Updated August 5, 2020 to add link to full report
The CMA has today announced that it has unconditionally cleared Amazon’s acquisition of a 16% stake in Deliveroo (alongside other rights including board representation). Following an in-depth Phase 2 investigation, the CMA has concluded that the transaction will not substantially lessen competition. This confirms its revised provisional findings issued in June 2020, in which it dropped its original proposal to clear the transaction on the basis of the “failing firm” defence against the backdrop of the Covid-19 pandemic.
The CMA initially identified concerns about the impact of the transaction on competition for the supply of online restaurant delivery platforms and the supply of online convenience groceries platforms in the UK, and the transaction was therefore referred for an in-depth investigation in December 2019. The relevant competitive environment was then significantly impacted by the Covid-19 pandemic, and in April 2020 the CMA announced that it had provisionally decided to clear the transaction on the basis of the “failing firm” defence i.e. that Deliveroo was likely to exit the market unless it received the additional funding available through the transaction, and the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed. This was the first (provisional) application of the failing firm defence by the CMA during the pandemic, with the CMA clearly indicating its willingness to take into account the unprecedented economic fall-out (see our previous post).
However, the CMA’s provisional decision was met with criticism from a number of interested third parties. Following consideration of the submissions received, and assessment of further evidence, the CMA issued revised provisional findings on 24 June 2020 in which it concluded that this was not in fact a case in which the “failing firm” defence would be applicable. In particular, a detailed assessment of Deliveroo’s finances showed considerable improvement in its financial position, which had not been anticipated in the early stages of the pandemic.
This meant that instead the CMA had to assess the specific impact of the transaction on competition between the two businesses, using a “counterfactual” in which Deliveroo would not have exited the relevant markets in any event. In its revised provisional findings, the CMA concluded that the transaction should still be unconditionally cleared, on the basis that Amazon’s acquisition of a 16% stake would not substantially lessen competition in any relevant market.
CMA’s clearance decision: key points
By way of summary of the key points:
- Following assessment of further evidence, including Deliveroo’s actual (as opposed to forecast) financial performance between April and June 2020, and the impact of the pandemic on funding markets, the CMA concludes that the relevant counterfactual was that absent the transaction, Deliveroo would have continued to compete as it currently does, including by seeking suitable investment to drive its expansion and innovation.
- The CMA’s decision not to apply the “failing firm” defence in this particular case should not necessarily be seen as discouraging merging parties from seeking to rely on that defence in other transactions, against the backdrop of the pandemic. The CMA has made clear that it remains willing to consider the impact of the pandemic as part of its merger assessment, and has issued specific guidance on the use of the failing firm defence in this context.
- However, the CMA has also emphasised that it will maintain its usual strict application of the relevant criteria for application of the failing firm defence, and this case demonstrates that the defence will not automatically be available simply because a business has been impacted by the economic fall-out of the pandemic.
- In its assessment of the impact of the transaction on competition, the CMA focuses on the impact of Amazon’s acquisition of a 16% shareholding on its incentives to compete independently with Deliveroo in both restaurant delivery and online convenience grocery delivery in the future. In particular it considers:
- unilateral effects on Amazon’s decision to enter a relevant market i.e. whether the 16% shareholding in Deliveroo is Amazon’s route to entering, and therefore it would not enter the market via another route; and
- post-entry unilateral effects i.e. whether if Amazon re-entered the market notwithstanding its investment in Deliveroo it would either compete less strongly to internalise 16% of Deliveroo’s profits or influence Deliveroo to compete less strongly against Amazon.
- The CMA concludes that at the 16% level of shareholding, the impact on Amazon’s incentives to compete would be limited. Similarly, Amazon’s ability to influence Deliveroo to compete less strongly against it would be relatively limited (compared to, for example, a scenario in which Amazon acquired a controlling interest). The CMA considers that there would therefore be no substantial lessening of competition.
- However, it is important to remember that this conclusion is case-specific. Indeed, the CMA expressly emphasises that the effect of a 16% shareholding could vary depending on the circumstances of a particular case, for example the rights that accompany the shareholding, the strategies of the businesses involved, the nature of the markets at issue and the constraints from other competitors in those markets.
- In addition, if Amazon were to increase its level of control over Deliveroo in the future, so as to move from material influence to de facto or de jure control, this could trigger a further investigation by the CMA under UK merger control rules.