Completed acquisition by William Hill plc of the licensed betting office business of Stanley plc The OFT’s decision on reference under section 22 given on 1 August 2005. Full text of decision published 15 August 2005. PARTIES 1. William Hill Plc (William Hill) provides bookmaking services through 1,613 licensed betting offices (LBOs) in the UK. It also operates an on-course betting business in the UK and an internet and telephone betting business taking bets from UK and non-UK punters. Its on-line casino and poker site is located on the Netherlands Antilles. 2. Stanley Leisure Plc (Stanley) operates 561 LBOs in the UK as well as an internet and a telephone bookmaking business, 41 casinos and an internet casino. This transaction concerns only the sale of its UK LBO business (the Stanley LBO business). The total turnover of the Stanley LBO business for the year ended 2 May 2005 was [more than £ 70 million]. TRANSACTION 3. The transaction completed on 18 June 2005. Completion was conditional upon clearance by the Irish Competition Authority which was announced 2 June 2005. JURISDICTION 4. As a result of this transaction enterprises under the control of William Hill and Stanley have ceased to be distinct. The UK turnover of the Stanley LBO business exceeds £70 million, so 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 a relevant merger situation has been created. 1 RELEVANT MARKET Product scope 5. The parties overlap in the supply of betting services through LBOs. Stanley’s telephone betting business and internet betting business are not part of the transaction and have since been closed down. 6. The Monopolies and Mergers Commission (MMC) had in its merger reports relating to Grand Met/William Hill1 in 1989 and Ladbroke/Coral2 in 1998 concluded that betting is a separate leisure activity that is not constrained by other forms of gambling or other leisure activities. 7. On the demand side, the MMC in both reports defined separate markets for on-course and off-course betting. Off-course betting is available through a range of sales channels, such as the telephone, the internet3 and LBOs. Telephone betting, internet betting and betting through LBOs has grown substantially in recent years.4 The majority of third party respondents commented that the growth in telephone and internet betting results from an expansion of the betting market rather than from customers switching away from, for example, LBOs. The MMC in Ladbroke/Coral stated, and more recent survey evidence from William Hill confirms, that LBOs tend to attract a different customer type than internet and telephone betting: the former catering for, usually, small bets made in cash; the latter requiring the setting up of a credit account (as well as access to a telephone and PC) and, on average, taking larger bets. While William Hill and a few third parties maintain that these different sales channels compete, a majority of respondents submit that there is limited switching. In the absence of any evidence on the proportion of marginal customers that would, or would be able to, switch from LBOs to telephone and/or internet betting, demand side- substitution is not considered to merit a product scope wider than LBOs. 8. On the supply side, the OFT considers that LBOs focus their activities on horse racing, greyhound racing and football betting although they also offer odds on specific events (e.g. snow on Christmas day). While the skill involved in managing risk is common to all sales channels, there is no conclusive evidence to suggest ease of supply-side switching for telephone betting or internet betting suppliers into the LBO sector; indeed evidence suggests that there are significant barriers to entry to the LBO sector.5 1 Grand Metropolitan Plc and William Hill Organisation Ltd, 23. August 1989, Cm 776. 2 Ladbroke Group Plc and the Coral betting business, 24. September 1998, Cm 4030. 3 Usually internet-based betting exchanges facilitate the making or acceptance of bets between individuals by providing for users to either bet on events in the normal way (back), or offer odds to other punters (lay). Bets are matched between people with opposing views on the outcome of those events. 4 Telephone betting has grown 22 per cent since 2000 in terms of gross win, amounting to £170 million gross win in 2004. Internet betting (including betting exchanges) has increased 549 per cent between 2000 and 2004. During the same time, LBO gross win has increased 30 per cent. 5 See paragraph 39. 2 9. In light of the MMC’s conclusion in its previous merger reports covering this sector and in the absence of any compelling evidence to the contrary, the OFT considers the relevant product scope to be the supply of betting services through LBOs. Geographic scope 10. Odds for starting prices (SPs),6 which account for the vast majority of bets, are set on a national level. Also, the MMC in Ladbroke/Coral found evidence that LBOs compete on a national level, e.g. in terms of branding and overall business strategy. 11. In terms of local competition, the MMC has in Grand Met/William Hill identified competition concerns as arising where the merger removed competition on a 400 metre (m) radius basis. This assessment of the ‘local’ market was, in part, influenced by the local authorities’ application of the ‘demand test’ 7 in their LBO licensing procedure. There was also evidence to suggest that punters were not prepared to travel far to place a bet in a LBO. Notwithstanding the arbitrary nature of an 400m isochrone (which does not take into account factors such as population density), responses received by the OFT indicate that a majority of third parties continue to consider a 400m radius an appropriate starting point for the assessment of local LBO competition. 12. In addition, the MMC in Ladbroke/Coral (at paragraph 2.151) also identified potential competition concerns as arising in those cases where the transaction would have removed all competition on an 800m basis. William Hill has submitted that there was no rationale for the application by the MMC of two different geographic market definitions (400m and 800m). It was, it submitted, inconsistent to disregard on the one hand a competitor LBO which was just outside a 400m isochrone in which the parties were both present as providing no competitive constraint, while on the other hand treating a Stanley LBO that is the only LBO within 800m of a William Hill LBO as posing a competitive constraint. However, the MMC in Ladbroke/Coral (at paragraph 2.153) considered that adverse effects might be expected to arise where choice was eliminated altogether, whether on a 400m or 800m basis. The OFT does not consider it has received sufficiently strong evidence as would justify ignoring the MMC’s comments. 13. One third party submitted that 400m isochrones are only appropriate for areas of large population density. William Hill submitted that regard should be had to the fact that the 6 SPs are the odds prevailing on-course at the time a race begins. They are set for each runner by observers from the Racing Post and the Press Association on the basis of their observations of the fluctuation in prices on-course. Satellite Information Systems (SIS) and Racing Data transmit betting data to LBOs. 7 The Betting, Gaming and Lotteries Act 1963 requires that an assessment of demand is undertaken before new licences are granted or existing licences renewed; The Gaming Act 1968 requires the licensing authority to assess the existing supply of gaming facilities. 3 MMC only used the 800m isochrone in respect of ‘towns where there were only two LBOs’ (Ladbroke/Coral, paragraph 2.151 – emphasis added). However, the evidence received by the OFT does not suggest that the MMC deliberately intended to distinguish between towns and cities in its analysis. 14. In light of the foregoing, the OFT considers that a substantial lessening of competition might arise in geographic areas where LBOs are more dispersed, and a merger to monopoly situation would not be caught on a 400m isochrone. The OFT considers that such an approach is not only more consistent with the evidence that a 400m isochrone is a good starting point, but also avoids over-reliance on arbitrary 400m isochrone when the nearest LBOs to each other are a William Hill and Stanley LBO. 15. The effects of this transaction will therefore be considered on both the local and national level, with the local assessment considering isochrones on a 400m and 800m basis. The regional level will also be considered for completeness. HORIZONTAL ISSUES The nature of competition Price competition 16. Price competition in off-course betting can be further distinguished into competition through the setting of odds and competition on the terms of betting8. 17. As mentioned above, SPs play a major role in off-course betting. SPs for horse racing reflect the odds being offered on-course and, as noted above, are set by the Racing Post and Press Association observers. SPs for greyhound racing are often set by Bookmakers’ Afternoon Greyhound Services (BAGS). 18. William Hill maintains that [90-100] per cent of its turnover in horseracing is achieved through bets at SPs which are common across all LBOs.9 The MMC in Ladbroke/Coral concluded that in general, price competition was subdued. This is also supported by third party responses which indicate that LBOs do not primarily compete on price. This might be expected to be less true of odds on events other than horses and dog races but this is a relatively small proportion (approximately [10-20] per cent) of a LBO’s business.