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OFT publishes restatement of its approach to 'failing firms' in merger reviews

146/08    18 December 2008

The OFT has today published a restatement of its approach to cases where merging parties seek to persuade the OFT that their merger which raises competition concerns should be cleared on 'failing firm' grounds, or reasons similar to it.

Download Restatement of OFT’s position regarding acquisitions of ‘failing firms’ (pdf 91 kb).

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 the merger.

The restatement also confirms that the OFT will provide informal advice in appropriate cases on the application of 'failing firm' arguments.

The OFT will clear a merger based on 'failing firm' claims where it has sufficient compelling evidence (1) not only that the business in question would inevitably have exited the market with no serious prospect of being reorganised, and (2) that there was no realistic and substantially less anti-competitive alternative to the merger.

In applying these principles, the OFT will take account of prevailing economic and market conditions when assessing evidence put forward by merging parties. In particular, those conditions will be relevant to an evaluation of evidence on the inevitability of a business exiting the market (because of, for example, cash flow difficulties or an inability to raise capital), and the realistic availability of alternative purchasers for an exiting business (as a result, for example, of difficulties in raising investment finance).

The restatement codifies the OFT's position on 'failing firm' claims as set out in its existing guidance and decisional practice. It does not constitute new guidance that departs from or relaxes the OFT's basic approach.

John Fingleton, OFT Chief Executive, said:

'Businesses in financial difficulty because of the current economic downturn or the 'credit crunch' need to understand clearly what their options are and how the OFT will look at the purchase of the business by a rival.

'A consistent and transparent application of the criteria the OFT uses to approach 'failing firm' cases is the best means of ensuring that businesses can continue to assess regulatory risk whatever the economic and market conditions.

'The offer of informal advice in appropriate cases is aimed at assisting companies devise solutions that are efficient and that do not lessen competition.'

NOTES

1. For the OFT's position regarding its approach to 'failing firms', see in particular OFT Mergers - Substantive assessment guidance (pdf 234 kb) May 2003 paragraphs 4.36 – 4.39, and OFT Decisions Anticipated acquisition by Tesco Stores Limited of five former Kwik Save stores (Handforth, Coventry, Liverpool, Barrow-in-Furness and Nelson) 11 December 2007 (Tesco/Kwiksave), and Completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY) Ltd 15 April 2008 (Homebase/Focus).

2. The OFT has applied the failing firm defence four times under the Enterprise Act 2002: (i) Anticipated acquisition by First West Yorkshire Limited of Black Prince Buses Limited, OFT decision, 26 May 2005 (failing firm defence met in respect of a bus business as a whole); (ii) Tesco/Kwik Save (failing firm defence met in respect of individual local grocery stores); (iii) Completed acquisition by the CdMG group of companies of Ferryways NV and Searoad Stevedores NV, OFT decision, 24 January 2008 (failing firm defence met in respect of target business); and (iv) Homebase/Focus (failing firm defence met in respect of an individual DIY store).

3. The OFT's position on when it will provide informal advice is set out in detail in the OFT's existing guidance in this area. See in particular OFT Interim arrangements for informal advice and pre-notification contacts (pdf 122 kb) April 2006, and OFT Mergers - jurisdictional and procedural guidance - Draft guidance consultation document (pdf 547 kb) March 2008. The OFT is aiming to finalise the latter guidance in early 2009.

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