Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc

Affected market: Sports retailing

No. ME/3986/08

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, third party views, assessment and decision.

The OFT's decision on reference under section 22(1) given on 7 August 2009. Full text of decision published 14 August 2009.

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

This decision should be read together with the OFT's decision of 1 May 2009, published on 21 May 2009 (the Decision), which concluded that the test for reference was met in relation to the completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc.

PARTIES

Sports Direct International plc (SDI) is the UK's leading sports retailer by revenue and operating profit, and the owner of a significant number of internationally recognised sports and leisure brands, operating approximately 375 retail outlets in Great Britain. The majority of retail outlets trade under the Sports Direct or Sports World fascias. SDI has acquired a number of retail businesses over the last few years, and some retail outlets still trade under their previous names, such as Lillywhites, McGurk, Exsports, Gilesports, Sports Soccer, Field and Trek, and Hargreaves.

In addition, SDI currently holds a 29.4 per cent stake in Blacks and a 25 per cent holding in each of Sweatshop and SheRunsHeRuns. The OFT considers that, in accordance with the OFT's guidance  and the established practice of the OFT and the Competition Commission (CC) in relation to determining material influence for the purposes of section 26 of the Enterprise Act 2002 (the Act), absent any evidence to the contrary, it is or may be the case that SDI has material influence in relation to all three retailers (Blacks,  Sweatshop and SheRunsHeRuns), as the level of SDI's shareholding in each would be very likely to provide it with the ability to block special resolutions at shareholder meetings.

JJB Sports plc (JJB) is one of the UK's leading high street sports retailers. As at 27 January 2008, JJB operated approximately 400 retail outlets in the UK  - although the OFT is conscious that this reduced through 2008/09.  JJB reported a pre-tax loss of £9.7 million for the first half of 2008.

TRANSACTION, PROCESS AND TIMING

The transaction concerns the completed acquisition by SDI of 31 retail outlets from JJB which took place between 5 November 2007 and 1 December 2008 (collectively the 'Acquired Stores' or, individually, an 'Acquired Store'). 
 
The OFT became aware of the transaction through an own-initiative investigation by the Mergers Intelligence Unit in December 2008. The original extended statutory deadline under section 24 of the Act was Monday 4 May 2009.

JURISDICTION

The OFT considers that the acquisition by SDI of 31 retail outlets from JJB constitutes enterprises ceasing to be distinct for the purposes of section 23 of the Act.

Section 27(5) of the Act provides that the OFT may treat successive events as having occurred simultaneously on the date in which the latest of them occurred. Section 27(6)(a) of the Act adds that a 'successive event' can occur within a two year period under or in consequence of the same arrangement or transaction, or successive arrangements or transactions between the same parties. In this case, the date of the latest retail outlet acquisition was 1 December 2008.

Given that the Acquired Stores had UK turnover in the last financial year of approximately £[ ], the turnover test in section 23(1)(b) of the Act is not met.

However, the OFT believes that it is or may be the case that the share of supply test in section 23(2)(b) of the Act is met and, therefore, that a relevant merger situation has been created. This is because SDI's share of supply of goods by national sports retailers (Sports Multiples, that is, SDI, JJB and JD Sports) in the UK, by number of outlets, in 2007 was 33 per cent. In this case, the acquisition of 31 retail outlets from JJB represents an increment of approximately 2.5 per cent.

In addition, the OFT believes that the share of supply test may also be met through the combination of SDI and the Acquired Stores' share of supply in the UK of sports clothing retail, which is also estimated to be greater than 25 per cent. SDI alone has a share of supply of all sports clothing retail in the UK of 24.9 per cent measured by sales and the OFT estimates that the increment arising from this transaction is approximately one per cent on the same basis.

For all of these reasons, the OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

ASSESSMENT

The Decision found that the reference test was met in relation to the supply of one or more categories of sports retailing in five local areas: Basildon, Llanelli, Newport, Harrogate and Isleworth.

The OFT suspended its duty to refer in order to seek undertakings in lieu from SDI because it considered that sale of stores in these five areas would constitute a clear-cut remedy to the competition concerns identified. The OFT had some reservations regarding the ability of SDI to divest these retail outlets to a suitable buyer. It therefore required that sale be achieved to an upfront buyer. In doing so, the OFT clearly stated that, should SDI be unable to find a suitable purchaser swiftly, and therefore be unable to divest the retail outlets in an expeditious and timely manner, then the OFT would reactivate its duty to refer to the CC.

From the Decision on 1 May 2009, SDI was given until the end of the (extended) divestment timetable on 31 July 2009 in which to locate a suitable purchaser (or suitable purchasers) and agree a sale.

SDI chose to pursue a sale to a single purchaser, JJB, because it recognised the difficulty of achieving a sale to multiple different purchasers. This was notwithstanding the OFT's initial concerns about whether JJB would in fact be a suitable purchaser. Ultimately, the proposed acquisition by JJB collapsed for unrelated reasons.

The OFT now considers that it is not appropriate to extend the suspension of its duty to refer in order to give SDI additional time to agree a sale for the following reasons:

• SDI has mischaracterised the respective roles of the OFT and CC.
  
  
• In this case, the OFT does not believe that there are good reasons to consider that undertakings in lieu will be forthcoming within a reasonable timeframe.
  
  - One of the reasons SDI sought to sell to JJB was because of difficulties involved in achieving sales of the five stores to multiple bidders. These difficulties remain.
  
  - In relation to the other Sports Multiples, SDI itself raised with the OFT in their discussions on 29 July 2009 the prospect that the Sports Multiples might be consciously refusing to engage with SDI given their knowledge of its need to divest the five stores if it were to avoid a reference.
  
  - As regards smaller independent operators, the OFT considers that it is far from clear that these would be regarded as suitable purchasers for one or more of these stores (for the reasons given in paragraphs 24 to 27 of the Decision).
  
  - The general economic conditions may result in fewer potential buyers amongst both larger and smaller operators. Indeed, SDI noted in its letter of 3 August 2009 the 'current, hugely challenging, high street conditions. Bank finance remains extremely tight'.
  
  
• SDI has not demonstrated genuine commitment to the divestment process. 

In light of all these circumstances, the OFT considers that it is not appropriate to provide SDI with additional time in which to seek to secure divestments. This is primarily because the OFT does not believe that a divestment would be achieved within the period requested by SDI. However, the OFT's decision to refer at this point in time is strengthened by SDI's lack of commitment to the divestment process, which further reduces the OFT's confidence in a successful divestment being achieved within a reasonable time period. In these circumstances, it is right and proper that the OFT should refer in accordance with the duty on it under the Act.

DECISION

The OFT's duty to refer is no longer suspended and the acquisition of the 31 retail outlets from JJB which took place between 5 November 2007 and 1 December 2008 will therefore be referred to the CC under section 22(1) of the Act in accordance with the Decision. Pursuant to section 25(5)(c) of the Act, upon reference to the CC, the ongoing extension to the duration of the statutory time limit in section 24(1) of the Act will be cancelled.

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