Proposed joint venture between Alliance Boots Limited and Dollond & Aitchison Limited in relation to their respective optical businesses

Affected market: Retail market for optical services

No. ME/4014/09

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, jurisidction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 1 May 2009. Full text of decision published 19 May 2009

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

PARTIES

Alliance Boots Limited (AB) is primarily active in the wholesaling and retailing of pharmaceutical products and the retailing of health and beauty products in the UK. Its activities in the retail opticians sector are through its subsidiary company Boots Opticians Limited (Boots), which has 286 outlets in the UK, operated both as in-store outlets within Boots Health and Beauty premises and as standalone outlets.

Dollond & Aitchison Limited (D&A) is a national chain with 400 outlets in the UK. It is owned by an Italian manufacturer De Rigo S.p.a. (De Rigo), which is active in the design, manufacture and marketing of eyewear, distributing its products in 80 countries worldwide. [see note 1] D&A's reported UK turnover for its last financial year was £168.6 million.

TRANSACTION

The optical businesses of AB and D&A (the parties) will be placed into a holding company, AD Holdco Limited (AD Holdco). AB and D&A will (indirectly) have a [55-65] per cent and [35-45] per cent shareholding respectively in AD Holdco. Pursuant to a shareholders agreement, AB will have the power ultimately to determine the budget and business plan in the event of disagreement. Therefore, for the purposes of section 26 of the Enterprise Act 2002 (the Act), AB will acquire de jure control of AD Holdco and D&A will acquire material influence.
 
The parties' rationale for the merger is to bring together AB's brand awareness as a source of healthcare products and De Rigo's eyewear design and manufacturing capabilities.

The merger was notified by the parties on 28 January 2009 and the administrative deadline for a decision was 8 April 2009.

JURISDICTION

As a result of this transaction AB and D&A will each cease to be distinct from the optical business contributed to AD Holdco by the other. Pursuant to section 28(1)(a) of the Act, given that the parent companies of AD Holdco (AB and D&A) remain under the same ownership and control after the merger, the relevant turnover is calculated by taking the total value of all the enterprises ceasing to be distinct (that is the parent entities and the optical businesses contributed to the JV) and deducting the turnover of the parents (which remain under the same ownership and control after the merger). [see note 2] The combined UK turnover of the contributed optical businesses exceeds £70 million, so the turnover test in section 23(1)(b) of the Act is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY COMMENTS

The OFT contacted a number of the larger chains competing with the parties. Only [  ] came back with a response, and its concerns that the merger would lead to a significant lessening of competition have been discussed in detail above. Despite making considerable efforts to contact a large number of independent opticians, the OFT received only a small number of views from them, which have also been discussed above.
 
The OFT received a response from [  ].

ASSESSMENT

The parties overlap in the retail market for the provision of optical services in bricks and mortar opticians.

Prior to considering the impact of the merger at the national and local level, the OFT considered who should be included in the effective competitor set. One third party argued that independent opticians should not be considered as effective competitors to the parties because they did not have the scale necessary to compete with large multiples. According to this third party, scale was particularly important to obtain large discounts from upstream suppliers, better rental conditions and large marketing budget. The third party further argued that the fast decreasing numbers of independent local opticians was evidence that they were unable to compete with the multiples.

However, the parties provided a substantial body of evidence clearly demonstrating that the independent opticians do provide an effective constraint on the parties. This evidence included internally commissioned market research reports that included detailed analysis on the independents, and examples of the parties monitoring and, on some occasions, reacting to independents in specific local areas.

At a national level, and in the absence of any third party concerns, the OFT considered that the parties' combined share of the optician's market in the UK was not high enough (16 per cent, increment 7 per cent) to raise competition concerns, in particular given the number of remaining players (both large multiples, smaller national and regional players as well as independent operators).
 
The OFT also considered the impact of the merger at the local level given its starting assumption in retail markets that competition occurs at a local level (on the basis that consumer demand for retail products and services is locally-driven) and in light of evidence provided by the parties indicating that they monitor and react to local competition.

The parties overlap in 320 areas on the basis of an isochrone with a six kilometre radius and 194 on the basis of an isochrone with a one mile radius (that is, 1.6 kilometre radius). Under the narrower isochrone, there were only four areas where the merger would lead to a reduction of competitors, including independents, from four to three. These areas were Banstead, Dartford, Hornchurch and West Thurrock (Lakeside Shopping Centre). For each of these areas the OFT asked the parties for the distance that [65 - 75] per cent of their customers travel for sight tests and the purchase of optician's products. This information indicated that these local markets were all wider than one mile, on such wider basis none of the above locations gave rise to an expectation of a significant lessening of competition because post merger none would have less than four optician outlets in the parties' catchment area.

The OFT has considered carefully the concerns raised by third parties about the effect of the merger both on local markets as well as potential vertical issues around the supplier of frames, ophthalmic lenses and hearing aid services. But, based on the parties' responses on these points the OFT is comfortable that no such issues arise as a result of the merger.

Consequently, the OFT does not believe 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.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. D&A is the holding company for three wholly owned subsidiaries: D&A Professional Services Ltd, which provides professional eye care services, D&A Eyewear Ltd, which is responsible for the provision of frames, lenses and accessories, and D&A Contact Lenses Ltd, which is responsible for D&A's contact lens business.

2. See in this respect paragraph 3.31 of the OFT's Draft Mergers - jurisdictional and procedural guidance - Draft guidance consultation document March 2008 which will, when finalized shortly, supersede the interpretation set out in paragraph 1.17 of the OFT's Guidance note on the calculation of turnover for the purposes of Part 3 of the Enterprise Act 2002 (July 2003).

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