OFT accepts failing firm defence in supermarket sector

The Office of Fair Trading (OFT) has recently cleared Tesco’s purchase of five convenience stores from FreshXpress on the strength of the failing firm defence (FreshXpress was carrying on the business of Kwik Save following its entering into administration). This is only the second time that the OFT has cleared a merger on the basis that the failing firm defence is met.

The failing firm defence requires the parties to demonstrate:

• the inevitable market exit of the failing business absent the merger and that this would occur in the near future;
• that there is no serious prospect of reorganisation of the business; and
• that there is no less anti-competitive alternative to the merger.

In the Tesco/FreshXpress case, the OFT was satisfied that in relation to four of the five stores, competitive conditions would deteriorate whether or not the merger proceeded and that there was no less anti-competitive alternative to the merger. There were no credible bidders except Tesco for these four sites. As regards the fifth store, the OFT found that while the failing firm defence was not met, due to particular circumstances of the case, competition concerns were not present. This was because the OFT believed a traditional analysis was likely to overstate the level of competition between Tesco and the target store. The particular factors included the relative weakness of KwikSave as an independent competitor, the relatively small size of the particular store and the fact that there are a number of one-stop shops just outside a five minute drive time from the store and a number of convenience stores within this five minute zone.

While the OFT’s guidance on the failing firm defence requires a great deal of evidence to be provided, and decisions are always made on the basis of the particular facts of each case, it is encouraging to see that the defence has once more been relied on in practice and is not just a theoretical possibility.

Please click here for the OFT’s decision in this case.