On 12 January 2021, the CMA ordered TVS Europe Distribution Limited ("TVS") to divest its ownership of 3G Truck and Trailer Parts Limited ("3G"). After conducting a Phase 2 merger inquiry, the Competition and Markets Authority ("CMA") ruled that only full divestiture would address its competition concerns.
| what you need to know - key takeaways |
- This case is a reminder that the CMA is willing to intervene in relatively small markets - 3G had a UK turnover of just over £10 million.
- The case highlights how important internal documents can be to the CMA's case, especially those which set out the rationale for a transaction.
- Of the ten transactions assessed by the CMA at Phase 2 since April 2020, only two have been cleared (one unconditionally, the other subject to a partial divestiture requirement).
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On 3 February 2020, TVS completed its acquisition of 3G. Completion of the transaction was not conditional on obtaining merger control clearance from the CMA. 3G, the target business, had UK turnover of just over £10 million per annum, significantly under the CMA's £70 million turnover based jurisdictional threshold. However, the transaction fell within the jurisdiction of the CMA as the parties' combined market shares were above 25 per cent; therefore the CMA considered that the "share of supply test" had been satisfied.
On 1 April 2020, the CMA launched a Phase 1 merger inquiry. On 2 June 2020, the CMA decided to refer the acquisition for an in-depth Phase 2 investigation, on the basis of concerns that that the transaction has resulted or may be expected to result in a substantial lessening of competition ("SLC") within a market or markets in the United Kingdom. Following that Phase 2 investigation, the CMA has concluded that the acquisition would likely result in an SLC.
The CMA's competitive assessment relied heavily on internal documents from both parties. In particular, the CMA appears to have placed considerable evidential weight on a number of documents prepared for TVS's board, which set out the rationale for the merger. One of those documents explained how the transaction would "strengthen UC's dominant market position", while another described how acquiring 3G would remove the constraint imposed by 3G, who offered lower prices pre-transaction. TVS did not realise at the time that these documents could become subject to external scrutiny. Interestingly and perhaps not surprisingly, the CMA considered that this enhanced (rather than diminished) the evidential weight that should be placed upon these documents.
Other evidence considered by the CMA in its decision included market share data and a closeness of competition analysis (in particular customer win/loss data).
The CMA assessed three different remedy options: (i) full divestiture; (ii) partial divestiture; and (iii) behavioural remedies. The CMA concluded that partial divestiture would be unlikely to create a viable standalone business able to compete with the merged entity. Consistent with previous decisions, the CMA was also reluctant to accept any behavioural remedies and showed a strong preference for structural remedies (i.e. divestment).
This case is the latest example of the CMA prohibiting a transaction following an in-depth Phase 2 investigation. Of the ten transactions assessed by the CMA at Phase 2 since April 2020, only two have been cleared (one unconditionally, the other subject to a partial divestiture requirement).
With thanks to Oliver Noble of Ashurst for his contribution.
