Consolidation within the betting industry, propelled by tougher regulatory requirements and higher rates of tax, has been hitting the headlines in recent months, with Ladbrokes and Coral, Betfair and Paddy Power, Bwin.party and 888/GVC leading the charge.
Taking the first of those as an example, a combination of Ladbrokes 2,209 betting shops at the end of 2014 and Coral’s 1,834 would mean that together they would operate more than 4,000 of the total 9,000 or so betting shops in the UK. Not surprisingly, this has raised competition concerns and the decision whether or not the deal proceeds will rest with the Competition and Markets Authority (CMA).
According to the Department for Business Innovation and Skills, the CMA was set up in 2013 specifically “to strengthen the existing competition regime to support growth in the economy” by reducing anti-competitive activities. It started operating fully in April 2014, following the abolition of both the Competition Commission and the Office of Fair Trading (OFT).
The Competition Commission had itself replaced the Monopolies and Mergers Commission (MMC) in 1999. History is now repeating itself because that was just a year after the MMC had been required to form a view whether Ladbrokes’ then intended acquisition of Coral’s betting shops was anti-competitive. It decided that it was, and that it would “reduce punters’ choice” and “weaken price competition”, both at a national and domestic level – a view subsequently endorsed by Peter Mandelson, who, as Secretary of State for Trade and Industry, blocked Ladbroke’s purchase saying that it “would damage competition and disadvantage punters”.
Someone who was closely involved in that episode of history was Warwick Bartlett, then the chairman of the British Betting Office Association. Today’s current proposals for a merger of Ladbrokes and Coral will necessitate the CMA being persuaded that things have changed since 1998. As Warwick has pointed out in recent months, things have changed significantly in that time in the following respects:
- the betting market has concentrated further with the big four bookmakers now having 86% of the market – up from 70% in 1997,
- there are now fewer small bookmakers to protect, and
- access to the internet has led to considerably greater competition in terms of betting pricing and value for customers.
It is of course the internet that has so completely changed the betting landscape over the last 17 years. This is where Ladbrokes and Coral find themselves in a much less dominant position than was the case in the land-based focused market of 1998 and commentators are suggesting that, to bolster up their defences against an ever-increasing increasing number of online operators, both companies may be happy to sell off some of their high street betting shops in order to get the go-ahead for the merger.
Such disposals occurred in 2006 when the OFT announced that it had accepted undertakings by each of William Hill and Ladbrokes to divest themselves of local betting shops in lieu of referring to the Competition Commission both the former’s acquisition of the licensed betting office business of Stanley Leisure and the acquisition by the latter of Jack Brown Bookmakers.
The CMA’s guidance on its jurisdiction and procedure in the case of mergers runs to 188 pages so what follows is necessarily a very brief summary, but its primary duty is to seek to promote competition, both within and outside the UK, for the benefit of consumers.
Under the Enterprise and Regulatory Reform Act 2013, the CMA:
- has a function to obtain and review information relating to merger situations,
- is obliged to bring to the attention of the Secretary of State any merger it is investigating at Phase 1 of its work, which it believes raises a material public interest consideration,
- can, either on its own account or in public interest cases where requested by the Secretary of State, negotiate undertakings in lieu of a reference for a Phase 2 investigation (for example as occurred with the OFT in 2006, as mentioned above) and
- has a duty to refer for an in-depth Phase 2 investigation any relevant merger situation where it believes 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” in a UK market. Following a reference for a Phase 2 investigation, the CMA conducts a more detailed analysis to determine, amongst other things, whether it should take action to remedy any substantial lessening of competition.
This leads to the obvious question about what constitutes the “substantial lessening of competition” (or “SLC”) test against which the CMA assesses mergers. An answer can be found in the OFT’s Merger Assessment Guidelines, which have been adopted by the CMA and say:
“A merger gives rise to an SLC when it has a significant effect on rivalry over time, and therefore on the competitive pressure on firms to improve their offer to customers or become more efficient or innovative. A merger that gives rise to an SLC will be expected to lead to an adverse effect for customers”
Quite what the CMA will decide (and when it will decide) depends on the quality of your crystal ball. For my part, I’m happy to quote the forecast by Numis analyst Ivor Jones, who has been reported as saying: “It is possible that Ladbrokes and Coral will be able to satisfy any concerns of the CMA at the Phase 1 stage, in which case completion could be late 2015/early 2016. More likely, in our view, is that the CMA will proceed with a Phase 2 investigation, which will take until mid-2016, with completion of the merger in the second half of 2016”.
Until then, Ladbrokes CEO Jim Mullen has made it clear that Ladbrokes will continue to view Coral as a “fierce competitor”, saying that “we’ll be looking to basically beat them in all products we compete in”. Interesting times lie ahead.
Article by David Clifton, Director Clifton Davies Consultancy
David Clifton will be speaking @ the Betting on Football Conference 10 September