Mergers and acquisition lawyers in the retail sector can get a peek into how their next deal might be viewed by the Competition Bureau from an analysis paper issued last week.
Following on the heels of some of the largest Canadian retail mergers of the last few years including: Canadian Tire/Forzani Group, Leon’s/The Brick, Agrium/Viterra, Safeway/Sobeys, La Coop Fédérée/Groupe BMR, Canadian Tire/Pro Hockey Life, and Loblaw/Shoppers Drug Mart. The paper provides a look at the economics tools and techniques the bureau uses when investigating retail mergers.
The bureau says the paper, written by its T.D. MacDonald Chair in Industrial Economics, Renée Duplantis, will “provide additional transparency to stakeholders and the general public about these investigations.”
Mark Katz, a partner in the competition and foreign investment review and retail practice at Davies Ward Phillips & Vineberg LLP, has done work for the Retail Council of Canada. He says the paper provides a good preview if you’re going to be doing a merger in the sector.
“One of the things it underscores for parties looking at these kinds of mergers is that if the bureau is going to do this kind of analysis you’re going to want to do the same kind of analysis in advance,” he says. “And in the submissions you make to them you’re going to want to address these issues in a way that will engage the bureau and hopefully persuade them of what you’re trying to say.”
He says the analysis is representative of the bureau’s ongoing attempt to be more transparent in how it conducts investigations.
“Without losing their enforcement edge, and recognizing that transactions differ, what they’ve done is pull it all together in a fairly short document which says: ‘This is how we’ve been approaching it in the last couple of years in dealing with these sizeable retail mergers.’ I don’t think it is breaking new ground but it is a helpful summary of the way they are approaching these mergers from an economic perspective,” says Katz.
There are investigations going on within the grocery sector in particular, says Katz and the paper touches on it in a very indirect way.
“The retail sector is constantly changing and very competitive around acquisitions. It’s very active and in that context this kind of guidance is helpful to have,” he adds.
The first section of the document discusses the bureau’s approach to analyzing the downstream (retailer to consumer) portion of a retail merger, while the second focuses on the upstream (supplier to retailer) portion of a retail merger.
In particular the bureau will assess whether the transaction could be expected to create, maintain, or enhance “monopsony power.”
Monopsony is similar to monopoly except that a larger buyer, not a seller, controls a larger proportion of the market and drives prices down. So in some instances the size of a retailer and its ability to bulk purchase at lower cost from suppliers could have a negative impact on its competition who may, as a result of the deal, face higher supply prices.
“It is refreshing to see more work being done on the monopsony market power side [large buyer/retailer side], not just supplier market power issues,” says Steve Szentesi of Steve Szentesi Law Corp.
This assessment follows the standard approach the bureau takes to merger review, applied to the buying, as opposed to the selling, side of the market. The bureau will also assess whether the transaction could have other impacts on input prices or otherwise distort downstream competition.
The bureau notes that the paper “does not replace any other Bureau publications and should be read in conjunction with the Merger Enforcement Guidelines.”