How to face the music in 2023
‘Spotify Wrapped’ crunches the data on the music you’ve listened to all year to generate interesting stats and your top tracks. As 2022 was a bumper year for interesting merger remedy decisions, ‘CMA Remedies Wrapped’ distills the key developments in merger remedy decisions into four main themes over four articles (and pairs each with an emblematic tune, not necessarily representative of Fingleton’s tastes). This series aims to:
- provide legal and economic advisors in the cut and thrust of CMA engagement with a bird’s eye view of the recent evolution of remedy policy, and some practical takeaways that flow from it; and
- help businesses that are planning transformative mergers to better understand how they can lean into the CMA process to their advantage.
In our final ‘CMA Remedies Wrapped’ article, we look at Theme #4 and ask where the ‘line in the sand’ is drawn when it comes to Phase 1 remedies (you can also revisit Theme #1, Theme #2 and Theme #3).
Theme #4: Line in the sand - evolution in Phase 1 remedies
While evidence of change in Phase 1 remedy policy has been less obvious than at Phase 2, the cases in 2022 reveal interesting trends with strategic implications. Not quite revolutionary but we can - like Motörhead - see evolution in where the line in the sand is drawn.
In local markets, only a full divestment of the increment will meet the strict phase remedy test
The CMA has consistently refused offers of partial local divestments at the end of Phase 1, holding the line that an acceptable remedy must restore the pre-merger market structure. The SLCs themselves were identified through more conservative filters (or ‘decision rules’, expressed in terms of local market shares) that the CMA uses to decide which deals meet the threshold for referral to Phase 2. This trend continued in 2022 across several cases.
In both student accommodation (Greystar / StudentRoost) and vets (Vet Partners / Goddard), the CMA identified local SLCs within catchment areas. The CMA set a conservative decision rule that a combined market share > 30% with an increment > 5% would meet the threshold for referral. The parties designed remedies around a subset of the assets purchased in a local area, aiming to reduce their combined market share to below the CMA’s local SLC threshold. The CMA batted these partial divestitures away, insisting that the remedy would have to cover the entire increment.
In CapVest LLP’s bolt-on acquisition of Dental Partners group, the parties did not hold out hope for a mitigation strategy. Faced with a similarly conservative decision rule, the parties offered a full divestment of the increment in the first instance and received approval from the CMA.
In global markets, a carve-out divestment is possible at Phase 1 but the divestment package must be comprehensive and coupled with an up-front buyer
A carve-out divestment is the sale of assets that are not neatly held within a single division. Instead, the assets are distributed through the seller’s business such that they may interact with / be dependent on other non-divestment assets (examples include staff and know-how). This remedy structure gives rise to implementation risks. To study how implementation risks have played out in previous carve-out cases, the CMA put out a tender this year for independent research into the effectiveness of its previously accepted carve-out remedies, which indicates this is a topic to watch in 2023.
In the meantime, the CMA has demonstrated its openness to carve-out remedies - even at Phase 1 - despite the implementation risks they can carry in at least two cases:
- In the multifunctional water taps merger (Osmosis / Firewall), the CMA accepted a global carve-out remedy that included all R&D (intangibles were again critical). It considered implementation risks not to be material and that shared assets were a relatively small part of the divestment business. The CMA mitigated some of the implementation risks by demanding an up-front buyer condition.
- In the ice machines merger (Ali / Welbilt), the parties combined a Phase 1 fast-track process with carve-out remedies at the end of Phase 1. Here too, the CMA asked for an up-front buyer and found a workable global carve-out divestment of the target’s ice machine business. By using the fast track process, the parties were able to ensure coordination between agencies - with the CMA, EC and DoJ all clearing the deal with remedies..
CMA remedies at Phase 1 can be creative
Following the CAT judgement in Meta v CMA strengthening the CMA’s remedy powers (see Theme #1), you might not have expected to see the CMA seeking out creative ways of restoring pre-merger competition at the end of Phase 1. But here are two cases where it did accept remedies that weren’t vanilla divestitures.
- Resolve the SLC by simulating a problematic tender to identify the winner: In Bouygues / Equans, the CMA found that there was a tightly-defined SLC because both merging parties were participants in the current round of a tender to supply the HS2 rail project. To remedy this, the CMA accepted an undertaking whereby an independent assessor would be brought in to review bids that had been submitted by the parties before the merger to decide which one was “most economically advantageous” to HS2. The ‘winning’ bid - determined by reference to a pre-existing evaluation methodology developed by HS2 which was provided to bidders - would proceed to the next round of the tender and the other would be withdrawn, removing the SLC.
- Facilitating an up-front entrant: In Korean Airlines / Asiana, the CMA found an SLC in passenger and cargo airline routes from the UK to South Korea. The UILs are to provide Virgin with everything it needs to enter the route and - if Virgin decides not to enter (or stops operating within a certain period after entry) - Korean Air should facilitate an alternative entrant.
If that wasn’t creative enough, the CMA allowed Korean Airlines to retain ownership of the landing slots and coordinated the design of the remedy with the Korean competition authority. The CMA spent a good amount of time assessing Virgin’s suitability as an entrant that Korean Air could set up to compete on the route.
These 2022 cases tell us three things about CMA policy on UILs:
- Behavioural remedies are not completely dead, even at Phase 1.
- A behavioural remedy at Phase 1 must have a definable end-point (a winning bid in the simulation or an effective entry by a competing airline) so that the monitoring burden on the CMA is not open-ended.
- It can take time to effect these remedies at Phase 1. Korean Air spent at least 10 months in prenotification, much of which could usefully have been spent ironing out the remedy with the case team.
Overall, the evolution of Phase 1 remedies presents businesses with new risks and opportunities in CMA engagement. While the “clear cut” Phase 1 UILs standard remained in place in 2022, this didn’t mean full divestment was the only recourse for companies looking to avoid a Phase 2 investigation and resolve CMA concerns at the end of Phase 1.
If you’d like to explore these ideas further with us, we would be happy to continue the conversation.