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In a frank reminder of the powers of competition law regulators over proposed M&A transactions in the UK, on 11 May 2015 the Competition and Markets Authority (“CMA”) published its provisional decision to refer the anticipated acquisition by Greene King of Spirit Pub Company for an in-depth “stage two” investigation, on the basis of competition concerns surrounding a lack of rival establishments in certain local areas of the UK.
M&A deals worth either more than £70 million or where the parties would in combination either create or increase a 25% (or greater) share of the relevant supply of goods or services in the UK or a “substantial part” of it should be notified to the CMA. There is no mandatory requirement to do this. However, where either or both of the above apply it is highly risky not to do so, as a third party complaint or a decision by the CMA investigating on its own initiative (eg having learnt of the deal in the press) could lead to a completed or agreed deal subsequently becoming unwound if found to result in a “substantial lessening of competition”. One should remember that the ‘clock’ for the CMA to conduct an investigation on a non-notified merger only starts ticking once it has become aware of the deal being proposed or having been completed.
Greene King, running approximately 1,900 UK pubs, and Spirit, with a 1,200-strong leased and managed estate, notified their proposed corporate amalgamation. Having notified, the CMA undertook its statutory 40 working day “Phase I” review, involving an initial probe into the likely impact of the deal on competition for pub trade in the relevant geographic areas, as well as surveying customer and competition observations. This initial review generally found that a variety of national and independent rival pub, restaurant and bar establishments provided more than adequate competition in the vast majority of those 1,000 localities in which Spirit and Greene King pubs were found to coincide.
However, the Phase I findings did also conclude that in relation to a small number of local areas the two chains had pubs in close proximity, without sufficient competition from other outlets. The outline concern, therefore, of the regulator was that post-merger this would lead to increased food and drink prices and/or a reduced quality of offering from the establishments in question, adversely affecting consumers in those particular areas.
The provisional decision of the CMA is that the transaction be referred to a Phase 2 in-depth investigation, which, over a period of up to 24 weeks (plus 12-18 additional weeks from publication of the CMA’s report to finalise remedies with the parties, having reached a decision that the deal substantially lessens competition), involve detailed economic and empirical analysis to determine whether and, if so, how the potentially problematic aspects of the deal could be addressed. This detailed investigation was the process that, prior to the reform of UK Competition Law in 2014, was formerly exercised by the Competition Commission (upon referral by the Office of Fair Trading).
In Greene King / Spirit, the CMA has also exercised its power to make its reference provisional on the receipt of satisfactory undertakings from the parties. This means that the parties are, in effect, invited to come up with proposed measures to alleviate the regulator’s concerns. In this context, as is most often the case, the principal step to get the deal cleared would be to offer to sell off parts of the merging businesses – here, that would mean certain pubs in the problem locations being auctioned to rival chains or independent buyers.
The parties were given until 18 May (five working days from being notified of the CMA’s provisional Phase I decision) to offer undertakings. The CMA would then have five further working days from receiving the undertakings to decide if they are, on the face of it, capable of addressing its concerns; if they are, then there would be a further 50 working days for the CMA to decide whether or not to accept the proposals or move to Phase 2.
Here, the CMA’s principal concern will be to ensure that any proposed pubs sales are sufficient in number, can realistically be completed sufficiently quickly to ensure no loss of competition in the intervening period and that the purchaser offers a realistic competitive rivalry.
As yet there has been no confirmation whether the parties have come up with undertakings that the CMA is willing to accept. The outcome, when known, will make for highly informative reading in relation to the treatment of divestment proposals in the context of potentially anti-competitive mergers and also how seriously the CMA works to secure a workable solution during the timetable for considering commitments under the procedural reforms to the merger control process introduced in 2014.
Most of all, however, as emphasised at the top of this piece, irrespective of this investigation concludes, it serves as a reminder of the major risks of not notifying the CMA (or, at the very least, seeking detailed advice on whether notification might be advisable) where a proposed transaction might present competition concerns.
Also, certainly, it will pay in every case to seek expert advice as early as possible in the deal (eg at heads of terms stage), and not at such a point as the parties are ‘locked’ commercially into a timetable that could well become scuppered by a CMA process. This may slow matters somewhat and incur some extra ‘up-front’ cost, but it is far preferable to the potentially arduous and financially-damaging consequences of having to halt and/or unwind a deal which the parties had already started putting into effect.
Following the CMA’s provisional reference decision, Greene King have now offered an undertaking in lieu of reference to sell off each of its pubs in those 16 local areas which the CMA has identified as posing likely competition problems post-completion of the proposed acquisition. These sales would involve divesting the names of these pubs and, in the case of managed premises, transferring out GK/Spirit staff working at these locations to the purchasing entities.
The CMA has announced that it considers these proposed commitments have a reasonable prospect of addressing its concerns, and now has until 21 July 2015 to formally decide whether or not to accept them (and, in turn, decline to proceed to an in-depth Phase 2 investigation).
The CMA’s latest update can be viewed on its case page.