JD Sports appeals CMA prohibition decision citing impact of Covid-19 as a key consideration

JD Sports has filed an appeal with the Competition Appeal Tribunal (CAT) against the decision by the CMA to prohibit its acquisition of rival retailer Footasylum, with the appropriate treatment of Covid-19 a key area of dispute between the parties and the CMA.

Among the grounds of appeal published on 23 June 2020, JD Sports alleges that the CMA erred in law and / or acted irrationally by excluding the effect of Covid-19 on Footasylum when considering the relevant counterfactual (i.e., the competitive situation that would have prevailed absent the merger).  JD Sports further alleges that the CMA was also mistaken in finding that Covid-19 would not materially affect the competitive constraint exercised by Footasylum.

In prior public statements JD Sports claimed that the CMA had failed to take proper account of the “seismic impact” of Covid-19 on the UK retail sector.

To date consideration of the impact of Covid-19 by the CMA, and other merger authorities, has focused primarily on the risk that a financially failing firm could exit the market if a relevant merger had not occurred.  In April 2020 the CMA published guidance on the “failing firm defence” in response to Covid-19 (see our blog post here).  This re-stated the CMA’s existing, pre-Covid-19 position, with no relaxation provided in relation to the stringent tests to be met to qualify as a failing firm.

The guidance was issued following the provisional clearance by the CMA of the acquisition by Amazon of a stake in Deliveroo, applying the failing firm defence in the context of the Covid-19 outbreak (see our e-bulletin post here).  The provisional findings in Amazon / Deliveroo were reversed on 24 June 2020 insofar as they related to the application of the failing firm defence.  This followed evaluation of new evidence by the CMA on the impact of Covid-19 on Deliveroo’s performance and finances.

While Footasylum had experienced trading difficulties prior to its acquisition by JD Sport, issuing three profit warnings in 2018/19, it was not characterised by the merging parties as a “failing firm” during the CMA’s investigation.  The grounds of appeal, as set out in the summary application, indicate that JD Sports instead submits that the impact of Covid-19 should have been considered by the CMA more broadly, including in relation to disrupted patterns of consumer behaviour and related changes to the structure of competition, and not solely through the lens of the failing firm defence.

Many parts of the UK economy have been severely affected by Covid-19.  This appeal may provide much-needed guidance as to the appropriate treatment of Covid-19 as a consideration in the assessment of mergers.  The outcome will be keenly followed by parties contemplating M&A activity in sectors as varied as retail, leisure, construction and civil aviation, all hard-hit by Covid-19

Other important aspects of the CMA’s decision in JD Sports/Footasylum have not been appealed.  In particular, at Phase 2 the CMA concluded that footwear and sportswear apparel sales made in-store and online comprised part of the same relevant market.  This conclusion still stands.  It is an important departure from the CMA’s general approach when examining retail mergers, with the CMA typically identifying separate markets for sales made via bricks-and-mortar store networks and online channels.

Read the full briefing here.

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