UK CMA provisionally clears Amazon/Deliveroo in first application of “failing firm” defence during the COVID-19 pandemic

On 17 April 2020 the CMA announced its provisional clearance of Amazon’s proposed acquisition of a stake in Deliveroo.  The transaction was referred for an in-depth Phase 2 investigation in December 2019, in light of concerns about the impact on competition for the supply of online restaurant delivery platforms and the supply of online convenience groceries. However, the ongoing COVID-19 pandemic has resulted in significant changes to the competitive environment since the start of the CMA’s investigation: against a backdrop of restaurant closures, consumer fears over contamination, and a significant reduction in the number of available drivers, Deliveroo has provided evidence to the CMA that without the Amazon investment it will fail financially and be forced to exit the market.

The CMA’s press release states that the CMA has been “considering this new evidence as a matter of urgency”, in light of the “wholly unprecedented circumstances” resulting from the current crisis. It has provisionally concluded that the transaction will not be expected to result in a substantial lessening of competition on the basis of the so-called “failing firm” defence: Deliveroo is likely to exit the market unless it receives the additional funding available through the transaction, and the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed.

Whilst this is only a provisional conclusion at this stage (with a final decision due by 11 June 2020 following a consultation process), the CMA is clearly indicating its willingness to take into account changes to the competitive environment resulting from the COVID-19 pandemic. By way of summary of the key points:

• This is the first application of the failing firm defence during the COVID-19 pandemic, which we have been anticipating that merging parties will seek to rely upon more frequently given the economic impact of the pandemic.
• It is also interesting to note that just two days earlier, on 15 April 2020 the CMA revoked an interim enforcement order (IEO) – also known as a “hold-separate” order – imposed in Takeaway.com’s acquisition of Just Eat, on the basis that there was no longer a risk of pre-emptive action.  This is an unusual step for the CMA to take during a Phase 1 review and suggests that the CMA has concluded provisionally that it has no competition concerns (the Phase 1 decision in that case is expected by 19 May 2020).
• However, the CMA’s approach is also likely to be of wider application beyond the online food delivery sector, and should offer some encouragement to merging parties wishing to rely on the “failing firm” defence (whilst noting that this has historically been a difficult argument to run, and it is too early to say whether the CMA will relax its usual strict application of the relevant criteria).
• The impact of COVID-19 on the relevant “counterfactual” when assessing the impact of a merger on competition is just one aspect of how the crisis is currently affecting merger control review, both in terms of process and substantive assessment.
• Merging parties should also factor in likely delays to the review process (whether as a result of formal changes to review deadlines or increased use of “stop the clock” mechanisms), and be aware that the precedent value of previous decisions may be reduced in markets which have been significantly impacted by the COVID-19 pandemic.

Read the full briefing here.

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