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CMA provisionally clears Amazon's investment in Deliveroo

Posted on 28 April 2020

On 17 April the UK Competition and Markets Authority ("CMA"), provisionally cleared Amazon's investment in Deliveroo. It is reported that Amazon led a £450 million funding round (in which a number of investors participated) and acquired a minority share of Deliveroo.

This marks a significant change on the CMA's part, which, in December 2019, had referred the deal to a Phase II investigation. A Phase II investigation will only take place where the CMA believes that the deal may give rise to a substantial lessening of competition. Phase II investigations are fairly uncommon, with only c. 20% of Phase I merger reviews being referred to Phase II, so the fact that the CMA has now given provisional clearance is a significant development especially so soon after the referral.

The CMA reached this provisional decision on the basis of the failing-firm principle. We set out below an overview of this principle and how it appears to have influenced the CMA's decision in this case.

The 'Failing Firm' principle

The rationale behind this principle is that if, absent the merger, the failing party would collapse and therefore leave the market, then it may be the case that allowing the merger will not have any greater anti-competitive effect then would otherwise be the case. This is sometimes referred to as the (broader) "Exiting Firm" principle, as the same arguments may also apply to undertakings, which absent a merger, would exit a particular market (but not necessarily fail entirely).

The approach taken by the EU and the CMA to this principle is essentially the same. In order for a merger to benefit from this principle, the relevant competition authority will need to be convinced that:

  1. the ‘failing firm’ would exit the market if the merger did not take place,
  2. there is no realistic less anti-competitive purchaser for the ‘failing firm’, and
  3. that the loss of the firm and its assets would not have a less anti-competitive effect on the relevant market(s) than the merger.

The first of these limbs requires the authority to make an assessment of the financial position of the allegedly failing entity in the proposed merger. The CMA's guidance states that the CMA must be convinced that it's "inevitable" the firm in question will fail, and therefore leave the relevant market if the merger does not proceed. In order to determine whether this is the case, the CMA will look at both the ability of the failing firm to meet its obligations (similar to the test applied in insolvency proceedings), and the possibility of successfully restructuring to avoid failure. In the case of firms that are part of a wider corporate group, this can also involve a review of the wider group's financial position, and how that has impacted upon the firm in question.

Assuming that the authority is satisfied that the firm would fail in the absence of a merger, the competition authority reviewing the merger will need to be satisfied that there were no other realistic purchasers which would lead to a less anti-competitive outcome. There are therefore two limbs to be considered: (i) are there any alternative purchasers, and (ii) if so, would a purchase by one of them be less anti-competitive. Again, these are factual questions, which will turn on the evidence that is put before the CMA as to the availability of alternative purchasers.

Finally, assuming that the authority is satisfied that the first two criteria are met, it must then determine whether it would be less anti-competitive to simply allow the failing business to fail. This is an inherently speculative question, which will require the authority to decide what would happen to that company's sales in the relevant market if it were to fail and exit the market without a merger.

The CMA has also published a number of documents which set out its approach to merger assessment in light of COVID-19. The guidance provided on the "failing firm" principle is essentially a re-statement of its long-standing guidance on this (referred to above). So on the face of things, its business as usual for the CMA.

The CMA's previous position in Deliveroo

At the time of the reference to a Phase II investigation, the CMA believed that:

"Amazon’s minority shareholding in Deliveroo, together with certain other rights, may give Amazon the ability to exercise material influence over Deliveroo. This assessment is based on a combination of factors, in particular because Amazon’s substantial expertise in areas such as the operation of online marketplaces, logistics networks and subscription services could allow it to influence other Deliveroo shareholders and board members."

Although, "Amazon [closed its restaurant delivery business], evidence examined in the CMA’s investigation indicated that Amazon has a strong continued interest in the restaurant delivery sector. The CMA believes that this evidence showed that Amazon may re-enter the supply of online food platforms in the UK, most likely through an alternative investment or acquisition. The CMA believes that Amazon’s investment in Deliveroo was strategic and that offering rapid food delivery is important to Amazon, and so it may have looked to invest in an alternative business absent the Merger"

As a result of Amazon's potential re-entry, the CMA considered that there was an alternative counterfactual to the merger which was pro-competitive as it would potentially introduce another competitor into an otherwise concentrated market, consisting of: Deliveroo, Just Eat and Uber Eats. Amazon was also seen to have the necessary infrastructure and logistics to overcome what the CMA perceived to be significant barriers to entry.

The CMA's new view

Fast-forward just four months, and we are now seemingly in a very different reality.

Whilst the CMA continued its Phase II investigation, it was presented with new evidence which it said it had been considering "as a matter of urgency". As a result of this new evidence, the CMA has essentially concluded that, due to the ongoing "lockdown" in the UK, "Deliveroo's exit from the market would be inevitable without access to significant additional funding, which the CMA considers that only Amazon would be willing and able to provide at this time. While securing additional funding from other sources may have been possible before the coronavirus outbreak, the pandemic has severely limited the availability of finance for early-stage business such as Deliveroo". The CMA has therefore given provisional approval to Amazon's investment in Deliveroo.

This decision by the CMA is particularly interesting because Big Tech: Google, Amazon and Facebook, in particular, have been under increased global competition law scrutiny of how they have achieved their market power. More often than not, the ascension to the top and continued dominance, of a market involves acquiring your rivals. As a result, there has been increasing scrutiny on the tech industry's biggest players' approach to mergers, acquisitions, and investments in their (potential) competitors.

The CMA emphasised in its decision that the investment required was "only realistically available from Amazon", and that there were "wholly unprecedented circumstances" to the case. What is clear, however, is that Big Tech is currently sat on huge cash reserves, positioning them as potential "white knights" in a world where financing is scarce and many businesses are facing collapse without external support. This may therefore enable the tech giants to make acquisitions that would ordinarily be considered to pose a serious risk to lessening competition, and thus face significant obstacles from competition authorities. It will be interesting to see how competition authorities across the globe manoeuvre around Big Tech in the post-COVID-19 economy when their cash will undoubtedly be needed to survive the crisis.

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