Parties considering retail mergers should take note of the approach that the Canadian Competition Bureau took in analyzing the proposed acquisition of The Brick Ltd. and its subsidiaries (The Brick) by Leon’s Furniture Limited (Leon’s). Stikeman Elliott LLP has experience acting as competition counsel in a number of retail mergers, including the recent acquisition by Canadian Tire of Forzani, in which the Bureau took a similar approach. Both retail merger reviews highlighted the key role of econometrics in the Bureau’s assessment of whether the merged entity will have the ability to increase prices.
On March 19, 2013, the Bureau released a position statement in respect of the merger of the two national retailers of furniture, mattresses, appliances and electronics. The Commissioner of Competition issued a “no action letter” to Leon’s and The Brick on March 11, 2013, meaning the merger will not be challenged. The Bureau’s review focused on the potential competitive effects in the retailing of furniture and mattresses. Leon’s and The Brick were viewed as particularly close competitors in respect of furniture and mattresses, with a high degree of differentiation from other competitors.
The Bureau went on to consider the potential loss in competition that might be expected to arise from the merger. The Bureau collected transaction level sales data to assess the degree of direct competition. The Bureau used a cross-sectional economic analysis to compare the parties’ prices in areas where they compete with prices in areas where they do not. The Bureau determined that the price effects were not material.
The Bureau’s assessment of whether the transaction would result in a substantial prevention or lessening of competition (an “SPLC Merger Enforcement Guidelines as having a constraining influence on price following a merger. In particular, the Bureau considered the extent to which barriers to entry existed, in addition to the presence of effective remaining competition in the retailing of furniture and/or mattresses:”) also considered various factors identified in the
- On barriers to entry, the Bureau noted certain barriers, such as scale, which provides a larger retailer with cost advantages over small retailers. Another barrier identified by third party market contacts consulted by the Bureau was the ability to secure viable real estate.
- However, the Bureau also determined that a number of national and regional retailers had overcome such barriers to entry, and that there would be sufficient effective competition to the merged entity in each of the local markets in which the parties compete. The Bureau thus concluded that the merger was unlikely to lead to an SPLC.
Consistent with the guidance provided in the position statement on the acquisition of Forzani by Canadian Tire, this position statement provides insight into how the Bureau approaches retail mergers. This position statement suggests that one of the Bureau’s principal concerns is the effectiveness of remaining competitors to constrain an exercise of market power. The review undertaken by the Bureau also highlights the potential requirement for parties to produce a large amount of data and internal documents in the course of a retail merger. The buyer will need to be active in retaining an economist and conducting an analysis of the data.
For more information concerning retail mergers, and the special considerations that should be taken into account, please get in touch with a member of the Competition and Foreign Investment Group at Stikeman Elliott.