CMA clears sugar merger after accepting exiting firm defence
On 3 September 2024 the Competition and Markets Authority (CMA) unconditionally cleared the acquisition of Tereos UK & Ireland’s retail sugar business by T&L Sugars Limited (TLS).1 The CMA conducted an in-depth Phase 2 investigation but ultimately cleared the transaction as the CMA accepted the exiting firm defence. In the TLS merger the CMA investigated whether the merger could result in a substantial lessening of competition in the UK as the deal represented a reduction in firms that supply the large majority of sugar to customers such as supermarkets and restaurants from three to two (often an indication of competition concerns to the CMA).
In the CMA's Updated Merger Assessment Guidelines (2021)2 it provided additional guidance on the exiting firm defence (what has historically been referred to as the "failing firm" defence). The CMA amended the guidance to reduce the test from three limbs to two:
- Limb 1: the firm is likely to have exited (through failure or otherwise); and,
- Limb 2: if so, there would not have been an alternative, less anti-competitive, purchaser for the firm or its assets to the acquirer in question.
Historically the failing firm defence had proved to be very difficult to establish as it required comparative evidence of the counterfactual if the merger is allowed to proceed compared to the counterfactual if the firm were to exit the market.
In the TLS merger the CMA concluded that "the most likely outcome would be that Tereos’ UK retail business would close. Since closure would also result in a loss of competition absent the merger, and the evidence showed that there was no other alternative and less anti-competitive purchaser for the business besides TLS, the group has decided to clear the deal."3
Another recent merger made successful use of the exiting firm arguments to gain clearance at Phase 1. The CMA investigated the anticipated acquisition of DNACO Limited (Cellmark) by Eurofins Forensics Lux Holding Sarl (Eurofins).4
In the Eurofins case the CMA found evidence that Cellmark was facing significant ongoing financial challenges since the pandemic and that absent the merger it would have exited the market. The CMA was also persuaded that there was no alternative less anti-competitive purchaser.
Recent decisions suggest that the CMA might be (slightly) more open to accepting the exiting firm defence. These recent cases indicate that the CMA is adopting a more pragmatic approach to the exiting firm defence and that we might expect to see more use of this as a path to clearance with the CMA. However, it should be noted that to successfully use the exiting firm defence parties will still be required to put forward extensive compelling evidence and cases will necessarily turn on their own facts.
1 ME 7074/23 - Anticipated acquisition by T&L Sugars Limited of certain assets of Tereos United Kingdom and Ireland Limited.
2 Merger Assessment Guidelines (CMA129) (publishing.service.gov.uk)
3 Sugar deal cleared by CMA - GOV.UK (www.gov.uk)
4 ME/7098/24 - Anticipated Acquisition by Eurofins of Cellmark.
