More Merger Remedies Than Ever

The Competition and Markets Authority has just completed its fourth year.

One particular development stands out, looking at the pattern of outcomes among the 250+ CMA merger decisions since 2014….

More Phase 1 remedies: Fewer Phase 2 investigations

On average, the Competition and Markets Authority (CMA) has accepted between 3 and 4 more remedy outcomes each year at Phase 1 than the Office of Fair Trading (OFT) which had responsibility for Phase 1 mergers until 2014.

At first glance that increase doesn’t look significant…. until one considers that:

  • the average number of Phase 1 remedies under the OFT was only 5 in the first place and that
  • the CMA has been formally considering 30% fewer cases than did the OFT.

The number of references to Phase 2 is on average just over 3 lower each year than it was before the CMA took over responsibility for Phase 2 mergers from the Competition Commission.

Pre-CMA the average annual number of references was 11.

While there is not be a direct one-for-one relationship between the increased average number of remedies and the lower average number of references, a  link would not be too surprising given the CMA’s stated policy of resolving more cases at Phase 1.

Overall, the percentage of problematic Phase 1 cases resolved through Phase 1 remedies, rather than reference to Phase 2, has been more that a third higher in the CMA’s first four years than for any four-year period under the OFT.

What has been the change in the pattern of outcomes at Phase 2?

The reduction in the average number of Phase 2 cases under the CMA reflects, in order of scale of change:

  • fewer mergers being abandoned on reference to Phase 2
  • fewer Phase 2 clearances
  • the near elimination of Phase 2 prohibitions and
  • a lower number of Phase 2 remedy outcomes.

This is consistent with the notion that, if there is some link between more Phase 1 remedies and fewer references to Phase 2, it is the more ‘marginal’ and more ‘fragile’ that may have been most affected.

If so it means that some cases that might have been cleared at Phase 2 are undergoing merger remedies at Phase 1.

This may be one reason why the proportion of cases being unconditionally cleared at Phase 1 or at Phase 2 is sharply lower under the CMA than it was under the OFT. (Another is the CMA’s greater selectivity in which cases formally to investigate.)

How Are Companies Responding?

Judging from conversations during some of my recent merger briefing sessions ,some companies considering or implementing mergers are already paying much closer attention to the potential for a Phase 1 remedy outcome than used to be the case.

This includes thinking harder about the more expansive types of Phase 1 remedy that the CMA has shown itself prepared to consider and accept.

For some it also means attending more to how they shape and scope their transactions and how they measure the degree of merger control risk they are taking on.

There are plenty of lessons merging companies can learn from the CMA’s 34 Phase 1 remedy cases so far – the subject of one of my recent briefings.

In recent months the rate of remedied cases has come back somewhat from its peak. Looking ahead, it will be interesting to see, therefore, whether we have already reached ‘peak Phase 1 remedy’.

 

 

 

 

A Closer Call – UK Merger Control Decisions in 2017

As 2017 draws to a close here are some of the distinctive features of this year’s merger decisions by the UK’s Competition and Markets Authority.

The picture I present is a bird’s-eye view, rather than a commentary on individual cases (which I will cover separately in my Merger 2017 A-Z briefings).

In particular, I focus on noticeable differences between this year’s cases (taken as a whole) and the overall pattern of CMA decisions across previous years, since the agency took over from its predecessor bodies in April 2014.

I focus on the 60 Phase 1 decisions in 2017 to date as there are too few Phase 2 cases to enable a meaningful comparison.

In what follows reference to ‘SLC’ cases means those Phase 1 decisions that found that the merger brings a reasonable prospect of a ‘substantial lessening of competition’.

Below I look at:

  • The pattern of cases
  • Decision outcomes
  • Theories of harm
  • Evidence
  • Key reasoning behind the decisions
  • Analysis
  • Implications for companies

Pattern of cases

  • Across the 60 Phase 1 published decisions in 2017 to date there has been a similar profile to the overall profile for previous years in terms of market concentration, though with more cases with 90%+ shares of supply
  • A much higher proportion of cases qualified for investigation under the ‘turnover test’ for jurisdiction, as opposed to the ‘share of supply’ test.

Decision outcomes

  • A much greater proportion of SLC decisions, almost wholly accounted for by….
  • A much higher proportion of cases dealt with by Phase 1 remedies – so-called ‘undertakings in lieu of reference’ to a Phase 2 investigation
  • A noticeably larger proportion of remedy findings among cases in which the parties had middle ranking shares of supply and/or modest increments to the share of supply

Theories of Harm

  • A much smaller proportion of cases in which a ‘potential competition’ theory was examined (i.e. the notion that the parties may compete in the future even if they have not to date). Previously such cases have proved untypically problematic for competition.

Evidence

  • Customer surveys and diversion evidence featured much more regularly
  • Clearance decisions relied noticeably more on third party evidence
  • Cases in which bidding analysis was key were much more frequently problematic than on average across previous years
  • A noticeably lower proportion of cases attracted complaints from rival firms

Key reasoning behind the decisions

  • ‘Closeness of competition’ between the merging parties featured prominently in a much higher proportion of cases than on average previously – to the extent that, in 2017, it was the most important of the three main reasons behind clearance decisions when taken as a whole. This was also the case for SLC decisions when taken as a whole
  • The number of rival firms remaining after the merger (another of the CMA’s three main decision reasons) was much less important in the reasoning behind SLC cases taken as a whole compared to previously, when it was the most prominent factor overall.

Analysis

  • The following topics all had a much higher profile in 2017 cases than on average previously:
    • Customer benefits through merger
    • Customer switching between rivals
    • Bidding analysis
    • Customer catchment areas
    • Customer surveys

Implications

What are the implications of the above for companies contemplating or planning a merger?

Click here for my summary assessment.

I shall be talking more about the above, as well as about the many other lessons to be learnt from individual cases within this year’s portfolio, at my customary January ‘Merger A-Z’ briefing events.

Which mergers threaten competition?

The UK’s Competition and Markets Authority (CMA) has just celebrated its third anniversary since taking over from the Office of Fair Trading and Competition Commission.

It has now made competition decisions in nearly 200 Phase 1 merger cases, enough to be able to discern some of the key factors that have informed its decision-making.

One factor that some (though far from all) companies and investors think about in assessing the chances of merger clearance is how the CMA may view the share of supply that the merged company would have in the products and services in which they overlap.

The following share of supply heatmap shows the pattern of decisions to date:

Share of supply in CMA Phase 1 decisions*

(April 1st 2014 to March 31st 2017)

170402-Share of supply heatmap

The colours indicate the proportion of cases that the CMA has found to represent a ‘substantial lessening of competition’ (SLC) at Phase 1 – ranging from:

  • brightest green at 0%
  • up through the shades of green to middle yellow (circa 50%)
  • and on through orange to the deepest red (100%).

The figures underlying the heatmap are taken from the large number of Phase 1 CMA decisions that report the merging parties’ shares of supply in the markets on which those cases focus.

Three features of the map stand out:

  1. The very high proportion of SLC findings in cases where the party with the smaller share of supply has a share of 20% or more
  2. No SLC finding where the parties’ combined share of supply is below 40%
  3. The significant proportion of cases that are found not to threaten an SLC even where the parties have a high combined share of supply.  This is where many of the cases with the most interesting lessons for companies and investors reside.

In general, as one might expect, the proportion of SLC findings increases the higher the combined share of supply and the higher the percentage increment to the larger share.

Further detail is covered in my merger briefings, including:

  • How (and how not) to interpret the heatmap
  • The most insightful parts of the map
  • Disaggregation of results, for example
    • by decision-maker
    • sector patterns
    • time period
    • remedies versus reference versus ‘de minimis’
  • Other notable patterns in the CMA’s decisions to date.

There are not yet enough Phase 2 cases to give a meaningful picture for Phase2.


 

* The share of supply heatmap is copyright Adrian Payne, 2017. The heatmap can be quoted and reproduced with the appropriate attribution.

 

 

The Most Interesting UK Merger Cases of 2016

Which are the most interesting UK merger cases of 2016 to date, as far as competition analysis is concerned?

My nominations this year include a number of CMA ‘firsts’ and plenty of food for thought on matters such as:

  • Consumer survey work – how and how not to approach it150301-CMA2
  • New methods of analysis
  • Conflicts between different sources of evidence
  • The balance between qualitative and quantitative evidence
  • Timeliness of evidence
  • What the CMA needs to show in order to find a substantial lessening of competition
  • The risks of non-notification
  • Misunderstandings about when the CMA may intervene

Here are my nominations. To access the CMA’s published decision please click on the blue text that contains the names of the merging parties:

Arriva Rail North/Northern Rail Franchise – Phase 2 divestment remedy

BCA Marketplace/SMA Vehicle Remarketing – Phase 1 divestment remedy

Celesio/Sainsburys Pharmacies – Phase 2 divestment remedies

Chemring/Wallop Defence Systems – Phase 1 clearance

Future/Miura – Phase 1 divestment remedy

Intercontinental Exchange/Trayport – Phase 2 Prohibition

Safetykleen/Pure Solve – Abandoned following Phase 1 Reference

Tullett Trebon/ ICAP– Phase 1 divestment

For further commentary….

My commentary on each of these cases is available in my briefing paper, ‘The Most Interesting UK Merger Cases of 2016’.

If you would like a free copy please add your details below and press the ‘submit’ button

January Seminars – A-Z of UK Mergers, 2016

The above cases will also be covered – along with many others – in my A-Z review of the year seminars which will take place in January as usual.

Please click here for further information .

 

Post last updated: December 6th 2016

 

2015/16: A Record Year For UK Merger Control

This post looks at the pattern of merger control decisions during the Competition and Markets Authority’s (CMA’s) second full year, which ended on March 31st. The decisions covered are those for which final decisions were published during the year.

In summary:

2015/16 turns out to have been a record-breaking year in many different respects

  1. A record low number of Phase 1 merger decisions

The 62 published CMA Phase 1 decisions was the lowest number of any year since the Enterprise Act came into force and well down on 2015/16.

A third successive sharp drop in the number of non-notified mergers that the CMA ‘called in’ for investigation contributed to the fall. Only 10 cases were called in, the lowest number I can recall for any year. Another record.

Phase 1 Merger Decisions – 2015/16 compared to previous years

160406-phase 1 figures 15-16

2. A record low number of decisions was found not to meet the jurisdiction criteria

The number and proportion of published cases found not to meet the qualifying tests for jurisdiction was in 2015/16 a fraction of its historic average – and by far the lowest in any year so far under the Enterprise Act.

3. Phase 1 competition problems at a record high

The proportion of Phase 1 cases meeting the jurisdiction tests (so-called ‘qualified cases’) that was found to threaten a ‘substantial lessening of competition’ (SLC) doubled compared to the CMA’s first year and reached a record high of 38%.

There are two elements to this that are worth noting:

  • Cases that are candidates for a Phase 1 SLC decision are examined in detail at a so-called ‘Case Review Meeting’, late in the Phase 1 process. The proportion of cases taken to a Case Review Meeting was well above average in 2015/16.
  • And of those cases, over 80% resulted in an SLC finding – again well above average.
  1. The lowest ever proportion of cases decided at Phase 1

The proportion of qualified cases decided at Phase 1 was the lowest to date under the Enterprise Act.

This result stems from the fact that, even though the proportion of problematic cases referred to Phase 2 for further investigation was well below average, the percentage of problematic cases in the overall caseload was at a record high, as described above.

  1. The proportion of problematic Phase 1 cases deemed too small to merit a Phase 2 investigation was at a record low

This statistic relates to so-called ‘de minimis’ cases. It is a great example of how one needs to look at individual cases (both notified and un-notified) in order to interpret the result.

Might it indicate that the CMA is taking a harder line on arguments put to it that a case is too small to warrant further investigation? Or does it show that the CMA is calling in fewer potential ‘de minimis’ cases? Cases strongly favour the latter.

6. A record high for Phase 1 remedies

The proportion of problematic cases dealt with by remedies at Phase 1 rose to a record high of nearly 40% in 2015/16.

It is striking that, at one point during the year, seven out of ten consecutive SLC decisions (excluding de minimis cases and automatic references) were dealt with through Phase 1 remedy rather than reference to Phase 2, another record under the Enterprise Act as far as I recall.

It is interesting that this is in the context of there being….

7. No Phase 2 prohibitions for the second consecutive year.

This means that the CMA Phase 2 decision-makers have yet to prohibit a merger.

There have, however, been two previous occasions in which there have been no prohibited mergers for two consecutive years. So this one isn’t a record !

2015/16 – CMA Final Phase 2 Merger Decisions

160406-phase 2 decisions 15-16

Looking ahead

Where does this cascade of new merger records leave the CMA, merging firms, competitors and customers?

There is little doubt that the CMA has become increasingly selective in the cases it has chosen to call in for investigation, to a degree that requires highly reliable information being available from merging parties in order to enable the CMA to avoid missing too many problematic deals of reasonable size.

The particular challenge here for the CMA is to make these ‘call in’ decisions accurately and quickly outside of the formal review process, without the range and quality of cross-checks that comes from interaction with competitors and customers when a case is called in for review.

As some have already recognised, for merging parties greater CMA selectivity is clearly relevant to decisions regarding notification. A key question, therefore, is whether the CMA will decide to be as selective in the year ahead. It is worth remembering here that there has already been more than one occasion under the Enterprise Act when tighter case selection has been followed by a move back to a more expansive approach to calling in cases for review.

For customers and competitors greater CMA case selectivity clearly puts a premium on making representations more quickly, rather than waiting for a formal investigation to begin. The much-expanded role for pre-notification also points in this direction, as does the earlier involvement of the Phase 1 decision-maker than used to be the case.

Turning to substantive decisions made during 2015/16 , as the National Audit Office recently put it, “the CMA is expanding the practice of clearing cases with remedies in phase 1 without the need to go for a more detailed and resource-intensive phase 2 review.”

It would be easy, however, to overstate the extent to which the 2015/16 remedies record is due to the CMA’s expanded Phase 1 remedy ambitions. In particular, the increasing level of challenge in many deal valuations (a factor in the low number of deals) seems to me to have had a notable effect on the appetite for regulatory risk and therefore the pattern of deals being brought to fruition (including their suitability for Phase 1 remedies).

Two other questions are also relevant here:

  • To what extent has the way in which CMA plans and manages its casework (now that Phase 1 and Phase 2 are under one roof) affected the pattern of Phase 1 decisions being made?
  • And what has been the impact of certain ‘bold’ Phase 2 clearance decisions on the attitude to remedies at Phase 1, both by parties and by the CMA?

On the whole, my own 2015/16 casework leads me strongly to suspect that the CMA’s record-breaking year for mergers hides patterns that are more complicated than they first appear from the aggregate statistics.

As always, many of the main lessons for interested parties to future mergers come from understanding what has worked well or badly in individual cases during 2015/16, as well as from understanding what the aggregate figures do and do not show.

In both respects 2015/16 should leave plenty of pause for thought for all concerned.

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© Adrian Payne, 2016

The Most Interesting CMA Merger Decisions of 2015

Last updated: February 29th 2016

Which were the most interesting UK merger decisions of 2015, in terms of the competition analysis undertaken?

160229-Phase 1 case summary slide

Here are my nominations, chosen from those cases that have completed their passage through CMA scrutiny (whether that was a Phase 1 assessment only or a Phase 2 inquiry as well) and for which a full final decision has been published.

To link straight to the CMA’s published decision for a case, please click on the blue highlighted titles.

Regus Group/Avanta Serviced Offices Group – Phase 1 undertakings in lieu of reference to Phase 2

The CMA found competition concerns in five areas of Central London and accepted divestments and a behavioural remedy to deal with these problems.

Points of interest included:

  • Comments by the CMA on the importance of the timely provision of evidence:
    • “At phase 1 the CMA has limited time to assess whether its duty to refer applies. The earlier that merging parties submit economic analysis supporting their case, the better-placed the CMA will be to assess that evidence and attribute appropriate weight to it. Accordingly, where possible, the CMA encourages merging parties to engage with it prior to commencement of the 40-working-day review period where they are considering submitting economic analysis.” – (Decision – paragraph 40)
  • Statistical analysis by the parties of a previous merger in the sector: The CMA reworked the analysis and produced more concerning results
  • The extremely detailed assessment of rival office capacities at a very local level, including the cross-checking of the parties’ figures with third parties
  • The disregarding of two office closures that took place before the merger and that would have created overlaps between the parties
  • The weight put on evidence of specific examples of local entry by rivals rather than on general ‘low barriers to entry’ arguments

Muller/Dairy Crest dairy operations – Phase 1 undertakings in lieu of reference to Phase 2

The CMA found competition concerns only in the supply of fresh liquid milk to national multiple retailers in the catchment area of Dairy Crest’s Severnside dairy, especially in the South West and Wales. Undertakings in lieu of a Phase 2 investigation were offered and accepted.

Particular points of interest are:

  • This is the first time that the new agency has accepted at Phase 1 arguments to the effect that assets would inevitably exit the market in the absence of the merger. (This was important because it enabled the CMA to conclude that, in certain products and geographic areas, the merger itself would not decrease competition compared to what it would otherwise be). In this case the CMA accepted the parties’ arguments that Dairy Crest would ‘downsize’ to a single dairy (Severnside) if the merger did not go ahead.
  • The CMA did not, however, accept the parties’ arguments that Dairy Crest would inevitably exit the supply of fresh milk to national multiple retailers if the deal did not proceed. This was largely because there was no mention of this in internal documents and because spare capacity at the plant would give both the ability and incentive to bid for contracts.
  • The CMA also rejected the parties’ arguments that milk supply is an ‘ideal bidding market’ in which strong competition can be achieved with few companies. The CMA concluded that none of the conditions required for such an outcome would be fulfilled. Neither did it accept that tenders follow an ascending (second price) auction model, as the parties claimed.
  • The nature and complexity of the remedies package (which is based around a toll agreement for processing at Severnside, lasting for up to 8 years) brings out how different the Phase 1 remedy  process can be under the CMA compared to Phase 1 under the OFT. The published decision on remedies itself runs to 45 pages. (One factor here is that the CMA has a greater ability as a single agency to decide on how to allocate resources as between the two phases of merger investigation than was the case when the two phases were undertaken by separate organisations. This gives greater scope for deciding that remedies are sufficiently clear-cut to avoid a Phase 2 investigation).

Poundland/99p Stores – Phase 2 clearance

At Phase 1 the CMA found potential concerns about the effect of the merger on competition in 92 local areas on the basis of a fairly standard retail merger assessment.

The CMA was highly critical of aspects of the parties’ online survey (as well as other aspects of their evidence such as their price-concentration and entry analysis) and therefore used cautious criteria to identify the local areas of concern in its Phase 1 assessment.

At Phase 2 the CMA commissioned its own survey covering a sample of 15 local areas. The results were used to construct a method that could be used to calculate so-called ‘Indicative Price Rises’ across all the overlap areas based on features such as the number and type of competitors and their proximity to one another.

An appendix to the Phase 2 report compares the results of the Phase 2 face-to-face survey with the Phase 1 online survey. It is a useful reminder of how much survey design can affect results.

Notwithstanding the price rise analysis, the CMA’s Phase 2 panel concluded, however, that the parties would not be likely to flex terms and conditions locally to take advantage of their stronger position in certain locations. This was based on evaluating the practicalities involved and the costs and benefits of changing certain aspects of its local offering.

The survey and profitability margin figures suggest that there could be strong incentives for the parties to close outlets in some areas where they both operate. The CMA concluded, however, that consumers would be unlikely to be harmed by any such closures because the parties have similar offerings and are located close to one another in the potential areas of concern. On this analysis customers would not therefore need to travel much further where they have to switch to the other outlet.

Despite a high level of interest in the case there were no third party submissions challenging the CMA to develop the reasoning published in its provisional Phase 2 findings. Similarly the provisional clearance decision meant that the parties themselves did not need to challenge further certain parts of the analysis. As a result the final report leaves open interesting questions that may need exploring in future retail cases.

160229-Phase 2 case summ slide

Reckitt/K-Y brand – Phase 2 licensing remedy

The CMA found harm to competition in the supply of personal lubricants to grocery retailers and to pharmacy chains.

There are many points of interest from both the Phase 1 and Phase 2 analysis, including:

  • The importance of ‘indicative price rise’ (IPR) analysis to the Phase 2 assessment, drawing on the results of a large consumer survey.
  • Also on this: many debates between the parties and the CMA on methodology and interpretation, including about the link between wholesale and retail prices
  • The CMA set out an approach to identifying so-called ‘marginal’ customers – those most likely to switch as a result of a price rise
  • Phase 2 analyses of competition by examining the effects of previous price changes and of price promotions
  • Many comments in Phase 1 on the parties’ own survey work and on other elements of their evidence
  • Close analysis of the future of the K-Y brand in the UK in the absence of the merger (the so-called ‘counterfactual’)
  • An eight year licensing remedy to position new entry, judged to be preferable to other remedies, including brand divestment. The idea is that the licensee will take over the K-Y product in the UK and rebrand it during the eight year period.

Surrey hospitals merger – Phase 2 clearance

Royal Surrey County Hospital NHS Foundation Trust (RSC) and Ashford and St Peter’s Hospitals NHS Foundation Trust (ASP)  provide clinical services from their sites in Guildford, Ashford and Chertsey.

The clearance decision is significant because it is the first Phase 2 clearance of an NHS merger.

The case contains many developments of interest at Phase 2, including:

  • recognition of the importance of accurate treatment coding and the significant effect that it can have on the assessment for some treatments
  • taking into account the competition impact of developments at rival hospitals that are not captured in analysis of historic figures such as GP referral patterns
  • caution in the use of the results of a large patient survey in the light of the high proportion of patients who did not have a clear view on which alternative hospital they would choose if they had to switch
  • use of ‘closest hospital’ analysis to examine the proportion of a hospital’s patients for which other alternative hospitals would be closest.

At Phase 1, Monitor accepted the case that three treatment areas would give rise to so-called ‘Relevant Customer Benefits’ (though those were not sufficient to avoid a Phase 2 reference).

Tattersalls/Brightwells Phase 1 – No competition conclusions made. Deemed too small to merit a Phase 2 investigation

This case involved the merger of two bloodstock auctioneers. The CMA said that it could not rule out the possibility of competition concerns (set out below) but did not find it necessary to conclude on these because the concerns would be too small to justify a Phase 2 investigation

To qualify for consideration as a so-called ‘de minimis’ case the competition problems identified must be of a type that cannot in principle be remedied (otherwise the possibility of reference to Phase 2 would not arise anyway). As the CMA noted in this instance:

“The CMA’s concerns regarding the supply of bloodstock auctioneering services for low-value flat racing horses in training in the UK and Ireland may in principle have been addressed by the divestment of the Ascot lease. However, the CMA found that the competition concerns that the Merger raises in terms of elimination of Brightwells as a potential competitor in the supply of auctioneering services for store horses do not led (sic) themselves, in principle, to being addressed through UiLs in the specific circumstances of this case”.

Clearly the range of such problems left open can differ from the range of problems judged to raise competition concerns if the analysis is completed and conclusions are drawn – for example where the former include competition problems that cannot in principle be remedied and the latter include only problems that can.

Could leaving open the competition conclusions in a case therefore itself affect whether a case qualifies as too small to justify a Phase 2 investigation? In this case, for example, if the CMA had completed its Phase 1 assessment and decided that the only competition concerns related to the Ascot lease it would presumably have sought a divestment in lieu of a reference to Phase 2 and would not have permitted a de minimis outcome.

Other interesting aspects of this particular case include:

  • Internal documents said to show a valuation premium being paid for the elimination of competition, high barriers to entry for new competitors and plans to compete in new areas (so-called ‘potential competition’)
  • A different product/service categorisation to that used in a previous decision in the same sector ( a good example of how parties should not place too much weight on previous decisions)
  • Analysis showing how comparisons of average prices charged can give a misleading picture of how closely two companies compete.

Sonoco/Weidenhammer – Phase 2 clearance

Sonoco and Weidenhammer both produce ‘composite cans’ for packaging both food and non-food products, with a very high UK share of supply.

Points of interest include the importance to the clearance decision of:

  • the ability of customers to switch to alternative forms of packaging or to move to self-supply
  • new suppliers being likely to enter the market if prices increased (or quality decreased), potentially sponsored by larger customers looking for alternative suppliers
  • the resulting additional volumes being sufficient to protect the interests of customers not willing or able to sponsor entry.

None of these seemed particularly promising arguments on the basis of the Phase 1 assessment.

InterCity Railways/InterCity East Coast Rail Franchise – Behavioural undertakings in lieu of reference to Phase 2

The CMA found no significant competition concerns on most routes where East Coast services overlap with existing Stagecoach or Virgin Trains rail or coach services. They found, however, that the franchise award could mean higher fares or reduced service quality for rail passengers travelling between Peterborough, Grantham and Lincoln and for coach and rail passengers travelling between Edinburgh, Dundee and Aberdeen.

Points of interest include:

  • Analysis of the way that government support increases the parties’ incentives to increase price or reduce quality
  • The framework used to assess incentives affected by the balance between dedicated fares and inter-available fares
  • Rejection of the argument that the small increment on a flow is sufficient reason to conclude that competition concerns cannot arise
  • The range of remedies accepted: including price cap, separation of decision-making and price monitoring.

Greene King/Spirit  – 16 divestments in lieu of reference to Phase 2

In its first review of a merger between major pub operators, the CMA has adopted a long overdue fresh approach to the way transactions in this sector are assessed.

The many points of interest include:

  • The use of an internet survey of  certain customers of 40 of the parties’  pubs to help inform how to assess the catchment area for identifying overlaps. (In previous cases administrative areas for licensing had been used)
  • A distinction between food-oriented pubs and so-called wet-led pubs
  • A 35% combined share of pubs in a catchment area was deemed to raise possible competition concerns (56 areas in all)
  • Further criteria applied included:
    • A ‘discount’ factor to give some weight to the constraint of wet-led pubs on so-called ‘dry-led’ pubs (30 areas)
    • Location and proximity of pubs (2 areas)
    • Flexing drive time-assumptions (4 areas)
    • Price pressure analysis (2 areas)
    • Comparison of menus and Trip Adviser ratings ! (2 areas)

The big question is how soundly-based this new approach is as there is very little commentary in the published decision on the internet survey that underlies it and no significant reference to the sensitivity of results to changes in the main variables, including the ‘discount’ factor.

These factors also make it difficult to tell how cautious (or not) the assessment was for a Phase 1 decision.

The Original Bowling Company/Bowlplex – 6 divestments in lieu of reference to Phase 2

The decision packs a lot in to its 29 pages. Analytical points of note include:

  • CMA concerns with both the sample and questionnaire design for the parties’ telephone survey results
  • Statistical analysis to examine the impact of entry and exit by rival bowling operators and by cinemas
  • Much of interest on so-called ‘catchment areas, including the differences between the analysis produced using the CMA’s software and that used by the parties
  • The use of price pressure analysis (so called ‘GUPPI’ analysis) to help identify areas of most concern and the rejection of the parties’ arguments against the validity of this approach
  • No mention of any potential for the merger to reduce competition by removing the opportunity for the parties to enter new areas to compete with the other (so-called ‘potential competition’).

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My training seminar ‘The 17 UK Merger Cases Most Worth Knowing About’ looks at that select band of cases that have most influenced how UK mergers are assessed. Details available on request.

 

 

The CMA’s first year – Mergers


On March 31st Competition and Markets Authority (CMA) completed its first year. In those 12 months the new agency took 84 Phase 1 and 3 Phase 2 merger decisions.

This article summarises some of the main points of interest. These focus on the pattern of decisions and the analysis underlying them (as opposed to how the changes to the merger control process have worked – which merits an article in its own right).

  1. Case numbers recover

As the graph below shows, Phase 1 case numbers were nearly back up to the annual average under the Enterprise Act, the highest number of cases since 2007/08.

This was despite a sharp reduction in the number of non-notified mergers that the CMA ‘called in’ for investigation –  one reason why the proportion of cases found not to meet the qualifying tests for jurisdiction was well below average (as also shown in the graph).

Is the CMA being more selective than its predecessor, particularly when it comes to smaller transactions (see also point 4)? Or were there simply fewer problematic non-notified deals among the 600-or-so transactions screened by the agency’s Mergers Intelligence team during the year?

Phase 1 Merger Control: 2014/2015

(Please click on the graph to enlarge it)

 150331-Phase 1 stats

There were only three Phase 2 decisions made during the year, the second lowest number in any year under the Enterprise Act and well below the average. This reflects in part the dearth of references to Phase 2 in the CMA’s first six months –  described in my earlier article – together with only two references being made in the OFT’s final six months.

  1. The 80/20 rule rides again

Around 80% of Phase 1 cases were cleared. Nearly 20% were found to give a reasonable prospect of in a substantial lessening of competition. This proportion is very much in line with the average level under the CMA’s predecessor Phase 1 body, the Office of Fair Trading.

  1. No take-off in remedy numbers

As can be seen from the graph there is little sign so far that the CMA’s new arrangements for remedying competition problems at Phase 1 have resulted in significantly more remedies being proposed and accepted, the main objective of the change.

Of this year’s three Phase 2 decisions, one (Breedon Aggregates/Aggregate Industries) involved a divestment remedy and a price cap remedy where divestment was not possible.

  1. Small is beautiful

By contrast more SLC decisions than usual were deemed too small (so called ‘de minimis’ cases) to justify the costs of a Phase 2 enquiry, including one (WGSN/Stylesight) involving a market of over £6m – the largest so far since the de minimis policy was introduced.

In addition to these, four cases were cleared on de minimis grounds without a final decision being taken on their competition merits (Eden/Riders, Vitec/Autocue, Phonak Comfort/Audio and Key Publishing/Kelsey). This is not entirely new but has not happened on this scale before. Is it an approach that will be expanded further?

De minimis arguments were rejected in only two cases: Reckitt/K-Y and InterCity Railways/Intercity East Coast Rail Franchise. In the former, the CMA worried about the fact that similar deals might happen (so-called ‘replicability’) – a contrast to the ‘wait and see’ approach in some other cases.

Overall, the CMA seems to be taking a more expansive approach to de minimis policy. As the new agency has to demonstrate benefits to consumers that are at least ten times its costs (previously it was five times costs) it would not be surprising if the balance of its case portfolio (within mergers and beyond) was to shift.

  1. Horizontally-challenged

Horizontal ‘theories of harm’ remained the overwhelming focus for the CMA’s analysis as usual. However 23 cases also involved so-called ‘vertical theories’. Once again coordinated effects were out of fashion, featuring in only one Phase 1 case (Ballyclare/LHD).

  1. Exit closed. Please try an alternative route.

As usual, exiting asset/failing firm arguments cut little ice with the CMA at Phase 1 – rejected in all 11 cases in which they were put forward (one of the most interesting being Roanza/Enza).

At Phase 2, however, these arguments played a key part in the clearance of the Alliance Medical/IBA deal , despite representations by one of the party’s competitors that they would have bought or supported the target business in the absence of the merger.

  1. Feeling the pressure

‘Upward price pressure’ measures combining ‘diversion’ and financial margin data turned up in only one Phase 1 case (Asda/Coop) this year. This somewhat understates the importance of the price pressure approach, however, as measures of diversion carried weight in numerous cases (see number 12 below) and financial margins continued to be examined, even though (somewhat puzzlingly) that analysis is not always evident in the CMA’s published decisions.

  1. Signs of entry

While entry arguments were often made by parties and (as usual) were mostly rejected or superfluous, there were nevertheless three Phase 1 examples where the CMA gave weight to timely, likely and sufficient entry by rivals (Ballyclare/LHD, Care Monitoring and Management/Pantzel and Coopervision/Sauflon Pharmaceuticals).

In addition the potential for innovation to enhance competition was given a lot of weight in Cirrus Logic/Wolfson.

Rival entry was also said to meet the ‘timely, likely and sufficient’ criteria in the Phase 2 Omnicell/Surgichem clearance decision.

  1. A rare sighting

Countervailing buyer power arguments appear to have played a part in just one Phase 1 case (Herstal/Manroy), though the summary of the decision gives more weight to this than the main text of the decision.

  1. No smoke without smoking guns

Third party views, internal documents and bidding/tendering data (in that order) were particularly important sources of evidence, with problematic internal documents cited especially frequently in the Phase 1 SLC decisions (a notable example being Pure Gym/The Gym).

However…as every year, seemingly hottish documents do not always mean SLC – witness the Multipackaging Solutions/Presentation products case.

On evidence more generally it is worth noting that the CMA used its new information-gathering powers on 23 occasions at Phase 1, applied to third parties as well as to merging parties themselves.

  1. Competitor concerns do matter

Interestingly the Phase 1 SLC decisions strongly tended to feature complaints from both customers and competitors (as compared to the clearance decisions).

Once more the simple and often-heard ‘conventional wisdom’  that competitor complaints tend to encourage agencies to clear mergers turns out to be pretty wide of the mark.

  1. Best bids

One quarter of all Phase 1 cases involved the use of data on the bids and tenders that the parties had been involved in, primarily to examine the degree of diversion of business between the parties and others.

Particularly interesting cases include: Sonoco/Weidenhammer, Ballyclare/LHD, Multipackaging Solutions/Presentation Products, and Xchanging/Agencyport.

Two points stand out:

  • One – bidding analysis is not as straightforward as it may seem.
  • Two – the results (and the reading of past cases involving this type of analysis) need careful interpretation.

To sum up

In summary, while case numbers recovered, there were few if any that offered great potential for a major policy change. Forthcoming decisions look much more interesting in that regard!

Arguably the main questions raised are:

  • whether there will be a  greater use of Phase 1 remedies in future
  • where de minimis policy is heading and
  • whether the CMA is becoming more selective about the non-notified deals it calls in for investigation.

As usual, however, there have been many interesting lessons for parties about to merge in terms of how to assess their merger and the approach the CMA will adopt.

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Links to cases referred to above can be found on the CMA’s web pages .