The Competition and Markets Authority has given provisional clearance for Amazon's investment in Deliveroo. A final decision will be made on 11 June.
In mid-2019 the CMA served an initial enforcement order on Amazon. It asserted that its minority shareholding gave "reasonable grounds for suspecting" Amazon and Deliveroo had "ceased to be distinct" or that "arrangements are in progress or in contemplation" which would make that the case. Amazon had previously closed its own delivery company. In taking a minority investment in Deliveroo, the CMA presumed that Amazon was less likely to re-enter the already concentrated market for online food delivery. In December, the CMA referred the proposed investment to a Phase 2 inquiry.
Since then, the Coronavirus pandemic has placed Deliveroo in financial difficulty and thereby created a very different competitive environment from the one that prevailed when the CMA originally called in Amazon's investment. To take account of the change, the parties advanced a 'failing firm' defence before the CMA: Deliveroo is likely to exit the market unless it receives the additional funding available through the transaction, and the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed.
The CMA has now provisionally determined that Deliveroo would not survive the coronavirus disruption without additional investment and that the investment required is only realistically available from Amazon. On that basis, Amazon's proposed investment in Deliveroo would not result in a substantial lessening of competition compared to what would otherwise happen, and the CMA has provisionally decided to clear it to proceed.
As COVID-19 continues to affect the economy, the CMA anticipates that more parties will seek to avail of 'failing firm' arguments to obtain merger clearance. It has therefore published a framework for assessment of cases in which the counterfactual (i.e. the future competitive situation on the market without the merger) involves the acquired business otherwise exiting the market.
The Framework states that sufficiently evidenced failing firm arguments should lead to unconditional clearance. According to the CMA, however, there are stringent conditions for establishing a failing firm scenario and relatively few cases are likely to satisfy the criteria. The CMA will consider three questions:
- Whether the firm would have exited (through failure or otherwise) absent the transaction;
- Whether there would have been an alternative purchaser for the firm or its assets; and,
- What the impact of exit would be on competition compared to the competitive outcome that would arise from the acquisition.
This is not a mechanistic exercise. The overarching consideration is the impact that the exit of the failing firm would have on competition within the markets at issue compared to the competitive outcome that would arise from the acquisition.
Where a business's financial difficulties fall short of satisfying the test, the CMA assures the parties that the implications of those financial difficulties may still be considered within its assessment. This does not entail any change in the standards by which mergers are assessed during the pandemic.
The updated guidance on merger assessment during the crisis reiterates that the substantive assessment by the CMA remains the same. It is forward-looking and evidence led. The primary focus is onpermanent structural change in the market brought about by the merger as distinct from short-term economic shocks.
Both the broader guidance and the annex on 'failing firm' scenarios provide helpful insight into the CMA's attitude to merger assessment during the present exceptional times. The Deliveroo/Amazon decision is an early example of this refined approach.