The U.K’s Competition and Markets Authority (CMA) may have put a dent in JD Sports’ expansion plans.
On Tuesday, the CMA’s provisional ruling calls JD Sports’ 86 million pound ($111.42 million) acquisition of fellow U.K. sports apparel retailer Footasylum into question following the completion of an in-depth investigation brought on by competition fears.
The merger of the two retailers would likely lead to a “substantial lessening of competition” (SLC), the committee found. For the time being, the CMA’s position is that the merger represents a real danger to the nation’s sports retail market, threatening to impact both the quality of goods and the services that accompany them.
If JD Sports is unable to convince the committee otherwise, it may have to sell Footasylum.
“We have provisionally concluded that the completed acquisition by JD Sports of Footasylum has resulted or may be expected to result in SLCs in the retail supply of sports-inspired casual footwear (in-store and online) and the retail supply of sports-inspired casual apparel (in-store and online) in the U.K.,” the CMA report read.
“The Merger removes a direct and significant constraint on each of the Parties in these markets, resulting in substantially less competition and…a weaker incentive to improve as much as they would otherwise,” the report added.
JD Sports acquired Footasylum in April and has since valued the company at 90 million pounds ($116.59 million). In comparison, JD Sports is valued at 8.23 billion pounds ($10.66 billion) on the London Stock Exchange. Despite the difference in size between the two retailers, the CMA’s investigation concluded that a merger is still likely to hurt consumers of both businesses.
The CMA’s judgment hinges upon a counterfactual argument, essentially a “what-if” scenario that examines a future with and without the merger. Crucially, it determined that—without a merger—Footasylum would have continued to compete against JD Sports in the 5.5 billion pound ($7.12 billion) U.K. sportswear industry.
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“We have provisionally found that the most likely counterfactual is that Footasylum would have continued to operate and compete effectively absent the Merger, although we recognize it had been in a weaker financial position around the time of the Merger,” the CMA wrote in its judgment.
There is no question over whether or not the two competed frequently when they were separate organizations, according to committee findings, as the CMA investigation revealed an exceptionally high degree of geographical overlap. In fact, there is not a single Footasylum location that does not compete against a nearby JD Sports.
Emails recovered by the CMA found that both organizations regularly monitored the other, especially Footasylum, which considered JD Sports its primary competitor. As a result, the CMA said competition between the two represented a greater constraint than any other JD Sports rival in the market.
The investigation also revealed a “possible form of coordination” between JD Sports and its two most important suppliers, Nike and Adidas.
“In essence, the theory is that Nike and Adidas would grant JD Sports preferential access to their products and, in return, JD Sports would limit its discounting for Nike and Adidas products and restrict its stock and sale of other suppliers’ products,” the report alleged.
All of these factors lead to the CMA handing down its provisional judgment, giving JD Sports a chance to alleviate these concerns ahead of a Feb. 25 deadline. Other interested parties will have an opportunity to respond before the committee closes the investigation on March 3 and makes its final decision.