As the private equity market in Europe reaches record levels in terms of both fund raising and deal sizes, a rise in competition concerns is predicted as private equity portfolios become larger and businesses within these portfolios are merged to create larger animals, consequently gaining ever larger market shares. While in the past private equity deals have not tended to raise many competition concerns, the authorities are becoming increasingly aware of these deals and are being forced to look at such transactions and also the companies within the private equity firm’s portfolio more closely. Angela Sormani reports.
James Dilley, assistant solicitor, EU & competition at SJ Berwin says: “In the early days of private equity, when firms had quite limited portfolios, they rarely tended to have companies within those portfolios with activities overlapping those of the next takeover target and therefore it was more than likely that no competition concerns would be raised.” But now deal sizes are rising and portfolios are becoming larger and often more concentrated, not only because of the amount of capital invested, but also because firms often have strategies to merge similar businesses within their portfolios. Once post-transaction market shares rise to around 30% to 40%, the competition authorities will look at these deals more closely. Dilley adds: “This trend is likely to grow as private equity funds and their portfolios grow.”
The procedure of divesting a business due to competition concerns when acquiring a similar business is quite common outside the private equity universe, but until now examples in private equity have been rare.
CVC’s £583m acquisition of SLEC, the owner of the Formula One Group is a recent example of a deal sparking such concerns. The European Commission has cleared the acquisition, but the clearance is conditional upon the divestiture by CVC of its 71% stake in Dorna, the promoter of the Moto GP motorcycle Championship, the FIM Supercross World Championship, the Spanish Road Racing Championship and the British Superbike Championship. SLEC is a holding company owning all the rights in the Formula One Group and because CVC is already active in the field of motor sports through Dorna, the Commission has provided CVC with a deadline to conduct an orderly sales process of that business. The main concern for any private equity firm in this scenario is what this deadline is. Private equity firms work to exit their portfolio companies within a given time frame anyway but there is always the risk that a forced deadline might affect the price of the sale if the purchaser was aware of the need for a quick sale and consequently attempt to drive the price down. Dorna, for example, was acquired in 1998 and so CVC may have already been planning to exit this investment and may have a purchaser in mind, particularly now the possibility of a logical merger with Formula One has been ruled out.
By divesting Dorna, the Commission concluded that CVC’s Formula One transaction would not cause competition concerns. Competition commissioner Neelie Kroes, said: “When the two most popular motor sport events in the EU, Formula One and Moto GP, come in the hands of one owner, there is a risk of price increases for the TV rights to these events and a reduction in consumer choice. I am satisfied that the commitments given by CVC will eliminate this risk.” The Commission’s market investigation showed that the proposed acquisition by CVC of SLEC could significantly reduce competition with regard to the selling of the TV rights of these events in Italy and Spain, ie the countries within the EU where these events are most popular. In addition, concerns were raised that in member states where Moto GP is less popular than Formula One, CVC might bundle the TV rights for both events. CVC’s commitment to divest its subsidiary Dorna in its entirety will eliminate the only overlap in the parties’ activities and remove possible concerns regarding the bundling of broadcasting rights.
Generally the Commission approaches such divestments as follows. After specifying the obligation to divest a business, the Commission states that in the first phase of the divestiture period, the selling party has sole responsibility for finding a purchaser for the business. If the party does not succeed in divesting the business in the stated divestiture period, then a divestiture trustee, approved by the Commission, will be appointed with an exclusive mandate to dispose of the business at no minimum price within an extended period. Obviously, this latter scenario is to be avoided and where the potential danger of an unsatisfactory sale price for a private equity firm may lie. The Commission’s guidance indicates it will normally consider a period of around six months for the divestiture period and an additional period of three to six months for the extended divestiture period as appropriate.
James Dilley at SJ Berwin says: “This appointed trustee will be loyal to the Commission and has certain duties that they have to adhere to and check that the sale is proceeding. But at a certain point the process can no longer drag on and the Commission will be able to insist that the business is sold.” He adds: “There must be a time scale for the CVC deal, but it’s probably quite long – the divestment time scale should be considered confidential information by the Commission. There have not been many cases of this sort relevant to private equity but we expect more.”
The most recent deal prior to the Formula One transaction was Candover and Cinven’s €1.05bn acquisition of Bertelsmann Springer in 2003, which raised competition concerns in Europe due to its ownership of French professional medical publishing business, Groupe Impact Médecin.
The stipulation of the EU Commission that Groupe Impact Médecin be sold stemmed from Cinven’s co-ownership of the specialist publisher MediMedia. According to the anti-trust authorities, Cinven and Candover would have, together with the activities of Bertelsmann Springer, gained control of the French market for professional medical publications. The British financial investors were able to dispel these concerns by agreeing to sell off Groupe Impact Médecin.