The UK Competition and Markets Authority (CMA) last month blocked the anticipated merger between J Sainsbury plc and Asda Group Ltd, citing its concerns about adverse impacts on consumers. Had it gone ahead the merger would have created the largest supermarket entity in Britain.
The CMA had earlier highlighted its concerns about the deal when it published its provisional findings from its Phase 2 investigation. We previously blogged about the CMA’s investigation into this tie-up here and here.
It offers a useful case study for the sorts of issues that can arise in a merger that is subject to CMA jurisdiction, and that need to be carefully considered at the outset of any deal that might qualify. It also illustrates that merger control can create risks for even the most well-resourced businesses and the best-planned mergers.
“Substantial lessening of competition”
The CMA considered the views of more than 60,000 consumers and held discussions with suppliers, trade bodies and competitor retailers. The CMA found “extensive competition concerns” about the impact on consumers of the proposed merger, including a “poorer shopping experience” (both online and in-store) which in its view could result from:
- higher product prices;
- reductions in product ranges offered; and
- reductions in product quality.
The regulator had also been concerned about the potential for increased petrol prices for consumers at over 100 locations where Asda and Sainsbury’s petrol stations overlapped – the merged entity would be the biggest fuel retailer by volume in the UK.
In the CMA’s final report, it concluded that the proposed deal would be expected, on the balance of probabilities, to lead to a substantial lessening of competition in a number of nationwide markets including the retail supply of groceries in both parties’ supermarkets, in Asda’s convenience stores and via online delivery. It also identified issues in more local markets (i.e. in areas where Sainsbury’s and Asda stores, online delivery services and fuel stations were close competitors to each other).
The parties would likely always have anticipated having to deal with competition concerns in certain local markets, for example through the divestment of certain stores to other retailers, but the CMA identified that retail customers and motorists across the UK would be likely to be affected by the merger. This made it much harder for the parties to offer any solution that might resolve those nationwide issues, and ultimately led to the deal being prohibited outright.
Potential effects on suppliers to Asda and Sainsbury’s
Suppliers who currently sell goods to both of Sainsbury’s and Asda might also have been adversely affected by a tie-up of the two giants – and the increased “buyer power” of the merged entity – as supply chains would be integrated, stock lines simplified and margins squeezed, particularly with respect to own-brand goods.
The CMA assessed the likely effects of such buyer power, but only to the extent that it might distort competition and result in adverse effects for the ‘downstream’ customers of the grocery giants. That analysis focused on two areas of concern:
- that the exercise of increased buyer power by the merged entity might result in reduced incentives or ability to invest and innovate on the part of suppliers who may have less funds to do so – the CMA’s finding was that there was insufficient evidence to conclude as such; and
- the potential for the merged entity to use its increased buyer power to force suppliers to raise prices for rival retailers (known as the “waterbed effect”, because as sale prices to the merged business go down prices charged elsewhere go up), resulting in price increases for customers of those rival retailers.
However, the CMA found that the overall net effect of these potential supplier impacts on households was “unlikely to be negative”.
Many market players had, at the time the CMA published its provisional findings in February 2019, expressed opposition to the proposed merger. The Food & Drink Federation had noted that a highly competitive grocery retail sector is in the best interests of food and drink manufacturers. The GMB trade union had flagged concerns about the merger placing a number of workers’ jobs in jeopardy, and NFU raised its own members’ concerns about the risk of the merged entity abusing market power through making unreasonable demands upon suppliers and transferring “excessive risk and unexpected costs” onto them. However, it must be noted that any such ramifications for employees and suppliers – including the potential increased squeeze on supplier margins when selling to the merged entity – do not form part of the CMA’s remit in merger cases and so were not analysed by the CMA.
Alongside its provisional findings, the CMA had issued a Notice of Possible Remedies outlining its options. These included blocking the merger – which the CMA viewed as a comprehensive solution to all aspects of the competition concerns it had – or divestiture. The latter would have involved the merging entities selling off a large number of their stores and/or operations (and potentially even one of the “Sainsbury’s” or “Asda” brands) to a new market participant or an existing rival.
Sainsbury’s and Asda had in response proposed a remedy package to the CMA, which they claimed would have created opportunities for new entrants to the market (or allow smaller rivals to expand rapidly) by:
- selling off 125-150 supermarkets and a number of convenience stores to one of their current competitors or a new entrant to the market; and
- selling off “a sufficient number” of petrol stations.
But this proposal did not address the CMA’s concerns about the effect on nationwide markets, and so divestiture was viewed as carrying a “significant and unacceptable risk of being an ineffective remedy”. The CMA went on to conclude that there was no effective way of addressing its concerns other than to prohibit the merger, notwithstanding statements from Sainsbury’s and Asda to the effect that they would commit to reducing some prices.
While the parties’ reaction to the CMA’s preliminary findings strongly suggested that an appeal would be forthcoming, in fact the deadline for appealing the CMA’s decision is this week, and the parties have already announced that neither of them would be appealing the decision. Asda has instead stated that it could consider being listed on the stock exchange. Sainsbury’s reported that the blocked bid cost them £46million.
If you would like assistance in understanding how merger control could affect a potential merger, or what you might be able to do if a rival’s merger could affect your business, please contact Charles Livingstone, Jamie Dunne or Adam McCabe.
On May 22, 2019