OFT closed case: Completed acquisition by Spirit Amber Holdings of the Scottish and Newcastle retail pub estate.
Affected market: Pubs and lodges
The OFT's decision on reference under section 22(1) given on 15 December 2003.
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 market.
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 minimal.
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 UK.
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 Enterprise/Laurel.
- 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)