Completed acquisition by Pendragon plc of Reg Vardy plc

Affected market: Motor vehicles

No. ME/2263/06

The OFT's decision on reference under section 22 given on 18 October 2006. Full text of decision published on 20 October 2006.

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

PARTIES 
 
Pendragon plc (Pendragon) is active in the UK in the retail sale and contract hire and leasing of new and used vehicles and associated servicing, repair and spare part supply.

Reg Vardy plc (Reg Vardy) was also active in these sectors prior to the merger. Reg Vardy's UK turnover for the financial year ended 30 April 2005 was £1,717 million.

TRANSACTION 
 
Pendragon acquired the share capital of Reg Vardy by way of an offer which became unconditional on 14 February 2006. As a result of the transaction, Pendragon controls ninety-six ex Reg Vardy motor vehicle dealership franchises throughout the UK.

JURISDICTION 
 
As a result of this transaction Pendragon and Reg Vardy have ceased to be distinct. The UK turnover of Reg Vardy 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 has been created for the purposes of section 22(1)(a) of the Act.

BACKGROUND

In its decision of 4 August 2006 (the Decision) the OFT announced that, on the evidence available, it believed that it was or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition (SLC) in the supply of servicing for new cars in four local areas in the UK. A copy of the Decision is attached at Annexe 1. For reasons set out in the Decision, the OFT believed that there was a duty to refer in respect of Vauxhall West Yorkshire, Vauxhall Central Scotland, Vauxhall Hartlepool, and Land Rover Northamptonshire.

On this basis, the OFT decided that the merger would be referred to the Competition Commission (the CC) unless Pendragon gave suitable undertakings pursuant to section 73 of the Act to address the competition concerns arising from the merger.

Pendragon offered undertakings including an option to divest those dealerships which the OFT considered necessary to fully address the adverse effects arising from the merger (the Proposed Undertakings). The OFT considered that this option was capable of clearly addressing the competition concerns identified in the four local areas.

CONSULTATION

On 20 September 2006, the OFT published the Proposed Undertakings inviting interested third parties to give their views on them to the OFT. Only one response to the consultation was received and the issues raised in it are summarised below followed by the OFT's response to each issue.

Issue: The Proposed Undertakings do not expressly prevent Pendragon from giving notice to terminate its dealer agreements with the relevant vehicle manufacturer prior to divestment

The third party which responded to the consultation was concerned that Pendragon may be able to terminate its dealership agreements prior to divestment so that it would be possible for a proposed purchaser to take over a dealership for the balance of the notice term with a view to closing and redeveloping the site and therefore defeating the purpose of the Proposed Undertakings.

OFT Response: Clause 2.1 of the Proposed Undertakings requires Pendragon to 'effect to the satisfaction of the OFT the divestment of each Divestment Dealership Business as a going concern'. The OFT considers that it would be a breach of the Proposed Undertakings if Pendragon gave notice to terminate any of its dealership agreements prior to the required divestment taking place.

Issue: Divestment should be of both the sales and service businesses

The concern expressed by the third party was that Pendragon should be required to divest both the sales and service businesses that form part of each dealership to ensure that the dealership sites remain viable.

OFT Response: Clause 14.4 of the Proposed Undertakings requires divestment of 'the whole or substantially the whole of the rights, assets, interests and obligations of or associated with' the relevant dealerships. The OFT is therefore satisfied that the Proposed Undertakings require Pendragon to divest both the sales and service businesses that form part of each relevant dealership. It is also clear at paragraph 51 of the Decision that the OFT did not consider that Pendragon's offer to only divest its authorised repairer agreements or its authorised repairer premises would address the competition concerns it had identified as it was not sufficiently clear cut or capable of ready implementation.

Issue: The Proposed Undertakings do not expressly require Pendragon to obtain consent for a potential purchaser from the franchisor prior to seeking approval from the OFT

The respondent pointed out that manufacturers have reserved a right within their dealership agreements to approve any potential change of ownership or transfer of rights under the agreement. It was concerned that the Proposed Undertakings do not expressly require Pendragon to obtain approval of the proposed purchaser from the relevant manufacturer prior to obtaining approval from the OFT. [See Note 1]

OFT Response: The OFT considers that for the OFT to be satisfied that the proposed purchaser is able to run 'a viable and active business in competition with Pendragon and other competitors' as required by clause 3.1(b) of the Proposed Undertakings, Pendragon or the proposed purchaser must satisfy the OFT that the relevant vehicle manufacturer consents to the proposed purchaser taking over the dealership franchise.

On the basis of the comments above, the OFT considers that it is not necessary to amend the Proposed Undertakings or to further consult on the issues raised above as the Proposed Undertakings are appropriate to remedy, mitigate or prevent the SLC or any adverse effect which has or may have resulted from it, or may be expected to result from it, in the supply of servicing for new cars in the four local areas in the UK identified in the Decision.

DECISION

The OFT decided on 4 August 2006 that the merger would be referred to the CC pursuant to section 22 of the Act if Pendragon failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision or any adverse effect which has or may have resulted from them, or may be expected to result from them. The OFT has decided to accept the Proposed Undertakings offered by Pendragon and attached at Annex 2 in lieu of reference to the CC, as they address all of the competition concerns identified in the Decision.

This merger will therefore not be referred to the CC and the Proposed Undertakings which have been signed by Pendragon will come into effect from this date.

NOTE

1. Pendragon wishes to clarify that under current dealership agreements it is only necessary for the relevant manufacturer to provide consent where the potential purchaser is not within the manufacturer's dealership network.

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