Anticipated acquisition by Co-operative Group Limited of Somerfield Limited

Affected market: Grocery retailing

No. ME/3777/08

The OFT's decision on reference under section 33(1) was given on 20 October 2008 (the Decision). The full text of the decision was published on 15 January 2009.

THE PARTIES

Co-operative Group Limited (CGL) is the UK's largest co-operative with a diverse range of activities including the operation of banks, funeral services, farming, pharmacies and food retailing. This case involves CGL's food retailing business.

At the time of making its submission to the OFT, CGL had 2,228 food retail stores comprising 1,717 convenience stores, 452 mid size stores and 59 one-stop stores.

Somerfield Limited (Somerfield) is a food retailer with (at the time of making its submission to the OFT) 877 outlets comprising 221 convenience stores, 616 mid size stores and 40 one-stop stores.

TRANSACTION

In July 2008 the parties entered into a sale and purchase agreement under which CGL will acquire the entire share capital of Somerfield's holding company, Violet Holdings Limited (the Transaction). Completion of the Transaction is conditional on the OFT not referring the Transaction to the Competition Commission (CC).

JURISDICTION

As a result of this transaction CGL and Somerfield will cease to be distinct. The proposed merger does not have a Community dimension under the EC Merger Regulation [see note 1] since both parties achieve more than two thirds of their Community turnover in the UK.

The UK turnover of Somerfield exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied.

The OFT concluded in its Decision that arrangements were in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

BACKGROUND

The Decision concluded that, on the evidence available, 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. Specifically, the OFT has found that there is a realistic prospect of a substantial lessening of competition as a result of the proposed merger in the retailing of groceries in 133 local areas.

To address the OFT's competition concerns CGL offered undertakings to divest a store (or stores) in each of the 133 local areas identified by the OFT, thereby effectively removing the store overlap created by the proposed merger and resolving the OFT's competition concerns. In 24 local areas where the OFT was concerned that there were expected to be a limited number of potential purchasers that might be interested in buying the divested store and who did not raise their own competition concerns in the event of a divestment to them, CGL offered to make the disposal of stores in those areas subject to an up-front buyer provision in its proposed undertakings.

Following suspension of the OFT's duty to refer, CGL entered into sale agreements, conditional only upon OFT acceptance of the undertakings in lieu and completion of the Transaction, to transfer stores in the 24 local areas that were subject to an up-front buyer provision. The proposed purchasers for these stores were named in Annex 1 of the proposed undertakings.

In the case of one up-front buyer store (the Somerfield store in Victoria Road, Glasgow) the parties stated that none of the eligible effective competitors (as defined in the Decision) [see note 2] was willing to purchase on a stand-alone basis either the Somerfield store or the overlapping CGL store, even for nominal consideration. CGL provided a range of evidence in support of this. CGL therefore submitted Lidl, an established supermarket operator, as their proposed purchaser for the Somerfield Glasgow Victoria Road store.

The OFT considered whether it would be appropriate to approve Lidl as a purchaser for the Somerfield store in Victoria Road, Glasgow notwithstanding that it was a grocery retailer from outside the effective competitor set. The OFT considers that, in the demonstrable absence of any purchaser from within the effective competitor set, approving Lidl as a purchaser provides the most satisfactory and comprehensive means of restoring competition to pre-merger levels.

The OFT's approval of Lidl for Somerfield Glasgow Victoria Road is strengthened by the OFT's belief that, were the merger to be referred to the CC the CC would be no better placed than the OFT to identify an effective purchaser to resolve competition concerns in this area.

CONSULTATION

On 4 December 2008 the OFT published the proposed undertakings (the original undertakings) inviting interested parties to give their views on them by 29 December 2008 pursuant to paragraph 2(1) Schedule 10 of the Act.
 
The OFT received a small number of responses to its consultation. As a result of some of the representations it received, the OFT decided to make two modifications to the original undertakings.

The first modification was designed to ensure that, where CGL could have divested a freehold interest, but decides, or is requested by the purchaser, instead to grant a long lease to the purchaser in question, it also sells its residual freehold interest to a third party independent of it. This is designed to ensure that the purchaser of the long lease is independent of and unconnected to CGL and that its ability, viably and actively, to compete with CGL and other competitors in the provision of grocery retailing is not prejudiced by having CGL as the landlord of the site in question.

The second modification provided additional comfort to the OFT that a purchaser has the incentive itself to run the store or stores it acquires. CGL has included a provision within all sale and purchase agreements that it has already entered into (that is, in respect of all of the divestment businesses subject to an up-front buyer provision and those other divestment business for which CGL has already entered into a sale and purchase agreement) that includes a warranty that the purchaser has the financial resources, expertise and incentive to run the divested store(s) in competition to CGL.

The OFT also received representations that it considered did not impact on the suitability of the purchasers listed for the 24 up-front buyer stores in terms of remedying, mitigating or preventing the substantial lessening of competition in the relevant local areas. Further, the OFT did not consider that these comments impact on the terms of the undertakings in lieu.

One third party submitted that, in broad terms, the approach the OFT intended to adopt for approving purchasers outside the effective competitor set discriminated against these retailers without justification. The OFT should, it said, instead, undertake detailed market analysis in each local area containing a divestment store before determining whether to approve a purchaser. The OFT considers that the comments by the third party do not alter the suitability of the identified purchasers for the up-front buyer stores listed in the original undertakings but rather focused on what the OFT's approach should be for the remaining stores. Therefore, the OFT did not regard the comments as relevant in deciding whether to modify further the original undertakings or to accept them.

Another third party commented that the divestment stores should be divested by process of 'blind bids' in order to prevent CGL from selecting weaker competitors as purchasers. The OFT does not consider that such an approach is necessary since all proposed purchasers for the divested stores are required under the original undertakings to be approved by the OFT before they are permitted to purchase a store to ensure that they fulfil the purchaser approval criteria in the original undertakings (including the requirement to remedy, mitigate or prevent the substantial lessening of competition).

The OFT's attention was also drawn to the need to bear in mind any accretion to national, as well as local, market power when considering purchasers' suitability for store divestments. The OFT notes that (as provided for in the undertakings) it will approve a purchaser only where it is satisfied that the acquisition by that purchaser of the relevant store (or stores) does not create a realistic prospect of a substantial lessening of competition within any market or markets in the UK – which includes competition at a national level. Furthermore, the OFT is confident that the ultimate divestment of all the stores will not risk creating any new competition concerns at the national level, as the divestment package represents a very small proportion of the national grocery market and the divestments are expected to be distributed among multiple buyers (as has already been the case for the 24 stores subject to an up-front buyer provision).

For the reasons given above, the OFT does not consider that it should further modify or refuse to accept the original undertakings on the basis of these representations.

On 7 January 2009 the OFT published the proposed modified undertakings (the modified undertakings) inviting interested parties to give their views on the proposed modifications by 13 January 2009 pursuant to paragraph 2(4) Schedule 10 of the Act.

The OFT received one response on the modified undertakings. A third party submitted that paragraphs 2.6 and 3.6 of the modified undertakings (which require CGL to obtain a warranty from a purchaser that the purchaser has the financial resources, expertise and incentive to maintain and operate the divested store(s) in competition with CGL) places no requirement on the purchaser to maintain and operate the store and may not be an effective means of ensuring that effective competition occurs. The OFT considers that, in the circumstances of this case, it would be disproportionate, in terms of placing obligations on either CGL or purchasers of divestment stores, for it to go further than requiring the inclusion of such a warranty. In particular, the OFT notes that all the upfront buyer stores were sold to established grocery retailers, and there is no reason to consider that the sale of the remaining stores would be materially different in this respect. Further, the OFT has not considered it appropriate in previous grocery divestment cases to require ongoing obligations in relation to the purchasers of divestment stores and it is not aware of any evidence that remedies in previous grocery cases have been ineffective as a result. Moreover, the OFT is not aware of any reason justifying a substantially different approach in this case.

Therefore, the OFT does not consider that the modified undertakings require further modification.

DECISION

The Decision concluded that the merger would be referred to the CC if the parties failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision.

The OFT considers that the modified undertakings are clear cut and appropriate to remedy, mitigate or prevent the substantial lessening of competition and any adverse effects resulting from it. The OFT has therefore decided to accept the modified undertakings offered by CGL.

The proposed merger will therefore not be referred to the CC and the modified undertakings, which have been signed by CGL, will come into effect from the day CGL completes its acquisition of Somerfield.

NOTES

1. Council Regulation (EC) No 139/2004.
2. The effective competitor set was referred to in paragraph 13 of the Decision and comprises those grocery retailers listed in table A2 of the Decision.

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