Anticipated acquisition by HMV Group plc through Waterstone's plc of Ottakar's plc

Affected market: Book retailing

No. ME/1974/05

Please note that the full text of the decision can be downloaded by using the link on the right . What follows are extracts regarding the parties, the transaction, jurisdiction, assessment, undertakings in lieu and decision.

The OFT's decision on reference under section 33(1) given on 6 December 2005. Full text of decision published on 21 December 2005.

Please note that square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties or third parties for reasons of commercial confidentiality.

PARTIES

Waterstone's Ltd (Waterstone's) is part of the HMV Group plc (HMV). It is active in the sale of books to final consumers via 195 retail outlets throughout the United Kingdom. Waterstone's total UK sales in the financial year ended 30 April 2005 were £416.4 million. 

Ottakar's plc (Ottakar's) is a UK-listed company active in the sale of books to consumers via 132 retail outlets in the United Kingdom. The turnover of Ottakar's in the financial year ended 29 January 2005 was £173.1 million.

TRANSACTION

On 8 September 2005, HMV announced its intention of making a public offer for the entire issued share capital of Ottakar's. The offer of 440p per share was later recommended by the independent directors of Ottakar's. HMV, through Waterstone's, then posted its offer document to Ottakar's shareholders on 19 September 2005.

The transaction was notified to the OFT on 9 September 2005.

JURISDICTION

As a result of this transaction Waterstone's and Ottakar's will cease to be distinct. The UK turnover of Ottakar's exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation will be created.

ASSESSMENT

The OFT's concerns in this case arise from a realistic prospect of unilateral effects. In other words, the OFT believes that there is a loss of close competition between the parties, primarily on non-price factors at the local level, though it may also have a national dimension in terms of scale and branding - as each party faces pressure from the other to preserve its reputation as the 'authority on books' in multiple locations across the UK. The evidence available was insufficient to conclude that this loss of close competition will be offset by the sum of the relatively more distant constraints posed by other book retailers. This finding applies both in regard to the present, actual constraint posed by the parties' rivals, and likely future constraints post-merger as a result of repositioning of their value proposition (e.g., by increasing their range, staff or other qualitative retail experience factors), or through entry or expansion into new geographic areas.

In its assessment of this case, the OFT has received an unusually high degree of complaints. In relation to the complaints from publishers, the OFT is of the view that the available evidence does not support any of the theories they advance, many of which are speculative in nature. In contrast, the concerns from consumers lend additional weight to the following propositions.

a. First, that each of the parties seeks to differentiate itself from other retail outlets in a similar manner: by stocking a large range of books, by developing a brand for being an 'authority' in books, and through pre-sales service. This creates a closeness of competition between them;

b. Second, that consumers particularly value the extra lengths to which Ottakars' goes to distinguish itself from Waterstone's and other retailers, and that the presence of a Waterstone's in the local area, according to the OFT's econometric evaluations, actually increases this drive by Ottakar's to enhance its value proposition;

c. Third, that the loss of competitive pressure from Waterstone's on Ottakar's post-merger, including the closure of a large number of Ottakar's stores, will deprive consumers of a distinctive book-buying experience that they value.

While Waterstone's may retain an incentive to differentiate itself from other retailers, and may face actual and potential constraints from Borders, WH Smith, Amazon and others, the available evidence did not sufficiently support the view that the cumulative potential of these constraints would redress the concerns identified.

Consequently, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

UNDERTAKINGS IN LIEU

Where the duty to make a reference under section 33(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from such of the parties concerned undertakings as it considers appropriate for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it.

The OFT has consequently considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above.

[  ]. . [  ].

In lieu of reference to the Competition Commission, HMV indicated a willingness to give undertakings to:

a. [  ].

b. [  ].

The OFT's guidance states that undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are 'clear cut and proportionate'.

The undertakings in lieu offered by HMV would only be sufficient were the OFT to conclude that [  ] would be sufficient to maintain the level of competition. As the discussion above demonstrates, the competitive interactions between the different retailers in this market are potentially more complex than that which could be captured by [  ] and [  ] fails to alleviate the concerns raised about the removal of what is distinct to Ottakar's. In the absence of additional information the OFT was not satisfied that the proposed remedy could be considered 'clear cut'.

In addition, it was not clear that [  ] would be sufficient to remedy the other concerns raised in relation to the loss of potential competition.

Accordingly, the OFT has decided not to exercise its discretion under section 73(2) of the Act to accept undertakings in lieu of a reference.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

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