Why Deliveroo was considered a ‘failing firm’ in the transaction with Amazon and what it means for UK M&A opportunities.
On 17 April 2020, the UK Competition and Markets Authority (CMA) announced their provisional findings in Phase 2 of their investigations of the anticipated acquisition by Amazon of certain rights and a minority shareholding in Roofoods Ltd, the parent company of UK-based delivery company Deliveroo in a $575 million transaction.
Background
Deliveroo is a UK company founded in 2013 whose main activity is restaurant delivery. It also partners with certain retailers to deliver groceries. It operates in over 200 towns and cities throughout the UK, has over 30,000 partner restaurants, and over 25,000 self-employed couriers, as well as employing over 1,000 people directly.
In May 2019, Amazon invested $US 575 million in Roofoods Ltd, receiving a minority shareholding and certain other rights in return. On 11 December 2019, the CMA announced that it was referring the acquisition for phase 2 investigations unless suitable undertakings were provided instead.
Phase 2 Investigations – Deliveroo as a ‘failing firm’
The CMA concluded that the proposed transaction between Amazon and Deliveroo would not be expected to result in a substantial lessening of competition (SLC) in either the market for online restaurant platforms or the market for online convenience groceries.
This provisional conclusion made by the CMA was founded on the basis that:
- Deliveroo would be likely to exit the market due to the economic distress caused to it by the COVID-19 crisis absent the proposed transaction – otherwise known as the counterfactual ‘failing/exiting firm’ scenario;
- Deliveroo required additional and external funding to prevent its exit from the market, and that Amazon was the only investor available to provide this;
- no less anti-competitive investor was available other than Amazon; and
- the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed.
What is the ‘failing firm’ defence?
The failing firm “defence” is used by the merging parties to claim that the competitive effects of the merger should be assessed by reference to a market situation in which the target company (Deliveroo) would have exited the market regardless of the transaction (here, that Deliveroo would have gone bust). Thus, the merging parties claim that any SLC due to the loss of the target company as a competitor would have arisen in any event and cannot be attributed to the transaction.
The Three Limb Test
The CMA uses a three-factor framework for assessing the exiting firm scenario, which was applied in the Deliveroo and Amazon case as follows:
Limb 1: Whether the firm would have exited (through failure or otherwise absent the transaction).
Limb 2: Whether there would have been an alternative purchaser for the firm or its assets.
Limb 3: What impact of exit would be on competition compared to the competitive outcome that would arise from the acquisition.
CMA guidance on COVID-19
On 22 April, the CMA published guidance on its approach to acquisition assessments during the COVID-19 outbreak.
The CMA explains in their guidance that its ultimate approach to assessing the competition concerns of the acquisition remains unchanged. The CMA will continue to investigate any potentially concerning transactions thoroughly and take appropriate action where and if necessary. The CMA restated its understanding of the pressures brought about by COVID-19 on both businesses individually and on the economy more generally and that it has been working with the government to relax competition law where appropriate and to provide guidance where necessary. The CMA has published guidance on its approach to business co-operation during the COVID-19 outbreak, which can be found here. The CMA is mindful of the potentially significant impact that COVID-19 may have on the market for mergers and acquisitions, as well as its ability to control the regulation and assessment of such transactions. In any case, the CMA emphasises that its overall approach to assessing the competition concerns of mergers and acquisitions remains unchanged.
The guidance provided by the CMA concerning their investigations into M&A transactions considers, among other things, information gathering, the timing of investigations, meetings and hearings, interim measures, and substantive assessments.
We are happy to answer any queries in relation to this guidance against the backdrop of the COVID-19 crisis, regarding whether this may give you an opportunity to sell or acquire a business that might previously have been challenged/prohibited.
Further Comment
In a time of significant economic volatility, this judgment from the CMA’s decision is helpful for the following reasons.
- It provides strong guidance, precedent, and parallels for any high growth company that is currently thinking about entering into a similar transaction now or in the coming quarters.
- The CMA comments that “there were a number of factors limiting the ability and willingness of Deliveroo’s existing shareholders to invest further funds in Deliveroo”. This posterchild for British entrepreneurialism raised over $1.5 billion from global institutions such as T Rowe Price and Fidelity. This, alongside other data, implies that there are investment, scale, and appetite ceilings for British based businesses. We will be publishing more on this shortly.
- There needs to be a full understanding of the specific classification of what a ‘failing firm’ is. Certainly, the cash-burn, zero-sum business models of venture-backed high growth companies may indeed make them precipitously ‘failing firms.’ Yet, for any management team in a similar position, they should study the context and particular explanation by the CMA as to why they believe Deliveroo is a ‘failing firm’ and that Amazon entering the market would increase competition via innovation and new opportunities its entry offers in a market that Deliveroo, arguably, created.
The full judgment can be found here.
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