Anticipated acquisition by HMV of 15 Zavvi stores

Affected market: Retail of entertainment products

No. ME/4036/09

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 22(1) given on 28 April 2009 Full text of decision published 14 May 2009

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

PARTIES

HMV Group plc (HMV) is active in selling entertainment products. It retails pre-recorded music, films, electronic games and peripherals, MP3 players and a small range of books (mainly music/artist related) under the HMV and FOPP brands. There are approximately 237 HMV branded and eight FOPP branded retail outlets in the UK. HMV retails books under the Waterstone's brand from approximately 309 stores in the UK. HMV also operates websites in the UK and the Channel Islands retailing music, games, films and books.

Zavvi Retail Limited (Zavvi) was also active in the sale of a broadly similar range of entertainment products to those sold by HMV as described above. Zavvi entered into administration on 24 December 2008.

TRANSACTION

HMV has taken over 15 stores that were previously trading as Zavvi prior to its entry into administration in the following three tranches:

(i) nine stores on 14 January 2009 [see note 4]
(ii) five stores on 16 February 2009, [see note 5] and
(iii) one store located in the Manchester Arndale Centre (Manchester Arndale) on 26 March 2009.

Collectively these 15 stores are referred to in this decision as the 'Acquired Stores'. The OFT understands that the Acquired Stores have been initially occupied under licence by HMV until legal completion in the form of transfer of leasehold interests (or grant of a new lease) can occur. This cannot take place until formal landlord consents to assign have been executed (or a new lease has been granted). Transfers of leasehold interests have been executed for only some of the stores, and therefore, as a whole, the transaction still remains anticipated. [see note 6]

This investigation was instigated by an OFT own-initiative enquiry and the original un-extended administrative deadline for its consideration was 14 April 2009. In line with section 27(5) of the Enterprise Act 2002 (the Act),  the timetable for consideration of this transaction re-commenced at the point at which the OFT received a satisfactory submission in relation to each additional tranche of purchases. The OFT was notified of HMV's final acquisition of the Manchester Arndale store on 9 April, and as a consequence the revised administrative deadline is 10 June 2009. [see note 7]

JURISDICTION

A relevant merger situation arises when two or more enterprises cease to be distinct and either the UK turnover test or the share of supply test set out in section 23 of the Act is met.

In relation to anticipated mergers, the requisite test for the OFT is that it has to reach a belief that it is or may be the case that arrangements are in progress or contemplation which, if carried into effect, will result in the creation of a relevant merger situation (section 33(1) of the Act).

The turnover generated by the Acquired Stores between December 2007 and November 2008 was approximately £[  ] million; the turnover test was therefore not met. However, HMV and the Acquired Stores overlap in the bricks and mortar supply of home entertainment products, and in particular recorded music, films and games and accessories and the share of supply test in section 23 of the Act is met in relation to the bricks and mortar retail of recorded music and DVDs in which HMV and the acquired stores hold [  ] per cent.

The OFT has considered carefully in this case whether it is or may be the case that enterprises would cease to be distinct under the arrangements in question. Specifically, the OFT considered whether:

(i) the Acquired Stores taken over by HMV should be considered to be 'enterprises' for the purposes of the Act, and

(ii) they should collectively be aggregated together under section 27(5) of the Act and treated as a single relevant merger situation.

Enterprises ceasing to be distinct
According to the administrator, the most valuable Zavvi assets were the leases of its properties. Although the administrator took primary charge of the sale of the Zavvi assets, any prospective assignment of leases (or granting of new leases) had to be negotiated through the relevant landlord of each of the stores. The administrator had the ability to place a prospective lessee temporarily into the premises under a 'licence to occupy' but any more permanent arrangements relating to the assignment or grant of an actual lease were subject to negotiations with landlords. The Acquired Stores had a number of different landlords and prospective tenants (including HMV) had to negotiate with the relevant landlord for each of the stores (in addition to, where relevant, negotiating with the administrator).

The overall substance of the various arrangements in relation to the Acquired Stores is that they have changed from being Zavvi stores to being traded by HMV. In relation to each of the stores, HMV informed the OFT that it has acquired the fixtures and fittings and has taken over responsibility for the staff in them (on the basis that the TUPE [see note 8] regulations either clearly apply, or, in some cases, HMV consider that they might apply). HMV will also inherit any goodwill that attaches to the stores through their past trading as entertainment stores under the Zavvi brand, although the OFT understands that consideration has not been paid to Zavvi or to the administrator by HMV in relation to all stores (the position varies between the stores). In a number of cases (but not all), existing stock has also been acquired by HMV.

The OFT views the transfer of the leases (on the same terms as the landlords had with Zavvi), or the grant of new re-negotiated leases with the landlords, as an integral part of the overall transfer of the Acquired Stores to HMV. In line with its decision in the Cineworld case, [see note 9] the fact that different components that may collectively constitute an enterprise (property, stock, fixtures and fittings, goodwill, employees) are acquired from different parties does not negate this conclusion.

As a result, the OFT believes that it is or may be the case that the Acquired Stores each constitute enterprises for the purposes of consideration under the Act.

The OFT accepts that this conclusion is stronger in relation to certain of the Acquired Stores than in relation to others. In particular, in relation to the Manchester Arndale store, the OFT considers that this particular situation qualifies for examination only on the basis that it 'may be the case' that a relevant merger situation has been or will be created. [see note 10] The OFT notes that, in any event, whether Manchester Arndale is treated as a relevant merger situation or is excluded from investigation under the Act does not alter the OFT's overall conclusion - for the reasons given in the remainder of the decision - not to refer the aggregated acquisition of the Acquired Stores by HMV to the Competition Commission.

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.

Application of section 27(5) of the Act
The Acquired Stores were acquired by HMV at different times (as discussed above). In addition, to some extent, different parties were involved in supplying the different components that collectively led to the transfer of the stores from Zavvi to HMV in the different locations, that is, the different landlords of the stores, and in one case (Manchester Arndale) a third party as a temporary occupier. [see note 11] 

Subject to a two year limit, section 27(5) of the Act gives the OFT the discretion to treat earlier acquisitions between the same parties or interests as having occurred simultaneously on the date on which the latest of them occurred. Section 27(8) of the Act states that, 'In deciding whether it is appropriate to treat arrangements or transactions as arrangements or transactions between the same interests the decision-making authority shall, in particular, have regard to the persons substantially concerned in the arrangements or transactions concerned'.

In this case, the OFT considers it appropriate to exercise its discretion under section 27(5) to treat together all of the 15 Acquired Stores, notwithstanding that different landlords were involved and there was a temporary intervening third party in one of the stores. This is because the transactions collectively arose from the recent entry into administration of Zavvi and because, in the OFT's view, Zavvi/the administrator, on the one hand, and HMV, on the other hand, were the persons substantially concerned in all of the arrangements.

THIRD PARTY VIEWS

The OFT did not receive any comments from third parties who were concerned about the transaction.

ASSESSMENT

The OFT 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 in relation to the 15 Acquired Stores by HMV and that these should be treated together under section 27(5) of the Act.

The OFT considers that, on a cautious approach to candidate product and geographic market definitions, the merger gives rise to potential competition concerns in relation to seven Overlap Stores.

After careful analysis, the OFT has concluded that the normal benchmark against which merger effects are assessed, pre-merger conditions of competition, did not apply in relation to these Overlap Stores as Zavvi had exited the market. The question, therefore, is whether there could realistically have been a substantially less anti-competitive alternative to the proposed merger.

The OFT is satisfied that there is no realistic prospect of a substantially less anti-competitive alternative buyer for the Overlap Stores, nor of any other outcome that would be substantially better for competition than an acquisition by HMV.

As such, the counterfactual against which the merger must be judged in this case is a scenario in which the competitive threat from Zavvi will be lost in any event. Accordingly, the merger itself cannot be regarded as the cause of any lessening of competition.

Consequently, the OFT does not believe that it is or may be the case that the acquisition of the Acquired Stores by HMV may be expected to result in a substantial lessening of competition within a market or markets in the UK.

DECISION

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

NOTES

4. Peterborough, Plymouth, Southend, Glasgow Silverburn, Glasgow Fort, Bournemouth Castlepoint, Salisbury, Crewe, Teeside.
5. Glasgow Buchanon Galleries, Croydon, Nottingham, Fulham and Hastings.
6. Since the OFT's decision was made we understand that the transfers of the leases in respect of the Bournemouth and Fulham stores have been executed.
7. The application of section 27(5) of the Act in this case is discussed in more detail further below.
8. Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246.
9. Anticipated acquisition by Cineworld Group plc, through its subsidiary Cine-UK Limited, of the cinema business operating at the Hollywood Green Leisure Park, Wood Green, decision of 17 March 2008.
10. In Manchester Arndale, a third party (Head) had in fact temporarily traded from the store during the intervening period between Zavvi's entry into administration and HMV's entry into the store. Further, HMV acquired no stock from Zavvi/the administrator or Head and paid no consideration to Zavvi/the administrator, and HMV stated there was also a question mark over its legal responsibility (i.e. under the TUPE regulations) for taking on the ex-Zavvi employees. However, set against this, HMV did in fact take on the employees in the store and did acquire the fixtures and fittings with the store. It would also inherit any goodwill that still attached to the store; even if there were to be a temporary interruption in the identity of the leaseholder, customers' overall perception will be that the operation of the store as an entertainment retailer would have been continuous in essence, despite any transient changes in signage.
11. The OFT was only made aware of this one case (Manchester Arndale) where a third party had temporarily occupied the store during the course of its investigation. Even if, contrary to its findings, there had been a similar occurrence at other stores, the OFT's analysis of section 27(5) would equally apply to those stores.

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