Competition watchdog orders JD Sports to dispose of Footasylum
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JD Sports is once again considering its options after the competition watchdog stood by its original ruling to block the Bury-based retailer’s £90m takeover of Footasylum.
It has ordered JD Sports to dispose of Rochdale-based Footasylum.
The Competition and Markets Authority announced last May that it had blocked the takeover deal after finding it would result in “substantial lessening of competition nationally” which could lead to fewer discounts or lower quality of customer service.
JD Sports appealed to the Competition Appeal Tribunal, arguing that the assessment of the impact of the merger on competition was too broad and that the CMA hadn’t gathered enough information regarding the effects of COVID-19 on the wider retail sector.
The tribunal then referred the case back to the CMA for reconsideration.
However, today, the CMA announced that it has found the “completed acquisition by JD Sports Fashion plc of Footasylum plc has resulted, or may be expected to result, in a substantial lessening of competition in the retail supply of sports-inspired casual footwear and in the retail supply of sports-inspired casual apparel sold both in stores and online in the UK.”
It said: “This merger would bring together two close competitors which would lead to worse outcomes for Footasylum’s shoppers.
“We have decided that the sale of the entirety of Footasylum to a purchaser approved by the CMA is an effective and proportionate remedy.”
In response, JD pointed out that, despite the ruling, the CMA has agreed with JD on a number of critical aspects, including that JD’s most important competitors are now the Direct to Consumer (DTC) operations of the international brands themselves rather than Footasylum with a market share of less than five per cent.
And, as a result of this merger, there would be no substantial lessening of competition for JD and so, consequently, JD has no incentive to raise prices or worsen its consumer offer.
JD said that this is the first time ever that the CMA, including its predecessors, has decided to block or remedy a deal between competitors where it found that there will be no “substantial lessening of competition” in relation to the acquiring business.
It added: “Prior to this, in every other case under the UK merger regime between competitors, including its first review of this merger with Footasylum, the CMA has justified its intervention on the basis that the merger eliminated important rivalry for both the acquiring and the target business.
“Given the critical areas in which the CMA agrees with JD and the fundamental change in its conclusion between the two inquiries, the decision to prohibit the acquisition defies logic.
“It is inexplicable to JD that the CMA remains of the view that one small competitor, Footasylum, with less than five per cent of the market, is not subject to the same competitive pressures and discipline from Nike and adidas DTC that affects the remaining 95%+ of the market.”
JD said the practical result of this “extreme and unprecedented finding” is that the CMA requires the unwinding of the acquisition, which closed in May 2019, meaning that JD cannot invest in and improve Footasylum’s customer proposition, as it has always intended to do.
JD said it is studying the report in detail and will carefully consider its options accordingly.
Peter Cowgill, JD Sports Fashion executive chairman, said: “The CMA rightly concludes that, following the acquisition of Footasylum, JD would have no incentive to raise prices or worsen its offer as its most important competitors are the DTC operations of the international brands themselves.
“However, the CMA has then somehow concluded that the competitive threat from DTC does not extend to Footasylum and that JD would have an incentive to worsen the offer in Footasylum to the detriment of both consumers and suppliers. We would suggest that the CMA is in a minority of one in reaching this conclusion.
“Overall, the CMA’s decision today continues to be inexplicable to anyone who understands what difference the pandemic has made to UK retail and how competition and the supply chain in our markets actually work.
“It is deeply troubling at a time when the UK high street has been seriously damaged already and is vulnerable to further closures.”
Russ Mould, investment director at Manchester investment platform AJ Bell, said: “Peter Cowgill’s blood is boiling as JD Sports is being forced to sell trainers shop Footasylum.
“He has been fighting the competition authority for some time, arguing that even after absorbing Footasylum into JD there still is plenty of competition in this sector, particularly from shoe manufacturers which are increasingly selling direct to consumers.
“But the CMA is not having it and insists that consumers could be worse off if JD was permitted to keep the business.
“The shoe market is well served by a range of retailers in the UK, so it does seem odd that the CMA is being so stubborn. Quite often in these situations, the company being investigated would be forced to sell some of the acquired shops in certain geographical locations, but not necessarily the entire business.”
He added: “JD Sports is unlikely to let the CMA have the final word and it now seems that Cowgill is on a personal mission to emerge victorious. It’s now a fight of principles and not letting the CMA set the precedent for future cases of a similar ilk.
“Footasylum is not really a material part of JD and was an opportunistic purchase in the first place, with the suitor only paying £90m two years ago. To put that in some context, JD is guiding to make at least £750m pre-tax profit this year from its whole business.
“Cowgill wants fair treatment in this fight and is unlikely to stand down until, given that the statement says JD is studying its options.”