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OFT seeks divestment in Homebase's acquisition of DIY stores from Focus

50/08    15 April 2008

The OFT is considering undertakings in the acquisition by Home Retail Group plc (HRG), owner of the Homebase DIY chain, of 27 stores from Focus (DIY) Ltd (Focus), instead of referring this completed deal to the Competition Commission (CC). However, if satisfactory undertakings are not given, the merger will be referred to the CC.

Aside from its specific findings in relation to the merger and competition in the DIY sector, this case is of broader relevance for a number of reasons. First, it is already the second undertakings case this year for a completed merger that was not notified and the OFT investigated on its own initiative (see press release 15/08). This is consistent with the OFT's objective of keeping non-notified merger activity under review and targeting those cases likely to pose harm to competition and consumers.

Second, in order to provide maximum transparency on the OFT's approach in retail sector mergers, this decision sets out in detail the OFT's general thinking on these issues, particularly where one national retail chain acquires a small number of stores from another, without causing any competition concerns at national level. In this case, the OFT had no national concerns but did have concerns that local DIY competition could be lost by the merger, even though Homebase argued that it sets prices and other aspects of its retail offer nationally across the chain. The OFT's principal concern was that the merger removed the competitive constraint that Homebase imposed on Focus and this was sufficient for the OFT's duty to refer to the CC. Finally, this is only the second case under the Enterprise Act in which the OFT has accepted a 'failing firm' defence applied at the level of an individual retail store - the first being Tesco's 2007 acquisition of certain Kwik Save stores.

Of the 27 acquired stores by Homebase, 12 of them gave rise to competitive overlaps. However, the scope of the OFT's concerns and the appropriate remedy were ultimately reduced to one of these overlap areas following thorough evaluation of evidence supplied by market participants. HRG has offered to divest either the former Focus store or the existing Homebase store to remove the overlap giving rise to these competition concerns. The OFT will require HRG to secure an up-front purchaser before consulting publicly on the terms of the undertakings. This is now the OFT's usual procedure in cases where there are relatively few potentially suitable purchasers. 

Simon Pritchard, OFT Senior Director of Mergers, said:

'We proactively investigated this merger as it created multiple local store overlaps between two of the only four national players in a concentrated DIY retail sector. We were ultimately able to narrow our concerns and are satisfied that the proposed divestment remedy would, in principle, resolve them. Beyond that, this case raises important wider issues, including our approach to retail sector mergers, and we invite the UK competition and business community to consider it when planning deals.'

NOTES

1. 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 has led to remedial action by the OFT or CC in twelve cases under the Enterprise Act 2002 regime. In some of these cases, it is always possible that the parties would have voluntarily notified the OFT of their merger at a later date; in other cases, it was clear to the OFT that this would not have been the case. As of March 2008, the OFT has a dedicated Mergers Intelligence Officer responsible for monitoring non-notified merger activity and liaising with other competition authorities. That person can be contacted confidentially at mergers.intelligence@oft.gsi.gov.uk if any interested party wishes to make the OFT aware of a merger that it considers might potentially be anti-competitive.

2. Undertakings in lieu - under section 73 of the Enterprise Act 2002 the OFT may, instead of making a reference, and 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, accept from such of the parties concerned as it considers appropriate undertakings to take such action as it considers appropriate. In doing so, the OFT will have regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects resulting from it. OFT guidance specifies that undertakings should be clear-cut, which means they must be effective and proportionate, and capable of ready implementation. Before accepting any such undertakings, under Schedule 10 of the Enterprise Act 2002 the OFT shall give notice of the proposed undertakings and will consider any representations made in accordance with that notice.

3. Undertakings in lieu cases - the OFT's undertakings in lieu cases include among others, divestitures of supermarkets (Co-operative Group Ltd/United Co-op), pharmacies (Boots/Alliance Unichem, Lloyds/IPCC), cinemas (Terra Firma/Odeon/UCI, Blackstone/UGC), betting shops (William Hill/Stanley, Ladbrokes/Jack Brown), car dealerships (Pendragon/Reg Vardy, Inchcape/EMH) and funeral homes (Co-operative Group Ltd/Fairways). For a full list, see the Undertakings register.

4. The reference test - the OFT has a duty to make a reference to the CC if the OFT believes that it is or may be the case that a relevant merger situation has been created; and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

5. Merger jurisdiction - 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.

6. The first failing firm case in relation to individual stores was the OFT's decision of 11 December 2007 on the anticipated acquisition by Tesco Stores Limited of five Kwik Save stores (Handforth, Coventry, Liverpool, Barrow-in-Furness and Nelson).

7. For details on the previous 2008 undertakings case in relation to a non-notified merger, see press release 15/08 (issued 4 February 2008) on the completed acquisition by Dunfermline Press Limited of the Berkshire regional newspapers from Trinity Mirror plc.

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

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