Affected market: Health and fitness clubs
The OFT’s decision on reference under section 22(1) given on 5 November 2007. Full text of decision published 16 November 2007.
Please note that square brackets indicate figures which have been deleted or replaced with a range for reasons of commercial confidentiality.
HBOS plc (HBOS) provides banking services in the UK and elsewhere. Its UK turnover was £[ ] million. HBOS has a 50 per cent shareholding in De Vere Hotels & Leisure Ltd, a hotel chain which operates health clubs. Uberior Integrated Ltd (Uberior) is a wholly owned subsidiary of HBOS and is responsible for making equity investments on behalf of the Bank of Scotland Integrated Finance.
David Lloyd Leisure Ltd, DLL SA, David Lloyd Leisure Espana I SL and David Lloyd Leisure Espana II SL (Collectively DLL) operate a chain of 59 health and fitness clubs in the UK as well as one club in each of Spain, Belgium and Ireland and seven clubs in the Netherlands. Its worldwide turnover in 2006 was £[ ] million of which £[ ] million was UK turnover.
Next Generation Clubs Holdings Ltd (NGC) operates 19 clubs in the UK. Two of these operate under the Amida brand, two under the Harbour brand, one under the Odyssey brand and the remainder operating as Next Generation Health Clubs. Its worldwide turnover in 2006 was £[ ] million, all of which was generated in the UK.
On 3 June 2007 Uberior and London & Regional Investment Holdings Ltd, a privately owned property company entered into a Subscription and Put Option Agreement whereby Uberior would acquire 55 per cent and L&R 45 per cent of the issued share capital of Versailles Holdco, which already owned the entire issued share capital of Versailles Bidco. Versailles Bidco in turn agreed to acquire (1) from Whitbread plc 100 per cent of the issued share capital of DLL and (2) from a wholly owned subsidiary of L&R 100 per cent of the issues share capital of NGC. These agreements were completed on 2 August 2007.
The parties notified the transaction on 7 September 2007. The administrative deadline expires on 5 November 2007.
As a result of this transaction Uberior and Versailles Holdco have ceased to be distinct. The UK turnover of Versailles Holdco exceeds £70 million [see note 1]1), so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
FRAME OF REFERENCE
The parties overlap in the supply of health and fitness club services in the UK.
The supply of health and fitness club services has previously been examined by both the OFT and the European Commission (EC). In Bridgepoint Capital/Permira/Holmes Place [see note 2] the EC did not reach a definitive conclusion on the precise product market. However, it did find that a product market comprising all sports and leisure centres, including publicly and privately owned clubs was too broad, identifying some important differences between publicly and privately owned clubs in terms of the facilities and charging structures offered. It was nonetheless recognised that in some instances there appears to be a degree of convergence.
In Virgin Active/Holmes Place, the OFT took a cautious approach and considered the appropriate product frame to be private health and leisure clubs which offer a comprehensive range of facilities and services. In particular, third party responses in that case indicated that in order to be a strong competitor, a private club must provide a combination of most or all of the following facilities: a gym; exercise class; swimming pool; sauna; café/bar; crèche; and beauty/spa treatments.
One third party suggested that a wider product market may be appropriate, stating that the level of competition in the industry has increased in the last five years partly due to significant investment by local authorities in the provision of public facilities. Another third party considered that the parties’ activities overlapped on a narrower basis, specifically premium health and fitness centres offering racquet sports facilities. On the basis of the information available, the OFT considers that this product frame is too narrow as there would be a significant proportion of customers who do not view racquet sports as an essential part of the health and fitness club offering. In particular, the OFT has found no evidence to show that following a price increase these customers would not be willing to switch to other health and fitness clubs rendering such price increases unprofitable. On this basis we consider that the product frame is wider than premium health and fitness clubs offering racquet sports. Furthermore, for those customers specifically looking to purchase racquet sport services, they will be able to substitute between both health and fitness clubs with racquet sports and other separate racquet sports providers/venues.
In this case, it was not necessary to reach a conclusion on whether public facilities should be considered as part of the appropriate frame of reference as no competition concerns arise on even a narrow product frame, specifically, health and leisure clubs services provided by chains and hotels.
Competition within the health and fitness industry would appear to primarily occur at the local level. The parties contended that there is an element of national competition between health and leisure clubs. However, this appears to be limited to building a brand and/or identity to help individual clubs compete at a local level.
All of the competitors who responded agreed that competition is conducted at the local level. This view is further supported by external customer research, including:
In 2005 a study by the IHRSA [see note 3] found that 70 per cent of members of health and fitness clubs stated location was the key criteria in determining which club they became a member of. * A recent survey conducted by the Fitness Industry Association [see note 4] found that on average members travel 2.6 miles to get to the gym with 80 per cent travelling by car. * The Health of the Nation Report conducted in 2006 by Deloitte used 20 minute travel times as the relevant catchment for gyms.
In Bridgepoint Capital/Permira/Holmes Place, the EC did not conclude on geographic scope as the merger did not give rise to competition concerns on any definition. However, in conducting the competitive assessment, they calculated share of clubs within a 1.5km radius (equivalent to 15 minutes walking time) of each of the merging parties’ clubs.
In the Virgin Active/Holmes Place case, third parties broadly supported the view that customers were willing to travel 15-20 minutes. However, it was also suggested that within London a higher proportion of members walked to the gym from home or work, whereas outside London, the majority of members travel by car. As a result, a cautious approach was taken and the effects of the transaction were considered based on both 15 and 20 minute walk times (1.5km and 2km radii), and 15 and 20 minute drive times.
The OFT found no evidence during its investigation to suggest a departure from the approach taken in previous cases. Therefore, the OFT has undertaken its competitive assessment on both a 15 and 20 minute drive time and a 15 and 20 minute walk time (using a 1.5km and 2km radii as a proxy).
At a national level, the parties will have a combined share of all private health and leisure clubs of [less than five] per cent (increment [less than one] per cent) in the UK. The sector appears to be highly fragmented with no competitor holding a share of supply greater than 5 per cent (by number of clubs). Even on a narrow product market consisting of all chains and hotels, but excluding independent gyms and public leisure centres the parties combined share of clubs is only [10-15] per cent. Given this, and the large number of competitors present, no concerns are considered to arise at the national level.
The parties identified nine local areas which gave rise to an overlap. The OFT examined each of these areas and found that, even when applying a narrow competitor set of only private health and leisure clubs operated by chains and hotels, at least four competitors would remain post-merger [see note 5]. Furthermore, in each local area there are likely to be additional independent health and leisure clubs offering comparable services. On this basis, no competition concerns are considered to arise at the local level given the number of remaining competitors capable of constraining the parties’ behaviour post-merger.
THIRD PARTY VIEWS
The vast majority of third parties contacted during the OFT's investigation did not raise competition concerns. Only one third party raised concerns in relation to the premium health and fitness centres offering racquet sports. However, they provided no evidence to support these concerns and, as discussed above, the OFT is satisfied that sufficient competitive constraints remain post-merger.
The parties overlap in the supply of health and leisure clubs services in the UK. At a national level, even on a narrow product market consisting of all chains and hotels, but excluding independent gyms and public leisure centres the parties combined share of clubs is only [10-15] per cent. Furthermore, a number of other independent and chain competitors are present in the sector.
At the local level, for each of the areas of overlap, at least four other competing chain operators and/or hotel operators, along with various other independent clubs will continue to constrain the parties post-merger.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- The UK turnover of Versailles Holdco was approximately £[ ] million, £[ ] million of which derived from DLL and £[ ] million from NGC.
- Case No COMP/M.3169 Bridgepoint/Permira/Holmes Place (2003)
- The IHRSA European Market Report 2006: The size and scope of the Health Industry
- State of the Fitness Industry Report FIA The Leisure Database Company, June 2006
- One local area was identified as giving rise to a reduction in the number of competing clubs from six to five and two other local areas gave rise to a reduction from seven to six. For all of the remaining local areas there were in excess of seven other competitors present.