Anticipated acquisition by Boots Group plc of Alliance UniChem plc

Affected market: Healthcare

No. ME/2134/05

The OFT's decision on reference under section 33 of the Enterprise Act given on 25 May 2006. Full text of decision published 26 May 2006.

Please note that square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.

PARTIES

Boots Group plc is a leading UK health and beauty retailer with 1,423 stores across the UK (1,350 of which contain a pharmacy). Alliance UniChem Plc (UniChem) is an international pharmaceutical distribution company. In the UK, UniChem is engaged in pharmaceutical wholesaling and retail pharmacy with a chain of 958 pharmacies (currently trading under the name Moss but being rebranded Alliance Pharmacy). UniChem's UK turnover for the year ended 31 December 2004 was [more than £70 million].

TRANSACTION

The merger will complete by means of a share-for-share transaction which will result in existing Boots shareholders holding 50.2 per cent of the merged entity with UniChem's shareholders holding the remaining 49.8 per cent.

JURISDICTION

As a result of this transaction Boots and UniChem will cease to be distinct. The UK turnover of UniChem 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 arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

BACKGROUND

By way of a decision of 6 February 2006 (the decision) the OFT announced that, on the evidence available, it believed that it may be the case that the merger may be expected to result in a substantial lessening of competition (SLC) in the supply of retail pharmacy services in up to100 localities in the UK (see note 1).  A copy of the Decision is attached at Annexe 1. For the reasons set out in the decision, the OFT believed that there was a realistic prospect that a SLC could result in those areas where the merger would lead to the reduction in the number of pharmacy fascias from two to one or three to two within one mile of either a Boots or UniChem pharmacy. Such an SLC could take the form of reductions in quality or the level of service provided and there may also be an impact on pricing, particularly of P medicines.

On this basis, the OFT decided that the merger would be referred to the Competition Commission unless Boots gave suitable undertakings pursuant to section 73 of the Enterprise Act to address the competition concerns arising from the proposed merger.

Boots offered undertakings to divest one of either a Boots or UniChem pharmacy in each of the overlap areas to a purchaser or purchasers to be approved by the OFT.

On 14 March 2006, the OFT published the proposed undertakings inviting interested third parties to give their views on them to the OFT. A total of 26 responses to the consultation were received and the main issues raised are summarised below:

The Undertakings require pharmacies to be sold off in 'lots' of no more than 25 packages

A number of objections were received regarding the stipulation in the Undertakings that the pharmacies are sold in such packages. It was suggested that this discriminates against smaller independent pharmacies or new entrants. The reason for the requirement is to ensure that a clear cut remedy is provided to address the competition concerns identified within an appropriate timeframe. In particular, the OFT has taken into account concerns regarding the practicality of considering and consenting to potentially 96 different purchasers. Given this, we do not consider it necessary or appropriate to amend the undertakings.

Boots will be permitted to offer finance to assist with the acquisition of pharmacies it sells off

The third party that raised this objected on the basis that finance, 'even on an arm's length basis', would create ties of inertia and loyalty which could entrench the supply relationship between the divested pharmacy and Boots. The third party said it was particularly concerned about situations where the purchaser was an independent chain of pharmacies with existing finance and supply agreements with Boots. They felt such supply and finance arrangements would contaminate the arm's length relationship. 

The OFT responded to this third party stating that we understood such arrangements to be relatively common in this industry, but invited further comments. However, the third party declined to provide any further comments. Given that the undertakings specify: the arm's length nature of the arrangement; that it should be on reasonable commercial terms; that it shall not compromise the purchaser's independence or ability to compete with Boots; and is repayable at three months' notice, we do not consider that it is necessary or appropriate to amend the undertakings.

The divestment period is not stated in the undertakings

The concern expressed by a third party was that third parties will not have the opportunity to comment on the suggested length of such period. Such divestment periods remain confidential for commercial reasons. We did nonetheless invite the third party to suggest an appropriate period for consideration but no suggestion was made.

Additional divestment areas

A number of individual third parties wrote to say that they felt divestments should have been required in additional local areas. OFT put these areas to Boots and, with one exception, the response provided confirmed that no further divestments were in fact necessary to address the concerns outlined in the OFT's decision of 6 February 2006. The one exception was Southampton (Hythe) which should have been included on the divestment list as a 2:1 area. This was omitted as a result of an administrative oversight by Boots.

Given the addition of this area to the divestment list, a further round of consultation took place. On 10 May 2006 the OFT published the proposed draft undertakings and revised divestment annexe and invited comments on the proposed modification concerning the inclusion of the divestment pharmacy business in Southamption (Hythe) by the 17 May 2006.  The OFT did not receive any responses to this second consultation. Therefore it is the OFT's view that the proposed undertakings are appropriate to remedy, mitigate or prevent the competition concerns identified in the decision of 6 February 2006.

DECISION

The OFT decided on 6 February 2006 that the merger would have been referred to the Competition Commission (CC) if Boots failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns outlined above. The OFT has decided to accept the undertakings in lieu offered by Boots, the text of which is attached at Annexe 2 to this decision, which address all of those competition concerns.

This merger will, therefore, not be referred to the Competition Commission.

NOTES

1. This has now been confirmed to be 96 areas in total.

Accepted undertakings - Boots / Unichem (pdf 628 kb)

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