With the challenges currently seen in the M&A market for large-scale standalone acquisitions, one widely applied M&A strategy is “buy and build”, namely serial acquisitions in the same or adjacent markets in order to grow scale and profits and leverage multiple arbitrage on the acquired assets.
We see the commercial sense in this strategy commonly where assets serve localised markets, such as retailers, wholesalers and local service providers (such as vets, dentists, and gyms). However, there may be material merger control risks associated with such a strategy.
Firstly, while UK merger control is ostensibly voluntary, over the last three years the CMA’s Mergers Intelligence Unit (MIU) has reviewed approximately 700 unnotified transactions per year and opened Phase 1 investigations in relation to 40–60 per year. In short, flying under the radar is hard. Moreover, the CMA is interested in preserving competition in local markets, as well as national and international markets. Indeed, in the seven years to 31 March 2022, over a third of its Phase 1 cases (37%) where it a found a substantial lessening of competition related to mergers affecting local markets.
Secondly, one possible response to the point above is for the parties to minimise the publicity associated with the merger. Yet while the CMA only has four months to investigate completed mergers, this time limit only starts to run when the material facts relating to the merger are “generally known or readily ascertainable”. In practice, this means the material facts have been publicised in the national or relevant trade press in the UK, and where the acquiring party has taken steps to publicise the transaction at large, for example by displaying a press release prominently on its own website.
These risk factors are well illustrated by the CMA’s recent decisions in relation to various completed mergers in the veterinary sector. In particular, the CMA issued press releases in February and April 2022 relating to two different completed mergers (CVS/The Vet and VetPartners/Goddard), where the CMA’s MIU called the mergers in, initial enforcement orders were imposed, and the mergers were only cleared subject to undertakings to divest local vets. In its press releases, the CMA emphasised that the number of independent vets had fallen sharply in recent years due to their acquisition by a small number of corporate groups, and that it had received complaints about higher prices or lower quality due to too many local practices being under common ownership.
This saga is continuing. In December 2022/January 2023, the CMA decided to investigate and impose initial enforcement orders (and a monitoring trustee) in connection with Medivet’s completed acquisitions of 17 independent vet businesses. The CMA similarly investigated IVC’s completed acquisition of eight independent vet businesses, and decided that merger references would be made absent undertakings in lieu on 17 February 2023.
UK merger control changes are on the horizon
Buy and build strategies may well become more complicated due to planned changes to UK merger control. In particular, in April 2022 the government announced proposals to introduce a new share of supply threshold. Under this new threshold, a merger may also qualify for investigation where at least one party has an existing share of supply of goods or services of 33% or more in the UK or a substantial part of the UK, and a UK turnover of at least £350 million. This is “to enable review of so-called ‘killer acquisition’ and other mergers which do not involve direct competitors.” Accordingly, this will also enable the CMA to investigate mergers where the buy and build strategy involves acquisitions at different stages of the supply chain (i.e. vertical mergers), such as between input suppliers and their customers.
So, what can investors and portfolio companies do to anticipate and mitigate the risks associated with this increased scrutiny?
- Assume that the CMA will investigate mergers that may raise competition concerns, even if they only affect local markets. Purchasers completing unconditionally bear all the competition risks, including complying with intrusive initial enforcement orders that prevent any integration or sharing of confidential information.
- Fully understand the commercial rationale for the transaction. The CMA will ask to see internal documents and business plans if it opens an investigation and these can be highly prejudicial if they suggest that the parties are close competitors or that the merger may lead to price increases or other customer harm. The CMA is sensitive to the risk of price increases due to a reduction in choice, perhaps more acutely so now given the ongoing cost-of-living crisis.
- Ask if either of the parties would have opened in new areas or lines of business absent the merger. This might create further competition concerns.
- Assess local competition carefully. This is often a complicated exercise, and understanding the catchment areas of local outlets may require analysis, with mapping software potentially required to assess the closeness of competition between various local rivals. Adequate time should be allowed for this, particularly if many overlaps are identified.
- Don’t assume the worst. The CMA still clears many mergers if sufficient competition remains, and it may be possible to divest overlapping outlets if they are viable standalone businesses. These divestments will need to be completed within fixed timescales – usually six months – to purchasers approved by the CMA. These divestment processes must be managed carefully to meet both the CMA’s requirements and to ensure that the sale process does not become a fire-sale.