In 2011 the Office of Fair Trading (OFT) issued a decision reviewing the acquisition of the Trafford Centre Group by Capital Shopping Centres (CSC) under the UK's merger control rules.
The Trafford Centre Group operates an out-of-town shopping centre on the outskirts of Manchester. The merger was ultimately approved in July 2011, but only after a very detailed review. This guide considers the approach that the OFT took in this case, which will be relevant to any future mergers between operators of retail parks or shopping centres in the UK.
When will shopping centre acquisitions be subject to the UK merger control regime?
The UK merger control regime is set out in the Enterprise Act 2002. The Act states that a "relevant merger situation" exists where:
The Act defines an 'enterprise' as "activities, or part of the activities, of a business" which would include a company owning or operating a shopping centre. The acquisition of the Trafford Centre Group amounted to a relevant merger situation because it had a turnover in 2009 of £87.8 million and because, after the merger, CSC would account for 30% of the retail space in shopping centres in Greater Manchester.
Where a relevant merger situation does exist, the parties can voluntarily notify the transaction to the OFT for approval. The OFT can also proactively investigate a relevant merger situation that is completed by the parties without having been pre-notified to the OFT, as appears to have been the case in relation to the acquisition of the Trafford Centre Group.
The creation of a joint venture can also amount to a relevant merger situation if at least two of the enterprises combined in the joint venture have a UK turnover exceeding £70 million.
What approach will the OFT take to shopping centre mergers?
The OFT will assess a relevant merger situation by considering whether there has been a "substantial lessening of competition" in a relevant market. The first step of this assessment involves identifying the product and geographical markets on which the transaction will have effects. The second step is to ascertain whether the transaction may give rise to a substantial lessening of competition on those markets.
Geographic market: in the CSC case, the OFT did not reach a definitive view on what was the relevant geographic market but instead reviewed the transaction using both a broad and a narrow geographic approach.
In the broad approach, the OFT reviewed the transaction within an area which was 60 minutes driving time from the Trafford Centre - which coincided with the North West region. In the narrow approach, the OFT reviewed the impact of the transaction within a smaller area which consisted of just the Greater Manchester region.
Although the OFT ultimately did not have to decide which was the correct approach in the CSC case, it is significant that the OFT evaluated the transaction on the basis of the smaller, Greater Manchester, 'market'. In future shopping centre acquisitions, the parties should consider whether there is a risk that the OFT could adopt an approach to geographic market definition that is equally narrow or even narrower.
Product market: in the CSC case, the OFT assessed the impact of the merger on both tenants and shoppers.
From the tenants' perspective the OFT tried to establish whether the Trafford Centre and the Arndale Centre, which was already owned by CSC, were targeted at such different customer groups that they should be considered to belong to separate product markets. This process involved an analysis of the types of customers visiting the two shopping centres.
From the shoppers' perspective, the OFT considered whether the merging centres would be considered as equivalent shopping destinations – whether in terms of location, types of shops or overall shopping experience - or whether they would be considered so different as to belong to different product markets.
The OFT's analysis in the CSC case: in its appraisal, the main question for the OFT was to establish how closely the Trafford Centre and the Arndale Centre competed with each other. In undertaking the 'close competitor' analysis the OFT sought the views of retailer tenants and reviewed the parties' internal documents. The OFT also considered how likely it was in practice, given the distances between the shopping centres involved, that shoppers would visit both centres on the same shopping trip.
The OFT ultimately concluded that the two shopping centres were not close competitors, and that in fact the Arndale Centre considered its closest competitors to be other shops in Manchester City Centre.
What happens if an acquisition is not cleared by the OFT?
If the OFT considers that a merger may be expected to result in a substantial lessening of competition in the UK (SLC), it is under a statutory duty to refer that merger to the Competition Commission. The Competition Commission will then conduct an in-depth investigation, lasting at least 24 weeks, into the merger.
If the Competition Commission decides that a transaction may be expected to result in an SLC it will consider whether any remedies could be adopted to mitigate or remove that SLC. Its usual approach is to require that the acquiring party gets rid of that part of the target's business which gives rise to the SLC. In some cases the Competition Commission may be willing to accept behavioural remedies - for example, regulating the terms on which the merged entity carried on business - if that would be an effective means of removing the SLC.
It is also possible for merging entities to try and negotiate comparable undertakings at the OFT stage of the investigation, if the OFT has reached the view that a merger may give rise to an SLC, in order to avoid a reference to the CC.
Hold separates
If a merger that may give rise to material competition issues is completed without having obtained prior OFT clearance, but later comes to the OFT's attention, there is the risk that the OFT may require so-called 'hold separates' from the purchaser. These prevent the purchaser taking any further steps to integrate the acquired business into its existing operations until the OFT has reached a decision on whether the merger should be referred to the CC. While the hold separates are in force, the acquired business must be run entirely independently of the purchaser.
In practice, it would be commercially very inconvenient for a purchaser to complete an acquisition and then be unexpectedly faced with the need to provide hold separates which could last for some time. The OFT has up to four months from the date of a transaction's completion or the public announcement of that transaction, whichever is the later, in which to decide whether to refer a merger to the Competition Commission for an in-depth investigation. If a completed merger was referred to the Commission hold separates would then apply during the period of its investigation, which could last up to a further 32 weeks.
Lessons from the CSC merger
The CSC case clearly indicates that merger control is an issue to be considered carefully, and at an early stage, when assessing the feasibility of a merger between companies that own or operate shopping centres.
When reviewing such a merger the OFT will scrutinise in detail how closely the shopping centres involved compete with each other, both for retailer tenants and for shoppers. The OFT's review may well focus on the merger's effects over a comparatively narrow geographic area.
The CSC case may have particular importance for mergers between shopping centres that have a similar customer focus and which are located in areas with relatively poor transport links.
The case is also a reminder that merging parties need to be careful what is said in their internal documents and in documents prepared by external advisers about a merger and its potential impact on customers and the market generally, unless the documents are covered by legal privilege. These documents may be reviewed by the competition authorities.