Antitrust in focus - February 2024

Out now: our latest Global trends in merger control enforcement report

Antitrust authorities continued to impact M&A in 2023, frustrating more deals and stepping up scrutiny of digital and private equity transactions.

Our report reveals the latest trends in global merger control activity, analyzing data from 26 jurisdictions.

We examine how antitrust authorities – particularly in the U.S., EU and UK – continue to take a tough approach to merger control enforcement. We consider the impact for M&A, including on transaction timetables and the allocation of execution risk. We explore the complexity created by new and expanding foreign investment regimes and the EU’s foreign subsidy review tool. We also look ahead to what dealmakers should watch out for in 2024.

Explore our ten key insights:

1. Tougher merger control enforcement frustrates more M&A 
2. Antitrust authorities remain unwilling to accept merger remedies
3. Digital M&A runs into antitrust hurdles with consumer, life sciences, transport and energy deals also targeted 
4. Private equity deals under increasing antitrust scrutiny
5. Review of below-threshold mergers creates uncertainty 
6. Record EU gun-jumping penalty contributes to surge in merger control fines
7. Complex deals face longer merger review periods
8. Diverse foreign investment landscape presents challenges for dealmakers
9. EU Foreign Subsidies Regulation increases M&A regulatory burden
10. Heightened risk of antitrust and foreign investment intervention met with robust deal provisions

If you or your teams would like a discussion on any of these topics or a training session to run through the report’s highlights, please get in touch with your usual A&O contact.

European Commission adopts revised Market Definition Notice

The European Commission (EC) has published an updated version of its Market Definition Notice (Notice) – guidance used for defining relevant markets in EU antitrust and merger control cases.

The update marks the first revision since the Notice was adopted in 1997 and amounts to a significant overhaul.

The revised rules aim to address new market realities, in particular “the increased digitalisation and the new ways of offering goods and services, as well as the interconnected nature of commercial exchanges”. The revision also brings the Notice in line with developments in the EC’s practice and the case law of the EU courts.

Upfront, the Notice confirms that the EC uses market definition to identify the boundaries of competition between companies, in particular to determine the relevant competitors and customers and to calculate market shares. Importantly, the EC makes clear that market definition is only an “intermediate tool to structure and facilitate the competitive assessment”. It is not a mandatory step in each case.

The amendments to the Notice fall in three broad categories: general principles, defining geographic markets, and the EC’s approach to market definition in digital and innovation-intensive industries.

1. Updates to general principles

These include:

• Greater emphasis on non-price elements: when defining the relevant market, the EC will consider not only a product’s price but also its degree of innovation and quality, including its sustainability, resource efficiency, durability and the value and variety of uses it offers.
• Clarification of tools to assess demand substitution: The traditional “SSNIP test” (used to assess whether customers would switch to other products if the price for the reference product slightly increased) only functions as “a conceptual framework”, and markets can be defined based on other types of evidence, eg qualitative characteristics such as functionality, quality and intended use. These may be more appropriate, for example, for zero monetary price products and highly innovative industries.
• Alternative metrics for calculating market shares: numerous metrics – other than sales – can be informative of market shares, such as number of suppliers, website visits and number of downloads in digital markets and number of patents/patent citations in markets with significant R&D investments.
• Clarifications on dynamic and forward-looking assessments: “expected transitions in the structure of a market” can be taken into account when carrying out forward-looking assessments. Short and medium-term changes in market structure (eg technological or regulatory changes) are relevant where “there is sufficient probability that new types of products are about to emerge”.
• Extensive guidance on the various sources of evidence and their probative value: The EC makes explicit reference to the use of public information, informal visits to collect product information and data requests to sector-specific regulators in cases involving regulated markets.

2. Expanded guidance on defining geographic markets 

Importantly, this includes the EC’s approach to defining global markets. The EC has clarified that when customers around the world have access to the same suppliers on similar terms, the market is likely to be global. The Notice also clarifies how the EC will assess competitive pressure from imports and notes that markets may be defined as global with specific areas excluded due to high entry barriers or other obstacles.

3. New guidance on digital and innovation-intensive industries

The revised Notice contains a new section on how to define markets in highly innovative industries characterized by significant R&D. This describes how the EC will deal with both pipeline products and early innovation efforts.

There are also new sections on: 

• Multi-sided platforms – the EC may define a single relevant product market, or separate markets for the products on each side of the platform.
• Digital ecosystems – there are various ways the EC could approach market definition and the EC sets out the factors it will take into account when deciding which to choose.

Read more about the EC’s approach to market definition in digital markets in our Tech Talk blog post.

We can expect the revised Notice to have an impact on the way that national antitrust authorities and courts across the EU analyze markets in merger control and antitrust cases. It also provides businesses with a more comprehensive, relevant and clear framework for self-assessment.

European Commission publishes briefing on first 100 days of foreign subsidy regime notification obligations and launches first in-depth investigation

The Foreign Subsidies Regulation (FSR), which entered into force last year, is designed to identify and (where necessary) remedy the effects of subsidies given to companies by non-EU countries that may distort competition within the EU’s internal market.

It comprises three tools: a transaction notification tool, a public procurement notification mechanism and ex officio investigation powers. More detail on these elements can be found in our previous alerts (on the overall FSR regime, on the procedural rules and on the regime’s impact on public procurement procedures). In addition, our Global trends in merger control enforcement report explains how the FSR is already increasing the regulatory burden on transacting parties.

The FSR notification tools have been in operation since October 2023. The European Commission (EC) has published an overview of its experience from the first 100 days since they kicked in.

Transaction notification tool

In its first issue of FSR Brief, the EC has provided some interesting statistics on transactions notified and has urged notifying parties to pay “special attention” to the “quality and completeness” of filings to ensure a timely and smooth assessment:

• Cases reviewed: 53 cases have been pre-notified, 14 of which have been formally notified. Nine have been fully assessed. The number of notifications appears high compared to the EC’s initial estimate that it would review around 30 transactions a year. No in-depth proceedings have yet been opened and no distortive subsidies have been found.
• Parallel assessments: unsurprisingly, most of the cases (42) have also been subject to parallel assessment under the EU Merger Regulation. Five were subject to a national merger control review. Around half of cases are subject to foreign investment screening in one or more Member States.
• Sectors: cases covered a large set of sectors, ranging from basic industries to fashion retail and high technologies. Interestingly, roughly a third involved an investment fund as a notifying party.
• Cross-border element: more than half of cases involved cross-border EU-non-EU transactions, whereas seven involved a cross-border transaction outside the EU.
• Types of foreign financial contributions (FFCs): the most common types assessed relate to the source of financing of the transactions, including capital injections and equity contributions, plus loans obtained from financial institutions which could be considered attributable to a third country. State guarantees, grants for specific projects and tax benefits (such as fiscal incentives for R&D and investment) have also been frequently observed.
• Correctly categorising transactions: the EC warns that identifying whether a concentration qualifies as an acquisition, a merger or a joint venture is a critical first step in determining whether the notification thresholds are met (as they apply differently in each of these structures). Getting it wrong could mean violating the standstill obligation. It could also lead to incomplete notifications as the incorrect types of FFC could be reported.
• Which FFCs to consider and report: the EC reiterates that both notification thresholds and reporting obligations are based on FFCs and not foreign subsidies. It explains which FFCs should be taken into account when applying the thresholds and which should be reported in the filing form. Where a filing is required but no FFCs need to be reported, parties should explain this (eg because exceptions apply). The EC clarifies which section of the filing form should be used to report various FFCs. It gives specific guidance on FFCs used to finance the transaction, including how to report FFCs granted by non-EU countries as limited partner investments in an acquiring investment fund. Finally, there are instructions on how to interpret reporting exceptions, in particular those related to investment funds. In case of any doubt, parties can contact their allocated case team.

Public procurement notification tool

On the public procurement front, the EC has published a much shorter summary. During the first 100 days, the EC received over 100 submissions (which likely cover two types of documents, ie notifications and declarations which tenderers need to submit if their contributions do not meet notification thresholds). However, experience so far demonstrates the need to raise awareness of the FSR for both tender participants and contracting authorities.

Shortly after publishing the summary, the EC opened its first-ever in-depth investigation. The probe stems from a notification submitted by a subsidiary of CRRC Corporation, a Chinese state-owned train manufacturer, in relation to a public procurement procedure launched by Bulgaria’s Ministry of Transport and Communications. The tender concerns the provision of 20 electric “push-pull” trains, as well as their maintenance and staff training services, and has an estimated contract value of around EUR610 million.

The EC’s preliminary assessment found “sufficient indications” that the company had been granted a foreign subsidy that distorts the internal market. The agency will now further assess the alleged foreign subsidies and determine whether they may have allowed the company to submit an unduly advantageous tender.

The EC has until July 2 2024 to either (i) issue a no-objection decision, (ii) accept commitments that fully and effectively remedy any distortion, or (iii) prohibit the award of the contract. Its decision will likely be a useful precedent for assessing participation in public tenders as well as Chinese investment – we will keep you posted.

New Chinese merger control thresholds take immediate effect

Towards the end of January 2024, the State Administration for Market Regulation (SAMR) published revised merger control thresholds. These took immediate effect.

Notably, the turnover thresholds for mandatory pre-merger filings have been significantly increased. Transactions must now be notified to SAMR if:

• the combined turnover of all parties in the last fiscal year exceeds either RMB12 billion (approx. USD1.7bn) globally or RMB4bn (approx. USD567.6m) in mainland China; and
• the turnover in mainland China of each of at least two parties exceeds RMB800m (approx. USD113.5m).

This revision is expected to reduce the number of notifiable transactions and ease the regulatory burden for businesses.

However, while a proposed threshold targeting “killer acquisitions” has been dropped, SAMR has reaffirmed its power to review below-threshold transactions that may have an anti-competitive effect.

SAMR has subsequently provided useful further clarity on various substantive and procedural aspects of the merger control regime, such as how to determine the parties to the concentration and when a filing should be submitted, in a merger-filing guidance handbook.

Our alert takes you through the threshold revisions and what they mean for M&A, including on-going deals. 

U.S. FTC Kroger/Albertsons challenge alleges harm to workers

The U.S. Federal Trade Commission (FTC) has sued to block the largest proposed supermarket merger in U.S. history – Kroger’s acquisition of Albertsons. The FTC has issued an administrative complaint and has also sought a temporary restraining order and preliminary injunction in federal district court. A bipartisan group of nine state attorneys general is joining the FTC’s federal lawsuit.

Significantly, the agency’s complaint introduces a novel theory of harm: harm to the labour market in which workers sell their labour to employers. It alleges that the acquisition would negatively impact unions and the workers they represent by immediately erasing aggressive competition for union grocery labour, threatening the ability of employees to secure higher wages, better benefits and improved working conditions. In many local areas the merged entity would be the only remaining employer of union grocery labour.

The case shows that the U.S. agencies are continuing to focus on the impact of M&A on labour markets. It is one of the first times that the FTC has applied the revised merger guidelines on this point.

In terms of consumer harm, the FTC alleges that in eliminating head-to-head price and quality competition, the deal would result in higher grocery prices and a reduced incentive on the parties to improve product quality and customer service.

Interestingly, this case is another example of the U.S. agencies rejecting as inadequate remedies offered by parties to address antitrust concerns. The FTC branded Kroger and Albertsons’ proposal to divest several hundred stores and select other assets to C&S Wholesale Grocers as a “hodgepodge of unconnected stores, banners, brands and other assets” that “falls far short of mitigating the lost competition between Kroger and Albertsons”.

In particular, the FTC considers that the scope of the divestment package fails to address all affected geographic markets and fails to include all the assets, resources and capabilities that C&S would need to replicate the current level of competition between Kroger and Albertsons. The FTC also notes C&S’s limited experience in operating retail supermarkets, particularly at scale, and the merging parties’ “track record of advocating for divestiture remedies that ultimately prove ineffective”.

See our latest Global trends in merger control enforcementreport for more on how the U.S. agencies are continuing to take a tough approach to merger control enforcement. 

European Commission greenlights Orange/MásMóvil joint venture subject to remedies

In July 2022, mobile network operators (MNOs) Orange and MásMóvil announced a 50:50 joint venture to combine their Spanish operations, subject to merger control approval from the European Commission (EC).

Following notification in February 2023 and an in-depth investigation lasting a year, the EC has conditionally approved the deal on the basis of remedies that will allow existing mobile virtual network operator (MVNO) Digi to begin providing services as a “new” fourth MNO.

The case is of interest as the most recent in a line of cases where the EC has considered “four-to-three” mergers between MNOs, and therefore the latest steer as to the scope for in-market consolidation within the EU mobile telecoms sector.

The EC’s concerns

There are four MNOs active in Spain, with Orange and MásMóvil being the second and fourth largest. Orange is a full MNO whereas MásMóvil has a hybrid position, operating both on its own network and through a national roaming agreement with Orange. There are also several MVNOs, which use the MNOs’ infrastructure to offer retail mobile services to consumers.

The EC was concerned that the tie-up will reduce competition in the Spanish markets for the retail supply of mobile and fixed internet services.

In particular, the EC found that the transaction would create the largest operator by customer numbers in Spain, would eliminate a close and important competitor and may have led to significant price increases (“well above 10%”) for Spanish customers. The EC was unconvinced that any efficiencies created by the deal (eg cost savings or incremental 5G or fibre roll-out) would have offset what it describes as the “transaction’s significant anti-competitive effects”.

The remedies – Digi as a new fourth MNO

To address these concerns, the parties have agreed to:

• Divest spectrum held by MásMóvil to Digi (currently “the largest and fastest-growing MVNO in Spain”) across various frequency spectrum bands. The EC says that this will enable Digi to build its own mobile network and to exert a strong competitive constraint on the joint venture.
• Give Digi the option of entering a national roaming agreement with the joint venture. The EC notes that this is critical, given Digi’s future mobile network would likely not cover the whole of Spain. Digi will therefore be able to decide if it wants to remain with its current wholesale provider or choose either the joint venture or the other remaining MNO.

For the telecom industry, at least part of the remedy package will look familiar. In conditionally clearing the four-to-three joint venture in Italy between CK Hutchison’s ‘Tre’ and VimpelCom’s ‘WIND’ in 2016, the EC accepted similar commitments for the divestment of mobile radio spectrum to Iliad, which stepped in as Italy’s new fourth MNO. However, unlike the Orange/MásMóvil decision, the WIND/Tre remedies package also included a divestment of certain mobile base station sites. It is not clear from the EC’s press release whether the remedy package is designed in a way that would incentivize Digi to build its own independent infrastructure on which to deploy its spectrum. Another difference is that Digi is already in the market as an MVNO, whereas Iliad was not active in the Italian mobile communications sector at all.

Like the 2016 decision, the Orange/MásMóvil decision also involves a fix-it-first remedy (ie where the parties conclude an agreement with the remedy taker during the merger review process and the EC approves that agreement as part of the clearance decision). Many antitrust authorities are keen on this type of remedy, which identifies the remedy taker upfront and therefore reduces the risk that the remedy cannot be fully implemented. In fact, it marks the second consecutive conditional clearance this year where the EC has used a fix-it-first remedy (the first being Korean Air/Asiana Airlines just over a week earlier – see our article below) and demonstrates the EC’s willingness to accept remedies that minimise implementation risk.

Implications

The outcome of the Orange/MásMóvil case was hotly anticipated by the telecoms industry as a sample case to test the EC’s current approach to four-to-three mergers between MNOs. This followed the EC’s 2016 decision to prohibit CK Hutchison (owner of UK MNO Three) from acquiring Telefónica’s O2, one of the three other UK MNOs, and the WIND/Tre decision discussed above, as well as the EC’s 2018 unconditional clearance of T-Mobile’s acquisition of Tele2 in the Netherlands (based on very specific facts). The EC had therefore not considered a four-to-three telecoms deal for several years and, at least in the early stages of the case, it was unclear how the EC would assess the transaction.

The EC’s decision on the Orange/MásMóvil deal was also particularly relevant in light of the long-running litigation before the EU courts arising out of the prohibition of the Three/O2 combination, which concluded last year.

The first instance judgment by the General Court had suggested an important shift in the fundamental legal test and standard of proof to be applied by the EC in such cases. However, this was overturned by the European Court of Justice (ECJ)’s 2023 ruling.

The ECJ upheld the EC’s appeal on all main grounds and, importantly, restored the “balance of probabilities” standard of proof and previous interpretation of the “significant impediment to effective competition” (SIEC) test. That judgment effectively gave the EC the green light to continue to conduct rigorous assessments of telecoms (and other) transactions involving consolidation in markets characterized by a small number of large players (read more in our alert).

While Competition Commissioner Margrethe Vestager has referred to this latest decision as proof that the EC will continue to look at telecom mergers on a case-by-case basis, the Orange/MásMóvil decision arguably indicates that the EC’s approach to assessing potential concerns arising from ‘in-market’ telecom mergers has not changed materially since WIND/Tre.

The case therefore gives telecoms companies a steer as to what may be possible in terms of European consolidation, and what concessions may be required to achieve it. However, the devil will ultimately be in the detail, both in terms of the EC’s detailed analysis and the exact scope of the remedies. The EC’s press release only confirms the broad parameters of the remedy package. Telecoms firms will have to wait a number of months to get sight of the EC’s full decision.

A single EU market for telecoms?

A day after the EC announced its conditional clearance of Orange/MásMóvil, the EC published a White Paper on digital infrastructure in the EU.

There had been rumours that the EC was poised to use this initiative to propose looser merger control rules for telecoms deals. However, the White Paper does not contain any such suggestions. Instead, it proposes various policy solutions aimed at creating a single EU market for telecoms.In particular, the document considers a more harmonised approach to the authorisation procedures of telecoms operators, more integrated governance at the EU level for spectrum and possible changes in the wholesale access policy (eg by proposing a European wholesale access product and recommending no markets for presumptive ex ante regulation save in certain circumstances).

As Commissioner for the Internal Market Thierry Breton said when publishing the White Paper, “We need to create a level playing field for a true Digital Single Market to unlock the investment needed to build the digital network infrastructures of tomorrow.” The EC launched a public consultation on the 12 scenarios set out in the White Paper, which will close on June 30 2024.

European Commission raises objections in rare predatory pricing case

The European Commission (EC) has sent a statement of objections to the Greek electricity provider Public Power Corporation (PPC) over predatory pricing allegations.

PPC is the largest supplier of retail and wholesale electricity in Greece. The Greek State holds a minority stake in the company.

The EC’s investigation concerns a six-year period up to 2019, when PPC controlled all lignite and hydro capacity as well as natural gas and renewable power generation plants.