Tesco, the UK's leading food retailer, and Booker, the UK's leading food wholesaler, announced on 26 January that they had reached an agreement on the terms of a proposed merger "to create the UK's leading food business". However, completion of the deal is subject to merger clearance by the Competition and Markets Authority (CMA) in the UK.
The CMA's investigation can consist of two successive phases. A standard merger review consists of a Phase 1 investigation. If at the end of Phase 1, there are concerns that the merger will lessen competition substantially, the CMA may refer the merger for an in-depth Phase 2 investigation.
Phase 1 Investigation
After receiving the complete notification documents from the merging parties, the CMA will formally open the first phase of the investigation and publish a notice inviting interested third parties to comment on the transaction. This will give suppliers, customers, competing retailers, wholesalers and other interested third parties the opportunity to express their views and concerns about the merger. The CMA will take these comments into account in its assessment of the merger.
The CMA has up to 40 working days to decide whether to clear the deal either unconditionally or to refer the transaction to a Phase 2 investigation if it believes that the deal raises competition concerns.
At this stage, the parties can offer commitments to remedy any competition concerns and avoid a Phase 2 investigation. These are referred to as "undertakings in lieu" of a reference. If the CMA considers that the proposed undertakings may address its competition concerns, it may formally review and publicly consult on them. This will extend the duration of Phase 1 by up to 50 additional working days.
Phase 2 Investigation
In Phase 2, the CMA will conduct an in-depth assessment that can take up to 24 weeks. Both at Phase 1 and at Phase 2, the CMA will consider whether the merger will result in a substantial lessening of competition. At Phase 2, it will consider whether on the balance of probabilities the merger is likely to result in a substantial lessening of competition and will apply a higher threshold to reach a definitive view on this criterion. For this reason Phase 2 investigations and analysis are deeper and broader than Phase 1. Third parties will be invited to make written submissions and participate in hearings.
At the end of Phase 2, the CMA can:
- clear the transaction
- decide that remedies are necessary to address a significant lessening of competition resulting from the merger
- block the deal.
Substantial lessening of competition
The CMA will assess whether the merger is likely to result in a substantial lessening of competition. It will consider whether the merger will give rise to a significant effect on rivalry between competitors or in the market place over time, and therefore on the competitive pressure on firms to improve their offering to customers or become more efficient or innovative. In practice, the CMA will identify the relevant market(s) impacted by the deal and assess the competitive effects of the merger in these market(s).
The proposed merger appears to bring together players acting at different levels of the supply chain, Tesco operating as a food retailer and Booker operating as a symbol group operator and wholesale supplier of groceries to catering customers and retailers. The CMA's merger assessment will depend on how it defines the markets and what, if any, overlaps it identifies between the merging parties' activities in these markets.
The CMA will also consider the potential benefits resulting from the merger. Tesco and Booker may claim that the new merged entity will be well-positioned to offer a more innovative offer for customers and consumers, ie it will improve consumers' experience with better availability of quality food at attractive prices across retail and eating out locations and it will create broader market opportunities for suppliers. It may be that some suppliers to Tesco and Booker will take the view that the competitive landscape would be harmed by the stronger combined buying power of a merged entity. The CMA will consider Tesco and Booker's position in conjunction with the views and concerns expressed by third parties, including competitors and customers.
If the CMA considers that the merger is likely to result in a substantial lessening of competition, the parties to the proposed merger may accept undertakings in lieu, in Phase 1, or undertakings in Phase 2, to remedy these concerns and obtain clearance. In previous cases involving mergers between food retailers and wholesalers, the remedies or undertakings in lieu have typically consisted of the divestment of stores in overlapping geographic areas. This type of remedy may be less relevant here.
The extent to which the CMA considers that the proposed merger raises competition concerns, which may be addressed by appropriate undertakings, to some extent depends on the overlaps in relevant markets identified between the merging parties. This will be informed by the CMA's market definition exercise and its assessment of the relevant markets. Suppliers, customers and competitors' concerns brought to the CMA's attention about the proposed transaction may also inform the competition issues raised by the merger as well as the type of remedies the competition authority can consider.
The CMA is very likely to review this transaction with great interest because of the size of the merging parties in their respective markets and the prospect of the tie up raising competition concerns. Interested third parties with concerns about the deal should consider making their views known to the CMA.