Anticipated acquisition by Nike, Inc. of Umbro plc

Affected market: Sports apparel and equipment

No. ME/3419/07

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 16 January 2008. Full text of decision published 6 February 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

Nike, Inc (Nike), headquartered in the US and listed on the New York Stock Exchange, is a multi-national supplier of sports/leisure apparel and sports equipment.

Umbro plc (Umbro), headquartered in the UK and listed on the London Stock Exchange, is also a multi-national supplier of sports/leisure apparel and sports equipment. Umbro's worldwide turnover during the financial year ended December 2006 amounted to approximately £150 million, of which £121 million was achieved in the UK.

TRANSACTION

The proposed transaction was announced on 23 October 2007 and comprises the acquisition by Nike of the entire issued share capital of Umbro. Nike filed an informal submission with the OFT on 21 November 2007. The administrative target date for the OFT's decision is 16 January 2008.

JURISDICTION

The EC Merger Regulation (Regulation 139/04; ECMR) does not apply because Umbro's EC turnover does not reach the relevant turnover thresholds in Article 1 ECMR.

As a result of this transaction, Nike and Umbro will cease to be distinct. Umbro's UK turnover exceeds £70 million, consequently 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 arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY COMMENTS

With the exception of the vertical issues discussed above, no substantial concerns were raised by third parties in relation to any of the various frames of reference.

ASSESSMENT

The parties horizontally overlap in:

• the supply of kit deals in the 'Big Five' European footballing nations
• the supply of replica football kit in the UK
• the supply of other branded athletic apparel in the UK
• the supply of cleated football boots in the UK
• the supply of other athletic footwear in the UK
• the supply of sports equipment for sports use in the UK, and
• the supply of sports equipment for leisure use in an unspecified geographic market.

In the supply of kit deals, the merger will increase the market share of the leading player Nike to [20-30] per cent (increment [5-15] per cent) in the Big Five European footballing nations, twice that of the next largest competitor, Adidas/Reebok. However, Nike and Umbro do not appear to have been closer competitors in bidding for kit deals than their market shares suggest, and a reduction in the number of bidders does not appear to result in football clubs getting worse deals. Therefore, there is no realistic prospect of unilateral anticompetitive effects arising. In any event, football clubs appear to have significant negotiating strength in kit deals, such that the loss of one bidder appears to matter little. Further, the OFT has ruled out coordination concerns given that the lumpiness and irreversibility of kit deals together with the fact that the merger increases asymmetry between the market participants reduces incentives to coordinate. Football clubs also were sanguine about the merger, as was The Football Association.

In the supply of replica kit, the merger brings together the largest (Umbro) and third largest (Nike) supplier with a combined market share of [40-60] per cent in the UK, twice that of the next largest competitor, Adidas/Reebok. However, sales of replica kit are driven by success in winning kit deals (see above), the market for which appears to the OFT to be sufficiently competitive. Further, Umbro's leading position is as a result of its sales of replica England kit, whereas Nike's and Adidas/Reebok's positions derive from sales of replica club kit. Replica national team and club kits are complementary, not substitutable. For these reasons, there is no realistic prospect of unilateral anticompetitive effects in the supply of replica kit arising.

As regards the potential for coordinated effects in the supply of replica kit, the OFT has not received any evidence of actual tacit or explicit coordination nor any evidence that the merger will 'tip' the market towards coordination. On the basis of the evidence received, the merger does not create a structural forum for coordination, Umbro does not currently act as a 'maverick', and the merger increases asymmetry between market participants which, together with the degree of product differentiation between football kits, reduces incentives to coordinate. The merger can be distinguished from the CA98 decision in 2003 involving Umbro, in particular on the basis that the price fixing arrangements in question occurred a number of years ago, that those arrangements played out vertically at the wholesaler/retailer level (whereas the merger is between two wholesalers), and that Nike was not a party to the arrangements. In the absence of any evidence, it would be too speculative to assume that Nike would prompt Umbro into further explicit coordination.

In the supply of other branded sports apparel, the merger brings together the largest and third largest suppliers in the UK but the increment of Umbro to Nike's [20-30] per cent market share is just [5-15] per cent, which is not high enough to give cause for concern over unilateral or coordinated anticompetitive effects.

In the supply of cleated football boots, the merger brings together the second (Nike) and fourth (Umbro) largest suppliers in the UK with a combined market share of [40-50] per cent. The increment to Nike's market share ([less than 10] per cent is not large enough to give cause for concern over unilateral effects but the market is almost a duopoly post-merger (with Adidas/Reebok), which may give cause for concern over coordinated effects. However, the likelihood of coordinated effects is undermined by the nature of the products and the frequency of new product launches, as evidenced by the monthly turbulence in market shares. Further, the market was almost a duopoly pre-merger and there is no evidence of coordination pre-merger. Also, Umbro's market share has been declining and there is no evidence that Umbro was a 'maverick'.

In the supply of other athletic footwear, the merger brings together the largest (Nike) and ninth largest (Umbro) suppliers in the UK but their combined market share of (no more than) [20-30] per cent and increment of (no more than) [less than 10] per cent are not high enough to give cause for concern over anticompetitive effects [see note 1].

There is no available data on shares of the supply of sports equipment. However:

• in the supply of sports equipment for sports use in the UK, the parties' combined market share - based upon sales of balls for team sports - is [15-25] per cent with an increment of [less than 10] per cent, which is not high enough to give cause for concern over anticompetitive effects, and
• in the supply of sports equipment for leisure use in the EU, the same suppliers sell athletic branded apparel (excluding replica kit) and branded backpacks, baseball caps, sunglasses, umbrellas, wallets, watches etc. Consequently, on the basis of sales of athletic branded apparel, the parties' combined market share of sports equipment for leisure use in the EU is [less than 10] per cent with an increment of [less than 10] per cent, which is not high enough to give cause for concern over anticompetitive effects. Equally, the parties' combined share of athletic branded apparel in the UK, although higher than on an EU-wide basis, is not high enough to give cause for concern over anticompetitive effects.

The OFT considered whether Nike and Umbro could leverage their 'must stock' replica kits to force other athletic branded apparel (including other replica kits) off retailers' shelves (i.e. vertical effects). We received no evidence that athletic branded apparel suppliers made wholesale sales of replica kit conditional in this way. Further, given the apparent negotiating strength of football clubs in kit deals, it is not clear that they would tolerate the risk of receiving lower royalties from branded athletic apparel suppliers on sales of replica kit so that these same suppliers could sell more athletic branded apparel.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTE

1. These market shares are upper bounds because they are for all athletic footwear, i.e. they include performance athletic footwear where the parties' market shares are much higher.

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