Anticipated acquisition by Menzies Distribution Limited of Grays Newsagents (York) Limited

Affected market: Wholesale distribution of newspapers

No. ME/3081/07

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 comments, assessment and decision.

The OFT's decision on reference under section 33(1) given on 3 August 2007. Full text of decision published 10 August 2007.

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

PARTIES

Menzies Distribution Limited (Menzies), a wholly owned subsidiary of John Menzies plc, is a leading newspaper and magazine wholesaler in the UK.

Grays Newsagents (York) Limited (Grays) is an independent newspaper wholesaler of national and some regional newspapers mainly in the York area. [see note 1] Grays' audited turnover was £15.266 million for the year to 30 September 2006.

TRANSACTION

Menzies has agreed to acquire the entire issued share capital of Grays from Perio News Limited, Grays' parent company, which is owned and controlled by Mr.Gray, Managing Director of Grays. The agreed consideration is [ ] (subject to adjustments).

Currently Menzies does not wholesale newspapers in the York area, only magazines, whereas Grays has only ever wholesaled newspapers in the York area. Grays' rationale for the transaction is to find a purchaser for the family owned business following Mr Gray's decision to retire and sell his business due to serious ill health. Menzies' rationale is to consolidate its position in the York area and benefit from any efficiencies flowing from distributing newspapers and magazines together from its existing Clifton Moor depot into the York area.

The parties filed a Merger Notice on 11 June but later withdrew that submission; the anticipated acquisition has therefore been treated under the administrative timetable with a target date for announcing a decision of 3 August 2007.

JURISDICTION

The parties' wholesale newspaper distribution businesses will come under common ownership and the parties' combined share of supply of newspaper wholesaling services in the UK exceeds 25 per cent, satisfying section 23 of the Enterprise Act 2002 (the Act). 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 VIEWS

Third party views are expressed below. In general, the majority of publishers were in favour or neutral regarding the merger. Opinion among small/medium publishers was divided. A significant number of retailers expressed non merger specific concerns about Menzies but equally some retailers acknowledged the transactional benefits of dealing with one wholesaler for newspapers and magazines in the York area and of any CSC reduction.

ASSESSMENT

Any possible merger effects of this transaction are in the OFT's view limited to wholesaling in the York area, as Grays has never bid outside York. Grays has only bid for two magazine contracts in the York area in the last 17 years and has been focussed on newspapers only for nearly 12 years; the OFT therefore considers that no concerns arise as regards magazines. Based on Menzies pre-merger record of 3 bids for newspaper contracts in 12 years, the constraint imposed by Menzies on Grays newspaper wholesaling absent the merger would appear to be relatively limited. Whilst Menzies may be considered to constrain Grays newspaper wholesaling in the York area to some extent, Grays does not appear to constrain Menzies.

In view of the possible loss of such constraint however, third parties have submitted that large publishers do have the ability and incentive to replicate the competitive constraint posed by Menzies as an alternative bidder, which is confirmed by the lack of material concerns from large publishers. Such constraint may take the form of sponsored entry from other multiples (including reconfiguring distribution territories if necessary to encourage bids); self-supply, one large publisher explained to the OFT that they would consider pursuing self-supply if prices increased post merger in the next tender; and publisher 'change of control' clauses, used to defeat any suspected unilateral effects of a merger or to require modifications/capital payments.

A wholesaling contract of sufficient scale and duration is also in the large publishers gift, to facilitate new entry. In the OFT's view, this is the critical pre-condition to entry and not the entry costs themselves, which are also largely recoverable on exit. Whilst there is a range of factors historical to wholesaling why there has been no new entry in recent years (from non multiples), these factors are unchanged as a result of the merger.

Wholesaler competition for many small/medium publishers appears in the OFT's view to be driven by the formers' agreements with large publishers. However, some small/medium publishers were not positive or materially unconcerned toward the merger, stating that they may not have sufficient buyer power to protect themselves post merger. The OFT therefore considered whether small/medium publishers would in fact have chosen from two newspaper distributors in York absent the merger. While the status quo is ordinarily the best guide to competitive conditions absent the merger, the OFT is satisfied that there is sufficient compelling evidence that this choice will not occur in this case because Mr Gray is in serious ill health and will retire rather than continue the business and invest capital in new equipment, and evidence shows that goodwill associated with Grays resides with the current management team led by Mr Gray himself as being instrumental to the credibility of the business from the perspective of large publishers. Due to any contract transfer requiring the consent under the change of control provision (which the large publishers have exercised unfavourably previously in respect of the other multiples but which have already exercised in favour in Menzies) and the fact that the other multiples have never bid in the York area, the OFT is satisfied that other potential buyers of the residual Grays business, or the liquidation of the Grays business, are not realistic scenarios against which the effects of the merger should be judged. Accordingly, the OFT believes it inappropriate in this case to adopt a counterfactual under which the Grays business would pass to a supplier other than Menzies.

Retailers have no choice of wholesaler pre-merger and this will not be altered by the merger, so the OFT considers their position as unaffected for the purposes of this merger assessment. Whilst retailers acknowledged some benefits of the merger, they also raised a large number of non merger specific existing disputes with Menzies' service level, which the OFT does not consider relevant to its merger assessment. Menzies has submitted that retailers which are currently customers of both Menzies and Grays in the York area will benefit from a reduction in CSCs by £144,830 per annum by avoiding the payment of CSCs to two wholesalers.

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 the Competition Commission under section 33(1) of the Act.

NOTE

1. Comprising postcodes YO1, YO7, YO8, YO10, YO17, YO19, YO23, YO24, YO26, YO30, YO31, YO32, YO41, YO42, YO51, YO60, YO61, YO62, YO91, HG1, HG2, HG3, HG4, HG5, LS24, YO43.

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