UK: Divestment Remedies And UK Merger Control: Is The CMA On A Roll?

The UK's merger control regime is one of very few voluntary and non-suspensory regimes in the world. This means that, despite jurisdictional thresholds being met, parties to transactions do not need to notify their transactions to the UK Competition and Markets Authority (CMA) in advance and may complete without clearance. The CMA can, however, where it considers it has jurisdiction to do so, investigate transactions (including completed transactions) and, ultimately, impose remedies where the deal risks a substantial lessening of competition.

Cérélia/Jus-Rol is the latest in a line of recent examples highlighting the material risks of opting not to file M&A activity in the UK. The CMA has again demonstrated its willingness to intervene in, and ultimately unwind, completed deals: highlighting the need for merging parties to carefully consider the risk profile of their deals with a UK element and appropriate ways to manage that risk.

Flexibility in the UK's jurisdictional test

The CMA currently has jurisdiction to review transactions, including completed transactions, where either of the following jurisdictional thresholds are met (subject to certain time limits).

• The UK turnover of the target group exceeds £70 million (the Turnover Test); or
  
  
• The acquiror and target groups together supply more than 25 per cent of a particular good or service in the UK or a substantial part of it (and where the merger results in an increment to that share of supply, even if minimal) (the Share of Supply Test).

(Note: The UK Government proposes to update these thresholds as set out in the Digital Markets, Competition and Consumers Bill currently being considered by Parliament – see our briefing.)

In most cases it will be clear to deal parties, and to the CMA, whether the Turnover Test is met. Consideration of the Share of Supply Test is, however, a routinely more complex exercise, affording the CMA a high degree of flexibility in asserting jurisdiction.

First, the Share of Supply Test does not equate to an assessment of the parties' shares in an economically defined 'market'. Rather, the CMA can assert jurisdiction on the basis of the parties' shares in any plausible description of goods or services in the UK (or a substantial part of it).

Second, the CMA does not need to link (i) the description of goods/services for which it finds the Share of Supply Test to be satisfied to (ii) the scope of goods/services for which it may find a 'substantial lessening of competition' (SLC). In other words, the CMA's SLC finding can be in an unrelated market, where the parties' have less than a 25% share.

Third, the CMA frequently uses the Share of Supply Test in creative and far-reaching ways. Recent examples include cases in which the target has no UK turnover or no direct UK customers, e.g. Sabre/Farelogix and Facebook/Giphy. Linked to this, the required 'increment' to the share of supply can be minimal.

Cérélia/Jus-Rol: completed deal to be unwound

Cérélia completed its acquisition of the Jus-Rol business in January 2022. It opted to do so without seeking prior merger control approval from the UK CMA. A month later, the CMA launched an investigation into the completed deal, imposing an 'initial enforcement order' (IEO) preventing the parties from taking further steps to integrate their businesses (a routine step in completed deals, which can be burdensome and financially costly to adhere to).

Whilst it was clear that the Turnover Test was not met (the Jus-Rol business did not generate more than £70 million of turnover in the UK), Cérélia initially disputed the CMA's view of the Share of Supply Test. It considered there to be no material horizontal overlap with Jus-Rol, and viewed their relationship as principally vertical in nature (Cérélia supplied certain services to Jus-Rol). The CMA however disagreed, finding a horizontal overlap (see below) and hence jurisdiction to investigate the completed deal on the basis of the Share of Supply Test.

One year after completion (January 2023) the CMA reached its final decision at the conclusion of a Phase 2 inquiry: that the deal would lead to a substantial lessening of competition (SLC) in the UK and that (having considered various remedies put forward) the only effective remedy would be for Cérélia to divest all of the assets of the Jus-Rol business to an independent buyer. The crux of the CMA's decision was that (i) both parties were active in the wholesale supply of 'ready to bake' dough products (DTB) to grocery retailers, and (ii) the deal would result in a "very high" combined market share (60-70%).

Cérélia appealed the CMA's verdict to the CAT, arguing (amongst other things) that the divestment remedy was irrational and disproportionate. The CAT has now (on 1 September 2023) dismissed Cérélia's appeal in its entirely, reiterating the wide margin of appreciation afforded to the CMA in its merger review function (appeals are limited to judicial review grounds only) and confirming the requirement on Cérélia to divest the entirety of the Jus-Rol business in the UK.

Rather than being an outlier, this case is the latest in a series of recent examples of the CMA requiring divestments in completed mergers (with the CMA having ordered 7 deal unwinds since 2021, and 10 since 2019).¹

Losses on forced divestment?

Whilst it remains to be seen how the Jus-Rol divestment will be put into effect (and whether, or to what extent, losses for Cérélia may crystallise), previous UK examples illustrate the potentially high costs for acquirors in being required to unwind a deal by the CMA.

Back in 2021, JD Sports was ordered by the CMA to unwind its completed acquisition of Footasylum on the basis of horizontal effects (the parties were found to be close competitors in the retail supply of sports-inspired footwear and apparel in the UK). Press reports suggest that JD Sports ultimately sold Footasylum to private equity firm Aurelius for £37.5 million, far less than the £90 million that it reportedly paid for the business in 2019.

A further example can be found in Meta's competed acquisition of Giphy (a case in which the CMA pushed the boundaries of its Share of Supply Test by finding jurisdiction in circumstances where the target did not yet generate any revenue from UK customers). Following a divestment order by the CMA, Meta reportedly sold Giphy to Shutterstock for $53 million after having acquired the business in 2020 for $315 million.

Whilst losses do not necessarily crystallise in each and every case (there are reports of particular deals achieving favourable returns on divestment), these cases do certainly highlight the significant risks and the importance of giving UK merger control sufficient consideration at the beginning of any deal process.

Footnote

1. These figures cover all completed deals ordered to be unwound by the CMA, including where the required divestment relates to the whole target or to all UK operations.

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.