The French Competition Authority ("FCA") has unconditionally authorized the acquisition of furniture retailer Conforama by Mobilux under the failing firm defence ("FFD").

Background

On 8 July 2019, Mobilux group ("Mobilux") announced its intention to acquire Conforama. Mobilux is the parent company of the BUT group, which operates a network of 322 stores in the retail distribution of furniture, homeware and general merchandise products in France and its overseas territories. Conforama is active in the same markets and operates a network of 170 sales outlets.

The transaction was initially notified to the European Commission, which, following a request from the notifying party, referred the case to the FCA on 26 June 2019 because of the operation's exclusive impact on the French market and the specific expertise of the FCA in examining mergers in the retail supply and procurement of furniture/furnishing.1

Due to the serious financial difficulties encountered by Conforama, the FCA granted Mobilux a derogation of the standstill obligation in July 2020, despite the fact that the transaction was far from straightforward, as shown by the outcome of the investigation which concluded to significant risks of impediment of competition (see below).

In the meantime, the FCA continued its investigation, and opened an in-depth investigation in September 2021. The investigation led to a clearance decision on 28 April 2022,2 in which the FCA accepted the failing firm defence for the first time.

Risk of impediment of competition

The FCA found that the transaction would entail three categories of risk of distortion of competition.

  • Firstly, the risk of strengthening the purchasing power of the new entity representing nearly 50% of the French market for distribution of bedding products. This could create a situation of economic dependence for suppliers.
  • Secondly, in the French overseas territories, the transaction would result in the disappearance of an alternative for franchisees, now facing a single franchisor in the furniture sector and risking deterioration of their contractual conditions.
  • Thirdly, the new entity could cause significant harm to competition in the retail distribution of certain furniture products for 56 catchment areas.

Mobilux was unable to demonstrate that remedies could have offset the three anticompetitive risks.

First time the FCA accepts the FFD

In France, the FFD was accepted in a few cases when mergers were investigated by the Minister of the Economy,3 but this is the first time that the FCA has accepted it since it gained merger control powers in 2009.

The FCA applied the three-limb test established by the Conseil d'Etat in Moulinex:4 (1) the firm in difficulty would rapidly exit the market if not taken over, (2) there is no alternative transaction with less harm to competition, and (3) the exit of the firm would be no less harmful for consumers than the proposed acquisition.

In the case at hand, the FCA firstly confirmed that, absent the transaction, Conforama would have quickly been forced out of the market. Secondly, the FCA concluded that there was no less anticompetitive alternative purchase for at least a substantial part of Conforama's activity. The potential existence of a credible alternative purchaser was in fact assessed twice, in 2020 and following a new market test in March 2022. Finally, the FCA assessed whether the exit of the company would be no less damaging for consumers than the notified merger, especially in the catchment areas for which anticompetitive risks had been identified.

The full decision, which has not yet been published, may contain additional interesting details on the FCA assessment. In any case, this decision of the FCA is welcome, as it shows that despite clearly identified risks for competition, the FCA chose to "save" Conforama instead of forcing the disappearance of its assets from the market. This contrasts with the recent Cofigeo case, in which the FCA had rejected the application of the FFD, using a particularly stringent application of the second criteria, so much so that the Minister of Economy made use (for the first time) of his power of review to overturn the FCA decision and clear the transaction.5

Rare application of the FFD in Europe despite the COVID-19 crisis

The decision is significant because the application of the FFD is a rare phenomenon in merger control in Europe even during the COVID-19 crisis.

At EU level, the FFD is envisaged in the Horizontal Merger Guidelines,6 but has been rejected in several cases,7 and accepted in only a few: in Kali+Salz/MDK/Treuhand,8 BASF/Eurodiol/Pantochim,9 and in Aegean/Olympic II (following a prohibition of that transaction two years earlier).10 More often in recent years, for transactions that would have fallen short of the high standards for FFD, the European Commission took into account the target's financial difficulties—and thus its deteriorating position—in the counterfactual to clear the transaction.11

In Italy, the legislator addressed the failing firm defence with special crisis regulations. Following the COVID-19 crisis, a Decree provided that mergers of national dimension concerning firms providing general economic interest or labour-intensive services, which risked going bankrupt, were automatically cleared as long as they were notified by 31 December 2020.12 The acquisition of Nexive by Poste Italiane benefited from this temporary legal provision.13 This provision is similar to the one for the reorganization of companies providing public services that allowed the ICA to clear the Cai/Alitalia/AirOne merger with remedies in 2008.14

In Germany, the FFD has historically been applied in a few cases, such as the acquisition of n-tv by RTL15 and the acquisition of the publishing business of the daily newspaper Frankfurter Rundschau.16 However, the authors are not aware of any recent examples of application of the FFD in Germany.

In the UK, in August 2020, after initially accepting that the anticipated acquisition by Amazon of a minority investment in Deliveroo could profit from FDD, the CMA reversed its decision that Deliveroo could be considered a failing firm regarding the evolution of its financial position and market conditions.17 In March 2022, the Competition and Markets Authority ("CMA") cleared the Freshways acquisition of the Medina group18 in application of its recently revised two-limb test for FFD: (1) the firm in difficulty is likely to have exited the market absent the transaction, and (2) there was no credible alternative purchaser.19 It is noteworthy that the CMA no longer examines whether the sales of the exiting firm could be dispersed across several firms in the absence of the merger. Arguably, therefore, the standard for applying the FFD in the UK seems lower than in the EU or in France.

In 2020, we wondered whether the COVID-19 crisis would lead to a resurgence of cases of application of the FFD.20 Two years later, despite the Mobilux case, we can only conclude that this has not been the case. We also have not seen a material increase in decisions granting derogations from the standstill obligation at EU level, with the European Commission granting three derogations in each 2020 and 2021 (by comparison, the EC granted 6 and 5 derogations in 2008 and 2009 in the midst of the financial crisis). This may be a reflection of the fact that the massive public support given to companies in difficulties during the COVID-19 crisis has been successful in keeping companies afloat, thus avoiding a wave of rescue M&A.