Anticipated Acquisition by Nike, Inc of Umbro Plc
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Anticipated acquisition by Nike, Inc of Umbro plc ME/3419/07 The OFT's decision on reference under section 33(1) given on 16 January 2008. Full text of decision published 6 February 2008. Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality. PARTIES 1. Nike, Inc (Nike), headquartered in the US and listed on the New York Stock Exchange, is a multi-national supplier of sports/leisure apparel and sports equipment. 2. Umbro plc (Umbro), headquartered in the UK and listed on the London Stock Exchange, is also a multi-national supplier of sports/leisure apparel and sports equipment. Umbro's worldwide turnover during the financial year ended December 2006 amounted to approximately £150 million, of which £121 million was achieved in the UK. TRANSACTION 3. The proposed transaction was announced on 23 October 2007 and comprises the acquisition by Nike of the entire issued share capital of Umbro. Nike filed an informal submission with the OFT on 21 November 2007. The administrative target date for the OFT's decision is 16 January 2008. JURISDICTION 4. The EC Merger Regulation (Regulation 139/04; ECMR) does not apply because Umbro's EC turnover does not reach the relevant turnover thresholds in Article 1 ECMR. 5. As a result of this transaction, Nike and Umbro will cease to be distinct. Umbro's UK turnover exceeds £70 million, consequently the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that arrangements are 1 in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. HORIZONTAL ISSUES 6. The OFT considers that six principal areas in which the parties overlap are valid candidate frames of reference for the purposes of this merger analysis. These comprise the supply of: (1) sponsorship of football clubs in order to acquire rights to produce and supply replica football kit ('kit deals') (2) replica football kit (3) branded athletic apparel (excluding replica football kit) (4) cleated football boots (5) athletic footwear (excluding cleated football boots), and (6) sports equipment. Kits deals Product scope 7. The parties overlap in the business activity of bidding for rights to provide financial sponsorship to clubs and national teams in return for the exclusive rights to produce and supply approved replica football kit. In general, kit deals are secured for a specified period - typically a number of years. 8. The sports apparel supplier seeks not only to maximise revenues from sales of replica football kit, but also values the brand exposure derived from the association with a particular team. To this end, in the tender and bid process, each football team is evaluated on its own merits in terms of its successes on the field, its profile nationally and internationally, and the size of its fan base. A sports apparel supplier will be chosen by a football team on the basis of the amount of and the terms and conditions on which sponsorship monies and other financial support (for example, royalties on product sales, performance-related bonuses etc) are proposed. 9. In principle, each individual replica kit deal could be considered to constitute its own distinct market, given the bespoke nature of the requirements of an individual football club or national team, and the likely absence of any uniform price for such deals. 10. However, the OFT also believes that distinct tendering and bidding processes may be rendered indistinct by virtue of supply-side substitution 2 - provided that there is a range of competitors that can bid within all of them. 11. In this regard, the parties submitted that competitors for kit deals comprise a large number of suppliers including Adidas/Reebok, Puma, Le Coq Sportif, Diadora, Errea, Canterbury, Lonsdale, Lotto, Uhlsport, Admiral, Kappa, Under Armour and Hummel. 12. The OFT's analysis of tenders for the kit deals most recently put out by eight leading football clubs in the UK indicates that substantially the same competitors bid for different clubs' kit deal. Specifically, 14 athletic branded apparel suppliers submitted 24 bids in eight tenders. On this basis, the OFT considers that, by virtue of supply side substitution, the supply of football kit deals is a relevant frame of reference for the purposes of this merger assessment. Geographic scope 13. Nike submits that kit deals are contested by multi-national suppliers at a pan-European if not global level. However, in the absence of reliable share of supply data on a total EU basis, it provided information against the top football divisions in the 'Big Five' footballing nations in Europe (Great Britain, Spain, Italy, France and Germany). These data showed the major apparel manufacturers supply kits to teams across a number of the Big Five countries. For example, Nike, Adidas/Reebok and Puma have kit deals in all five countries while Umbro and Kappa have deals in four of the five countries. 14. Nike proposes that it would be inappropriate for the OFT to examine the impact of the merger on kit deals on a narrower geographic basis - for example by considering the more expensive kit deals for 'top tier' clubs and teams separately from mid/low tier and lower division clubs and less popular or successful national teams. 15. The OFT received some conflicting evidence on the geographic boundaries of the supply of football kit deals. In particular, suppliers' shares of kit deals appeared to vary across countries, with some suppliers strongest in their 'home' countries. This could indicate separate national geographic markets. Conversely, the majority of football clubs who responded to its survey - three of whom had previously negotiated such deals with suppliers in continental Europe - indicated that they would consider switching their replica kit deal to a supplier outside the UK. 16. On balance, therefore, the OFT considers that it is appropriate to consider the impact of this merger on the basis that the geographic scope for the supply of kit deals is at least as wide as the Big Five footballing nations in Europe. 3 Assessment 17. The merger would increase Nike's share of the supply of kit deals in the Big Five European countries to around [20-30] per cent, an increment of around [5-15] per cent - twice that of the next largest competitor, Adidas/Reebok. 18. The OFT considers that the parties' combined share of European kit deals could be high enough to raise initial concerns for unilateral effects, specifically: • participation effects, which arise when a change in bidding behaviour makes competition less vigorous, or when the bid-taker simply has fewer bidders from whom to choose, and • information effects, which arise when bidders share data relating to the underlying value of a particular tender, thereby resulting in lower bids being made overall. Participation effects 19. Nike submits (and responses from football club have confirmed) that the financial support proposed by apparel manufacturers in the context of a kit deal includes one or more of the following: • a sponsorship fee • royalties on product sales • performance-related bonuses (successes within tournaments) • marketing commitment (for example, to support 'grass roots' football schemes within the community) • product support (for example, the provision of kit and other apparel for a club's senior and junior teams). 20. Having collected bidding data from football clubs, the OFT's analysis indicates that a reduction in the number of bidders does not systematically result in clubs getting worse deals. According to the available evidence, clubs lever the above components in the overall package of financial support in order to obtain favourable deals. 21. Nike submitted details of a total of [15-25] previous kit deals tendered from within various European countries for which the parties had bid over the last 10 years. The OFT's analysis of this data indicates, on the one hand, [that Nike bid against certain other kit suppliers either as often as against Umbro or more often than against Umbro]. On the other hand, the available information indicates that Umbro bid against [the other major kit suppliers] either as often as against Nike or more often than against Nike. 4 22. Moreover, Nike submitted analysis of the profitability of some of its current kit deals with various football clubs and national associations - as well as the forecast profitability of some clubs and associations targeted by Nike for potential kit deals - which demonstrates that kit deals are often loss-making when the indirect costs of servicing them are taken into account. 23. Football clubs' responses to the OFT's survey (supported by documentary evidence supplied by the parties) indicates that most would switch or consider switching their kit deal to a new supplier in the event of a 5 per cent decrease in the level of financial support in their kit deal, or an equivalent worsening of non-financial terms. 24. Finally, there is support in responses from third parties for Nike's further submission that football teams have the ability to self-supply replica kit. 25. Consequently, the OFT considers that there does not appear to be a realistic prospect of the merger leading to anticompetitive unilateral participation effects in kit deals in the Big Five. Information effects 26. The more that each football club secures its kit deal via a formal procurement auction, the greater the likelihood of information effects.1 27. In this regard, Nike submits (and responses from football clubs have confirmed) that kit deal negotiations are not formal tender and bid processes.