Clamping down on roll-ups

Antitrust authorities in a number of jurisdictions, including the U.S., the U.K. and the Netherlands, have promised to crack down on PE roll-up strategies. They want to take a close look at situations where acquirers buy smaller assets – which on their own fall below merger control notification thresholds – and combine these into a larger entity that concentrates market power.

The U.S. antitrust agencies have been particularly active:

• In a landmark lawsuit against Welsh Carson the Federal Trade Commission (FTC) alleged that the acquisition of 17 anesthesiology practices over a ten-year period, together with price-setting and market allocation agreements, violated U.S. rules prohibiting monopolies, unfair methods of competition and anti-competitive acquisitions. If successful, the FTC is likely to pursue similar actions.
• “Prior approval” obligations are now imposed by the FTC in all transactions requiring remedies. These force the acquirer to seek FTC permission to close any future deal in the same (or adjacent) markets, even if it falls below reporting thresholds. They could clearly have a major impact on PE acquisition strategies in terms of both feasibility and timing.
• Updated U.S. merger guidelines explicitly encourage the agencies to evaluate series of acquisitions as part of an industry trend or to assess whether an overall acquisition pattern or strategy of the acquirer might harm competition.

In the U.K., the Competition and Markets Authority (CMA) also has PE consolidation in its sights. Last year it investigated two sets of PE-backed roll-ups in the vet sector, in both cases calling in the deals (sometimes 18 months post-completion) after acquirers Medivet and IVC chose not to notify the individual transactions.

Medivet was forced to divest 12 of the 17 vet practices it had purchased. IVC had to sell off each of the eight target businesses. The CMA has since launched a market review into concentration levels in the sector.

Ramped up enforcement of interlocking directorates

The U.S. agencies have significantly increased enforcement action against “interlocking directorships”. These are prohibited under Section 8 of the Clayton Act, which states that directors and officers cannot serve on the board of a competitor.

So far, the Department of Justice Antitrust Division (DOJ) has unwound or prevented at least 15 interlocks involving 11 companies. PE firms have been among those targeted. The FTC has also stepped up, challenging Quantum Energy’s seat on natural gas producer EQT’s board. This is the first time that the FTC has applied Section 8 to a non-corporate entity.

Elsewhere, PE firms holding minority stakes in rival businesses have attracted attention. The head of the Australian Competition and Consumer Commission has flagged potential antitrust concerns on the basis that it is often sponsors who make the more “competitively significant decisions”, despite not being in control. It remains to be seen whether any concrete enforcement action will follow.

Bolstering information requirements in filing forms

Antitrust authorities need to be aware of roll-up strategies or interlocking directorates in order to take enforcement action. This may be challenging, especially where deals fall below notification thresholds. Some agencies plan to tackle this by adding information requirements into notification forms.

In the U.S., updates to the HSR filing form will require parties to provide details on fund ownership structures, cross directorships and details of prior acquisitions going back ten years.

At EU-level, the European Commission's revised Form CO now requests information on rivals with significant non-controlling shareholdings in the parties.

National regulators have also pledged to work together to share information. The Biden Administration has announced, for example, that the Department of Health and Human Services will share data to help the antitrust agencies identify potentially anti-competitive roll-ups. Authorities in other jurisdictions may follow suit.

Skepticism over private equity firms as remedy takers

Where merging parties are required to divest businesses to obtain merger control clearance, some antitrust authorities have expressed doubts as to whether PE firms can be effective purchasers.

The theory is that a PE remedy-taker may prioritize financial returns over competing aggressively and innovating or may not have the experience to run the divestment business as a credible competitor to the merged firm. These concerns have been voiced by DOJ and CMA officials.

Ongoing merger control hurdles for private equity firms

Looking ahead, PE firms and their acquisition strategies will continue to face antitrust headwinds. From a practical perspective investors should:

• Expect close scrutiny of any roll-ups/serial acquisitions, especially in local markets. For roll-up strategies impacting voluntary merger control jurisdictions such as the U.K., consider how and when to publicize the acquisitions – there is a fine balance between limiting the risk of the authority noticing a transaction(s) and ensuring that it does not have a long “look back” period to call in the deals.
• Prepare to gather additional information when making merger control filings, at least in the U.S. and EU, which will inevitably increase administrative burden.
• Be aware of the importance of internal documents. These can be critical to an authority’s merger control assessment. Be careful about how they portray the market, the particular transaction and any wider acquisition strategy.
• Be alert to the risk that minority stakes could be viewed unfavorably by antitrust authorities, especially where their portfolios have overlapping activities.
• Expect tougher lines of questioning when being considered as a potential divestment purchaser in merger control processes.