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May 6, 2020

Competition watchdog blocks JD Sports takeover of Footasylum

The UK competition watchdog has blocked JD Sports Fashion Plc's proposed takeover of Footasylum saying it would lead to "substantial lessening of competition nationally" and leave shoppers with fewer discounts or lower quality customer service.

By Hannah Abdulla

The UK competition watchdog has blocked JD Sports Fashion Plc’s proposed takeover of Footasylum saying it would lead to “substantial lessening of competition nationally” and leave shoppers with fewer discounts or lower quality customer service.

In its decision announced today (6 May), the Competition and Markets Authority (CMA) said it had taken into consideration the uncertain and challenging trading conditions around Covid-19 and how this might affect the competition concerns surrounding this transaction.

“While it is significantly affecting the sector, the CMA has not found evidence that the impact of coronavirus would remove its competition concerns. However, the CMA does believe that the continuing uncertainty means that JD Sports should be allowed sufficient time in which to sell Footasylum, given the additional challenges associated with coronavirus.”

The deal had reached Phase 2 of the CMA’s investigations in which decisions are made by independent inquiry groups chosen from the CMA’s panel members who come from a variety of backgrounds.

The CMA said it had analysed a wide range of evidence looking at how closely these firms compete as well as competition from other retailers, whether they are online-only or also have stores, and the constraint from suppliers like Nike and Adidas. It also conducted two surveys of more than 10,000 of the companies’ customers.

“These surveys showed that many JD Sports and Footasylum shoppers see the other firm as their next best alternative. For example, more than two-thirds of Footasylum’s in-store customers said that they would shop at JD Sports if they could no longer shop at Footasylum – substantially higher than for any other retailer.”

Kip Meek, chair of the CMA inquiry group, said: “This deal would mean the removal of a direct competitor from the market, leaving customers worse off. Based on the evidence we have seen, blocking the deal is the only way to ensure they are protected.

“This decision comes at a very difficult time for retailers and we have been careful to consider the effects of coronavirus. However, we need to make sure we think about the impact of this merger on shoppers, both now and in the foreseeable future and we do not see the effects of the current crisis changing the competitive dynamics in a way that diminishes the substantial lessening of competition which we need to remedy.

“We never take decisions to block mergers lightly, but in this case the evidence has shown it is necessary for JD Sports to sell Footasylum, so that they can continue to compete against each other as independent businesses.”

JD Sports had submitted a takeover offer of GBP90.1m for Footasylum in April last year, which the boards of both companies accepted. 

Decision fails to recognise “long-term societal and behavioural change” in how consumers shop

Commenting today (6 May), JD Sports said it “fundamentally disagrees” with the conclusion reached by the CMA in its final report.

“When the CMA published its provisional findings in February, we said at the time that they demonstrated a complete misunderstanding of our market to an alarming extent. Today, and equally frustratingly, in the midst of a global pandemic and with the UK high street in a state of complete lockdown, the CMA’s final decision is even more absurd,” said Peter Cowgill, executive chairman of JD Sports Fashion Plc. 

“Since the CMA launched its review 12 months ago, the competitive landscape in which we operate has changed beyond recognition. Further, since the outbreak of Covid-19, competition has not lessened; it has become even more intense as the consumer transition to online has accelerated at a meteoric rate. We are astounded that the CMA has failed to recognise that this isn’t just a short-term blip, but rather a long-term societal and behavioural change in how consumers shop.

“As physical stores have closed in line with Government guidance, consumers have shifted their spending exclusively online, where Footasylum is an insignificant player in the context of the overall market and heavily dependent on its store estate. The clear evidence from China and other European markets is that, when current lockdown measures are lifted, it is virtually certain that footfall levels will not return to pre-crisis levels. This outcome would disproportionately impact smaller retailers like Footasylum, whose stores and shopping centre outlets rely so heavily on concentrated footfall and high trading densities.

“It is therefore extraordinary for the CMA to now require the divestment of Footasylum, in full knowledge of the impact that Covid-19 has had on its operations and, indeed, the retail industry as a whole. In this regard, we must face the fact that there is a significant probability that a prospective purchaser could look to substantially reduce Footasylum’s central operations, resulting in a considerable loss of jobs, particularly in the North West of England, which is entirely at odds with the Government’s current strategy.

“Given the injustice of the CMA’s decision and its disregard of irrefutable evidence of real-world competition, we will now carefully consider whether to formally challenge today’s decision in the Competition Appeal Tribunal.”

Decision may have widespread implications for future retail M&A

Greg Lawless, analyst at Shore Capital, said the firm was “surprised” at the verdict. 

“Against the current backdrop, with much of the UK high street temporarily closed, we are surprised by this final ruling. As we have chronicled, the UK retail landscape is changing with much of the high street temporarily closed and there is no end in sight, as yet. Normal trading conditions will take some time to unfold from the dark shadow of Covid-19 with social distancing measures needed in retail operations across the UK.

“We thought that the CMA’s role was to protect consumers. In our view, this looks like a heavy-handed regulatory approach and may have widespread implications for future retail M&A. Sports retailing is a global industry with third party brands competing for consumer’s share of spending.”Given the context of Covid-19 we can not see a queue of buyers forming to purchase Footasylum, aside perhaps from Mike Ashley’s Sports Direct.

“The CMA’s crystal ball of the view of the market, has in our view, failed to take into account the unfolding retail landscape. Quite what the UK retail landscape will look once the dust settles but the CMA has failed to account for the potential impact of the evolving retail market, given the challenges of Covid-19.”

Meanwhile, Pippa Stephens, retail analyst at data and analytics company GlobalData, noted: “Following the CMA’s ruling, Footasylum will no longer be able to piggyback upon JD Sports’ success in the market, with the latter having reported impressive UK growth in recent years, making headway on key competitors like Sports Direct. The footwear specialist may not prove to be strong enough to stand on its own two feet in the future, given the impact of Covid-19. 

“The UK clothing and footwear market is forecast to decline by 30.1% in 2020 as a result of the Covid-19 pandemic, with footwear expected to be the worst-performing of the two sectors. Footasylum is likely to be experiencing a severe decline in demand, despite trainers being a more desirable footwear category, as consumers primarily go outside for exercise during lockdown.

“While its abundance of products from the likes of Nike and Adidas will satisfy consumers’ desire for branded items, Footasylum also continues to face added pressure as direct-to-consumer channels become more dominant.”

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