Affected market: Pubs
The OFT's decision on reference under section 22(1) given on 11 October 2005. Full text of decision published 20 October 2005.
Yates' Wine Lodges Limited (Yates) is owned by the Laurel Pub Company Limited (Laurel), which before the transaction owned and operated 314 city centre pubs and bars in the UK, as well as eight restaurants. Laurel is majority-owned by the Tchenguiz Family Trust (TFT). The TFT also owns the Globe Pub Company Limited (Globe). Globe currently owns 508 pubs, which are managed under an agreement by Scottish and Newcastle Pub Enterprises.
The SFI Group Limited (SFI) owned 150 pubs prior to the transaction and it was put into administration immediately prior to the sale. The turnover generated in the UK by the assets acquired by Yates in 2004 was £95.5 million.
The transaction comprises the acquisition by Yates of 101 pubs from SFI branded as 'Slug & Lettuce', 'Litten Tree', 'Bar Med', 'Fiesta Havana' and 'Label' (the latter being a chain of pubs and bars) and certain of SFI's subsidiaries. SFI and its administrators have retained 49 pubs and bars from the original estate.
The acquisition was completed on 23 June 2005, and a satisfactory submission was received on 11 August 2005 following an enquiry letter sent by the Office of Fair Trading. Due to failure by the parties to provide information under the timeframe provided, the statutory deadline was extended to 27 October 2005 and the administrative deadline to 12 October 2005.
The acquisition will result in two enterprises ceasing to be distinct within the meaning of section 26(1) of the Enterprise Act 2002. The turnover test is met since the turnover generated in 2004 by the acquired assets was greater than £70 million. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
The parties overlap in the ownership and operation of pubs and bars. In previous cases the OFT has considered the appropriate frame of reference to be the ownership and/or operation of pubs, where 'pubs' are defined as being 'premises operated under a full publican on-licence' (see [note 1]). This definition encompasses bars and inns, but excludes restaurants and registered restaurants which operate under restricted licenses.
In previous cases the OFT has pointed out that the distinction between pubs and other on-licensed outlets has blurred over recent years, causing pubs to potentially compete with other on-licensed premises (even though there are some limitations in demand and supply side substitution); however, it has been accepted that sales from off-licensed outlets do not constrain pubs. It has also been noted that it could be appropriate to further segment pubs according to location, customer profile, range of products sold and 'pub experience'. Laurel submitted that although it believes that all types of pubs and bars compete, the degree of competition between them may vary according to the type of customers they target. In addition, Laurel believes that restaurants and other licensed premises compete with each other to varying extents, and it submitted that its restaurants set prices with regard to nearby on-licensed premises (to the extent that they compete).
In view of the changes in the market and in the licensing laws (see [note 2]), the OFT has considered alternative product market definitions. It has consulted the parties and third parties on the extent of competition from different types of premises within the pub segment, competition from other types of establishments, competition with the off-trade and other aspects of the nature of competition in the pub market. However, the OFT currently has insufficient evidence to justify taking a different view from that in previous cases, i.e., that pubs is the appropriate frame of reference. Nonetheless, it is worth noting that the OFT believes that the merger does not raise competition concerns on any of the alternative approaches.
Where national chains exist, in previous cases it was acknowledged that although on the supply side certain parameters of competition are increasingly determined at the national level, some parameters of competition are still determined locally to an extent. On the demand side, many pubs exhibit strong local characteristics.
In previous cases involving pubs it was pointed out that the use of Petty Sessional Divisions (PSDs) as a proxy for analysing the alternatives for local consumers and the extent of local competition among pubs has some inherent weaknesses, and that as a consequence of the new licensing regime the PSD will no longer be the relevant licensing area. In this and in previous investigations, the parties to the merger and third parties have been questioned on the most appropriate method for examining local competition following the removal of the PSDs. In previous cases a number of respondents have indicated that the most appropriate alternative would be to use local authority areas (LAAs) as a proxy. Although it was acknowledged that this would have similar flaws as the PSD methodology, information on the number of pubs would at least be relatively reliable.
Laurel's response to our queries indicate that there is a degree of local competition in this sector as Globe's beer prices to its tenants vary by geographic location and Laurel changes its retail prices according to pub location. Although it does not have any studies regarding the distance that people are willing to travel to visit a pub or bar, it suggested that in its experience pubs have a catchment area of, typically, 5-6 miles.
The OFT's analysis focused on assessing the combined share of supply according to the number of pubs at a national level and within a PSD, as in previous cases, as well as within a LAA. Furthermore, the overlaps with Laurel's restaurants and the levels of concentration in high street locations were also taken into account. In view of the fact that the case under consideration does not raise any concerns under any of these methodologies, it is not necessary to conclude on the most appropriate geographic frame of reference.
The parties overlap in 65 PSDs. However, based on the parties' estimation of their share of supply, there is not a single PSD or LAA area in which the combined share of supply is greater than 25 per cent of the total number of pubs. Indeed, analysis commissioned by the parties from AC Nielson show that the highest combined share of supply within a PSD is less than 10 per cent. In addition, on a national level the parties have less than 2 per cent of the pub market.
Laurel's restaurants only overlap with the pubs and bars acquired from SFI in the Nottingham and Reading PSDs, and the combined share of supply considering all licences within any given PSD or LAA is even lower than the combined share of pubs.
Finally, in response to a third party comment that the merged group was saturating the high street with its various brands of pubs and bars, Laurel presented data prepared by AC Nielsen indicating that it does not own more than 15 per cent of pubs in any town centre across the country (and in most areas its share of supply is well below that).
On the basis of the low combined national and local shares of supply, at both a PSD and LAA level, as well as in town centre locations, the OFT believes that no horizontal concerns will arise as a consequence of this merger.
BARRIERS TO ENTRY AND EXPANSION
In view of the lack of horizontal concerns, it is not necessary to conclude on barriers to entry and expansion.
In view of the lack of horizontal concerns, it is not necessary to conclude on the existence of countervailing buyer power. In addition, the low shares of supply that the parties have following the transaction indicate that this merger does not raise any concerns regarding enhanced buyer power in relation to brewers.
There are no vertical issues arising in this transaction in view of the fact that the parties are not active in the distribution or supply of beverages.
THIRD PARTY VIEWS
Third parties were generally unconcerned about this transaction; only one third party raised concerns regarding the potential saturation of the high street by the merged party, which has been addressed above.
Yates and SFI overlap in the operation and ownership of pubs. This merger does not give rise to competition concerns due to the low combined share of supply at national, PSD and LAA levels coupled with the virtual absence of third party complaints.
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.
- Greene King Plc/Laurel Pub Holdings Ltd 2004.
- The current licensing regime involves different types of licences with different degrees of restriction placed upon them (e.g. full on-licences, restricted on-licences and club on-licences). This is being replaced with a system in which there is only one type of licence for all types of premises. Furthermore, responsibility for premises licensing will be transferred from local magistrates to local authorities. The new system will come into into full effect in November 2005.