Affected market: Pubs and lodges
The OFT's decision on reference under section 22(1) given on 15
Scottish & Newcastle plc (S&N) is an independent company listed
on the London Stock Exchange and is the holding company of the S&N
Group which operates in the brewing, beverage distribution, pub, lodge
and restaurant sectors. The S&N Retail estate comprises
approximately 1400 licensed premises and 131 lodges situated throughout
the UK. In 2002, the turnover of S&N's Retail estate was £[ ]
([see note 1]) million.
Spirit Amber Holdings is a newly established company formed by a
consortium led by Texas Pacific Group (TPG), Blackstone International,
CVC Capital Partners (CVC) and Merrill Lynch Global Private Equity.
Spirit Group Holdings (Spirit) is an independent managed pub retailer
and operates 1,070 licensed premises throughout the UK. Spirit is held
by seven shareholders, including TPG ([ ]) and CVC ([ ]) ([see note
1]). Under a joint venture with Spirit, Whitbread plc currently
operates and manages 11 Travel Inns at sites where Spirit pubs are also
co-located. In addition, Spirit owns and operates a further seven
hotels in the UK.
CVC holds a 3 per cent stake in Punch Taverns plc (Punch). On 10
December 2003 TPG sold its 21.8 per cent stake in Punch to institutional
investors. Punch is an independent pub retail company which operates
approximately 4,515 leased and tenanted pubs in the UK.
Spirit Amber simultaneously acquired S&N's UK retail business along
with the entire issued share capital of Spirit. The parties notified
the transaction to the OFT on 21 October 2003 and the 40 working day
administrative deadline is 16 December 2003. The merger was completed
on 3 November 2003 and the statutory deadline is 3 March 2004.
As a result of this transaction, Spirit and S&N Retail have ceased
to be distinct. The UK turnover of S&N Retail exceeds £70 million,
so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the
Act) is satisfied. A relevant merger situation has been created.
There have been a range of cases involving pubs in the UK. In a number
of these cases competition concerns have been considered to arise at the
local level where the merger adds to or creates a share of supply (by
number of pubs) of 25 per cent or more in any Petty Sessional Division
(PSD). Most recently, in Enterprise Inns Plc's acquisition of The
Laurel Pub Group Ltd ([see note 2]), there were a total of 10
PSDs where the merger created or added to a market share of over 25 per
cent of pubs. Enterprise offered to divest 59 pubs in lieu of reference
to the Competition Commission.
The parties overlap in the operation of pubs and to a much lesser extent
in the operation of lodges.
Consistent with previous cases ([see note 3]), the appropriate
frame of reference to adopt when assessing the competitive effects of
this merger is considered to be pubs ([see note 4]).
S&N operates 131 lodges under the Premier Lodge brand in the UK.
Spirit has a joint venture between with Whitbread in relation to 11
Travel Inns, whereby Whitbread operates and manages the hotel and
Spirit, the co-located pub and restaurant. Both sets of accommodation
are thought to compete with a range of other accommodation in the UK
including budget (2 star) mid-market (3 star) and upscale (4 star)
hotels, bed and breakfasts and guesthouses. In addition, Spirit owns 7
hotels outside of the joint venture with Whitbread. These hotels do not
benefit from any official Star Ratings, but tend to be pub/hotels which
also operate a bespoke restaurant and trade in the 'Budget+' category
([see note 5]).
In previous cases involving pubs, the geographic analysis of overlaps
for assessing the extent of local competition among pubs has focused on
Petty Sessional Divisions (PSDs). Where a merger creates or increases a
market share of 25 per cent or above in any PSD, parties have been
required to divest a number of pubs to reduce their market share in any
PSD to no more than 25 per cent or the pre-merger level.
Despite concerns over the ability for PSDs to accurately capture the
geographic scope of competitive constraints on individual pubs ([see
note 6]), based on the information available and in the absence
of a detailed study into local market conditions, PSD areas are
considered to be the best available proxy for the local geographic
The geographic scope for lodges exhibits both national and local
elements. Chain hotels compete to an extent at the national level. Brand
and reputation of the chain are established nationally. They may also
have central reservation systems and be able to offer discounts for
customers booking more than one night's accommodation within the chain.
On the demand side, consumers are generally restricted to a local area
when seeking accommodation. The search area for the individual consumer
is generally dependent on the characteristic of the consumer concerned
and the purpose of the accommodation for example within a town centre,
motorway service area or close to an airport. Considering these
factors, the exact size of the local search area is difficult to assess
and define. However, no matter how this search area is defined, the
merger does not appear to give rise to any competition concerns.
Supply at the national level is highly fragmented with the five largest
companies accounting for around 30 per cent of supply and the twenty
largest companies accounting for just under 50 per cent of supply. The
parties estimate that they will have a combined UK share of supply of
[0-5 per cent] ([see note 1]) of full on-licences and [0-5
per cent] ([see note 1]) of pubs. It is important to note that
shares of supply by number of pubs may understate the parties true size
and market power. Managed estates, such as the parties, are generally
larger with higher sales turnover than that of the industry average.
At the local level, there are no PSDs in which the parties' combined
share of publican full on-licences creates or increases a share of 25
per cent or more.
At the national level, the parties will own 149 lodges/hotels. The
British Hospitality Association estimates that there are 50,000-60,000
hotels in the UK ([see note 7]), giving the parties a tiny
national share of supply. This figure may slightly overstate the number
of establishments competing with Spirit and S&N as the base includes
all hotels, the higher star rated ones not necessarily placing much
constraint on S&N and Spirit's lodges and hotels.
At the local level, there are only four Spirit owned or Spirit and
Whitbread owned hotels that are located in the same towns as an S&N
Premier Lodge Hotel. There are no areas in which the merged entity's
combined share of hotels will exceed 25 per cent as a result of the
transaction, although there is one area (Blackpool) where there are only
five budget hotels and SpiritAmber has interests in three. However, the
parties submit that they are uncertain about the reliability of this
source, given that they would expect there to be more than five budget
hotels in Blackpool.
Barriers to entry and expansion
The main barrier to entry in pub retailing is obtaining a licence to
supply alcohol. Small scale entry does not appear to be difficult -
most pub groups have a number of lease schemes available. However, the
parties estimate that the capital expenditure required to enter the pubs
sector on a scale necessary to gain a 5 per cent share of supply (which
would be larger than the merging parties share of supply) would be over
£[ ] ([see note 1]). In addition, estimated expenditure on
advertising promotion and sales required to gain a 5 per cent share of
the UK pub sector would be in the region of £[ ] ([see note
1]) million per annum.
The main barrier to entry for de novo entrants in hotels is the need for
local authority planning approval for a new building. New entrants may
also face barriers in terms of brand loyalty and reputation of the
established brands. Barriers to entry therefore may exist but are not
believed to be high.
For both the lodges and pubs segments, buyer power is believed to be
The sale of the S&N pubs estate will, in the longer term, break the
vertical link between its retail and brewing operations. In the short
term, the transaction will have no impact on the vertical supply chain
as arrangements are designed to provide a period in which S&N can
adapt to the situation of no longer being vertically integrated. The
OFT has not been asked to form a view as to whether these arrangements
would be considered ancillary to the merger.
Upstream buyer power
The proposed merger is likely in the longer term to enhance the
parties' negotiating position with upstream brewers. One third party
commented that this would be a positive outcome. However, another
raised the possibility of the merged entity using any advantageous
supply terms and its scale and market share to price at predatory
levels. Combined the parties account for [0-5 per cent] (increment
[0-5 per cent]) ([see note 1]) of total UK beer sales and
[5-10 per cent] ([see note 1]) of on licensed beer sales and
it is therefore questionable whether enhanced buyer power will be
significant ([see note 8]).
THIRD PARTY VIEWS
Of the third parties contacted, none considered the merger to raise any
substantial concerns. One third party suggested that the transaction
should be looked at on the basis of turnover within defined geographical
territories and should be based on all licensed on-trade premises in the
With respect to the pubs segment, the acquisition of S&N's pub
retailing business would give the parties control over 2,486 pubs
(increment 1,075) resulting in a national share of supply in pubs of
[0-5 per cent] ([see note 1]) (increment [0-5 per cent]
([see note 1]). There are no PSDs in which the parties'
combined share of publican full on licences creates or increases a share
of 25 per cent or more.
In the lodges segment, the proposed merger appears unlikely to result in
a substantial lessening of competition at the national or local level.
At the national level, the accretion to the acquirer's share in the
supply of accommodation is minimal. At the local level there are only
four towns in which the parties overlap and in none of these will have
more than 25 per cent of hotels as a result of the merger.
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.
- Actual figures replaced by a range at the request of the parties for
reasons of commercial confidentiality.
- A published version of the OFT's advice to the Secretary of State on
this case can be found on the OFT website.
- For further discussion, refer to the OFT's advice in
- A pub is defined as a full publican on-licence.
- The room rate is typically higher than that of a Travelodge or Travel
Inn, the standard being higher than that in budget hotels.
- For further discussion, see Enterprise/Laurel.
- Of these, 21,234 were registered with national tourist boards The
British Hospitality Association Report on Trends and Statistics 2002, as
quoted by the parties.
- (see note 1)