Proposed merger of British United Provident Association Limited (BUPA) and Community Hospital Group plc (CHG) and related transactions

No. 00076/N

Report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 27 November 2000, to the Secretary of State under section 86(1) of the Act

The Competition Commission's findings

The Competition Commision (CC) found that the acquisition of 26.8% of CHG by SBUKE was a qualifying merger. Since BUPA had funded this transaction and was bearing the financial risk, the CC concluded that BUPA were associated persons, and therefore that a second merger situation existed involving BUPA, SIL and CHG. The CC also found that the proposed acquisition by BUPA of 100% of CHG was a qualifying merger.

The CC found that BUPA had a strong position in the market for private medical insurance (PMI) with a market share of around 40%. Their major competitor, PPP Healthcare Group (PPP) had around 31%. In the national market for private medical services (PMS), BUPA currently operates 36 hospitals and the CC found that this number would rise to 58 if the merger were completed. The CC examined BUPA's position as the operator of one of four national chains of hospitals. Following the merger, there would be just three chains, and BUPA's share of revenue would rise to around 42%. The CC found that the BUPA PMS business would account for 33% of the BUPA PMI network and 35% of PPP's network.

BUPA told the CC that they were willing to consider divestment of some hospitals in order to address local overlaps in the PMS market. The CC identified a number of such overlaps. The CC also identified a number of wider effects, however, including a strengthening of BUPA's bargaining power to the benefit of both the PMI and PMS businesses and the likelihood of price rises in PMS as a result of the elimination of competition from CHG.

The CC were not persuaded that the existing 'Chinese wall' between BUPA's PMS and PMI businesses 'provides an effective safeguard against BUPA's capacity to exploit the opportunities for inter-market leverage that the merger will further facilitate' (paragraph 2.176).

The CC therefore found 'that the proposed merger [of BUPA and CHG] may be expected to operate against the public interest with particular effects adverse to the public interest of reducing competition in the PMS market; and, of higher prices for PMI and PMS than would otherwise have been the case' (paragraph 2.188).

The CC noted that the two existing merger situations (SIL/CHG, and BUPA/SIL/CHG) 'arose from an arrangement entered into on BUPA's initiative with the specific objective of facilitating the proposed merger while avoiding a breach of the undertakings which prevented it from buying CHG shares directly' (paragraph 2.191).

The CC considered that, in the event that the BUPA-CHG merger was unable to proceed, a continuation of the SBUKE shareholding would provide a means of limiting the potential of CHG as an important competitor in the PMS market. They also considered that the period before an orderly disposal, which they were told could take up to 12 months, would create uncertainties for shareholders, potential shareholders (including potential bidders), staff, consultants and patients. They concluded these effects would, in their view, be clearly contrary to the public interest (paragraph 2.194).

The Competition Commission's recommendations as to remedy

BUPA-CHG
The CC considered a wide range of possible remedies in the proposed merger of BUPA and CHG and sought views from interested parties. The possible remedies included prohibition, divestment of hospitals, separation of BUPA's PMI and PMS businesses, and behavioural undertakings.

The CC concluded that none of the divestment options would have substantial effects on BUPA's market power or on the strength of vertical linkages within BUPA's structure (see paragraph 2.207). They also did not think it possible that behavioural undertakings would prevent senior staff in one BUPA business from having close regard to the effects that their decisions would have on the other business. This view was shared by third parties.

The CC therefore thought that nothing short of the complete separation of the businesses would constrain BUPA's buyer power (paragraph 2.207). They began to consider the arguments for setting up wholly separate PMS and PMI companies, one of which would be controlled by BUPA and one of which would not. However, BUPA declared that it would not proceed with the merger on these terms.

The CC therefore concluded that the right course would be to recommend that the Secretary of State should prohibit the proposed BUPA/CHG merger.

SIL/CHG and SIL/BUPA/CHG
The CC consulted interested parties on two possible remedies in the event of an adverse finding:

that SBUKE should sell the shares it has acquired in CHG in a manner, or at a time, or to a purchaser or purchasers, subject in each case to the approval of the DGFT; and
that during SBUKE's stewardship of the shareholding it should be prohibited from exercising its rights to vote on any matter without the consent of the DGFT.
CHG indicated that it would wish to have a role in helping to find purchasers for the shares and would wish to ensure that they were not dumped on the market. It also wished to have the opportunity to buy back some of the shares. The parent of SBUKE indicated that a sale by auction might be the most appropriate process but some flexibility might be desirable in order to ensure the best price was obtained.

The CC concluded that both of the remedies detailed above should be adopted. They felt that SBUKE should put proposals to the DGFT to facilitate an orderly disposal of the shares within six months or within such time as the DGFT thinks fit.

Assessment

The CC considered the proposed merger of BUPA and CHG in great detail. I agree with their finding that this proposed merger may be expected to operate against the public interest, with particular adverse effects in the PMS and PMI markets.

I consider that the CC has explored the range of remedies which could possibly address the adverse effects. On the basis of the evidence presented in their report, I agree that it would be necessary to explore structural remedies in relation to BUPA's PMS and PMI businesses to address the adverse effects identified. I note, however, that BUPA has indicated that it would not proceed with the merger on these terms. In these circumstances, I concur with the CC that prohibition is the only appropriate recommendation.

I also agree that SBUKE's shareholding in CHG should be divested in an orderly fashion and that this should ideally be performed within six months. I would propose to discuss the details with the parties and with CHG before making detailed proposals to you.

I note that the CC recommends that the parties should not exercise the voting rights attached to the shares held by SBUKE/SIL in the period prior to disposal, except with my consent. My initial view is that in most circumstances the shares should not be voted prior to disposal. If circumstances arise in which an absolute majority of shares is needed to win a particular vote, however, I consider that it would be appropriate to require SBUKE/SIL to vote their CHG shares in the same proportion as the other CHG shareholders. I propose to discuss this matter with the parties before negotiating an appropriate undertaking with them.

Recommendation

I agree with the CC's recommendation that the proposed merger of BUPA and CHG should be prohibited. I also agree with their recommendation that the completed mergers, by which BUPA, acting together with SIL and SBUKE, has acquired 26.8% of the ordinary share capital of CHG, should be prohibited.

I recommend that you should invite me to seek undertakings to achieve an orderly divestment of the 26.8% of CHG shares held by SBUKE and to ensure that the voting rights are exercised in the interim only if absolutely necessary, and then in proportion to the votes cast by other shareholders.

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