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CVC's acquisition of the retail chain Matas

31. januar 2007

4/0120-0401-0009/FI/LD/JG/KH The Council meeting 31 January 2007

1. The capital fund CVC has notified its acquisition of the Danish retail chain Matas. The acquisition constitutes a merger according to the Danish Competition Act and is therefore subject to approval of the Danish Competition Council. CVC’s turnover exceeds the EU thresholds for merger control and thus has community dimension. Initially, the parties notified the merger to the Commission with a request pursuant to Article 4(4) of Council Regulation (EC) No 139/2004 (‘EC Merger Regulation’) for referral of the case in its entirety to Denmark. This applies to mergers which may significantly affect competition in a market within a Member State which has all the characteristics of a distinct market. On November 9th 2006, the Commission referred the merger to the Danish Competition Council.

2. The Matas chain comprises 294 Danish shops (including 2 newly opened shops), owned by 180 different owners who each has one share in Matas A/S (the procurement/wholesale company) per shop. In 2005, the shops in the Matas chain had a combined turnover of […] billion DKK. The Matas chain has shops located all over Denmark.

3. The CVC controlled MHolding 3 A/S has entered binding agreements concerning the acquisition of 208 shops including the 2 newly opened shops (A-shops) in connection with the acquisition of approximately 97 per cent of the share capital in Matas A/S. Moreover, an agreement has been entered with 45 other shops (B-shops) of a possible later acquisition with specific future terms. The B-shops’ right to selling, as well as MHolding 3 A/S’s right to buying at a later date are called put- or call options. Moreover, the A- and B-shop owners are selling their Matas A/S shares to MHolding 3 A/S with the option of buying shares in the new Matas group (Mholding) together with CVC. With regard to the remaining shops, no agreement has been entered on sale of the shops and the shop owners mentioned cannot invest in Mholding A/S. The latter shops (C-shops) sell their Matas A/S share. 3 shops (D-shops) neither sell share nor shop.

4. The proposed transaction means, that the Matas chain, henceforth, will consist of a capital chain including the A-shops and the B-shops, which, during a period of 3 years, may be bought by Mholding or sold to Mholding according to the option agreements, as well as a franchise chain consisting of the B-, C- and D-shops not acquired by CVC. The B-shops affiliation is clarified no later than on February 1st 2009.

5. The Matas chain’s core retail activities are the sale of perfume, skin care, cosmetics, diet supplements, herbal medicine, OTC (over the counter) drugs and material products. Matas’ competitors are perfumeries, department stores, pharmacies, supermarkets, health food shops dispersed all over Denmark. No other market player has a variety of products comparable to Matas.

6. CVC has no activities in Denmark overlapping with Matas’ activities, neither horizontally nor vertically.

Delimitation of relevant markets etc.

1. The Danish Competition Authority (DCA) has outlined a series of relevant markets which will be affected by the merger. These are the market for high end cosmetics, low end cosmetics, the market for diet supplement and herbal medicine, the market for OTC drugs as well as the market for material products.

2. For a number of reasons the market power of the chain on the retail market is assessed on the basis of all 294 shops in the chain – whatever the ownership. For example, consumers perceive Matas as a single chain.

3. The market for high end cosmetics comprises perfume, skin care, make-up etc. Typically, these products are only sold through a selective distribution channel (perfumeries, department stores and Matas). Unlike this, the products on the low end cosmetics market are sold more widely, including convenience stores, supermarkets etc. Moreover, there is an intermediate segment, called bridge products, comprising e.g. perfumes with a short product life cycle and which are typically connected with a popular person (e.g. Celine Dion, Britney Spears etc.) or brand (e.g. Adidas, Hummel, etc.). The DCA finds that the bridge products are not a part of the market for high end cosmetics. Whether the low end cosmetics products and the bridge products are part of the same or of different markets is left open in the decision.

4. The DCA has outlined the geographical market for high end cosmetics to include Denmark, excluding tax free sale. The fact that a consumer needs to have an air line (or ferry) ticket in order to buy tax free means that in many cases it will not be possible, directly, to choose the airport (or ferry) as an alternative source of supply to domestic shops. This represents a powerful argument for not including the tax free sales from e.g. airports in the relevant market. The geographical extent of the market, including especially whether the tax free sales in e.g. airports, on planes and onboard ferries must be included in the market, has been studied more closely in a telephone interview survey. Among other things, the survey shows that 83 per cent of those buying high end cosmetics have bought these products in Denmark while 15 per cent have bought abroad or in connection with travelling. Moreover, the survey shows that 59 per cent of those having bought high end cosmetics have not been travelling by plane within the past year (the rate is somewhat higher for those travelling by ferry, car or train).

5. The survey shows, in total, that the tax free sale imposes a certain competitive pressure on the shops. The survey also shows that the substitution possibilities, in practice, are significantly weakened, as it is a precondition to be in possession of an air line ticket when buying in an airport. Moreover, the DCA’s findings show that Matas’ turnover approx. doubles in November and December while Copenhagen Airport’s remain constant throughout the year. On this background, tax free sales are not considered to impose a sufficiently significant and constant competitive pressure throughout the entire year on the domestic shops, including Matas. It is thus not included in the geographical market.

6. The Matas chain’s biggest competitors within high end cosmetics are the department stores Magasin (Aarhus, Odense, Rødovre, Lyngby and two in Copenhagen), Illum in Copenhagen, Sallling in Aalborg and Aarhus, the perfume capital chain Douglas representing 3 shops in Aarhus, Copenhagen and Kolding, respectively, the perfume capital chain Esthetique representing 5 shops in and around Copenhagen (Fisketorvet, Hundige Storcenter, Frederiksbergcentret and Lyngby Storcenter and Ringkøbing, and the voluntary chain BeautyZone representing 14 shops in Copenhagen, Odense, Esbjerg, Kalundborg, Næstved, Skanderborg, Glostrup, Silkeborg, Thisted Hjørring, Middelfart, Randers, Skagen and Aabenraa. Moreover, there are 70 private perfumeries without chain affiliation in the market for high-end cosmetics as well as pharmacies with a limited selection of high end skin care products.

7. The DCA finds that the Matas chain with a market share of more than […] per cent holds a dominant position in the market for high end cosmetics. Moreover, the DCA finds that the Matas chain, even if including tax free sales, has a dominant position in the market for high end cosmetics with a market share of […] per cent. This is partly due to Matas’ strong position in the market and partly the characteristics of the market.

8. The market is characterized by the fact that no other competitor has an equal nationwide network of shops, and that the biggest competitor has a significantly smaller market share. Furthermore, supermarkets to a great extent are excluded from carrying high-end cosmetics due to selective distribution.

9. In the market for low-end cosmetics, the Matas chain has a market share of approximately […] per cent, not constituting a dominant position.

10. The market for diet supplement and herbal medicine products comprise concentrated sources of nutrients or other components of a nutritional or physiological activity, including remedies for treatment of minor diseases where one would normally not seek medical attention. Matas has a market share of […] per cent in this market. In spite of the relatively high market share, the DCA finds that Matas does not hold a dominant position in this market. This is due to the fact that the biggest competitors (Dansk Supermarked, Coop and the pharmacies) like Matas are present nationwide. The same applies to private health food shops which source through the purchasing association Helsam A/S, as well as pharmacies, which basically are all members of one of the four existing chains: A-apoteket, Apotekeren, ditApotek and Pharma. On this market, it is not equally a ‘must’ as for high end cosmetics for the suppliers to be present in the Matas chain, as they might just as well sell their products through supermarkets, in the health food shops or in the pharmacies.

11. In the market for OTC drugs, Matas has a market share of approximately […] per cent, and in the market for material products approximately […] per cent. Matas does not hold a dominant position in either of these markets.

12. As for the 3 other relevant markets, the DCA has also assessed the geographical market to be Denmark. Dansk Supermarked, Coop and the pharmacies, which are Matas’ biggest competitors on these markets are present nationwide as Matas. Especially, Dansk Supermarked and Coop have sufficient capital power and infrastructure for Matas to loose market shares if Matas were to raise prices unilaterally.

The impact of the scheduled merger

1. The DCA finds that the transformation of Matas from a voluntary chain to mainly a centralized capital chain and partly a franchise chain impedes competition significantly in the market for high-end cosmetics.

2. The concerns of the DCA relate to two issues. The first issue concerns the Matas chain’s possibility of influencing market prices. The second issue concerns the Matas chain’s ability to reinforce the barriers for competitors to enter and establish a foothold in the market for high-end cosmetics. Both issues relate to the changes which are a consequence of the transformation from a voluntary chain to a capital chain and Matas’ market power.

3. The individual shops in a voluntary chain have a possibility for setting their own prices. However, the voluntary chain may set maximum prices for campaign products as well as demands on the shops carrying a certain range of products, including products promoted during campaign sales.

4. In a capital chain, prices, product range, suppliers etc. are decided upon centrally for shops owned by the capital chain. The DCA assesses that the relatively small number of shops in the Matas chain not owned by Mholding, to a great extent will follow the pricing strategy of the capital chain. This is supported by the fact that the shops in the voluntary chain previously, according to the parties, only to a limited extent made use of the possibility to price individually. After the merger, it will be easier to uniform prices in the entire Matas chain, as possible retaliation by the CVC-owned shops is greater.

5.´The following is concentrated on the impact of the proposed merger on the Danish market for high end cosmetics with Matas holding a dominant position.

Prices

1.The impact of the merger on prices can be categorized into two main problems. First, there is a risk that prices will approach the recommended prices, respectively the campaign prices as a result of the weakened competition between the Matas shops. Secondly, there is a risk that the general price level is raised, as Matas, with the increased market power, will be able to influence the recommended prices of the suppliers in upward direction.

2.The DCA has considered the risk that prices might rise to equal the producers’ recommended sales prices as a result of the elimination of the internal competition between the Matas shops. The DCA has, to this end, conducted a study of the degree of competition already existing internally within the Matas chain. The result shows that the Matas shops have been selling campaign sale products at campaign prices past the fixed campaign sale period set by Matas. This form of competition will cease to exist within the capital chain and will probably only, to a limited extent, take place within the independently owned Matas shops. The result of the study also shows that there is price competition between Matas shops for some products. This will be eliminated for the merging shops and it is assumed to be reduced as regards the independently owned Matas shops.

3.The very possibility that the members of a voluntary chain might deviate from the recommended sales prices places a restraint on the level of the recommended sales prices in practice. This constitutes a price reducing factor that will not exist in a capital chain, where prices are set centrally.

4.Thus, there is a risk that the prices might rise, because the prices of the capital chain will be controlled centrally and assumingly will follow the recommended sales prices set by the suppliers, and because the independently owned shops have less incentive to sell their products below the recommended price, the campaign price, respectively.

5. As mentioned, there will, moreover, be a risk that the Matas chain, in the future, might be able to influence the recommended prices of the suppliers in an upward direction. Relative to a voluntary chain, a capital chain has typically a differently strong negotiating power as regards the suppliers, as the supplier agreements are set centrally - among other things in order to benefit from centralized purchases.

6. Usually, a voluntary chain enters into agreement with suppliers on behalf of the chain members. However, the chain members have an equal opportunity to enter into agreements individually with suppliers outside the chain. Moreover, the chain often performs an intercompany invoicing on behalf of its members. Today, the shops on average purchase […] per cent of all their products from Matas. This does not mean that Matas decides the product line and purchases on behalf of the shops. This will, however, be the case in the future where the chain company decides on behalf of the shops, being a part of the capital chain.

7. As Matas, already having a strong position in the market for high-end cosmetics, now strengthens its position by its transformation into a capital chain, this will lead to a strong pressure on the suppliers, as several of these already predict, for large discounts, extended period of credit etc., without being fully based on cost savings or other corresponding advantages. As regards the competitive situation at retail level, it is questionable whether special discounts to the dominating retailer will be passed on to the consumers: It is solely a matter of redistribution of profit between the suppliers and the retail chain. Higher prices for the consumers might, however, be the consequence if the suppliers, as a result of increased discounts set by Matas, chose to raise the recommended prices generally.

8. Thus, the merger will most likely have an impact on uniformity of prices and the general price level.

Access to the market

1. A stronger Matas chain will make it more difficult for competitors to access and to enter the market. In order to establish new shops, three major important factors must be taken into consideration: access to shops, products and staff.

2. First, a new market player must find suitable locations for her/his shop(s). Competitors inform that they have had difficulties finding suitable locations, especially in shopping centres, as a result of existing non-compete clauses with the Matas shop owners obstructing the letting of facilities to shops competing with Matas. Moreover, shopping centres – in order to achieve the highest degree of diversity in in the shop supply – are inclined to letting out only to one shop within each category, as well as they will often prefer to rent out to a market-leading chain, which is considered having preference to the consumers. The high end cosmetics market is one of the areas where the centres often do not want more than one of a kind. Matas is market leader in the high end cosmetics market. This implicates that many of the centres are occupied by Matas.

3. Secondly, a new market player will be forced to deliver the high-end products, which the consumers demand. As the capital chain can achieve a significant influence on the retail market, it might possibly be able to require exclusivity by some of its suppliers. Agreements on exclusivity with several of the comparatively few suppliers of high end cosmetics might prevent access to the market.

4. Thirdly, as the suppliers have selective criteria imposing standards on the level of education needed for the staff at a shop seeking to obtain approval as a dealer, a new market player must hire staff with adequate experience and knowledge of the products. As a result of the merger, a great number of the present Matas shops are covered by non-compete clauses. This represents a barrier of access to the market, as a new player will not be able to hire the former employees right away.

5. When a new chain is established, marketing is required in order to draw the consumers’ attention to the chain. Moreover, MHolding has stated that they will increase the number of Matas shops, up grade shops, as wells as wishing to intensify the existing marketing, which per se can create difficulties for new market players to enter the market and for the existing market players to expand.

6. The merger will make it less attractive for the competitors to try to enter the market or try to capture market shares from Matas, as the risk of competitors being exposed to e.g. aggressive price competition will increase when facing a capital chain (and not individual chain shops), that is able to choose and respond selectively, especially in local areas where competitors tries to gain market shares.

Efficiency gains

1. The parties have indicated that the transformation of a voluntary chain into a capital chain, among other things, will create more consistent and effective marketing by ensuring a competitive/lower price level, by ensuring consumer-friendlier consumer politics, by ensuring more news and a wider range of products, by ensuring adequate support of marketing in the shops as well as a quicker response to consumer demands.

2. However, the parties have not shown that the merger entails adequate gains for the consumers when assessing the mergers significant impact on the effective competition.

Overall evaluation and commitments

1. As an overall evaluation, the DCA finds that the merger impedes effective competition significantly and that, subsequently, the merger, without adequate commitments from the parties, cannot be approved.

2. To meet the DCA’s concerns, the parties have committed themselves to overcome a series of the specified issues, which in overall terms means that the merger does not significantly impede the effective competition.

3. Some of the commitments constrain the Matas chain’s possibility to acquire competitors in the following years, as well as they allow for a spin-off of the B-, C- and D-shops from the Matas chain to competitive players or to a new independent, voluntary chain. This will work against the very concentration in the market which is a result of the merger.

4. Other commitments reduce the barriers for competitors to establish new shops or for the competitors buy or enter agreements with the Matas shops which are not part of the capital chain Matas. Thus, Matas foregoes any competition clauses as regards the former shop owners, who do not reinvest in Matas, as well as no competition clauses will be entered for C- and D-shops. A- and B-shop owners, reinvesting in the new Matas, will be subject to a limited competition clause, for a shorter period of time, when they are no longer share holders in the new Matas. Franchisees in the Matas chain, can act freely in relation to buying and selling. Thus, they are no longer obliged to carry a certain range of products, except for certain concept products. At the same time, the commitments help solve the problems by gaining access to suppliers as well as trade with these on non-discriminatory terms. Thus, no exclusive agreements must be entered with suppliers of high end cosmetics already being sold in Denmark.

5. The commitments are, thus, especially aimed at opening up access to the market and ensuring that the players can compete on a level playing field. This is meant to contribute to maintaining continuous pressure of competition on all players in the market to the benefit of the consumers.

6. It is not common practice to perform detailed regulation of prices in commitments, neither is it the case in the present case. On the contrary, it has been attempted to meet the market concerns, caused by the merger, whereby the frames of competition in the market are ensured.

7. Through the commitments, Matas’ competitors are ensured better access to supplies, staff and facilities. Other barriers against establishing a new competitive chain or the expansion of an already existing competitor are capital requirements including the fact that one must compete against a well-established brand like Matas. These barriers, however, do not originate from the merger and are subsequently not addressed in the given commitments.

8. The commitments are time-limited. The commitments concerning the chain’s relation to the independent shops’ right of disposal, suppliers and others expire on June 30th 2014. The commitments concerning CVC’s possibilities of buying the Matas shops which, after the completion of the merger, are not owned by MHolding, including their possibility of leaving the Matas chain, expire on December 31st 2010. Moreover, the commitments cease to apply in case the Competition Council decides that Matas no longer holds a dominant position in the market for high-end cosmetics.

Conclusion

1. The DCA finds that the commitments proposed by the parties meet the competition concerns, caused by the merger.

2. On this background, the merger is approved as it does not impede competition significantly cf. Article 12 c, section 1, cf. section 2 and Article 12 e section 1.