The Office of Fair Trading ('OFT') has cleared the acquisition by Kingfisher plc, the parent company of B&Q, of 30 former Focus DIY stores.  Focus went into administration on 5 May 2011.

The OFT found that there were no competition concerns in relation to 20 of the stores as B&Q was not present in the local market.  Prima facie local competition concerns were found in relation to the remaining 10 stores.  Given that Focus was in administration, the OFT considered whether the failing firm defence might apply. If it did apply, the OFT would assess the merger against the counterfactual that Focus would have inevitably exited the market (such that any loss of competition cannot be attributed to the merger).  A core issue was whether the OFT could be totally satisfied that there was no less anti-competitive alternative to the merger.

In assessing the 'failing firm' defence, the OFT considers three criteria:

  • whether the firm would have exited through failure or otherwise (the fact that a company goes into administration does not by itself mean that this criteria is necessarily met);
  • whether there would have been an alternative purchaser for the firm or its assets which would result in a less anti-competitive outcome;
  • what would have happened to the sales of the firm in the event of its exit (in certain cases, albeit not usually in retail cases, the competition authorities might conclude that competition can become more fierce following the demise or exit of one of the competitors).

All three criteria must be met before the OFT will accept the 'failing firm' defence.

After discussions with relevant parties such as the administrator, investment bankers, former senior management of Focus and possible purchasers, the OFT concluded that that there was no alternative purchaser which would result in a less anti-competitive outcome and cleared the merger.

Sheldon Mills, OFT Director of Mergers, stressed that even where firms have gone into administration, it remains vital that the OFT rigorously assesses whether a merger is likely to result in a substantial lessening of competition to ensure that consumers are protected.  He stressed that in this case the OFT had carefully targeted its investigation on the key issues, enabling it to come to a swift conclusion.

It is relatively rare for the OFT to be satisfied that all three criteria for satisfying the failing firm defence have been met.  It is also notable that the OFT managed to complete its assessment in only 19 working days, well below the standard administrative timetable of 40 working days.  

To view Community Week, Issue 529; 15th July 2011 in full, Click here.

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