A heated battle between one of the U.K.’s chief judicial bodies and one of the nation’s biggest commerce regulators just tilted in JD Sports Fashion’s favor as the casual sports apparel retailer may be able to complete its contested merger with Footasylum after all.
The Competition Appeal Tribunal (CAT) overturned the Competition and Markets Authority’s (CMA) prior decision to block the 86 million pound ($113.2 million) merger following a lengthy appeal from JD Sports. The transaction has been up in the air and under regulatory scrutiny since its initial completion in March of last year.
In a 92-page judgment, CAT said that CMA acted “irrationally” in determining two factors: the competitive effects of the merger, as well as whether it had a sufficient basis to make the argument that Footasylum would have continued to compete effectively without the merger despite the financial difficulties it faced.
As a result, the case will now be remitted to the CMA for full reconsideration. The CMA’s previous order, which would have forced JD Sports to divest the Footasylum business, will be cancelled.
The CMA said it would “take stock” of the judgment and “carefully consider” next steps, “including whether to appeal.”
“We have always maintained that this merger would provide significant long-term benefits to customers, colleagues and brand partners, and so we are very pleased with the Competition Appeal Tribunal’s judgment today,” said Peter Cowgill, executive chairman of JD Sports Fashion Plc, in a statement on Friday.
Cowgill noted that the company looks forward to “presenting further evidence which demonstrates the true extent to which the competitive landscape has evolved, in particular as a result of the unprecedented challenges caused by the Covid-19 pandemic.”
In May, when CMA handed down the injunction, JD Sports said that Footasylum was especially vulnerable to the Covid-19 downturn that hit the majority of U.K. high street retailers. JD Sports appealed the decision based on the present Covid-related pressures on retailers, which put the future of Footasylum and its 2,500 employees at risk.
In its statement, the sports apparel retailer suggested that without backing from a merger, Footasylum would have entered administration—the U.K.’s equivalent of a U.S. Chapter 11 bankruptcy. JD Sports cited an Office for National Statistics report that showed a 35 percent decline in U.K. apparel sales volume in March.
JD Sports itself wasn’t exactly in the best financial health either, finding itself having to put its Go Outdoors outdoor athletic apparel branch into administration in late June. In its first half, JD Sports saw sales dip 6.5 percent year over year to 2.54 billion pounds ($3.31 billion), with pre-tax profit dropping 68.1 percent to 41.5 million pounds ($54.1 million).
In the CMA’s initial conclusion in May, the watchdog said that the merging parties were close competitors in the relevant markets and that the merger would result in the “removal of a direct and significant constraint on each of them.” The CMA argued that the combined retailer would have the ability and a strong incentive to deteriorate price, quality, range and services (PQRS) across the casual sports apparel category. The watchdog also pointed out that pressure provided by other retailers and suppliers such as Nike and Adidas would not be sufficient to prevent what it called a “substantial lessening of competition.”
The CAT did point out that CMA’s analysis showed a strong incentive for the merging companies to deteriorate the important PQRS aspects, and that its argument was “sufficient to demonstrate an adverse effect on consumers.”
But the tribunal also highlighted in its assessment that the CMA did not follow up on inquiries with suppliers and failed to properly assess the likely impact of Covid-19. It also said the CMA had not properly considered the ability of power players like Nike and Adidas to boost their direct-to-consumer operations while stores were shuttered during lockdown.
“We are disappointed that the tribunal disagreed with the CMA’s approach to information gathering about the specific impact of coronavirus on the sector given the circumstances at that time,” CMA CEO Andrea Coscelli said.
The CMA said it found no evidence that Covid-19 would remove any competition concerns posed by the merger.
In August, the CMA slapped JD Sports and shareholder Pentland Group with a 300,000 pound ($395,310) fine for breaching an order related to the Footasylum deal. The regulator said that JD broke the rules of injunction when Footasylum closed a store in Wolverhampton, England. JD Sports said the closure was made by Footasylum without its knowledge, and Footasylum told the authority that plans to close the store preceded the merger.
Two months later, CMA withdrew the penalty notice following JD Sports’ appeal against the issue.