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

Affected market: DIY retailing

No. ME/3427/07

The OFT's decision on reference under section 22(1) given on 7 August 2008. Full text of decision published 8 August 2008.

PARTIES

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

TRANSACTION

HRG completed the asset acquisition of the Leasehold properties on 31 December 2007.

JURISDICTION

The merging parties overlapped in the supply of DIY and home-enhancement products through DIY sheds in the United Kingdom (UK). The OFT believes that the combination of the leases, together with the goodwill attached to the premises, and employees forms an 'enterprise' for the purposes of section 23 of the Enterprise Act 2002 (the Act). The turnover of the Leasehold properties was more than £70 million, thus meeting the jurisdictional threshold of the turnover test pursuant to section 23 of the Act.

Therefore, the OFT concluded in its decision of 15 April 2008 (the Decision) that two or more enterprises had ceased to be distinct and that the turnover test pursuant to section 23(1) of the Act was met. Therefore, a relevant merger situation had been created for the purposes of section 22(1) of the Act.

BACKGROUND

The Decision concluded that, on the evidence available, 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. On this basis, the OFT decided that the merger would be referred to the Competition Commission (the CC) unless the parties gave suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision.

HRG offered undertakings to remove the overlap resulting from the merger in Woking to an up-front buyer, that is to a named purchaser to be identified in advance of acceptance of the undertakings in lieu. The OFT considered that this offer was capable of clearly addressing the competition concerns identified in the Decision and suspended its duty to refer on this basis.

Following suspension of the OFT's duty to refer, HRG proposed Focus as its proposed purchaser for the acquired store in Woking. As a general matter, any proposed divestment remedy that unwinds a transaction (in the relevant market) by returning the assets to the seller is presumptively clear-cut in restoring competition to pre-merger levels. However, this fact alone will not necessarily be dispositive of the issue in every case, and this particular proposal required closer consideration.

This was because pursuant to the proposed undertaking, Focus would re-acquire a unit of approximately two thirds the size of its former store, while the remaining third of the former area would be used for HRG's Argos brand. This reduction in the size of the store was carried out at the request of Focus. The OFT assessed and consulted publicly on this solution and in particular on whether the reduction in the size of the store would prevent this remedy from restoring competition in Woking.

In light of the evidence received from HRG and Focus, the OFT considers that the undertakings in this case constitute a clear-cut remedy that – in line with the OFT's starting point for undertakings in lieu – restores competition to its pre-merger levels. The OFT considers, based on information from Focus, that the downsizing of the premises, as well as the fact that another HRG brand will open a branch alongside the divested store, will not undermine the effectiveness of this remedy. In addition, the lack of third parties' concerns during the public consultation period on the proposed undertakings re-enforces the OFT's provisional conclusion that the undertakings in lieu will comprehensively restore competition in a clear-cut manner in this market. In short, the OFT believes that Focus will be able to compete with the Homebase store and other rivals in the Woking area as effectively as if the merger had not taken place.

On 10 July 2008, HRG entered into a business sale agreement for the transfer to Focus of approximately two thirds of the Leasehold property HRG had originally acquired from Focus in Woking. The agreement was made conditional on the OFT's formal approval of the sale of the leasehold property to Focus and the acceptance by the OFT of undertakings in lieu of reference by HRG.

CONSULTATION

On 16 July 2008, the OFT published the proposed Undertakings, inviting interested third parties to give their views on them to the OFT by 4 August 2008.

No responses were received during the consultation process.

DECISION

The Decision concluded that the merger would be referred to the CC if the parties failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision. The OFT has decided to accept the proposed Undertakings offered by HRG in lieu of reference to the CC, as they are, in the circumstances of this case, clear cut and appropriate to remedy, mitigate or prevent the competition concerns identified in the Decision.

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

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