitted that the exiting firm test is met at a very advanced stage of the CMA’s investigation (ie in response to the issues letter) limited the CMA’s ability to conduct the evidence-gathering that would typically be required to assess whether this test is met.

This is all rather circular!

But it isn’t new.

Late and unsuccessful deployment of an exiting firm case at Phase 1 has been seen many times before.

In fact I talked about it in my very first blog – nearly ten years ago!

In a later post I’ll aim to look at some of the reasons why this scenario recurs.

In the meantime, here’s the key question that firms contemplating merger in the UK might want to ask very early on:

What can be learnt from the 48 previous CMA cases in which ‘exiting firm’ arguments have been deployed about :

prospects for success and

how best to make the argument?


The Great Bake … Off

Cérélia/Jus-Rol

On January 20th the CMA announced its first merger prohibition of the new year by concluding that merger between Cérélia andJus-Rol is likely to reduce competition substantially and that Jus-Rol needs to be sold to an independent buyer.

It is unusual to see a case in the food manufacturing sector referred to a Phase 2 inquiry. In fact it’s only the second time for the CMA, out of 29 cases to date.

And this is the first to be prohibited.

According to the CMA, Jus-Rol is by far the largest supplier of branded ready-to-bake products in the UK, while Cérélia is the largest supplier of own-label ready-to-bake products, making these items on behalf of some of the nation’s largest grocery retailers.

Key to the CMA’s Phase 2 conclusion were the following findings:

  • the merger brings together the 2 leading suppliers in the market by a considerable marginready-to-bake items supplied by Cérélia and Jus-Rol account for nearly two-thirds of all such products sold to grocery retailers in the UK.
  • Jus-Rol items compete with supermarkets’ own-label products supplied by Cérélia for the same space on many supermarket shelves.
  • grocery customers regard the companies’ products to be important alternatives to one another – particularly because there are few credible alternative suppliers of either branded or own-label products.
  • the merging businesses face limited competition, with all other suppliers being far smaller and many of them lacking the capabilities held by Cérélia and Jus-Rol.

So is this food sector prohibition as unusual as it might seem?

Not if you look more widely than this particular sector.

According to my analysis there have been 10 previous deals with the same pattern of key evidence, across all sectors. Only two have raised no significant competition problems and none have so far survived the Phase 2 process.


The link to the CMA’s Phase 2 report is here.

More Problematic Than Not

Number Four in my look back at 2022…..

This was the year in which there were more Phase 1 merger interventions than unconditional clearances (among Phase1 decisions published during the year) – for the first time.

Despite the very low number of published Phase 1 decisions, the number of remedy decisions was well above the CMA average (10 versus 6) and the highest since 2017.

The number of reference-to-Phase-2 decisions was just above the average for previous years (11 versus 10).

Also:

Between 2017 and 2021 the number of references had been more than twice the number of remedies.

In 2022 they were roughly even.

2022 is also, therefore, the year in which Phase 1 remedies came into their own again.

Basement Clearances

This is the third of my posts looking back at UK merger control in 2022……….

The first looked at the low overall number of cases and the second at the near disappearance of so-called ‘de minimis’ cases.

In this post I look at Phase 1 clearance cases.

Here are the figures for Phase 1 clearance cases (in which I include ‘de minimis’ decisions)…

Four points stand out –

1.In 2022 there were just 20 Phase 1 published decisions that reported unconditional clearance, by far the lowest under the CMA.

2. And most of these were in the first half of 2022. The second half saw only 7.

3. It is the fourth successive annual fall and a sharp drop from 2021.

4. And the first year that fewer CMA Phase 1 published decisions reported clearance than did not.

Which all begs the question – Where have the clearance cases gone?

More on this in future posts………..

Much De Minished

Continuing my look back at 2022….

One of the features of the very low number of cases in 2021 and 2022 is the tiny number of cases considered for application of the ‘de minimis’ (low market size) exception to the CMA’s duty to refer.

In simple terms this exception enables the CMA to decide that it is not worth taking further action against mergers where an investigation has shown that competition problems may arise but where the size of the markets involved and/or the effects of the competition harm are too small to justify a reference to an in-depth Phase 2 investigation

In 2021 and 2022 I am aware of only one case in each year where ‘de minimis’ was considered in a public investigation – and accepted in both cases.

In the CMA’s early years between six and nine were considered in each year, with many being unsuccessful.

It is true that, in 2017, the CMA increased the market size below which it would be likely to exercise the exception.

This inevitably takes some cases out of the CMA’s reach (by my calculation, perhaps about half of them at the original thresholds).

But it also shifted the lower de minimis boundary upwards, meaning that cases that would once not have qualified for de minimis treatment, now do so.

So where are these cases?

Perhaps there simply haven’t been many in recent times and they will reemerge in due course.

Perhaps the CMA’s Merger Intelligence Committee has paid them less attention than before.

Or maybe more are now being dealt with through the CMA’s non-public briefing paper system , under which – since 2016 – merging parties have been able to submit a short paper to the CMA setting out why the CMA should not formally investigate the deal.

If there were, say, 50-100 briefing paper cases during 2022, it would be quite plausible that 5-10 or so might feature de minimis aspects (though less clear why none would make it through to investigation).

In the absence of published data on the CMA’s briefing paper activity how likely is this scenario?

If you have views on this (or any of the above) do let me know, either in the comments box below or by dropping me a line.

A Low, A Low

Happy New Year everyone.

As we look forward to 2023, what better time to review some of the key features of UK merger control in 2022?

Let’s start with the number of cases. (In coming posts I’ll look at other aspects).

Here’s my calculation of the number of Phase 1 published decisions by year (excluding those cases that were investigated but failed to meet the jurisdiction thresholds and national security-driven cases):

201462
201570
201660
201761
201855
201958
202047
202140
202241

The headline point is clear: the number of published Phase 1 decisions remained near its record low in 2022, despite the UK taking on responsibility for more merger cases after leaving the EU. Some predicted a big increase in the CMA’s caseload as a result.

A number of factors are relevant here, including:

  • Deal numbers – still affected by pandemic-related disruption
  • The type of deals being done
  • How selective the CMA is in the deals it chooses to investigate

What’s your view on the balance between these?

Do feel free to post your comments in the box below.

How The CMA Merger Numbers Are Made Up

There’s been a big overall decline in the percentage of CMA cases cleared unconditionally (at Phase 1 or Phase 2)* in recent years.

It’s been much commented on and interpreted.

But it’s not quite what it seems when you look behind the headline numbers.There are very different patterns when looked at by case type.

In fact, arithmetically at least, the aggregate change is accounted for by just one type of case.

Here’s the overall pattern for 2019 and 2020 cases, with the size of the different elements proportional to the number of outcomes in each category – where

  • green = unconditional clearance at Phase 1 or 2
  • yellow = remedies at Phase 1 or 2
  • red = prohibited or abandoned …….

Source: Adrian Payne analysis of published CMA decisions

It illustrates how important it can be to look behind the aggregate numbers when considering past or potential case outcomes and when interpreting ‘trends’ in the aggregrate numbers.

In one of my next Merger Insight briefings I’m going to be discussing the reasons behind these patterns and what they mean for companies planning mergers.

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(* Percentage of publically-investigated cases. Takes no account of cases the CMA chooses not to investigate publically, on which no meaningful data are published.)

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The Surprising UK Share Of Supply Test

Surprise, surprise

Why are so many companies surprised to find their mergers investigated by the CMA?

It’s partly down to the elasticity with which the CMA exercises its ‘share of supply’ jurisdictional test.

Over the past year of two I have featured some persuasive articles on this in my UK Merger Spotlight.

Perspective

It’s important, however, to keep a sense of perspective:

The share of cases examined under the share of supply test is well towards its CMA low, as the diagram here shows.

Growing Unease

Maybe there are other reasons why unease among merging companies and their advisers has been growing about ‘share of supply’ cases?

Here are three:

  1. Collapse in Phase 1 ‘share of supply test’ clearances

As the following diagram shows, since mid-2019 the proportion of ‘share of supply’ cases cleared at Phase 1 has nose-dived.

By contrast, the proportion of clearances among cases investigated under the CMA’s £70m turnover test has continued to climb – up to a CMA record of nearly 75%.

2. More referrals of ‘share of supply’ cases for in-depth Phase 2 investigation

The proportion of ‘share of supply’ cases referred for a Phase 2 investigation during the second half of the CMA’s case portfolio has been double what it was in the first half. (Meanwhile the proportion for ‘turnover test’ cases has stayed about the same).

3. Worsening outcomes at Phase 2 for ‘share of supply’ cases

The proportion of ‘share of supply’ cases cleared at Phase 2 has also dropped sharply between the two periods (though here there has also been a smaller but significant drop in the proportion of turnover test cases cleared at Phase 2).

In 2020, these three developments have culminated in

  • ‘Share of supply’ cases accounting for three quarters of the Phase 2 investigations completed to date
  • Just one clearance  among these ‘share of supply’ Phase 2 cases and
  • Over half prohibited by the CMA or abandoned by the parties.

So What?

1. Increases pressure for change

Well, for a start, the ‘share of supply’ case outcomes may explain some of the current criticism of the UK’s ‘voluntary’ notification regime.

Some would like the UK to move to a more ‘mandatory’ notification regime, with no share of supply test or with a share test that gives the CMA much less discretion. (It would, of course, be ridiculous to think that some such calls might also have anything to do with views on Brexit !)

2. Demonstrates the contribution of the ‘share of supply’ test

Second, the figures bring home how important the ‘share of supply’ test has been and continues to be to the UK merger control regime.

There is considerable onus therefore on those who advocate change to show how the contribution that the ‘share of supply’ test has made to the protection of UK consumers can be preserved or enhanced in any new system without adding unduly to the burden on merging parties or the taxpayer.

3. Provides important lessons for merging firms

And finally, for companies who may be considering merger in coming months the figures show how important it will be to take ‘share of supply’ test considerations fully into account in assessing UK merger control risk.

On this point it’s worth noting too that over a third of ‘share of supply’ cases examined so far this year were selected for investigation by the mergers intelligence function (a much higher proportion than for turnover test cases).

Especially in the new post-Brexit environment it is important for companies – even those with limited activities in the UK – to consider more carefully whether the CMA might take an interest in their deal, even where potential grounds for that interest might not be immediately obvious.

If that happens maybe the ‘share of supply’ test will spring fewer surprises in 2021 ?


In January 2021 I will be running a Merger Insight briefing discussing:

”The Extra Questions Merging Companies Need To Ask About The UK Share Of Supply Test.”

Details will be posted here. Do drop me a line if you would like to register interest now.


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CMA Phase 2 Decisions: The Long And Short Of It

There is a lot of interest at the moment as to what governs extension of the CMA Phase 2 timetable and whether extension has been a ‘good or bad sign’ for merging parties.

In my latest Merger Insight briefing yesterday I therefore looked at the Phase 2 cases to date for which the CMA extended the timetable for review – usually by up to eight weeks.

Below is a key chart that informed the discussion.

From left to right it ranks the Phase 2 final outcomes in ascending order of the duration of the Phase 2 process.

Each case is coloured as follows:

  • Black – merger abandoned
  • Green – unconditional clearance
  • Orange – clearance with remedies
  • Red – prohibition

The chart rather explains itself….

 

About a third of Phase 2 investigations to date have been extended. With one or two exceptions these are concentrated in the right-hand third of the chart.

It’s immediately apparent therefore that the proportion of cases unconditionally cleared has been very low for extended cases – less than half that for cases that ran to the usual timetable.

However it’s not all bad news for parties involved in extended cases. Extension can lead the CMA to become comfortable with a relaxation of remedies proposed at the provisional findings stage and enable late-emerging evidence to be explored in full.

Even so – the fact remains that only just over one in five extended cases have ended up being cleared.

Or – to put it another way – over two-thirds of mergers that have been prohibited or remedied at Phase 2 have involved extended investigations.

The other talking point yesterday was the proportion mergers that parties have decided to abandon. But that’s a story for another day….


For details of my free Merger Insight briefings please click here.