On March 19, 2013, the Competition Bureau issued a summary of the approach taken in its review of the proposed $700 million acquisition by Leon's Furniture Limited of The Brick Ltd.1 The publication is the eighth such summary released since Interim Commissioner of Competition John Pecman was appointed to the position in September 2012,2 and provides the business and legal communities with meaningful insight into the Bureau's practical approach to mergers between close competitors.
summary of the transaction
The proposed transaction was merger of two national retailers of furniture, mattresses, appliances and electronics. At the time that the transaction was announced, Leon's had 74 retail stores across Canada, in addition to three stores in Ontario operating under the Appliance Canada banner. The Brick had a total of 231 retail stores. In conducting its review of the transaction, the Bureau obtained the parties' transaction-level sales data, strategic marketing documents, and business plans, as well as input from competitors, suppliers and customers. The Bureau determined that the parties' retail operations overlapped in over sixty local markets across Canada.
Information obtained over the course of its investigation revealed that The Brick and Leon's were close competitors — potentially each other's closest competitors — with respect to the retailing of furniture and mattresses. A relatively simplistic analysis of the transaction could have examined the parties' combined market shares of furniture and mattress retailing — likely relatively low in most areas — and on that basis concluded that the transaction was unlikely to be problematic. An alternative analysis, reflecting the closeness of the substitutability between the Leon's and The Brick, and perhaps employing critical loss and/or upward pricing pressure considerations as contemplated in the Merger Enforcement Guidelines,3 might have suggested a larger concern. In fact, however, as the Bureau's Statement reveals, using transaction-level sales data, the Bureau conducted a cross-sectional analysis to quantify the competitive pressure that the parties exerted on each other. From this analysis, and particularly by comparing the parties' prices in markets where they compete with prices in markets where they do not compete, the Bureau was able to estimate the potential loss in competition expected to result from the merger.4
While the Bureau's summary does not elaborate on the findings of the cross-sectional analysis, the Bureau ultimately determined that the price effects observed in its econometric exercises were not material, as contemplated by recent Competition Tribunal jurisprudence.5 This conclusion was apparently confirmed from more traditional sources, such as the contents of the parties' internal strategic and marketing materials, input from other market participants and a review of the impact that Leon's entry into several local markets had on the performance of established The Brick stores within those markets.
Ultimately, the Bureau concluded that, notwithstanding the parties' relationship as close competitors and the presence of barriers to entry,6 the transaction was unlikely to lead to "a substantial lessening or prevention of competition" due to the existence of effective remaining competition from competitors at the national and regional level.
The Bureau's analysis of the Leon's/The Brick transaction underscores the importance of specific data of the competitive dynamics, where such data is available, and also the importance of demonstrating the ability of remaining competitors to constrain the prospective exercise of market power of the merged entity. The emphasis on effective remaining competition in merger reviews in the context of major retailers/distributors was also recently emphasized by the Bureau in its clearance of WESCO Distribution Inc.'s $1.15 billion acquisition of EECOL Electric Corp,7 in which the Bureau emphasized the importance of remaining effective competition in the case of a transaction between close competitors.
increased transparency at the mergers branch
The summary of the approach taken by the Bureau in arriving at a no-action letter in Leon's/The Brick is, as noted, the latest in a series of helpful publications released since Interim Commissioner Pecman took office in September 2012 – more than one per month since then. While Bureau staff have emphasized that the methodologies and conclusions discussed in its merger review summaries are specific to the review of the transactions in question and are not binding for the purpose of future merger reviews, the publication of merger review summaries are of considerable value to the business community and their counsel.
As Interim Commissioner Pecman remarked in a recent presentation at McMillan's Vancouver office,8 applying Canada's competition laws in a transparent and predictable manner is one of the Bureau's three priorities going forward. Publishing these merger review summaries requires real investment of resources. It also requires a willingness to subject the Bureau's work to scrutiny and potential criticism. The Bureau is to be commended for making transparency a goal, and for taking meaningful steps to put it into practice.