Completed Acquisition by William Hill Plc of the Licensed Betting Office Business of Stanley Plc

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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.

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.

19. The OFT therefore considers that price competition between LBOs through the setting of odds might be limited given the large proportion of bets which are made at SP odds.

8 These include offering a percentage addition to winning on certain categories of bet; offering to pay out on both results in a horse race in the event that a result is changed; offering to pay on the SP if a punter takes an early price but the SP turns out better etc. 9 Horseracing accounts for [65-75] per cent of William Hill’s total LBO turnover and greyhound racing for [15-25] per cent with no significant proportion of the latter being at bookmakers’ odds.

4 Non-price competition

20. The MMC in Ladbroke/Coral categorised the following forms of non-price competition: branding, quality of outlet, and product range. Other elements include stake limits, win limits (maximum pay-out) and opening hours. Third parties agree that LBOs mainly compete on these non-price parameters of competition.

National issues

21. Table 1 below provides the parties’ shares by shop count and gross win.10 By shop count, post merger William Hill has a share of supply of 26 per cent (increment 7 per cent). The HHI of 1433-1470 and increment of 250 is indicative that the market is, and remains, concentrated. By gross win, post merger William Hill has [25-35] per cent (increment [0-10] per cent) of LBOs in the UK. The HHI by gross win is [1600-1700], (increment [150-250]), again indicating a concentrated market.

Table 1: UK Share of supply for LBOs by shop count and gross win (2004) LBOs Shop Count LBOs (gross win £m) Shop count Share of Gross win Share of supply per £m supply cent per cent William Hill 1613 19 [500-600] [15-25] Stanley 561 7 [100-200] [0-10] Combined 2173 26 [650-750] [25-35] Ladbroke 1941 23 [600-700] [20-30] Coral 1176 14 [350-450] [10-20] Tote 460 5 [50-150] [0-10] Betfred/ Done 500 6 [50-150] [0-10] Jack Brown 125 1 - - Others 2124 25 [600-700] [20-30] Total 8500 [2550-2650] HHI 1433-1470 [1600-1700] HHI increment 250 [150-250] Source: William Hill

22. Post-merger, there remains a ‘Big 3’ (William Hill, Ladbroke, Coral - supplying 63 per cent by shop count and [65-75] per cent by gross win) but with William Hill becoming the largest supplier. The Stanley LBO business had been the fourth largest player representing 7 per cent (by shop count) and [0-10] per cent (by gross win). Stanley had been represented in all the standard economic regions in Great Britain, except Wales, but the majority of its LBOs were located in the North West of England.

10 William Hill submits gross win is a more accurate measure than turnover given that tax is levied on gross win. Moreover, it maintains there is no longer any publicly available data to enable it to estimate sector turnover.

5 23. The MMC in Ladbroke/Coral raised concerns that the merger of two of the ‘Big 3’ was likely to weaken the operation of early prices.11 William Hill has provided a study (of ‘overround’ data) concluding that the potential loss of Stanley would not adversely affect the odds on early prices available to punters. The OFT considers that this study should be considered with some caution because it appears to indicate that Stanley is as strong a competitor as Coral - contrary to the MMC’s findings in Ladbroke/Coral that competition between the ‘Big 3’ was particularly strong. Moreover, both Betfred and Paddy Power have been excluded from this analysis (insufficient data).

24. However, William Hill’s submissions as to the general competitive position of Stanley have been confirmed by a majority of third party responses: i.e., that Stanley is not a ‘maverick’ on this market; does not have a very strong brand or innovative products range; and has, apart from a recent refurbishment programme, generally failed to invest. While all other bookmakers have expanded their number of outlets between 2002 and 2004, Stanley’s LBO business has declined in number during that period. William Hill has also highlighted, that the MMC in Ladbroke/Coral did not consider Stanley a ‘national player’. In any event, if that position had changed, it argued, then Tote and Betfred would also count as national players which would make the transaction, at worst, a reduction from 6 to 5 players on the national level.

25. While some third parties were generally concerned about further consolidation in this market, the OFT has not received any compelling evidence to suggest that this transaction might raise the realistic prospect of a substantial lessening of competition at the national level.

Coordinated effects

26. In Grand Met/William Hill, the MMC concluded that the merger (which gave the ‘Big 3’ together almost 42 per cent of outlets and 60 per cent of turnover) did not materially affect competition on a national level. However, in Ladbroke/Coral the MMC noted at paragraph 2.188 that ‘[I]n some respects there is evidence of co-operative activity typical of an oligopolistic structure’. Notwithstanding the findings in Ladbroke/Coral - as a result of that merger the ‘top 2’ (William Hill and Ladbroke) would have represented 49 per cent of the market (by shop count) and 52 per cent (by gross win) - there has been no evidence presented in this case to suggest that co-ordination between the parties would become any more likely as a result of the merger. Third parties were largely unconcerned about this issue.

11 Early prices are available in LBOs on the morning of the race and some weeks in advance for major races.

6 Regional issues

27. The regional level was considered for completeness and the parties have submitted shares of supply on a regional basis. As mentioned above, the Stanley LBO business had been primarily active in the North West of the UK while William Hill is particularly strong in the South East. However, it does not appear that any parameters of competition are set at this level. William Hill maintains that prices are not set on a regional basis, advertising is not carried out on a regional basis and customers do not choose between suppliers on a regional basis. The regional analysis is not considered to raise any additional issues.

Local issues

28. In terms of local competition, it can be expected that the competition effects arising in each specific overlap area will vary according to the distance between each LBO and the location of each relative to the individual consumer. However, as it is impossible to assess each overlap individually by consumer, the OFT has applied the methodology developed by the MMC in Grand Met/William Hill and expanded within Ladbroke/Coral. In the former, the MMC required divestments in all localities where the parties remained the only LBO within a 400m radius. In the latter, the transaction was prohibited on the basis of national competition concerns; however, the MMC considered (but did not conclude on) the local impact where the merger removed or reduced (from three to two fascias) choice on a 400m basis and also where the merger removed choice on a 800m isochrone basis (see the section entitled geographic scope above).

29. In order to apply the Ladbroke/Coral methodology in this case, the parties have provided detailed maps for the localities falling into the three categories set out in Table 2 below. William Hill had supplied information on the areas where choice is reduced (from three to two fascias) subdivided into localities where another representative of the ‘Big 3’, i.e. Ladbroke and/or Coral is present or not. This reflects William Hill’s contention that the presence of another large chain (in particular Ladbroke, Coral, Betfred or the Tote) would provide a sufficient constraint post merger. However, given the conflicting evidence on the degree of competitive constraint posed by large chains as opposed to smaller independent players, the OFT considers that a cautious approach is appropriate. This is discussed further below at paragraph 36.

7 Table 2: Summary of number of local overlaps Category Number of LBOs A (2-1 400m) William Hill & Stanley have LBOs within 400 metres of each 41 other and there are no other competitors present within the isochrone. B (3-2 400m) William Hill & Stanley have LBOs within 400 metres of each 26 other and there is a competing bookmaker within the isochrone C (2-1 800m) William Hill & Stanley have LBOs within 800 metres of each 12 other and there are no other competitors present within the isochrone. TOTAL 79

30. The number of overlaps allocated to each category is sensitive to the methodologies used. William Hill has submitted that the MMC in Ladbroke/Coral (in particular from a reading of paragraphs 2.11 and 2.150) applied a ‘two-ring analysis’; that is, that the number of competitors in either of the ‘two rings’ (one around each William Hill and Stanley LBO) should be considered. If there was a competitor present in at least one of the two rings, this would indicate there was no substantial lessening of competition.

31. Having considered these arguments in light of the Grand Met/William Hill and Ladbroke/Coral reports, the OFT is not convinced that it is correct to say that the MMC applied a ‘2 ring’ approach as described by William Hill. First, while it is possible to read the Ladbroke/Coral report in this way, it is clear that the intention (of the parties in that case) had been to apply the same methodology as that in Grand Met/William Hill (see Ladbroke/Coral, paragraph 2.11). Moreover, Appendix 3.3 of the Grand Met/William Hill report makes clear that divestment was required in localities where the merger reduced the number of LBOs from 2 to 1 within 440 yards, even if a competitor was present in the ‘second ring’. Notwithstanding the above, there are also questions as to whether there is a sufficient economic rationale for the approach suggested by William Hill. In particular, a chain of substitution across the ‘two rings’ might not be a sufficiently strong constraint on the LBO where the merger has removed all competition within 400m.

8 32. Therefore, the OFT believes that there is likely to be a substantial lessening of competition where the merger removes all competition within a 400m radius of either the William Hill or Stanley LBO. While the OFT accepts that the arguments for a substantial lessening of competition where the parties are the only LBOs within 800m are less strong, it has received no convincing evidence to overturn the potential concerns identified by the MMC in the Ladbroke/Coral report. This is particularly so given that the potential competition concerns flow from a situation in which the merging parties are each other’s most proximately located competitors. Therefore, the OFT also believes that it may be the case that a substantial lessening of competition will arise where the parties operate the only LBOs within 800m of each other and the merger removes competition within this area.

33. William Hill has submitted – in the context of the concerns expressed in Ladbroke/Coral regarding reduced competition - that where the merger gives rise to a reduction from 3 to 2 players within a 400m isochrone this will not give rise to competition concern. This is because: prices are set nationally; Stanley was a weak LBO competitor which rarely initiated bonuses; any lack of competition would be likely to attract new entry; and the MMC in Ladbroke/Coral only mentioned a reduction from 3 to 2 as a potential problem because that merger was between two of the ‘Big 3’.

34. Ultimately, the MMC did not conclude on the 3 to 2 issue in Ladbroke/Coral since sufficient adverse effects were found to arise at the national level. In this case, several factors lead the OFT to believe that, on balance, a reduction from 3 to 2 players gives rise to a realistic prospect of a substantial lessening of competition.

35. While it is true that most prices are set nationally there is some scope for competition on prices and offers for bets made other than at SP odds. Also, third parties confirmed that all LBOs strongly compete on non-price elements: location; quality of the outlet; staff; pricing/promotions; service; product range; atmosphere and branding. The existence of local competition is supported by the fact that William Hill’s internal training documents indicate that staff should monitor all local competitors and the majority of third parties also confirmed they would scrutinize all competitors at the local level.

9 36. The OFT has received little quantitative evidence to demonstrate whether a reduction in the number of fascia in a local area does or does not lead to a lessening of price and non-price competition. However, the evidence that we have received indicates a positive correlation between the number of LBOs in an area and the availability of bonuses.12 These data also suggest that the initiation of the ‘bonus’ offer to which William Hill (and others) respond is more likely to come from a competitor which is not one of the ‘Big 3’ – suggesting that it is the smaller players that are more likely to initiate competition at the local level. While pre-merger both the Stanley and William Hill LBOs within an area might have felt the need to respond to the ‘bonus’ offer made by a competitor, the merger may well reduce the incentives upon William Hill to respond at one or both outlets post-merger. Put differently, this evidence suggests that there is greater reason to be concerned about the loss of local competition to the major chains from a small independent LBO than from a rival ‘Big 3’ LBO.

37. As discussed below, the evidence suggests that, while barriers to entry and expansion in this sector are reducing, they are not currently sufficiently low that it can be concluded that any competition concerns resulting from a reduction in choice at the local level will be addressed through new entry.

38. On balance, the OFT believes that there is a realistic prospect that the transaction will result in a reduction in choice and local price and non-price competition amounting to a substantial lessening of competition in those locations where the merger removes competition within either a 400m or 800m isochrone or the merger reduces competition (from three to two fascias) within a 400m isochrone.

39. On that basis, 79 localities have been identified where the merger may create the realistic prospect of a substantial lessening of competition. 53 localities fall under the merger to monopoly category (on a 400m or 800m basis) and there are 26 localities where the transaction results in a reduction in fascia from three to two (on a 400m basis).

Barriers to entry and expansion

40. The main barrier to entry to establishing LBOs is the requirement to obtain a betting office licence. According to the regulations currently in place, applications for a licence are granted on the basis that there is sufficient unmet demand, which the local authorities assess on a 400m basis. The Gambling Act 2005, which no longer contains this ‘demand criterion’ has received Royal Assent this year and is due to be implemented in 2007. The new Gambling Commission will be issuing additional guidance: it remains to be seen how these might affect entry. In any event, a new entrant would have to find suitable premises and carry out considerable investment to

12 Bookmakers offer various types of bonuses, for instance paying out on a ‘first past the post’ basis which treats a horse as winning if it was declared the winner or has crossed the line first even if it is subsequently disqualified.

10 41. build up a brand. There is no evidence of substantial new entry within the last five years, although there has been some expansion by existing players. In light of the above, barriers to entry appear to remain relatively high while barriers to expansion seem to be less substantial. The OFT believes that these barriers are not low enough to alleviate the competition concerns identified above.

VERTICAL ISSUES

42. While the transaction may, potentially, remove a party (Stanley) sponsoring horse racing in the UK, William Hill claims that in the last year, 32 organisations have sponsored horse races. Third parties were unconcerned.

THIRD PARTY VIEWS

43. It has not been possible to obtain customer views because no relevant consumer body exists. However, several associations and government bodies dealing with the betting industry have been contacted and none raised any substantial concerns.

44. Overall, third parties only expressed concerns in relation to the local competition aspects of the merger. No national competition concerns were raised except for general concerns regarding the further consolidation in the market which were not supported by substantial evidence.

ASSESSMENT

45. The parties overlap in the supply of betting services through LBOs. Post-merger, their national share of supply amounts to 26 per cent (increment 7 per cent). Given that the Stanley LBO business does not appear to be a strong national player and in the absence of significant third party concerns, the transaction is considered not to raise the realistic prospect of a substantial lessening of competition on the national level.

46. On a local level, the transaction has been assessed on the basis of 400m and 800m isochrones. In light of the MMC’s report in Ladbroke/Coral and the available evidence in this case, the transaction is considered to raise the realistic prospect of a substantial lessening of competition in all localities where the merger removes competition within a 400m or an 800m isochrone. Where the merger reduces competition but does not remove it, the available evidence, on balance, suggests that there may be an SLC where the number of fascia is reduced from three to two within 400m isochrone because of the potentially adverse effect on local competition.

47. In light of the licensing obligation and the continued application currently of the statutory demand criterion by licensing authorities, barriers to entry are considered not to be low enough to alleviate the competition concerns identified above.

11 48. Consequently, the OFT believes that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

UNDERTAKINGS IN LIEU

49. Where the duty to make a reference under section 22(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from such of the parties concerned undertakings as it considers appropriate for the purpose of remedying, mitigating or preventing the SLC concerned or any adverse effect which has or may result from it.

50. The OFT has therefore considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above. The OFT’s guidance on undertakings in lieu of reference state that, ‘undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut’ (Mergers – substantive assessment guidance, para 8.3).

51. William Hill has indicated that it would be prepared to consider divesting either the William Hill or Stanley LBO in those areas where the OFT believes that the merger may be expected to give rise to a substantial lessening of competition. The areas where such a divestment is likely to be required fully to address the OFT’s competition concerns are those described at paragraph 38-39 above.

52. Accordingly, the OFT has decided to exercise its discretion under section 73(2) of the Act to consider whether to accept undertakings in lieu of a reference.

DECISION

53. Therefore, on the basis of the information currently available to it, the OFT has decided not to refer the completed acquisition by William Hill of the Stanley LBO business to the Competition Commission because it is considering whether, instead of making a reference, to accept appropriate undertakings from William Hill to address the competition concerns arising from the merger.