Tag: mergers

The online market for food delivery has grown rapidly grown in recent years. Deliveroo was founded in 2013 and has become one of the most recognised brands in this market. It now has a presence in around 100 towns and cities in the UK. In addition to offering customers restaurant cooked meals delivered straight to their homes, Deliveroo also provides a grocery store delivery service, for example in partnership with with the Co-op.

Despite Deliveroo’s strong brand, the market leader in online restaurant delivery is actually Just Eat. Just Eat’s business model is built on it acting as an intermediary between restaurants and consumers who can use Just Eat’s website or app to order take-aways. This is in contrast to Deliveroo which also provides the delivery service. This means that Just Eat’s service is more viable in smaller towns. Deliveroo’s other main rival is Uber Eats.

Having been founded in the UK, Deliveroo has subsequently expanded its operations to around 10 other countries. However, this global expansion resulted in Deliveroo making losses of almost £200m in 2017. In part as a result of these losses, Deliveroo decided to look for new investment and by May 2019 had raised £450m. Deliveroo intends to use this money to fund its continued international expansion and to improve the service it provides. This includes growing its delivery-only kitchens business, which enables it to be less reliant on links with traditional restaurants.

Amazon was one of the big investors in Deliveroo, although the exact amount it invested is unknown. Interestingly, both Amazon and Uber have previously made approaches to buy Deliveroo outright. For Amazon this latest move may be a first step before looking to fully acquire Deliveroo.

Despite this not being a full merger or acquisition, it was still investigated by the UK Competition and Markets Authority (CMA). Its remit allows it also to examine situations where an enterprise gains a ‘material influence over the policy of another’. This was the case with Amazon’s investment which, despite only allowing it to become a minority shareholder, enables it to participate in the management of the company.

Last week the CMA announced that it had completed its initial investigation and that it had concerns about the investment. Andrea Gomes de Silva, CMA Executive Director, stated that:

If the deal were to proceed in its current form, there’s a real risk that it could leave customers, restaurants and grocers facing higher prices and lower quality services as these markets develop. This is because the significant competition which could otherwise exist between Amazon and Deliveroo would be reduced.

The CMA has two specific concerns. Firstly, it is worried that competition in online restaurant delivery will be harmed. Amazon had started competing with Deliveroo in this market in 2016 when it launched Amazon Restaurants. However, it shut this down two years later. The CMA uncovered internal documents from Amazon suggesting that it continued to monitor closely this market. Therefore, the CMA believed that Amazon re-entering the market was a distinct possibility and argued that this would be a substantial boost for competition. The CMA’s concern was that its investment in Deliveroo would make this re-entry less likely.

On the other hand, there is a counterargument to the CMA’s which says that Amazon’s entry through investment, even if only at this time resulting in minority ownership of Deliveroo, could itself boost competition. This is an important trade-off the CMA should take into account.

Secondly, the CMA is worried that Amazon’s investment will also harm competition in online grocery store delivery. Here, Amazon and Deliveroo are two of the leading players in the market. The CMA believes that, as the market grows in the future, competition between the two could intensify. However, the investment in Deliveroo would put this in jeopardy.

At the time of writing, Amazon and Deliveroo have five working days to offer proposals to the CMA to address these competition concerns. It will be interesting to see how they respond to the CMA and whether a full-blown investigation follows. If it does, this may eventually lead to the CMA blocking Amazon’s investment.

POSTSCRIPT: Amazon and Deliveroo did offer a proposal to address the competition concerns and so on 27th December the CMA referred the case for a full-blown investigation.

To be continued.

Articles

Questions

  1. What are the key features of competition in the online market for food delivery?
  2. What are the pros and cons of Just Eat’s business model in comparison with Deliveroo’s?
  3. What are the potential advantages Amazon has over the other players in the online market for food delivery?

The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.

In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:

When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.

According to Asher Schechter (see linked article below):

Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.

The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.

Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and deprive “American workers of about $1.25tn of labour income every year”.

One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:

They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.

According to research by Luis Quintero and Jacob Cosman:

… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.

Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.

In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.

Articles

Questions

  1. What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
  2. How can concentration in an industry be measured?
  3. Why have US markets become more concentrated?
  4. Why have markets in the EU generally become more competitive?
  5. Find out what has happened to levels of concentration in the UK housebuilding market.
  6. What are the possible effects of Brexit on concentration and competition policy in the UK?

Earlier this week FIFA, the world governing body of football, announced plans to expand the World Cup from 32 to 48 teams starting in 2026. It is fair to say that this has been met with mixed reactions, in part due to the politics and money involved. However, for an economist one particularly interesting question is how the change will affect the incentives of the teams taking part in the competition.

As a result of the change in the first stage of the competition, teams will be play the two other teams in their group. The best two teams in the group will then progress to the next round with the worst team going home. This is in contrast to the current format where the best two teams from a group of four go through to the next round.

Currently, in the final round of group matches all four of the teams in the group play simultaneously. However, an immediate implication of the new format is that this will no longer be the case. Instead, one of the teams will have finished their group matches before the other two teams play each other. This could have important implications for the incentives of the teams involved. To see this we can recall a very famous match played under similar circumstances between West Germany and Austria at the 1982 World Cup.

The results of the earlier group games meant that if West Germany beat Austria by one or two goals to nil both teams would progress to the next round. Any other result would mean that Algeria progressed at the expense of one of these two teams. The way in which the match played out was that West Germany scored early on and much of the rest of the game descended into farce. Both teams refused to attack or tackle their opponents, as they had no incentive to so (see here for some clips of the action, or lack of!).

There is no evidence to suggest that West Germany and Austria had come to a formal agreement to do this. Instead, the two teams appear to have simply had a mutual understanding that refraining from competing would be beneficial for both of them.

This is exactly what economists refer to as tacit collusion – a mutual understanding that refraining from competition and keeping prices high benefits all firms in the market. Much like the fans who had to sit through the farce of a game (you can hear the frustration of the crowd in the video clip linked to above), the end result is harm to consumers who have to pay the higher prices or go without the product.

For this reason governments use competition policy to try to stop situations arising in markets that make the possibility of tacit collusion more likely. One way in which this is done is by preventing mergers in markets where tacit collusion appears possible and would be facilitated by the reduction in the number of firms as a result of the merger. The equivalent for the World Cup would be preventing a change in the format of the competition.

An alternative approach is to tinker with the rules of the game in order to make collusion harder. FIFA seems to have some awareness of the possibility of doing this as it is suggesting that it may require all tied games to extra-time and then a penalty shoot-out in order to determine a winner. Clearly, this would go at least some way to alleviating concerns about tacit collusion in the final group matches because coordinating on a draw would no longer be possible. In a similar fashion, competition authorities can also intervene in markets to change the rules of the game (see for example the recent intervention in the UK cement industry).

Therefore, more generally, the World Cup example highlights the fact that variations in the structure of markets and the rules of the game can have significant effects on firms’ incentives and this can have important consequences for market outcomes. It will certainly be fascinating to see what rules are imposed for the 2026 World Cup and how the teams taking part respond.

Articles

World Cup: Fifa to expand competition to 48 teams after vote BBC News (10/1/17)
How will a 48-team World Cup work? Fifa’s plan for 2026 explained The Guardian, Paul MacInnes (10/1/17)
The Disgrace of Gijón and the 48-team FIFA World Cup Mike or the Don (12/1/17)

Questions

  1. What is the difference between tacit collusion and a cartel?
  2. Why does a reduction in the number of firms in a market make collusion easier?
  3. What other factors make collusion more likely?
  4. How does competition policy try to prevent the different forms of collusion?

This time last year bookmakers Ladbrokes and Coral announced their intention to merge. This was closely followed by a merger between Betfair and Paddy Power. This wave of consolidation appears to have been partly motivated by the rise of online gambling, stricter regulation and increased taxation.

The UK Competition and Markets Authority (CMA) commenced an initial investigation into the Ladbrokes-Coral merger in late 2015 and, at the request of the merging parties, agreed to fast track the case to a detailed phase 2 investigation.

Despite the growth in the online market, the CMA’s investigation recognised the continued importance of high-street betting shops:

Although online betting has grown substantially in recent years, the evidence we’ve seen confirms that a significant proportion of customers still choose to bet in shops – and many will continue to do so after the merger.

The CMA identified almost 650 local markets where it believed there would be a substantial lessening of competition. It concluded that this could have both local and national effects:

Discounts and offers of free bets to individual customers are 2 of the ways betting shops respond to local competition which could be threatened by the merger. Such a widespread reduction in competition at the local level could also worsen those elements that are set centrally, such as odds and betting limits.

Therefore, earlier this week the CMA announced that before it is prepared to clear the merger, the parties must sell around 350 stores in order to preserve competition in the problem markets (many of these overlap so the number of store sales required is less than the number of problem markets). This divestment represents around 10% of the total number of stores currently owned by the two merging parties. It appears that rivals Betfred and Boylesports, plus a number of private equity investors, are already interested in purchasing the stores.

This may also not be the last consolidation in the industry with the struggling leading bookmaker William Hill apparently attracting merger interest from rival 888 in combination with a casino and bingo hall operator.

Articles

BHA warns CMA over Coral-Ladbrokes merger Racing Post, Bill Barber (7/7/16)
Ladbrokes-Gala Coral must sell 350-400 shops to clear merger BBC, (26/7/16)
William Hill is lukewarm on ambitious three-way merger deal The Telegraph, Ben Martin (25/7/16)

Questions

  1. Why might the merging parties in this case have been so keen to fast track the case to phase 2?
  2. What are the key factors in defining the market in this case? How do you think these would have affected the decision?
  3. Are there arguments that wider social issues in addition to the effect on competition should be taken into account when considering mergers in this market?
  4. Which of the potential purchasers of the divested stores do you think might be best for competition?
  5. How do you think this market will evolve in the future?

On 13th October 2015 the management team of SABMiller (the second largest brewing business in the world) agreed in principle to a $108 billion takeover offer from AB-InBev (the largest brewing business in the world). When the announcement was made it was clear that the global nature of the businesses involved meant that the deal would have to be cleared by numerous competition authorities from all over the world. This blog focuses on the latest developments in the European Union.

The relevant legislation in Europe that addresses Mergers and Acquisitions (M&As) is the Merger Regulation that came into force on the 1st May 2004. This legislation gives the European Commission (EC) the power to investigate M&As that are said to have an ‘EU dimension’ as they exceed certain turnover thresholds.

Businesses involved in an M&A that meet the ‘EU dimension’ are obliged to pre-notify the EC and obtain clearance before going ahead with the deal. AB-InBev formally notified the European Authorities of its intention to acquire SABMiller on 30th March 2016.

Once official notification has been received, the EC launches a Phase 1 investigation which usually has to be completed in 25 working days. The investigation focuses on whether the M&A would:

“significantly impede effective competition, in the internal market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant market position” (Article 2(2) and (3))

This is often referred to as the ‘SIEC’ test. In addition to worries that an M&A may create or strengthen ‘single-firm dominance’, the ‘SIEC’ test is also used to test for ‘collective dominance’. Collective dominance is the possibility that the M&A might make either formal or tacit collusion more likely.

The European Competition has expressed concerns that the acquisition of SABMiller by AB-InBev might significantly impede effective competition in the premium lager market. Unconditional clearance of the deal would result in the same business owning many of the best-selling premium lager brands in Europe, including Stella Artois, Beck’s, Budweiser, Corona, Peroni and Grolsh.

As part of the Phase 1 investigation, the management of the businesses involved with the M&A can have ‘State of Play meetings’ with officials from the EC. At these meetings EC staff can raise any competition concerns they have with the deal and the businesses can respond by offering to take specific actions that they hope will address any issues. The most common action is a commitment to sell of some of the assets of the newly merged business.

Any commitments must be made no later than 20 days following the formal notification of the merger and they result in the time frame for the Phase 1 investigation being extended from 25 to 35 working days.

On the 8th April, AB-InBev made a commitment to the EC to sell the SABMiller brands Peroni, Grolsch and Meantime as a potential remedy for their competition concerns. A price of €2.55 billion for the deal was agreed with Asahi – the largest Japanese brewery. The sale of the brands is subject to the acquisition of SABMiller by AB-InBev being completed. Following this commitment, the EC extended the deadline for the Phase 1 investigation to May 24th.

It appears that at subsequent State of Play meetings EC officials expressed concerns that this commitment was not enough to address fully their worries over the impact of the acquisition on competition.

On April 27th (just inside the 20-working-day deadline) AB-InBev made an extended package of commitments to the European Union authorities to try to remedy their continued concerns. The commitments now include the sale of the SABMiller breweries in Eastern Europe (Poland, Hungary, Romania, the Czech Republic and Slovakia). Part of this sale would also include the Pilsner Urquell brand – a best-selling beer in the Czech Republic – and the Drecher brand – a best-selling beer in Hungary.

If the EC decides that the deal still raises concerns and could significantly impede effective competition in the single market, then the acquisition will be referred for a Phase 2 investigation. Phase 2 investigations are far more detailed than at Phase 1 and place far greater burdens on the parties involved. They also take much longer. The initial deadline for completion is 90 working days, but this can be extended to 125 working days in certain circumstances. Taking holidays into account they could last for 6 to 7 months before coming to a final decision.

This may help to explain why AB-InBev is willing to sell off nearly all of SABMiller’s European assets in the hope of obtaining clearance for a deal at the end of the Phase 1 investigation. The company aims to finalise the takeover in autumn of this year and is therefore very keen to avoid any regulatory delay created by a more detailed Phase 2 investigation.

Its willingness to sell off the European assets also confirms AB InBev’s main motive for its acquisition of SABMiller – to gain access to new and growing markets in Africa and Latin America.

It will be interesting to see the outcome of the Phase 1 investigation on May 24th.

Articles

AB InBev accepts Asahi offer for Peroni and Grolsch Independent (19/4/16)
Asahi laps up Peroni and Grolsch to smoothe AB InBev’s SABMiller deal The Telegraph (19/4/16)
Peroni and Grolsch sold as AB Inbev and SABMiller deal nears The Guardian (19/4/16)
AB InBev offers more SAB Europe assets to win EU deal approval Reuters (29/4/16)
Peroni and Grolsch brands sold by AB InBev to Asahi BBC News (19/4/16)

Questions

  1. What threshold criteria have to be met in order for a merger to be classed as having a European dimension?
  2. Discuss the different types of decision that can be made by the European Commission at the end of a Phase 1 investigation.
  3. Compare the notification system used by the European Commission with the one used by the UK competition authorities.
  4. Discuss some of the market conditions that would make either formal or tacit collusion more likely.
  5. Discuss some factors that might make it in the interests of society for an M&A to go ahead?
  6. To what extent does the evidence suggest that M&As have delivered the benefits predicted by the managers of the businesses involved?