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

Affected market: Cinemas

No. ME/3390/07

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 views, assessment and decision.

The OFT's decision on reference under section 22(1) given on 17 March 2008. Full text of decision published 24 April 2008.

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

CineWorld Group plc (CineWorld) is a listed cinema group with a circuit of 73 sites with a total of 758 screens. CineWorld operates a 12 screen cinema in Wood Green.

Standard Life Property Income Trust (Standard Life) is part of Standard Life plc [^ see note1], one of the UK's largest financial services providers. The premises at the Hollywood Green Leisure Park, Wood Green (the Premises) are owned by Standard Life and held within an income trust, the property having been acquired for its income stream.

Samenic Limited -formally known as Hoyts Cinemas Ltd (Hoyts), an Australian cinema operator, is the holder of the current lease from Standard Life for the Premises at Hollywood Green Leisure Park. Hoyts having sold all of its cinema operations, except those operated from the Premises, to National Amusements, trading as Showcase, in 2001, this is Hoyts' sole remaining cinema business in the UK. The Premises are currently operated as a Showcase cinema by National Amusements on behalf of Hoyts under a management agreement (originally for two years but now under a 'rolling' contract).

TRANSACTION

An agreement for lease in respect of the Premises has been entered into by CineWorld and Standard Life. Completion of the agreement for lease is subject to Standard Life obtaining vacant procession of the premises and is also subject to OFT clearance. Separately, the current lessor, Hoyts, will surrender its lease to Standard Life [   ]. CineWorld notified the transaction on 5 November 2007 and the administrative deadline for a decision was 12 February 2008.

JURISDICTION

A relevant merger situation arises when two or more enterprises cease to be distinct enterprises and either the UK turnover test or share of supply test set out in section 23 of the Enterprise Act 2002 (the Act) is met. 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)).

Enterprises ceasing to be distinct

Considering the overall substance of this transaction, rather than just its legal form, the OFT has reached a belief that it is or may be the case that the agreement for lease by Standard Life to CineWorld, when taken together with the acquisition of additional assets from Hoyts, via Standard Life, and the transfer of certain staff from Hoyts/National Amusements to CineWorld, will result in two or more enterprises ceasing to be distinct.

CineWorld has argued that no enterprises have ceased to be distinct since:

• The contractual arrangement is that of a new lease being granted by Standard Life to CineWorld. The relationship between CineWorld and Standard Life is limited to that between a (prospective) tenant and landlord. Separate from the transaction, Standard Life has entered into an agreement with Hoyts, under which Hoyts will surrender its existing lease of the premises [  ]. There is, however, no contractual relationship between CineWorld and Showcase (or Hoyts) (the tenant and operator of the current cinema business on the Premises). Given that the only party with whom CineWorld is contracting, Standard Life, is neither the tenant nor the cinema operator, therefore, no relevant merger situation can exist.
• No direct premium has been paid by CineWorld to Hoyts or National Amusements/Showcase, indicating that no goodwill is being paid for the cinema business.
• Other than fixtures and fittings, no equipment will pass from Hoyts to CineWorld. [  ].
• There is no direct or indirect agreement or understanding between CineWorld and National Amusements/Showcase (or Hoyts) under which CineWorld will acquire and carry on the Showcase business. In particular, CineWorld is not bound by its lease with Standard Life to operate a cinema from the Premises. There is therefore no genuine continuity between the existing Showcase cinema business and the new CineWorld business.
• And finally, because of the different business model operated by CineWorld cinemas, customers will perceive a distinct change when CineWorld takes on the lease of the premises. This fact is accentuated by the fact that CineWorld might choose to close the cinema for several weeks for refurbishment of the Premises. Therefore it is not reasonable to presume that customer perception will be one of the operation of a continuous business.

The OFT has carefully considered all the points put forward by CineWorld as to why this transaction does not give rise to two or more enterprises ceasing to be distinct, but is not persuaded by them (on the basis of the 'is or may be the case' standard) for the following reasons:

• As mentioned above, the OFT considers the substance of a transaction over its form, i.e. the legal form of the arrangements is not determinative. In this case, the lease of the Premises to CineWorld by Standard Life has the same competitive effect as would a direct assignment of the existing lease (with the transfer of assets, staff and goodwill) from Hoyts to CineWorld.
• Currently the Premises are operated as a cinema by National Amusements, trading as Showcase, notwithstanding that National Amusements or Hoyts has no direct contractual relationship with Standard Life.
• [   ].
• Fixtures and fittings at the Premises owned by Hoyts will pass to CineWorld, via Standard Life. [  ].
• The OFT's view is that, even if there were to be a temporary interruption for refurbishment, customers' overall perception will be that the operation of the Premises as a cinema will in essence be continuous, despite any changes in signage.
• CineWorld has said that the Transfer of Undertakings (Protection of Employment) Regulations may apply to the employees of Hoyts and Showcase which are transferring to CineWorld, which again tends to indicate that an on-going business activity may be transferring.

The test for the OFT under the Act is whether it is or may be the case that enterprises will cease to be distinct and the OFT believes that the test is met in this case. In the event of doubts as to whether the transaction does in fact constitute a relevant merger situation, then it is appropriate that these should be determined by the Competition Commission (CC) at second phase - should the OFT reach a view that the relevant merger situation is or may be expected to result in a substantial lessening of competition.

Share of supply in a substantial part of the UK

The parties overlap in the supply of film exhibition services. The share of supply test in section 23 of the Act is met in the London Borough of Haringey, which is considered by the OFT to be a substantial part of the UK.

The use of the Borough of Haringey as a substantial part of the UK for the purposes of the jurisdictional test would be consistent with the CC's recent finding in its Tesco/Co-op Slough Report [see note 2] that the Borough of Slough is a substantial part of the UK. CineWorld has disputed this contention, arguing that the CC's findings in Tesco/Co-op Slough were specific to the market in that case which was 'local in nature'. CineWorld contended that cinemas and supermarkets were very different and that the OFT should apply the same test in this context as had previously been applied in other cinema merger cases.

However, the OFT does not consider it appropriate for the CC to characterise Slough as a substantial part of the UK on the one hand, and the OFT to characterise Haringey an insubstantial part of the UK on the other: Haringey's population is around 80 per cent greater than that of Slough; the boroughs are of similar size, and, in light of the CC's reference to the local nature of grocery retailing, there is also no basis to distinguish cinemas from grocery stores, as cinemas also compete locally for local consumers. In the circumstances, therefore, the OFT believes that the Borough of Haringey is a substantial part of the UK.

Therefore, 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.

THIRD PARTY VIEWS

The OFT received a number of unsolicited complaints about the transaction from Wood Green cinema-goers. Their main concerns were the potential loss of an alternative cinema venue and concerns about potential price increases that might occur post merger. Third parties pointed to the fact that the basic cost of a ticket for adults at the CineWorld Wood Green is £7.00, CineWorld's cheapest London ticket price, with the Showcase price being about the same, which they ascribed to the fact that there is competition between the two Wood Green cinemas which act to constrain each other.

ASSESSMENT

On careful analysis, 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.

The parties overlap in the supply of film exhibition services.

The OFT's approach to geographic market definition follows previous cinema merger cases considered by the OFT and the CC. At local level, while CineWorld argued that cinemas in Central London should be included in the market analysis, on the basis of the CineWorld survey and third party evidence, the OFT considered that the geographic market, while wider than Wood Green, is not as wide as to include Central London cinemas. The survey evidence suggests that, as with previous cinema merger cases, the area of North London covered by a 20 minute drive time isochrone centred on the target cinema, with a 30 minute drive time sensitivity check, is the best-available proxy in the circumstances.

In the twenty-minute primary isochrone, the transaction would reduce the number of cinema fascia from four to three; the other fascias are Vue and Odeon. In this area, the parties would have an estimated market share of [60-65] per cent (increment [10-15] per cent) by number of screens and [60-65] per cent (increment [15-20] per cent) by number of seats (including the CineWorld at Enfield; the combined share ([40-50] per cent) and increment ([15-25] per cent) is still significant if excluded. These concentration data raise prima facie unilateral effects concerns, consistent with previous cases.

Consistent with these results, the OFT received a number of unsolicited third party complaints from local cinema-goers. The main concern of third party customers was the likely increase in price of cinema tickets should the transaction go ahead. These concerns were validated by economic evidence. The CineWorld survey results indicated a high diversion ratio from the Wood Green CineWorld to the Wood Green Showcase ([ ] per cent). This result shows that the Wood Green Showcase is the Wood Green CineWorld's closest competitor by some margin. Given the high diversion ration between the parties and the high gross margins achieved, economic analysis carried out by the OFT shows that the increase in revenue from raising prices by 10 per cent would be greater than the revenue lost by customers' switching to an alternative cinema. Therefore, from the evidence available, it is clear that a 10 per cent post-merger price increase on ticket sales would be profitable. Non-price pressure on each merging party would also be reduced by the merger.

For the reasons given in more detail above, neither entry nor expansion will be timely, likely or sufficient to resolve these concerns.

Consequently, the OFT believes that it is 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.

EXCEPTIONS TO THE DUTY TO REFER

The OFT's duty to refer under section 33(1) is subject to the application of certain discretionary exceptions in section 33, of which two might potentially have been relevant here.

The first is the 'markets of insufficient importance' or de minimis discretion: section 33(2) provides that 'the OFT may decide not to make a reference under this section if it believes that (a) the market concerned is not, or the markets concerned are not, of sufficient importance to justify the making of a reference to the Commission ...'.

CineWorld did not argue that the de minimis exception should be applied. However, as the use of this exception is at the discretion of the OFT, it is not necessary for a party to plead the exception in order to benefit from it in an appropriate case. The OFT's revised Guidance on the use of the markets of insufficient importance states that '[b]efore using this discretion the OFT will exercise its judgment in considering each case on its individual facts.' The revised Guidance notes that '[t]he OFT is generally likely to consider the affected market(s) to be of sufficient importance to justify a reference where their annual value in the UK, in aggregate, is more than £10 million.' In the current case, the estimated total revenue for the seven cinemas within the 20 minute isochrone in 2007 is over £15 million and therefore presumptively outside the scope of the de minimis provision. The OFT considers there is no reason arising from the facts of this case why the scope of the de minimis exception should be extended to apply in the circumstances of this case.

The second exception to the duty to refer is the undertakings in lieu discretion, but the parties did not offer any such undertakings.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

NOTE

1. The OFT has since been told that Standard Life Property Income Trust (SLIPIT) is not part of Standard Life plc. It is a listed Investment Trust, with different shareholders and an independent board.

2. Paragraph 4.6, Tesco plc and the Co-operative Group (CWS) Limited - A report on the acquisition of the Co-operative Group (CWS) Limited's store at Uxbridge Road, Slough, by Tesco plc - 28/11/2007 (Tesco/Co-op Slough).
Borough of Slough - population 119,500, area 12.6 sq miles.
Borough of Haringey - population 225,700, area 11.5 sq miles.

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