Completed acquisition by Home Retail Group plc of 27 stores from Focus (DIY) Ltd

Affected market: DIY Retailing

No. ME/3427/07

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 33(1) given on 15 April 2008. Full text of decision published on 12 May 2008.

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

PARTIES

Home Retail Group plc (HRG) is the parent company of Homebase Limited (Homebase) and Argos Limited (Argos), both active in retail operations, and ARG Financial Services. Post-merger, Homebase operates a national chain of 338 home-enhancement and DIY stores.

The acquired business comprises a portfolio of 27 leasehold properties (the Leasehold properties) from Focus (DIY) Ltd. (Focus). The transaction also includes the transfer of over 750 employees pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The OFT has confirmed that the aggregate UK turnover of the Leasehold properties in 2006 was over £71 million.

TRANSACTION

HRG completed the asset acquisition of the leasehold properties on 31 December 2007. The OFT examined this merger on its own initiative, following which the parties submitted a satisfactory notification on 3 December 2007 (including accurate turnover information). The extended statutory deadline expires on 17 June 2008.

JURISDICTION

The test for the OFT is that it should reach the required level of belief that it is or may be the case that a relevant merger situation has been created, that is, that two or more enterprises have ceased to be distinct and either the turnover test or share of supply test set out in the Enterprise Act 2002 (the Act) is met.

HRG argued that the Leasehold properties do not amount to an enterprise for the purposes of the Act. It described the Leasehold properties, at the point of sale, as 27 empty shells incapable of being carried on for gain or reward without stock, fittings or branding.

The transfer of physical assets alone may constitute an enterprise in some cases.  In this case, the OFT notes that immediately prior to this transaction, the Leasehold properties were trading and generating turnover from business activities very similar to and, indeed, claimed to be in competition with, those of the acquirer. This appears to the OFT to be representative of the activities of an enterprise and may also suggest that the locations carry some element of goodwill since customers for DIY/home enhancement products will inevitably have some expectation that such activities are carried on from the Leasehold properties. In addition, the OFT notes that the TUPE Regulations applies and some 750 employees have been transferred from Focus to HRG as a result of this transaction. In the OFT's view, the application of TUPE is a strong indicator in favour of a finding that an enterprise has been transferred.

Moreover, the OFT considers the substance of a transaction over its legal form. In this case the transfer of the leases (together with the goodwill attached to those particular locations) as well as the employees would enable HRG to carry on the same business activities from those premises with little interruption. Thus, the OFT believes that it is or may be the case that each Leasehold property, and the portfolio of 27 as a whole, forms an enterprise for the purposes of the Act.

The OFT accordingly believes that it is or may be the case that enterprises have ceased to be distinct and that the turnover test in section 23 of the Act is met. Therefore, a relevant merger situation under section 23 of the Act has been created.

THIRD PARTY VIEWS

The OFT received comments from around 20 companies active in the affected markets but none raised competition concerns regarding this merger.
 
ASSESSMENT

Homebase and the 27 acquired Focus stores overlapped in the supply of DIY and home enhancement products through national DIY retail chains in 12 overlap areas across the UK.

HRG submitted that the OFT, in considering the relevant counterfactual in this case, should take into consideration that those stores included by Focus in its list of Tactical stores were to be closed in the absence of a sale. It argued that, for the Leasehold properties included in the Tactical stores, there was no alternative buyer.

In line with its stated approach, the OFT has first assessed any expected loss of competition against the benchmark of the pre-merger competitive status quo. In those cases where this comparison could lead to a realistic prospect of substantial lessening of competition, the OFT has then considered whether this is the correct counterfactual to apply. An adjustment to the default counterfactual is relevant only in respect of the St. Albans Focus store.

Based on available evidence, the OFT considers that the relevant market definition in this case is the supply of DIY and home enhancement products through national (and, where applicable regional or local) DIY sheds, assessed nationally as well as locally. The constraint that other retailers through different distribution channels exercise on the national DIY sheds on a category-by-category basis has been analysed in the competitive assessment of each local market although none of the OFT's conclusions turned on this issue.

At the national level, this merger has not resulted in a reduction in the number of national DIY shed chains. Based on the minimal increment to HRG's turnover (less than one per cent) or the number of its stores, the OFT does not believe that this merger raises any national competition issues.

For reasons set out in detail above, the OFT considers that local competition could be lost by the merger, but took into account the relative asymmetry of the constraints between the parties in its approach to local evidence. In particular, the OFT had concerns that the constraint from Homebase on Focus stores lost by the merger could be significant. At the local level, in order to concentrate its assessment on areas raising potential competition issues, the OFT has applied three preliminary filters to identify those areas where the merger would lead to a fascia reduction. The application of these three filters removed 15 non-overlap locations that did not raise any competition concerns. 

In respect of the 12 locations where the merger did give rise to a reduction in fascia, the OFT considers that the test for reference is met only in relation to Woking, although it would also have been met in St. Albans but for the counterfactual against which the OFT judged the merger effects in this area.

• In Woking, the February survey shows a high diversion ratio from Focus to Homebase ([more than 50] per cent) with a higher diversion ratio from Homebase to Focus than from Homebase to B&Q. This can be explained by the lack of a B&Q store in Woking. With respect to other category specialists, the critical loss analysis the OFT produced based on the February survey results shows that the relevant product market in Woking includes only the four DIY sheds. Thus, the OFT believes that the merger has led to a realistic prospect of a substantial lessening of competition in Woking.
• In St. Albans, the merger gives rise to a fascia reduction from three to two with high diversion ratios (Focus to Homebase [more than 50] per cent and Homebase to Focus [more than 25] per cent) and therefore the potential for a substantial lessening of competition. However, in this case the OFT has received compelling evidence that, absent the merger, the acquired Focus store would have closed given the absence of any other realistic potential purchaser. Closure would have reduced the number of fascia and taken capacity out of the market. The OFT does not believe that simply allowing the store to close would have provided a less anti-competitive outcome. Therefore, the OFT believes that, compared to the appropriate counterfactual of closure of the Focus store, the merger does not give rise to a realistic prospect of a substantial lessening of competition.

New entry and the threat of entry can also represent important competitive constraints on the behaviour of the merged entity. However, entry must be timely, likely and sufficient in scale or character to replicate the competition lost by the merger. Based on the evidence before it, the OFT does not believe that entry in Woking is timely, likely or sufficient.

Consequently, the OFT believes that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom; that is, the supply of DIY and home-enhancement products through DIY sheds in Woking.

EXCEPTIONS TO THE DUTY TO REFER

Undertakings in lieu

Where the duty to make a reference under section 22(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from such of the parties concerned undertakings as it considers appropriate for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it.

The OFT's guidance states that in order to accept undertakings in lieu of reference '[…] the OFT must be confident that the competition concerns identified can be resolved by means of undertakings without the need for further investigation. Undertakings in lieu of reference are therefore appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are capable of ready implementation […].'

HRG proposed on a without prejudice basis the divestment of the acquired Focus or the existing Homebase store in Woking.

This proposed undertaking removes the overlap in the Woking locality. Therefore, the OFT believes it constitutes a clear-cut remedy, making it appropriate for the OFT to suspend its duty to refer. The OFT considers that, in the circumstances of this case, in particular given the prima facie limited number of suitable potential purchasers, a necessary requirement to suspend the duty to refer and consider undertakings in lieu is that divestiture of one of the above stores should be to an upfront buyer. 

HRG proposed a series of further undertakings to resolve concerns in other areas. However, it was not necessary to consider such undertakings given that the OFT's duty to refer applies only in respect of the acquisition in Woking. This is consistent with the OFT's approach of reaching its judgment on its statutory duty to refer independent of the scope of the actual offer, if any, of undertakings.

In light of these considerations, the OFT is currently of the view that the proposed undertakings in lieu-assuming they are capable of being implemented-will restore competition to pre-merger levels, and that the undertaking offered is sufficiently clear cut to remedy the concerns identified, namely the substantial lessening of competition in the supply of DIY and home-enhancement products through DIY sheds in Woking.

Therefore, the OFT has decided to exercise its discretion under section 73(2) of the Act to consider whether to accept undertakings in lieu of a reference.

DECISION

The OFT's duty to refer the completed acquisition by HRG of the Leasehold properties to the Competition Commission pursuant to section 22 of the Act is suspended because, on the information currently available, the OFT is considering whether to accept appropriate undertakings in lieu of reference from Home Retail Group pursuant to section 73 of the Act.

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