On 4 October the Competition and Markets Authority announced that it had accepted undertakings from Barratt Developments and allowed its acquisition of Redrow plc to be implemented.
This followed the CMA's decision on 8 August to refer the merger for a full Phase 2 inquiry unless the parties offered sufficient undertakings to allay the CMA's concerns about the impact of the merger on competition. At the time of that decision the CMA issued an initial enforcement order to prevent the parties finalising the merger at the end of August.
The parties proposed such undertakings and the CMA launched a consultation on them on 12 September.
Substantial lessening of competition
The test for referring a merger to a detailed Phase 2 inquiry (which we previously wrote about in the context of the Vodafone/Three merger) is that the CMA believes that a transaction may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.
In this case the CMA's concerns about a substantial lessening of competition were focused on the merger's effects on the supply of new build private residential housing in a specific area around a specific Barratt development in Whitchurch which overlapped with a Redrow development in Nantwich – a perfect example of just how narrow the CMA may go when identifying a market that is adversely affected by a merger.
The CMA had concluded that there would not be a substantial lessening of competition at a national level, notwithstanding that Barratt was already the largest housebuilder by volume of short term land bank holdings, given the significant competitive constraint imposed by a large number of other large housebuilders.
Undertakings
Barratt offered to address that concern by:
- Appointing an independent third-party agent to manage the sale of any unsold houses/transactions that have not legally completed at Redrow's Nantwich development;
- Ensure that unbuilt houses and infrastructure at Redrow's development are completed to Redrow's standards and in a timely manner; and
- Provide aftersales services to everyone who has bought a home, to the level meeting or above Redrow's pre-merger standards.
- A monitoring trustee and an independent quantity surveyor (as approved by the CMA) would also be appointed to monitor compliance with these commitments.
The consultation closed on the 26 September 2024 without the CMA having received any submissions that changed its view that those undertakings would be acceptable. The CMA has now formally accepted them and the merger can be put into effect.
While the CMA has shown a growing preference for structural (that is, divestment) rather than behavioural remedies in recent cases, this case is a good example of circumstances where the competition concern may be sufficiently narrow, and therefore easily remediable, for behavioural remedies to be appropriate.
The CMA's approach to housebuilder mergers
The Barratt/Redrow merger follows a series of housebuilding mergers that have either been cleared by the CMA and its predecessors, for example:
- In CALA/Banner (2014) the CMA similarly concluded that the merged entity would face sufficient competition to ensure that the merger would not raise competition concerns, and even lifted the initial undertakings placed on the merged entity as it considered that these were disproportionate.
- In Taylor Woodrow/George Wimpey (2007) the Office of Fair Trading (the CMA's predecessor body) found that the fragmentation of the market meant that there would still be competitive restraints on the merged entity from other participants in the market.
The Barratt/Redrow may be the closest that a Phase 1 investigation into a housebuilder merger has come to being referred for a Phase 2 inquiry. Although some concerns about specific geographic areas were raised in the CALA/Banner merger, these were not investigated and highlighted to the extent that they were in Barratt/Redrow.
This is consistent with an increasing focus on effects on local competition, an approach that has also been taken in other sectors (see also Lindab/HAS-Vent, where the CMA found competition concerns regarding the merger in relation to the city of Nottingham and the Stoke-on-Trent area and required Lindab to sell sites in those areas to competing businesses).
The merger in relation to the CMA housebuilding market study
The Barratt/Redrow decision harks back to some of the main concerns that were highlighted in the CMA's market study into housebuilding published in February 2024. For example, the CMA looked at the potential impact of the merger not only on prices but also on quality and customer satisfaction, leading to undertakings under which Barratt will complete houses at the former Redrow site to Redrow's standards and provide aftersales care at the same level or higher than Redrow would have provided.
At the same time the CMA's conclusions that there was no national adverse effect on competition, and that behavioural undertakings would mitigate local concerns, are consistent with the findings of the market study – the final report highlighted that many outside factors influence the lack of competition in the market, such as planning regulations and a lack of outside pressure to innovate in the sector. The study also found that the largest 11 housebuilders (which include Barratt and Redrow) provide around 40% of new homes built in Great Britain – this shows that the market is still fragmented in terms of competitors.
How does the CMA's approach to the housebuilding sector compare to other sectors?
The CMA's approach to the housebuilding sector is more hands-off than might be observed in sectors such as technology. As highlighted in the housebuilding market study, this is partly due to the fact that the CMA cannot intervene (whether under a market study or in the course of a merger inquiry) to fix many of the factors that make the market less competitive than it could be. Rather, these are for the UK and devolved governments, or the housebuilders themselves to resolve.
However, the CMA did open an investigation into concerns over information sharing between housebuilding companies as a result of the market study – this remains ongoing and is expected to conclude by the end of 2024. The sector is therefore still within the CMA's sights.
Further, on 22 October 2024, the UK Government responded to the Competition and Markets Authority’s (CMA) market study on housebuilding, acknowledging the CMA's conclusions that the market is failing to provide enough high-quality, affordable homes and that the current speculative model hinders competition and innovation. You can read our updated blog here.
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