On November 5, 2021, the UK Competition and Markets Authority (“CMA”) published its final submission report in sports-inspired casual footwear and apparel retailer JD Sports’ completed acquisition of rival Footasylum, deciding (once again) to block the deal. This is the latest twist in a saga that has now lasted for more than two and a half years.
JD acquired Footasylum in April 2019, but – presumably given the (apparently) voluntary nature of the UK merger control regime – decided not to notify the completed transaction to the CMA. However, CMA’s Merger Intelligence function identified the transaction as warranting investigation and promptly summoned it for a Phase 1 review. Shortly thereafter (in May 2019), and as is the standard practice in CMA reviews of completed transactions, the CMA imposed strict separation agreements on the parties through an Initial Enforcement Order (“IEO”) to ensure that the parties’ businesses were managed . independently throughout the investigation.
The transaction was then referred for an in-depth Phase 2 investigation in October 2019. The CMA decided to block the transaction in May 2020 (the “Original Decision”), essentially finding that: (i) the parties were close competitors; and (ii) the transaction would result in a substantial lessening of competition (“SLC”) in the UK markets for sports-inspired casual footwear and clothing (see VBB on competition law, Volume 2020, n° 5).
JD then appealed the initial CMA decision to the UK Competition Appeal Tribunal (“CAT”). In November 2020, the CAT allowed the appeal on purely procedural grounds (while all substantive grounds were dismissed). The main argument argued on appeal was that the CMA acted irrationally by failing to properly assess the effect of the COVID-19 pandemic on the transaction, both when: (i) assessing the competitive constraint that Footasylum would have exerted on JD in the counterfactual; and (ii) whether the parties’ major suppliers would exert increased competitive pressure on the merged entity in the future, due to the growth of their own direct-to-consumer (“DTC”) channels. Essentially, the CAT concluded that the CMA had established the significance of the pandemic to its analysis, but then had not gathered enough evidence to assess the issue(s) before it (although, more importantly, the CAT did not determine that such evidence would have changed the outcome of the CMA’s decision if considered).
The CAT, in referring the case to the CMA for reconsideration in the light of the effects of the COVID-19 pandemic, considered that this question was sufficiently relevant to weigh on the assessment of the CMA on the whole operation. (to see VBB on competition law, Volume 2020, n° 11). This prompted the CMA to conduct the rebate investigation which has just been completed.
The reasoning of the CMA
The CMA has now (again) found – “based on a substantial body of evidence” (including, in particular, evidence regarding the impact of the COVID-19 pandemic on competition, and other relevant factors affecting competitive dynamics) – that the transaction would result in an SLC in the retail supply of sports-inspired footwear and casual wear (in-store and online) in the UK, as it would bring together two close competitors and would therefore lead to poorer results for Footasylum buyers.
However, the SLC that the CMA has now identified in its referral differs significantly from the SLC previously found from its (initial) Phase 2 investigation, in that: (i) while the operation (still) results in a loss of Footasylum’s competitive constraint on JD; (ii) the SLC at issue now relies primarily on the removal of the constraint imposed by JD on Footasylum. This reflects the CMA’s findings on market developments since its initial Phase 2 investigation (including, for example, some prominent vendors’ DTC acceleration strategies), which made Footasylum a weaker constraint – and other competitors becoming stronger constraints – on JD. Especially, this is the first time that the CMA has blocked an agreement between competitors solely on such an asymmetrical basis – i.e. when the CMA has found an SLC only in relation to the acquired company, and not also in relation to the acquiring company. However, the CMA also noted that relevant market developments did not weaken Footasylum to the point that the transaction would no longer result in SLC at all.
While some other aspects of the CMA’s reasoning in its Final Remand Report (for example, with respect to market definition) do not differ materially from those in the (original) Final Phase 2 Report, the following the (updated) analysis of the CMA are particularly noteworthy:
- With respect to the parties’ (counterfactual) argument that Footasylum is vulnerable to “incremental disintermediation” by certain vendors seeking to reduce the number of third-party retailers it works with, given all the evidence (including the range and the volume of product that Footasylum has received from certain suppliers since 2019), the CMA concluded that the most likely scenario in the absence of a transaction is that Footasylum would continue to receive product from these suppliers (so that “it could compete…in the same way as it does today”).
- In the CMA’s view, the evidence (including the parties’ internal investigations and documents) shows that JD is a particularly close competitor and a strong competitive constraint on Footasylum in the relevant markets – although the CMA also acknowledges that other companies (including some suppliers) have become stronger competitors since the AMC’s original Phase 2 investigation. However, overall, the CMA considers that JD “is by far the closest competitor to Footasylum”, and that the merged entity “will have a strong incentive to make Footasylum’s offer worse”. That said, the CMA nevertheless considers that the evidence does not indicate that Footasylum constitutes a strong constraint for JD (whether in footwear or clothing).
In light of the foregoing, the CMA has concluded that Footasylum should now be sold – in its entirety – to a CMA-approved acquirer.
The road to follow
At this stage, it remains to be seen whether – and if so, on what basis – JD will seek (once again) to challenge the CMA’s decision before the CAT. Although JD has not publicly confirmed that she will appeal, in a statement following the CMA’s decision, she observed that the regulator’s decision “defies all logic.” If JD does eventually pursue an appeal, it will be interesting to see if and to what extent JD challenges the AMC’s unprecedented conclusion of an asymmetric SLC (especially given that the press release accompanying the decision of the CMA somewhat surprisingly refers to the ‘thriving sports fashion market’ in the UK). If this happens, it will be interesting to see if the CAT concludes that the finding of an asymmetric SLC falls within the very wide margin of appreciation of the CMA. The CAT has recently reaffirmed the extent of the CMA’s discretion in the particular context of the jurisdictional test for share of supply (see VBB on competition law, Volume 2021, n° 5).
Finally, and as explained above, the CMA imposed an IEO in May 2019 – shortly after the transaction was finalized. As this IEO remains in place today, the merging parties were held separately for the duration of the CMA’s review – a total period of more than two and a half years, during which they will likely have incurred significant costs (and spent considerable amounts of time and resources) to ensure continued compliance with the IEO and negotiate numerous waivers. Thus, this case is also a reminder that the closing of a transaction which could raise substantial competition concerns, without first obtaining the approval of the CMA, entails appreciable commercial, operational and reputational risks. These risks are heightened by the CMA’s recent interventionist approach and its ability (and, indeed, recent willingness) to impose increasingly substantial fines on parties for IEO-related violations (as discussed below). below regarding Facebook/Giphy).