UK Blocks Merger Of JD Sports And Footasylum

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The UK’s competition regulator, the Competition and Markets Authority (CMA) has blocked the sports fashion retailer JD Sports’ already completed purchase of sportswear retailer Footasylum. The CMA concluded that the parties were close competitors and the transaction would lead to a substantial lessening of competition nationally in the sports inspired casual footwear and clothing market, which would leave shoppers with fewer discounts or receiving a lower level of customer service. The CMA has now ordered JD Sports to sell Foot asylum.

Following the completion of the deal in April 2019 for a purchase price of £86 million (US$ 111 million), the CMA referred the merger for an in depth investigation after JD Sports declined to offer remedies to address the CMA’s initial competition concerns.

Having reviewed the transaction, the CMA concluded that a number of key pieces of evidence pointed to close competition between the parties and therefore the merger would reduce competition in the market. From an analysis of the companies’ internal strategies and decision making documents, it discovered that the two parties monitor each other’s activity closely. The CMA also surveyed over 10,000 of the parties’ customers, finding that more than two thirds of customers surveyed would switch to JD Sports if Foot asylum left the market. The CMA also found that Foot asylum store openings negatively impacted footwear and clothing sales at nearby JD Sports stores. With regard to the relevant product market, the parties are active in selling products such as trainers, tshirts, sweatshirts and tracksuits, both in store and online. The CMA considered these two sales channels to be one product market, given the evidence which the CMA found indicating that consumers in the sports inspired casual footwear and clothing market shop both in store and online interchangeably.

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In assessing whether rival retailers posed a competitive constraint on the parties, the CMA determined that rivals, such as Foot Locker and Sports Direct, which sell multiple brands, as well as Nike and Adidas, which sell only one brand, impose a lower competitive constraint than the parties do on each other. As a result, the CMA found that the level of competition which these rivals exert on the parties was not sufficient to stop consumers being worse off after the merger.

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While the CMA acknowledged that the Covid 19 crisis has led retailers to face uncertain and challenging trading conditions, the CMA said that it had not found evidence that the impact of coronavirus would remove its competition concerns. In April, the CMA released guidance indicating that it would consider the impact of Covid 19 during merger reviews under its existing “failing firm” framework.

The “failing firm” framework allows a firm acquiring another firm that is about to go out of business, to argue that the acquisition of such a firm would not result in a substantial lessening of competition since it is likely to exit the market anyway. However, the CMA noted that neither party had claimed that it would exit the market absent the merger and so the merger could not be assessed under the CMA’s “failing firm” framework.

Nonetheless, JD Sports argued that the CMA should have given the impact of the Covid 19 crisis much more attention and has indicated that it intends to appeal the decision to the UK’s Competition Appeals

Tribunal. Specifically, JD Sports contends that the CMA’s decision fails to take account of the dynamic and rapidly evolving competitive landscape and the long lasting impact that Covid 19 has had on the industry, to the particular detriment of smaller retailers like Footasylum, which it says is in a weak financial position.

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Finally, because the acquisition was completed before the CMA started its in depth review, JD Sports will now have to sell Foot asylum. Although the CMA has indicated that, in light of the Covid 19 outbreak, it will give JD Sports “sufficient” time to sell Foot asylum, this case shows the danger of completing an acquisition in the UK without previously notifying the CMA of the proposed acquisition.

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