Thursday, 12 October 2017

The Complex World of a Competition Regulator

In today’s post, the focus will be on a few potential M&A (Mergers and Acquisitions) deals that the British competition regulator, the Competition and Markets Authority (CMA), is currently dealing with. Whilst also serving as a review of the recent business news in this field, this post will seek to analyse the complex nature of the CMA’s task and all of the aspects that it must consider; the effect of their decision in a given case will, by its very definition, go on to have massive consequences for those businesses involved and, more importantly, the public which is exposed to the effects of these potential deals. What we will see is that, in a number of cases, the balance which is aimed for will weigh heavier on any given side, but finding a solution to this is almost impossible, if even desirable.

First up for us is Tesco and its proposed deal to take over the wholesale company Booker, which is something we have analysed before here in Financial Regulation Matters. The proposed £3.7 billion takeover by Tesco will, if it is allowed to proceed, create a powerhouse within the sector and will boost Tesco’s position against its obvious competitors. However, even though the shareholders of Tesco are not too enthralled at the idea of a takeover, the issue with regards to competition is apparent with the attention being paid to the deal by the CMA. For the CMA, who mandate as an independent non-ministerial department includes investigating potential restrictions to competition, effects upon consumer interests, punishing cartelisation, and also enforcing consumer protection legislation, their focus will later depending upon the nature of the case in front of them, and on this occasion the effect upon this specific marketplace is causing the most concern. Despite only very recently posting notice of a 9% increase in profits, Booker and its proposed merger with Tesco is coming under increasing pressure from British wholesalers, with seven of the largest firms calling for the CMA to block the proposed deal on the grounds that the merger ‘threatens the survival of the independent retailer’. This argument is based upon the notion that Booker, if allowed to merge and then utilise the purchasing power and networks of Tesco, will effectively be able to drive other suppliers out of business by allowing Booker to buy products at ‘Tesco prices’, meaning that the increased share of the market for Tesco (already at 29%) would mean that independent retailers would be met with a ‘stark choice: join a Booker/Tesco symbol or go out of business’. Another fear of the seven wholesalers is that Tesco, having access to Booker’s network of retailers like Londis and Premier, would be able to demand that smaller branded suppliers subscribe to Tesco’s pathway or face being forced out of the marketplace, via a lack of exposure to customers. Nevertheless, the CEO of Booker sounded upbeat whilst announcing the recently improved figures, ultimately declaring that he believed the deal had integrity, although he did confirm that he did not want to comment directly on the case because the CMA’s findings are due out within the next month (with a final and ultimate decision due next year). What we can see is that the CMA have a number of aspects to take into consideration, because it is unlikely that Tesco’s competitors will take this assault on the marketplace lightly. Also, this deal is part of a new strategy by Tesco to focus its efforts on the national marketplace, with a proposed deal to merge with Vision Express causing concern amongst the CMA because of the potential effect that the deal could have upon consumer choice. It is important, therefore, that the broader strategy is taken into account, in some form at least, because to encourage such an approach unchecked can have much larger consequences further down the line, which is the argument of the wholesalers whose entire marketplace is under threat. There are, of course, other examples of the mammoth task facing the CMA, and the case of Sky is just one of those examples.

In September of this year, the Murdoch family’s proposed takeover of Sky, valued at £11.7 billion, was referred to the CMA by the Culture Secretary Karen Bradley. Rupert Murdoch’s 21st Century Fox company is attempting to increase its share in Sky so that it has a controlling stake, one which would see Sky and its ‘Sky News’ platform submerged into the 21st Century Fox family alongside the infamous ‘Fox News’. The potential issues come in the form of how appropriate the deal would be with regards to ‘media plurality and broadcasting standards’, with the connotation being that a. the merger will give the Murdoch’s a much tighter grip upon public opinion in this country and b. bring an organisation that has been castigated for its broadcasting standards further into the broadcasting fold in this country. Even though the attempted merger has been repackaged so that the ‘News Corp’ label has been diverted away from this deal, the memories of the ‘phone-hacking scandal’ still loom large over the projected deal and that is, to all intents and purposes, one of the biggest sticking points. The CMA will soon make their decision and advise the Culture Secretary upon how it perceives the case should be handled, with the final decision being Bradley’s alone. Yet, this example shows us the broad range of considerations that the CMA must ponder, with the potential influence upon the political arena being one of the most important that it could deliberate on. For our purposes, there is one final piece of news that shows that the CMA needs to take into account the future forms that a certain area of business will take.

This dynamic is exemplified in the recent news that the proposed £200 million merger between Just Eat and Hungry House, two food ordering/delivery companies, is likely to go ahead with the CMA’s approval. Despite concerns regarding the effect of the merger upon consumer choice and the business of fast-food outlets, the CMA is reportedly preparing to provisionally approve the deal on the basis that Hungry House, without the merger, will likely go out of business. As the news broke and Just Eat’s share price rose accordingly, further concerns have been raised regarding the effect of the deal. The provisional opinion is based, primarily, upon a reclassification of the two businesses’ objectives, with the CMA now deciding that the two are not in direct competition with each other and that other companies like Deliveroo are more suited to being referred to as Just Eat’s competitors; the declining value and profitability of Hungry House, and also its ever-weakening challenge to Just Eat’s hegemony, have ultimately proved to be its downfall in seeking protection against the takeover, although the increasing position of Deliveroo, who alternatively offer a service based upon delivering food from restaurants that do not usually offer deliveries, is perhaps more of a factor in allowing Just Eat to enhance its market position. However, criticism regarding the structure of the marketplace persists, and more importantly makes a lot of sense. The argument is that Just Eat has been allowed to fundamentally position itself between the food outlets and the consumer, with it being suggested that the merger will only enhance the company’s aim of being the go-between between consumer and food outlet. This dynamic will fundamentally disadvantage the food outlets that either a. are working with Just Eat but will be susceptible to price increases for Just Eat’s services, or b. are operating independently and being forced out of the marketplace based on their inability to compete with the marketing and spending power of Just Eat. It is likely, upon reflection, that the process of ordering food online will become central in the modern environment and, as such, a vast proportion of the population will be forced to engage with Just Eat; therefore, the alteration of the method of business in this particular market is being actively defined by the policies of the CMA.

Ultimately, the CMA is a vital component of the regulatory framework in this country, with each jurisdiction competition-related authority also proving to be central to their relative framework. It is acknowledged that this should not be surprising to readers, but providing an overview of just some of the cases that the CMA is currently dealing with, together with a review of the different complexities that go with each case, provides just a small insight into both the importance of the organisation, but also the impossibility of the task it faces. It must, at once, consider the effects on consumers, upon the rival business and the specific marketplace, upon the wider political arena, and also the actual structure of business within a particular field in the present and distant future; when it is listed, it can be seen that the CMA has a remarkable task. In terms of the current environment, the CMA has an additional aspect to consider, and that is that businesses will be looking to reorganise and protect their positions within their given markets because of the vast and increasing amount of uncertainty in the current era, which means that the expertise of the CMA is likely to be increasingly called upon the near future. Considering this, and then considering that its budget stands at a very modest £65 million, leads one to suggest that there may need to be an extra capitalisation of the budgets of these central components of the framework (like the calls of Financial Regulation Matters and others to further support the Serious Fraud Office, for example); whether these extra resources will be forthcoming is another story entirely however, because as the country hurtles towards the economically-uncertain cliff edge that is Brexit, calls for the increased funding of regulators to constrain economic activity will, in all likelihood and rather unfortunately, fall upon deaf and short-sighted entities.

Keywords – Competition and Markets Authority, Tesco, Booker, Sky, 21st Century Fox, Rupert Murdoch, Phone-Hacking Scandal, Just Eat, Hungry House, Deliveroo, Competition, regulatory framework, Brexit, Economic Cycles, @finregmatters

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