Connells Ltd / Sequence UK Ltd

OFT closed case: Completed acquisition by Connells Ltd of Sequence UK Ltd.

Affected market: Estate agency services

No. ME/1467/03

The OFT's decision on reference under section 22 given on 27 January 2003.

PARTIES

Connells Ltd (Connells) is part of the Skipton Group which includes Skipton Building Society, who supply estate agency services including conveyancing, residential lettings, sale of residential and business properties, mortgage broking and valuations.

Sequence UK Ltd (Sequence) supplies estate agency services including conveyancing, residential lettings, sale of residential and business properties, mortgage broking and valuations.  Sequence's UK turnover in 2002 was approximately £102 million.

TRANSACTION

Connells acquired Sequence from Royal Insurance Holdings plc on 22 October 2003.

The transaction was notified on 1 December 2003. The administrative deadline is 30 January 2004 and the statutory deadline is 20 February 2004.

JURISDICTION

As a result of this transaction Connells and Sequence have ceased to be distinct.  The UK turnover of Sequence exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 is satisfied. A relevant merger situation has been created.

RELEVANT MARKET

The parties overlap in the supply of estate agency services. The principal role of an estate agent is to market residential property for sale and to obtain an offer for the property.  Estate agents also offer a variety of services associated with the sale of a property, including financial services, conveyancing, and property management services.  For example only 56 per cent of Connells total turnover was generated from residential sales (see [note 1]).

Product market

Many estate agents now advertise properties for sale on their own websites.  There has also been a significant growth in property portals, where customers can search for a property by themselves (see [note 2]). The parties have submitted that there are also a number of websites that compete directly, but who do not have a high street office.  It has been estimated by the Keynote report that 5 per cent of properties are sold without the mediation of an estate agent.

The parties and third parties have commented that internet sites are complementary to the business as they provide an additional advertising medium. As such, it appears unlikely that internet sites place a competitive constraint on estate agency offices.

Geographic market

Property owners generally look to local estate agents in order to sell their property. This is, in part, because these agents know the area well which is important in the process of aiming property at the right buyers.

The parties submit, and third parties confirm, that for a branch located in a densely populated area, sellers would typically be located less than two miles from the office.  For rural areas, approximately 50 per cent would be within a five mile radius, 25 per cent between five and ten miles and the rest in excess of ten miles. Thus if fees charged by estate agents in a local area were to rise, it would seem unlikely that customers would switch to neighbouring regions.

The appropriate frame of reference appears to be the local supply of estate agency services, within a five mile radius. However, it is possible that in certain areas the geographic scope could be wider.

COMPETITIVE ASSESSMENT

The parties overlap in 53 local regions. The parties submit that local shares of supply for these areas are not available, however the parties do submit that post-merger shares of supply would not exceed 10 per cent in any region.

Data has been provided to the Office by the parties which details, in each of the overlap areas, how many competitors would remain post-merger. This information has been obtained using yell.com and, as such, it may not necessarily reflect all the competitors in an area. Thus a cautious view needs to be taken when interpreting the data.

The data illustrates that, post-merger, a number of competitors remain at the local level, both independents and chains. However, according to this data there are 11 areas post-merger where there are less than five competing agents, and two areas where there are no competing agents. The OFT carried out some basic research into these specific areas using the website UpMyStreet.co.uk, which connects to the Thompson Directory, and found that according to this data source there were only four areas where there would be less than five competing agents post-merger and no areas where there were no other competing agents. This indicates that the data provided to the Office may not fully reflect all competitors in a local area.

In these four areas of overlap there may be prima facie concerns relating to the ability of the parties to increase prices or decrease the quality of service. However, when assessing whether a merger results in a substantial lessening of competition, barriers to entry and buyer power must also be considered.

The parties and third parties maintain that it is relatively easy to set up an estate agency office. The parties estimate that leasing and advertising costs are approximately £5,000.  The company would also need a vehicle for market viewings, 3-4 members of staff and the normal administration and accounting facilities. One third party estimated that the cost for setting up an office was approximately £50-75,000, with a weekly running cost of £2,000. They estimated that annual costs were in the region of £150,000 and that annual income would be between £175-200,000. The parties and third parties have also submitted to the Office that there are no regulatory restrictions or professional qualification requirements needed to enter this sector. However, one third party submitted that although entry into the sector was easy, it was difficult for smaller firms to remain in business due to the regulatory requirements which impose a compliance burden.

There do not appear to be any significant switching costs. Sellers are usually under contract for a set period, although multiple agency agreements are available. Overall, there do not appear to be significant barriers to entry or expansion.

Some third parties submitted that the transaction may strengthen the national presence of Connells, who post-merger have a share of supply of total branches of 4.2 per cent an increase of 1.3 per cent and this may give rise to network effects. Firstly, it was put to the Office that the merger may strengthen Connells position with regard, in particular, to the sale of financial products. Secondly, another competitor asserted that the transaction may, as a result of referrals, ie transferring seller details between branches, and brand strengthening lead to network effects. Connells may build up a critical mass of properties and prospective buyers, gaining local economies of scale. It may be difficult for other companies to replicate this network due to the amount of investment required.

However, currently the impact of national branding seems limited due to the desire to retain local brands, for example Sequence trades under various names including Allen & Harris, Fox & Sons, Swetenhams Ltd etc. Clients are not locked into the network and are able to seek the advice and services of other providers and affinity groups such as TEAM Association. Such affinity groups exist where independent estate agencies can benefit from network effects. It would, therefore, seem unlikely that any network effects that may arise as a result of the merger pose a substantial concern.

As buyers of estate agency services are individual consumers it is unlikely that they would have any buyer power.

VERTICAL ISSUES

This merger does not appear to raise any vertical concerns.

THIRD PARTY VIEWS

The majority of third parties had no concerns regarding this merger. Two competitors had concerns regarding possible network effects associated with this merger through the sale of financial products, referrals and branding and that regulatory requirements made it difficult for smaller firms to remain in the market.

ASSESSMENT

The transaction qualifies on the turnover test of the Act and the parties overlap in the supply of estate agency services. However the parties' shares of supply will remain low post-merger and they continue to face competition from other estate agents in the majority of areas of overlap. In those areas where there are fewer competing agents, barriers to entry or expansion do not appear to be significant.

The OFT does not therefore believe that there is a significant prospect that the merger would substantially lessen competition within a market or markets in the United Kingdom for goods or services. Nor does it believe that there is a credible alternative view that the merger might substantially lessen competition.

DECISION

This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.

NOTES

  1. Estate Agents’ Keynote report 2003 page 27.
  2. Estate Agents’ Keynote report 2003 page 17.
Published 27 January 2004