On 12 August 2015 the Competition and Markets Authority (“CMA”) issued its final report on its in-depth competition review of the anticipated acquisition by Reckitt Benckiser (“RB”) of the K-Y brand of personal lubricants.

Having found that the proposed purchase of the K-Y brand by RB was likely to result in a substantial lessening of competition in the market for the supply of personal lubricants to grocery retailers and national pharmacy chains, the CMA has decided to impose a remedial arrangement whereby, post-completion, RB grants an eight-year licence of the K-Y brand to a third party to give potential competitors a reasonable opportunity to introduce a viable rival brand.

Given the parties’ high share of supply and the lack of viable competitors and new entrants into the market, the CMA was not willing to accept the less extensive measures proposed by RB to address its competition concerns.

WHAT DID THE TRANSACTION ENTAIL, AND WHY DID THE CMA FIND IT PROBLEMATIC?

The deal in question saw RB agree to purchase from McNeil-PCC, Inc. (a subsidiary of Johnson & Johnson) the international K-Y brand and its related global assets. Whilst in other jurisdictions this acquisition entailed other products supplied under the K-Y brand, in the UK the acquisition only concerned the basic “K-Y jelly” product.

Having received clearance (where required) across a total of 50 countries in which the acquisition has completed, the transaction remained pending clearance from the CMA.

Since the acquisition entailed the rights, liabilities and assets relating to the K-Y brand, the CMA concluded that, post-completion, RB would therefore have acquired all that it needed in order to continue the supply of K-Y branded personal lubricants to retailers and wholesalers.

The K-Y brand was therefore deemed to constitute an “enterprise” within the meaning of the Enterprise Act 2002 (“EA 02”), with its proposed acquisition thereby giving rise to a “relevant merger situation” over which the CMA had jurisdiction. Having conducted an initial review of the transaction, the CMA announced on 19 December 2014 its intention to refer it for an in-depth “Phase Two” investigation.

This was, notably, on the basis that RB’s Durex brand (which included personal lubricants, as well as other ‘intimate enhancement’ products) and the K-Y brand were one another’s closest competitors, such that in most grocery outlets and many national pharmacy chains they were the only two products available for purchase.

RB SOUGHT TO ALLAY THE CMA’S INITIAL CONCERNS WITH THE OFFER OF COMMITMENTS, BUT THE REGULATORS WANTED REMEDIES TO GO FURTHER

With the CMA having reached the preliminary conclusion following its “Phase I” review that there was a realistic prospect of the transaction giving rise to a substantial lessening of competition, RB offered to address its concerns by proposing a combination of pricing and licensing remedies.

However, given the closeness of competition between the relevant brands and the evidence already gathered from consumer surveys and competitors regarding their preponderance in the UK market, the CMA did not consider these commitments sufficiently extensive or far-reaching.

As a result, on 7 January 2015 the CMA referred the transaction to a Phase Two investigation to consider the parties’ position in the relevant market in further detail and establish the likely impact of the proposed acquisition of the K-Y brand by RB.

CMA FINDS SERIOUS COMPETITION ISSUES AS THE PARTIES’ COMPETING BRANDS ARE THE ONLY MAIN OPTIONS CURRENTLY AVAILABLE TO CONSUMERS

Following a four-month in-depth study, involving surveys of consumers and seeking the views of competitors and retailers, the CMA issued provisional findings on 22 May 2015, which largely confirmed the concerns raised at Phase One; notably, the CMA concluded that:

  • grocery retailers and national pharmacy chains are largely influenced by consumer preferences, brand awareness and/or marketing support from brand proprietors when deciding which brands to stock
  • given the predominance of these brands in the market, grocery chains and national pharmacy stockists sell only a small number of different brands of personal lubricants, usually either only K-Y and Durex, or (on occasion) these brands plus their store own-brand label, and
  • there is some evidence of consumers switching between the K-Y and Durex, including in response to changes in price, with competitors also describing the two brands as competitors.

Whilst recognising that own-brands exerted some limited competitive pressure on the parties’ brands, the CMA ultimately concluded that limited shelf-space for new entrants to put forward a viable alternative would mean the merged brand under RB enjoying a post-acquisition share of supply of between 60% and 80%.

The adverse effects of this substantial reduction in competition were expected to be particularly acute in the grocery retail and national pharmacy store supply chains on account of the limited use of countervailing buyer power by these retailers in resisting increases in cost price.

In fact, the CMA’s study observed these stockists introducing rises in retail prices at a margin greater than the rise in wholesale prices introduced by RB, which apparently reflected purely a larger bottle size. This provided a further demonstration as to the adverse effect of limited choice in the market.

CMA ORDERS THAT THE BRAND BE LICENSED TO A COMPETITOR FOR AN EIGHT-YEAR PERIOD

Despite RB offering certain commitments as to price and other terms of brand licensing, the CMA decided in light of the competition concerns raised that the K-Y brand had to be licensed by RB to a third party for a minimum of eight years, to allow the possibility of prospective rival brands setting up in viable competition.

The licence will need to be an exclusive, comprehensive and irrevocable grant to use the brand on existing K-Y branded personal lubricants and on a co-branded basis for these lubricants and other similar products (including the right to sell to the NHS), meanwhile not permitting RB to use the brand or any related IP rights in the UK during the licence period or a ‘black-out’ period covering a minimum of the final 12 months of the licence term.

Another key requirement will be that the licensee of the brand is entitled to continue using the K-Y product formula on a perpetual basis after the eight year licence term has expired. This will ensure that the licensee could market a viable competitive product in the long-run if it wished to do so.

THUS, A REMINDER TO SEEK ADVICE ON ANY FORM OF ACQUISITION

The measures imposed by the CMA are evidently far-reaching and, commercially, very stringent. They demonstrate the power of the regulator to intervene in and, if necessary, require wholesale restructuring of an acquisition, if that is what deemed necessary in order to maintain a competitive marketplace.

Given the predominance of the parties’ respective brands in the personal lubricant market (particularly in respect of supply through supermarkets and UK-wide pharmacies), the CMA decided in RB’s case that the brand being acquired actually needed to be licensed out to another provider, in order to keep open the prospect of viable competition emerging in the long run.

This case serves as a powerful reminder to parties to any type of transaction that if a merger or acquisition of shares or, indeed, a “business” of any kind (including, as this case shows, a brand and its related goodwill and IP) could give rise to a substantial share of supply of the relevant product in the UK (or any part of it) then the CMA can take extensive action to rework the deal.

It is therefore imperative to seek advice from competition law specialists before proceeding to complete on the proposed terms.