On 29 August 2020, Reliance Industries’ retail group, Reliance Retail Ventures Ltd (‘RRVL’) acquired the wholesale, retail, logistics and warehousing businesses of the Future Group for a total transaction value of Rs. 27,513 Crore. As a part of the three-step acquisition, all listed Future Group Companies shall be merged into Future Enterprises Ltd, that shall transfer all relevant assets to Reliance’s retail entities for Rs. 24,713 Crore. RRVL will further invest a total of Rs. 2,800 Crore in Future Enterprises for a 13% equity share. The deal will give RRVL access to over 1,800 new stores across the country and access to brands such as Big Bazaar and Central, providing the retail behemoth with control of about one third of the market, and make it about 2.5 times larger than its nearest competitor.
While the deal offers a life-jacket to the otherwise sinking business of India’s erstwhile retail giant Kishore Bayani, it is still subject to regulatory approvals – one of the most significant being that from the Competition Commission of India (‘CCI’). In this context, the author will highlight two key considerations for the CCI – first, the elements and applicability of the failing firm defence to the present deal. Second, and more pertinently, the necessity of considering the future anti-competitive effects of such an acquisition. Here, the focus should not only be on traditional parameters of appreciable adverse effects on competition under the Competition Act 2002 (‘the Act’), but also on the realities of an increasingly digitized and interoperable market structure, the prime example of which is Reliance itself.
Applicability of the Failing Firm Defence
The failing firm defence (‘FFD’) is employed to defend mergers that would otherwise be deemed to be anti-competitive. It is important to note that contrary to the prominent European and American jurisprudence, the Indian Competition Act only treats FFD as one of the factors to be considered while assessing the permissibility of a particular merger under Section 20(4)(k) of the Act. Further, the defence is rarely successful owing to the stringent rules of evidence imposed by regulatory bodies, and has never been used in India. Nonetheless, the economic crisis caused by COVID-19 has pushed several companies into financial distress and on the brink of insolvency, as a result of which the FFD has regained relevance as a theoretical as well as practical solution to an inevitable slew of mergers and takeovers that are to come. Thus, the parameters upon which the defence is premised pose significant questions for the CCI to take into account when assessing the Reliance Future deal.
The FFD originates from United States Antitrust jurisprudence, and has since grown as a defence for horizontal mergers in other jurisdictions, contingent upon the satisfaction of a three limbed test – (i) one of the parties in the proposed combination is financially distressed and will be unable to meet its obligations in the future; (ii) there exists no alternative solution that is less anti-competitive than the concerned merger and (iii) without the proposed combination, the assets of the failing company would be forced out of the market. The 2004 European Guidelines on horizontal mergers as well as the 2010 United States Horizontal Merger Guidelines have incorporated the FFD, which includes a ‘counterfactual’ test to examine whether market competition would deteriorate to at least the same extent in the absence of the proposed combination.
In this regard, the Olympic/Aegean Airline case is the primary precedent in determining the success of such a defence with respect to each of the three conditions, especially in circumstances of national economic crisis. The European Commission had originally rejected the parties use of the FFD with respect to Olympic Air’s financial status and thus prohibited the proposed merger. The Commission’s reasoning was premised on several factors, of which there are two key points relevant to the present case. First, the Commission was not satisfied as to the fulfilment of the second condition under the FFD, as there was no proof of negotiations with alternative buyers and the reasons for their failure. Second, upon analysing the counterfactual, the Commission believed that the deal would most likely lead to substantial deterioration of market competition, more than what would have resulted if Olympics’ assets were to exit the market. In 2013, two years later, the same transaction was unconditionally approved by the European Commission in Olympic/Aegean II, in large part due to the economic distress caused by the Greek Sovereign Debt crisis and the fact that by then, Olympics parent company was itself facing financial troubles.
Fast-forward to 2020, and the unprecedented economic crisis caused by COVID-19, which has only exacerbated the Future Group’s pre-existing financial woes, can push the Reliance-Future Deal over the brink. The first limb of the test will most likely be satisfied, considering Future’s highly leveraged assets, mounting pressure from creditors, falling share prices and likelihood of going into insolvency if it weren’t for the suspension of the IBC. Nevertheless, the reasons for the failure of the FFD in Olympic/Aegean I remain important, as Reliance must necessarily show that the proposed acquisition will not lead to anti-competitive effects in the relevant market. In fact mergers such as General Electric/Alstom, Hutchison3G/Wind and T-Mobile/Tele.ring, filed subsequent to Olympic/Aegean, successfully received the Commission’s authorisation by proving the counterfactual in their favour, i.e. that the combination was the least anti-competitive arrangement in the event the failing firm exited the market. Thus, even if the Reliance Future Deal does not employ the FFD in the strict sense, these two factors (national economic crisis and the counterfactual test) will likely be fundamental in receiving the CCI’s nod of approval.
Assessing Possible Anti-Competitive Effects – The Fine Line Between Synergy and Dominance
To answer whether the Deal is the least anti-competitive arrangement, it is important to analyse the pre-existing standard for appreciable adverse effects on competition (‘AAEC’) under the Act. Section 6 of the Act requires every combination to be scrutinised for the likelihood of AAEC within the relevant market, provided it satisfies the minimum threshold under Section 5. Upon such inquiry under Section 20(4) of the Act, if it is found that there is a likelihood of causing AAEC, the combination shall stand rejected. As mentioned above, the failure of the target company is only one factor that needs to be supplemented with a conclusion that the combination is the least anti-competitive alternative. Whether there existed alternative buyers the Future Group could have negotiated with is a question of fact for the CCI to consider. Beyond that, the author will critically analyse the impact on competition the present horizontal merger may have and essential points the CCI must contemplate while assessing the validity of the merger and possible ways of structuring it.
While traditional factors under Section 20(4) such as market share, degree of countervailing power and likelihood of the removal of a ‘vigorous and effective competitor(s) in the market’ remain important, Reliance Industries’ unparalleled data repository should play an additional role in the assessment. In that light, it becomes important to draw attention to the Report of the 2019 Competition Law Review Committee (‘the Report’). The Report recommended that merger control frameworks must take into account not just immediate effects on competition, but also scenarios where the combination may adversely affect competition in the future. In this regard, the Report took a leaf out of the 2019 UK Expert Panel Report and recommended that the scope of merger control in India should be expanded beyond traditional metrics of asset and turnover thresholds to include challenges unique to digital markets. This includes introducing ‘deal value’ or ‘size of transaction’ as additional factors when assessing horizontal mergers, as well as including ‘access to or control over data’ as a relevant factor when determining dominance as per Section 19(4) of the Act.
These considerations become critical to the present deal. Reliance Industries’ acquisition of Future Enterprises provides massive synergistic benefits by almost doubling retail space under operation, bolstering revenue and EBITDA, strengthening both back-end and front-end retail businesses and providing access to a strong supply chain. Resultantly, RRVL will become the largest organised retailer in an otherwise fragmented USD 850 Billion retail market, followed only by a trailing DMart and largely unorganized brick-and-mortar shops. While RRVL will still control only about a third of the market, the CCI’s inquiry should not end here in so far as AAEC is concerned. The CCI must take into account inevitable overlap with the largely unregulated digital market, especially in light of Reliance’s recent foray into the online retail space through JioMart and its deal with Facebook.
Reliance Industries has access to huge amounts of data of Indian users, across its multiple subsidiaries and business ventures. The flow of data, unlike that of other assets, is not regulated within subsidiaries and holding companies. Thus data, as a flexible and interoperable asset, can be generated and utilised in online and offline retail spaces and allow both businesses to complement each other through targeted advertisements, user feedback loops and network effects (which were emphasized in the 2019 Report as well). JioMart’s potential relationship with physical kirana stores is another important factor to consider when assessing future impact on competition, as Reliance will indirectly function as both a competitor and a digital platform provider. In light of this, the creation of a much more saturated and anti-competitive physical retail market with barriers to entry is not unimaginable.
While a large part of it is in the form of a slump sale of a company on the brink of extinction, one must not forget the strength of the Future Enterprise’s logistic support, legacy and brand value. The deal is capable of almost doubling RRVLs market footprint and creating a symbiotic relationship between online and offline retail markets. The acquisition is thus incomparable with other approved FFD backed mergers, or even Amazon’s recent investment in Deliveroo – which has often been offered as an example of COVID-19 related acquisitions. In fact, it is important to note that Amazon only acquired a 16% stake in the company, a relatively small percentage that played an important role in the U.K. Competition and Markets Authority’s approval of the deal. The Reliance Future Deal, on the other hand, is a complete acquisition, and includes a non-compete clause that runs 15 years.
Therefore, the aforementioned concerns coupled with RRVL’s expected dominance, have the potential to not only create barriers to entry for other players, but also result in a likely decline of other rivals’ ability to compete in the relevant market.
The Reliance-Future deal can re-invent a sinking legacy, provide a sigh of relief to several creditors and create tremendous growth opportunities for RRVL. However, regulatory approvals remain a critical stage that ought not to be overlooked. As explained, Reliance Industries’ control over data, and recent expansions, indirectly multiplies the synergistic benefits of this deal, which could lead to far greater adverse effects on competition than anticipated under the existing merger control framework. Thus, while considering the relevance of the failing firm defence, the CCI must utilise this opportunity to examine the dynamic nature of the retail market, especially with respect to mergers where data plays a crucial role and where online and offline markets overlap, and conclude whether the deal will leave the market less competitive than in its absence. Even if the CCI gives the deal a regulatory nod, its reasoning and structure must set a precedent that reflects foresight in anticipating AAEC and ensuring healthy market competition.
- EBITDA refers to Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a metric used to evaluate a company’s operating performance. This term is usually used to describe the amount of cash (currency) which is generated and consumed in a given time period. ↑
- Data rich companies can create competitive advantage by improving and personalizing service based on customer data, thereby acquiring new users. This can further allow monetization of services, which is further invested in improvement of services and expansion of customer base. ↑
Network effects are the phenomenon by which the value of a good or service for an existing user increases as a new user/different group of users joins the network/platform. For two sided marketplaces like online retail, the more customers and sellers/service providers join the platform, the more its value and resultant benefits increase. See also CCI’s Market Study on E-Commerce in India 2020. ↑