The CMA provisionally clears Amazon investment in Deliveroo amid COVID-19 financial struggle
FURTHER UPDATE 26 June 2020: The CMA published yesterday a set of revised provisional findings. The regulator now suggests that the pandemic will not cause Deliveroo to be a failing firm, so it would not exit the market in the absence of the Amazon investment, but has reconsidered the impact, in the light of third party comments and the proposed size of Amazon's shareholding (16%). The provisional conclusion remains that the transaction should be cleared. In its associated press release, the CMA says: 'We’ve carefully considered how this investment could affect competition between the two businesses in future. Looking closely at the size of the shareholding and how it will affect Amazon’s incentives, as well as the competition that the businesses will continue to face in food delivery and convenience groceries, we’ve found that the investment should not have a negative impact on customers.' The CMA appears to be satisfied that the two businesses will continue to compete, where there is any overlap. However, it is clear that it may re-visit the position, including if Amazon acquires a controlling influence.
UPDATE 15 June 2020: The CMA has extended the statutory deadline for its final report on the Amazon / Deliveroo investment by 8 weeks as there are 'special reasons' why it cannot be prepared and published within the original reference period. The CMA cites a need to take full account of representations received (from the parties themselves and third parties) in response to the provisional findings and to reflect the impact of COVID-19 in its assessment. The revised reference period will now expire on 6 August 2020, although the CMA notes that it hopes to complete its inquiry in advance of this date.
The views expressed in the responses received so far vary widely, however, there is a general theme repeated in some; that parties feel the CMA should further scrutinise the transaction and the impact of the COVID-19 outbreak in relation to Deliveroo, especially given that the situation is temporary and that Deliveroo is a business operating in one of the only markets which is experiencing increased demand during the pandemic, food delivery.
We will provide further updates in due course.
The Competition and Markets Authority (CMA) has provisionally approved an opportunistic investment by Amazon in "failing firm", Deliveroo.
Whilst the grocery market has soared over recent weeks, Deliveroo, a well-established restaurant and grocery delivery service, has been hard hit by the effects of social distancing and compulsory lockdown. The closure of key restaurants has led to a significant decline in its revenue and efforts to expand its convenience groceries supply (for example, its recent partnership with M&S), have not yet covered the shortfall.
Prior to the pandemic, Amazon, which has dabbled in restaurant delivery in London previously, was lined up to invest $575 million into Roofoods Limited (Deliveroo) in exchange for a minority shareholding. Amazon had withdrawn its own restaurant delivery service in November 2018 after seemingly struggling to compete with established service providers.
During its Phase 1 investigation, the CMA had considered that the proposed investment could damage competition; viewing the move as likely to discourage Amazon from re-entering the online restaurant food market and from developing its presence within the online convenience grocery delivery market in the UK. Irrespective of the shareholding being a minority, the CMA suspected Amazon would attain a material influence over Deliveroo board members, due to Amazon's vast experience within logistics, subscriptions and the online marketplace arena.
However, during the Phase 2 investigation, and in the midst of the pandemic, Deliveroo relied on the hitherto-rare "failing firm" defence; arguing that, without Amazon's investment, it would become insolvent and exit the market altogether – leading to a more detrimental effect on competition than the investment itself.
What is the "failing firm" defence?
Where a proposed transaction prompts competition concerns but one of the parties is a "failing firm" (i.e. the target company is relying on the investment or acquisition in order to stay solvent), the transaction may be permitted as an option less adverse on competition than the exit of the receiving company from the market. Often wielded as a last resort where the CMA has substantive concerns relating to a proposed transaction, the defence is not frequently successful.
There are three conditions which must be satisfied for a company to rely on this defence:
- if the transaction is not permitted, the exit of the "failing firm" from the market is inevitable in the near future, due to its financial difficulties;
- there are no alternatives which are less anti-competitive than the proposed transaction; and
- the transaction would be less anti-competitive than the exit of the "failing firm" from the market.
The CMA's Phase 2 findings
On 17 April 2020, the CMA published its provisional Phase 2 findings that, as a consequence of COVID-19 and the resulting toll it has taken on Deliveroo's financial position, Deliveroo may exit the market if it does not secure investment (with Amazon being the only realistic investor at this time). The CMA considered that the loss of a key market player, such as Deliveroo, would be worse for consumers than allowing the transaction to proceed and, as a result, provisionally approved the investment.
The statutory deadline for the CMA's final report (following public consultation) is 11 June 2020.
The CMA's decision prompts the question as to whether we will see an influx of so-called "rescue mergers". Rarely used before the pandemic, the "failing firm" defence may now be raised by competitors seeking clearance to merge with or invest in their struggling rivals – or provide an entry point into the market for players in other industries.
There are, though, some constraints. In the Deliveroo example, the CMA was persuaded that there were no realistic investors other than Amazon. Going forward, and especially once the economy begins to recover, if other companies are in a similar situation, the number of alternative (and less anti-competitive) investors is likely to increase.
In practice, and if eligible, companies in financial difficulty may instead opt for the financial support being offered by the UK Government in order to stay afloat; rather than looking for investment from third parties. The CMA has not clarified if it will accept the "failing firm" defence where companies might have been able to rely on alternative financial support introduced as a response to COVID-19 but have chosen not to do so.
Competition regulation: business as usual?
The CMA has announced that it is operating largely "business as usual", as evidenced by its clearance of the £6.2 billion takeover of UK delivery company Just Eat by the Dutch-headquartered multinational, takeaway.com. This decision on 23 April 2020 followed around a week after the Amazon decision and came nearly four weeks ahead of the usual regulatory deadline.
The CMA has published a "failing firm" refresher in the context of COVID-19 which makes clear that there will be no relaxation of the standards by which mergers are assessed.
Whilst the CMA is cutting some slack to businesses where evidence gathering is taking longer than usual, they appear to be ready and willing to act particularly quickly in the current circumstances where this is desirable.
Having said that, restrictions in certain industries have been eased to allow for collaboration between competitors. For example, in the dairy industry, where demand has fallen dramatically following the closure of the hospitality sector, competition rules have been relaxed allowing farmers and processors to share labour and facilities or cooperate to reduce production temporarily in order to minimise waste.
In a similar vein, the European Commission has adopted a state aid temporary framework to facilitate member states in supporting the economy. The UK's "umbrella scheme" has been approved, which provides financial support for companies "in distress". However, aid may only be granted to companies which were not in difficulty on 31 December 2019.
We discuss the national support measures which member states are able to adopt without infringing state aid rules and the temporary measures which may be notified to the European Commission in our article on COVID-19 and state aid, available here.
If you would like to discuss any of the issues raised in this article or have other concerns about the impact of Coronavirus, please contact Ian Holyoak or Abbey Smith in Michelmores' Commercial team.
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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.