The Competition and Markets Authority (CMA) last year reviewed the acquisition by BCA Marketplace plc (BCA) of SMA Vehicle Remarketing Ltd (SMA), a competing provider of vehicle auction services, for £43 million (as reported here and here). The investigation ended just before Christmas, with the CMA accepting undertakings offered by BCA. The CMA's case page can be viewed here.
The CMA initiated its investigation in June 2015, just weeks after the deal was announced. The CMA immediately imposed an initial enforcement (or 'hold separate') order on the companies, prohibiting the integration of the businesses while the investigation progressed.
The CMA's Phase 1 investigation concluded that, while the the deal did not present national competition concerns, it could result in a lessening of competition in the Newcastle area. Sheldon Mills, Senior Director of Mergers, said that:
'Used vehicle auction services are vital for businesses involved in the buying and selling of used vehicles. We found a significant competitive overlap between the merging parties in the north-east of England which could drive higher auction prices or reduced services or quality.'
Key to this conclusion would have been the fact that competitors and (more importantly) customers had expressed concerns about that area, where only one other competing auction site would continue to operate. BCA had the opportunity to propose a solution to this anti-competitive impact, and offered to sell the auction site it acquired from SMA in the Newcastle area (as detailed here). The undertaking was considered by the CMA and consulted on, and ultimately accepted.
Had BCA not offered an appropriate undertaking, the merger would have been subject to a more detailed 'Phase 2' CMA inquiry. Assuming this would have produced the same conclusion about the deal's impact on competition (though that's not always the case), the CMA would likely have ordered BCA to sell off (or 'divest') the Newcastle site. BCA are therefore likely to have taken the view either that Phase 2 would not produce a different result, or that sacrificing the Newcastle site was better than incurring the added cost of a Phase 2 investigation and/or bearing the burden of the hold separate order for the further 18-24 weeks the CMA has to complete the process.
This case highlights some of the key risks of unconditionally completing deals which are subject to CMA jurisdiction, and emphasises the benefits of a proactive approach to merger clearance. The lessons for other businesses include:
- By unconditionally completing a deal which met the 'share of supply' test (i.e. it would result in the combined business having a market share of 25% or more in at least part of the UK) BCA became subject to the CMA's initial enforcement powers. 'Hold-separate' orders can be onerous, severely restricting the purchaser's ability to integrate or even control the management of the target business. While BCA secured several derogations, significant work would have been required to convince the CMA to allow those. Hold separate orders are intended to dis incentivise parties from completing deals that fall within the CMA's jurisdiction, and to encourage the proactive notification of conditional deals.
- Because the deal was 'called in' by the CMA (i.e. not proactively notified by BCA), it was 3 months before the inquiry proper even began, during which the CMA would have been requiring BCA to produce significant amounts of information (with the hold separate in place the whole time). Only once the CMA was content it had everything it needed would it actually start the formal 'clock' on the investigation. This would have entailed not just delay but also significant cost and management time on BCA's part, none of which may have featured in the original deal budget estimates.
- BCA has been forced to divest part of its acquisition. This may well add further cost, as such forced sales often result in a significant loss against the purchase price.
- The case also illustrates the CMA's power and willingness to intervene not only in deals that will have a national impact on competition, but in those which will affect apparently 'small' or 'niche' markets such as used car auction services in the Newcastle area.
If you have any queries regarding merger control or competition law please feel free to get in touch with the team, or to comment below.