Concentration control: The advantages of phase I commitments

In July 2019, the Spanish National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia, “CNMC”) authorized 12 phase I concentration transactions, two of which, Cirsa/CGSO and Lyntia/Negocio Iberdrola, were approved subject to fulfilling certain commitments.

Although the vast majority of the transactions notified to the CNMC since 2014 were authorized with no commitments, some transactions pose competition problems, and, in these cases, the possibility of quick authorization with commitments can be very positive for the parties, given the drawbacks of long and intense phase II investigations. Since 2014, concentration transactions approved in phase II with commitments have usually lasted about seven months, with an average of six requests for information and long commitment negotiations (the parties have had to submit about four versions of commitments).

Therefore, in cases where there are obvious risks, the parties try to offer commitments to face them and get a quick and relatively easy authorization. The last two transactions of a total of 17 are good examples of this.

The transaction between Cirsa and CGSO (decision available here) took place in the gambling and leisure sector, in particular on-site gambling. Specifically, the transaction consisted of Cirsa, the industry leader in Spain and Latin America and recently acquired by US company Blackstone, taking exclusive control of the entire CGSO share capital.

The CNMC detected risks to competition in the type B machine management segments in hospitality and gambling saloons and bingo halls in Valencia, Aragón and, in particular, Catalonia, because of the large market share that Cirsa would have after the transaction.

To mitigate these risks, the CNMC authorized the transactions two months after its notification under the following commitments offered by the parties:

• Removing the exclusivity clauses from all the HORECA channel agreements in Catalonia to foster competition between operators sharing the same premises;
• Establishing a five-year term for all hospitality and gambling saloon agreements, in Catalonia and outside, to increase the frequency of operator company change options;
• Reviewing all the agreements with a term longer than five years within 12 and 24 months; amending agreements that will end within 24 months as they are renewed; renegotiating those that end after 24 months before that date at 25% per semester; and
• Closing two bingo halls in Barcelona, whose licenses will be available to competitors and contribute to reduce pressure on the market share.

The second transaction, Lyntia/Negocio Iberdrola (decision available here), took place in the telecommunications industry, in the dark fiber optics market. The transaction refers to Lyntia’s acquisition of the long-term rights of exclusive use of the excess fiber optics network capacity and the portfolio of agreements with dark and lit fiber customers, owned by three Iberdrola S.A. subsidiaries: Iberdrola España, Iberdrola Distribución Eléctrica, and Iberdrola Generación.

This transaction, valued at €260 million, allows Lyntia to challenge Reintel’s market leadership, as it acquires 57% of Iberdrola’s network capacity, thus obtaining 30,000 km of available fiber optics network in Spain. Lyntia, now the main dark fiber market operator, holds more than 90% together with Reintel, which results in a great market concentration and significant entry barriers.

Because of this high degree of concentration, the CNMC made its authorization conditional on fulfilling the following commitments:

• Keeping the dark fiber offer in new agreements and non-discrimination by route to prevent the market shutdown that could occur as a result of the vertical integration of the resulting entity;
• Not terminating the agreements in force without justification and offering extensions to agreements in force that will end within ten years to prevent competitor exclusion and price increases;
• Storing and retaining all the documents required to meet potential CNMC information requests;
• Sending an annual fiber network report to the CNMC including (i) total, occupied and available network capacity by urban area; (ii) dark and lit fiber offer with its main financial, commercial, and technical characteristics; and (iii) a list of the requests for contracting dark fiber that were not met, specifying the requester and the reasons why the request was not fulfilled.

In this case, the notifying parties had to submit a second commitment proposal which, together with the information requests made by the authority, resulted in the transaction being approved two months after being notified.

These two cases show the advantages of previous and careful evaluation of concentration transactions, given the risk of intervention by the competition authorities. Perhaps phase II could be avoided after an advanced critical analysis of the transaction to enable the parties, if necessary, to identify and offer phase I commitments to avoid the need to initiate phase II. In addition, by identifying the potential commitments early in the process, the parties will be well-placed to consider them in the transaction structure and negotiation.