Parties considering retail mergers should take note of the
approach that the Canadian Competition Bureau took in analyzing the
proposed acquisition of The Brick Ltd. and its subsidiaries (The
Brick) by Leon's Furniture Limited (Leon's). Stikeman
Elliott LLP has experience acting as competition counsel in a
number of retail mergers, including the recent
acquisition by Canadian Tire of Forzani, in which the Bureau
took a similar approach. Both retail merger reviews highlighted the
key role of econometrics in the Bureau's assessment of whether
the merged entity will have the ability to increase prices.
On March 19, 2013, the Bureau released a
position statement in respect of the merger of the two national
retailers of furniture, mattresses, appliances and electronics. The
Commissioner of Competition issued a "no action letter"
to Leon's and The Brick on March 11, 2013, meaning the merger
will not be challenged. The Bureau's review focused on the
potential competitive effects in the retailing of furniture and
mattresses. Leon's and The Brick were viewed as particularly
close competitors in respect of furniture and mattresses, with a
high degree of differentiation from other competitors.
The Bureau went on to consider the potential loss in competition
that might be expected to arise from the merger. The Bureau
collected transaction level sales data to assess the degree of
direct competition. The Bureau used a cross-sectional economic
analysis to compare the parties' prices in areas where they
compete with prices in areas where they do not. The Bureau
determined that the price effects were not material.
The Bureau's assessment of whether the transaction would
result in a substantial prevention or lessening of competition (an
SPLC) also considered various factors identified in the
Merger Enforcement Guidelines as having a constraining
influence on price following a merger. In particular, the Bureau
considered the extent to which barriers to entry existed, in
addition to the presence of effective remaining competition in the
retailing of furniture and/or mattresses:
On barriers to entry, the Bureau noted certain barriers, such
as scale, which provides a larger retailer with cost advantages
over small retailers. Another barrier identified by third party
market contacts consulted by the Bureau was the ability to secure
viable real estate.
However, the Bureau also determined that a number of national
and regional retailers had overcome such barriers to entry, and
that there would be sufficient effective competition to the merged
entity in each of the local markets in which the parties compete.
The Bureau thus concluded that the merger was unlikely to lead to
Consistent with the guidance provided in the position statement
acquisition of Forzani by Canadian Tire, this position
statement provides insight into how the Bureau approaches retail
mergers. This position statement suggests that one of the
Bureau's principal concerns is the effectiveness of remaining
competitors to constrain an exercise of market power. The
review undertaken by the Bureau also highlights the potential
requirement for parties to produce a large amount of data and
internal documents in the course of a retail merger. The buyer will
need to be active in retaining an economist and conducting an
analysis of the data.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Competition Bureau issued a template document for use as a form of Consent Agreement, to be filed with the Competition Tribunal to resolve concerns the Bureau may have with proposed mergers.
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