When minority shareholdings trigger investigations
The UK’s competition watchdog has approved Amazon’s 16% slice out of online food delivery company, Deliveroo. This followed more than a year of deliberations.
The decision was announced by the Competition and Markets Authority (CMA) in August 2020. The CMA found that Amazon’s minority share in Deliveroo would not result in a substantial lessening of competition in the UK market for both online restaurant delivery and convenience grocery delivery platforms. However, the CMA warned a further increase in its shareholding could prompt another investigation.
Key Takeaways
The lengthy investigation provides a timely reminder that minority shareholdings can trigger merger reviews, both overseas and in Australia.
The transaction also reflects a market appetite for food delivery consolidation as diners turn to food delivery apps during COVID-19 lockdowns (notwithstanding that COVID-19 may have initially had a significant impact on Deliveroo’s business).
Overview of the Amazon/Deliveroo merger
In May 2019, Amazon led a funding round for Deliveroo in exchange for a minority shareholding, as well as some other rights.
The CMA began a ‘Phase 1’ investigation into the transaction during mid-2019. In December 2019, it published its initial findings. The CMA considered the transaction would reduce competition by, among other things, discouraging Amazon from re-entering the market for online restaurant food delivery platforms in the UK following the closure of its Amazon Restaurants food delivery service in 2018.
Based on these concerns, the CMA referred the transaction to a ‘Phase 2’ inquiry. However, as COVID-19 struck, the economic effects of the pandemic placed Deliveroo’s business in financial difficulty. In April 2020, the CMA found Deliveroo was likely to exit the market unless it received the additional funding available through Amazon’s investment. Accordingly, recognising the urgency of the situation, the CMA quickly and provisionally approved the deal under the ‘failing firm’ defence. Specifically, the CMA found that ‘the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed.’
However, two months later, the CMA concluded the economic impact on Deliveroo was not as severe as anticipated, and considered it was no longer a failing firm. Nevertheless, the CMA provisionally cleared the deal once again. This time, the CMA focused on the effect on competition resulting from the transaction, with a finding that the transaction would not materially impact Amazon’s incentives to re-enter the market, or the constrains from other suppliers who remain active in the relevant markets.
The CMA’s final decision ultimately found the deal would not substantially lessen competition in the markets for online restaurant and online convenience grocery delivery platforms. The assessment looked at whether a 16% shareholding would affect Amazon’s incentive to compete independently with Deliveroo in both markets. On this, the CMA concluded that Amazon could re-enter the online restaurant platforms market through multiple routes. However, the CMA warned a further increase in Amazon’s shareholding could trigger another investigation.
When minority shareholdings trigger investigations: a recipe for disaster?
The CMA determined that Amazon’s 16% shareholding was enough to trigger jurisdiction for merger review. Under UK competition laws, the CMA must establish whether an acquisition amounts to a merger before being able to assess the merger.
The CMA concluded it had jurisdiction on the basis that Amazon would have the ability to exercise material influence over Deliveroo through the transaction. The factors that led the CMA to reach this conclusion included:
- the size of Amazon’s investment and its associated rights;
- Amazon’s position as a significant strategic investor with various additional rights; and
- Amazon’s status and expertise relevant to the areas Deliveroo operates.
What about Australia?
If the ACCC considers that the acquisition of minority interests raises potential competition concerns, it may launch an investigation.
In August 2019, the ACCC announced it was investigating Qantas Airways’ acquisition of a 19.9% stake in Alliance Airlines. This interest made Qantas the biggest single shareholder of Alliance. Given Qantas completed the acquisition without first seeking ACCC clearance, the ACCC’s inquiry is an enforcement investigation, rather than a traditional merger review.
More than a year later, the ACCC is continuing its investigations and obtained an undertaking from Qantas to not acquire any further interest in Alliance until the investigation is completed. The ACCC holds concerns that competition may be reduced by:
- positioning Qantas to seek material influence over Alliance Airlines;
- negatively impacting customer perceptions of Alliance Airlines’ future as an independent competitor to Qantas making it difficult for Alliance to compete because Qantas will become the largest shareholder;
- placing Qantas in a position to limit fundraising by Alliance Airlines and block a complete takeover or scheme of arrangement by an investor; and
- reducing Qantas’ incentive to compete with Alliance Airlines because Qantas has an interest in Alliance Airlines’ profits.
The regulator activity in UK and Australia highlights that minority shareholdings trigger investigations that are lengthy and detailed. Any move by a company to acquire a stake in another company, particularly where they are close competitors, requires a careful review of merger control laws and consideration as to whether clearance should be sought in a voluntary regime.
Market appetite for food delivery mergers
Globally, 2020 has seen an increase in food delivery consolidation within the market, as COVID-19 has changed the way people consume goods and services. Besides Amazon’s minority shareholding in Deliveroo, food delivery mergers have been a continuing trend in the market.
- April: CMA also cleared the merger of two delivery food companies, Just Eat and Takeaway.com.
- June: Just Eat Takeaway announced it had entered into an agreement with U.S. based food delivery service Grubhub to acquire 100% of the shares of Grubhub. The proposed acquisition has received regulatory approval from the U.S. Federal Trade Commission.
- July: Uber announced it had entered into an agreement with U.S. based food delivery start-up Postmates under which Uber will acquire Postmates in an all-stock transaction. The proposed acquisition is subject to regulatory approvals.
COVID-19 has accelerated the transformation of the food delivery sector, and it will be interesting to watch the appetite in this market as it grows.
Image credit: Set of Packed in paper containers and boxes of Chinese food. Home food delivery concept by wuestengiel / Creative Commons / CC BY 2.0 / Remixed to B&W and resized
