47/09    28 April 2009

The OFT has cleared the proposed acquisition of 15 former Zavvi stores by HMV plc.

The OFT investigated the merger on its own initiative. Prior to Zavvi going into administration at the end of last year, both parties were leading national retailers of entertainment products, with overlapping stores in a large number of local areas across the UK.

Following its investigation, the OFT has decided that a reference to the Competition Commission is not be necessary as the 'failing firm defence' is met.

A merger based on a 'failing firm' claim can be allowed by the OFT if evidence clearly shows that, without it, a business would have exited the market completely, and that no realistic alternative to the merger was available. The rationale for accepting such claims is that any harm to competition would result even without the merger, and so should not be attributed to it.

In light of the difficult economic climate, the OFT issued a restatement of its position on 'failing firms' in December 2008.
In this case, the OFT received compelling evidence that:

• without the merger the stores would inevitably have exited the entertainment retail market as a result of Zavvi's collapse, and
• there was no less anti-competitive alternative to the merger in the overlap areas, and this included no other realistic entertainment retail purchaser for the stores.

Although members of the previous management of Zavvi have acquired ex-Zavvi stores in other areas, there was clear evidence that the landlords of the stores to be acquired by HMV would not have reached agreement on acceptable tenancy terms with this new management group.

John Fingleton, Chief Executive of the OFT, said:

'Although the current economic climate may result in an increase in the number of failing firm cases, we will continue to scrutinise such claims carefully to ensure competition is protected.

'Given the overwhelming evidence pointing in favour of a failing firm defence in this case we did not consider it necessary to undertake a detailed market analysis, enabling us to carry out our investigation in a more proportionate and timely manner'.

This is the fifth time that the OFT has cleared a transaction using the failing firm defence, and the first since the December restatement.

NOTES

1. The stores the HMV proposes to acquire are in the following areas: Peterborough, Plymouth, Southend, Glasgow Silverburn, Glasgow Fort, Bournemouth Castlepoint, Salisbury, Crewe, Teeside, Glasgow Buchanon Galleries, Croydon, Nottingham, Fulham, Hastings and Manchester Arndale Centre.

2.  On 18 December 2008 the OFT published a restatement of its position regarding acquisitions of 'failing firms' - see press release 146-08. This clarifies the OFT's position on 'failing firm' claims as set out in its existing guidance and decisional practice. It also confirms that the OFT will provide informal advice in appropriate cases on the application of 'failing firm' arguments.

3. The OFT has previously applied the failing firm defence in the following cases: 1. Anticipated acquisition by First West Yorkshire Limited of Black Prince Buses Limited, 2. Tesco/Kwik Save, 3. Completed acquisition by the CdMG group of companies of Ferryways NV and Searoad Stevedores NV, and 4. Homebase/Focus DIY stores.

4. Own-initiative merger inquiries - while the majority of mergers reviewed by the OFT arise from voluntary notification by the parties, the OFT's own-initiative inquiry programme can lead to remedial action by the OFT or Competition Commission.

5.  The Reference Test - The OFT has a duty to make a reference to the Competition Commission if it 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, and the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

6. Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.

7. The full text of this decision will appear in the mergers section.