Things to do before seeking merger clearance from OFT: lessons from the Co-op

A competition law expert has said that the deal illustrates how much work merger partners need to do before even approaching the OFT.

The OFT said that it would accept the merger based on the Co-op's proposals and final approval only hinges on the sale of the 126 shops the chain has earmarked for disposal.

The OFT conducted research into how the merger would affect local markets for grocery supply. That involved interviews with 40,000 consumers, which it said was the most extensive piece of consumer research ever conducted in a merger case.

The OFT found that there was no national competition issue involved in the merger. The company would become only the fifth largest UK groceries retailer with 8% of the market.

It would, though, be problematic in areas which are served principally by Co-op and Somerfield shops, because it would reduce competition in those areas significantly.

The OFT identified 126 areas of the UK where it had such concerns. It is in these areas that the Co-op has promised to sell shops to ensure that there is an alternative groceries provider in any given place.

"Once finalised, the divestment package will directly safeguard the welfare of many thousands if not millions of UK consumers by restoring grocery store competition in the 126 local areas affected, while allowing an otherwise likely pro-competitive merger to go ahead," said John Fingleton, the chief executive of the OFT.

According to one expert who used to work in the OFT's mergers division, the action is evidence that the OFT is keen to settle large cases such as this at an early stage. Edward Anderson was assistant director in the OFT's mergers division and is now a competition law expert at Pinsent Masons, the law firm behind OUT-LAW.COM.

"It's a very strong indication of the OFT's willingness to resolve what are huge and complicated merger cases at the first instance," said Anderson. "The test for referring a merger to the Competition Commission is that there is a reasonable prospect of a substantial lessening of competition. That is a low test, but to the OFT's credit they are willing to see if through the divestment process they can resolve the competition concerns and let a pro-competitive merger happen."

The OFT said that the merger would create a stronger competitor on a national scale to provide the 'big four' supermarket giants – Tesco, Asda, Sainsbury's and Morrison's – with competition.

The OFT has previously addressed concerns that the market for groceries in the UK is so heavily dominated by those four firms that competition has been damaged. It said that it had drawn on some of the work done in the supermarket area in coming to its conclusions about the Co-op and takeover of Somerfield.

The OFT said that it would not approve the merger until every one of the shops in the 126 areas in question had been sold. It said that it would have to approve the buyer of the shops in each case, but that it would keep the location and identity of the shops a secret because of the commercial sensitivity of the sale process.

Anderson said that the significant research that underpinned the decision and the investigations into highly local markets is evidence not only of the OFT's willingness to settle such cases early, but of the highly structured approach taken in supermarket cases.

"The OFT has the benefit of a very established framework from the Competition Commission in terms of how it assesses supermarket mergers because there have been quite a few of them," he said. "It says how you need to look at mergers, how you look at them on a national level and, because people shop within fifteen minutes by foot or 30 minutes by car, it sets out various rules of thumb the OFT can apply on a local level."

He said, though, that where a deal depends on the sale of some of the assets of the newly created company, the merger partners must be prepared to do huge amounts of work before even approaching the OFT.

The OFT has said on much smaller cases, where four or five stores were to be divested, that if they get deals like this where there will be divestments then they want up-front remedies, they want the companies to do a lot of work up-front, to say 'we know this will be a problem but we think we have found an appropriate purchaser'," said Anderson.

"That's a lot of work for parties involved in the merger process but it goes to show that it's worthwhile. If you don't do all that work then if you get referred by OFT to Competition Commission then you are in for at least another six months of investigation and huge legal costs and contractual uncertainty, which is undesirable for both of the parties," he said.