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CMA Vets PE Roll-Up Transactions

July 25, 2023
The CMA increasingly reviews PE mergers including historic roll-up deals, which will prompt sponsors to reassess merger control risks.

The UK’s Competition and Markets Authority (CMA) is increasingly focused on competition concerns arising from PE buy-and-build transactions, including historic deals, as it looks to protect against perceived threats to consumers. Over the past six months, two cases have seen the CMA launch significant investigations, find competition concerns, and accept divestment remedies. So far the CMA has focused on veterinary services, however, other sectors featuring consolidation-based business models could also come into focus, such as elderly care, fertility, dentistry, and physiotherapy.

With other regulators — including those in the US — voicing similar concerns and flagging PE and roll-up strategies as an enforcement priority, PE firms and portfolio companies need to consider the heightened risk and growing threat of enforcement action.

Roll-ups on the CMA’s radar

The CMA has broad discretion to assert jurisdiction to review a deal (closed or not). A review may occur if the target meets the turnover test (£70 million) or if a PE buy-and-build platform (which extends to the sponsor’s entire portfolio, even if held in different funds) will have a combined share of supply of 25% or more in a “substantial” part of the UK following the transaction. A “substantial” area has, in recent cases, included narrow geographical catchment areas.

Further, the CMA may refer a completed transaction for investigation up to four months after the merger’s completion date, or later if “material facts” concerning the merger (and the fact of its completion) are not readily ascertainable. The regulator is increasingly relying on the latter test to review historic deals (sometimes years later) by asserting it is not time-barred since material facts have not been made sufficiently public. PE firms must be mindful of the increasingly prescriptive level of disclosure needed to get the four month time-bar clock ticking — which can include national or trade press coverage and prominent, clear, and detailed press releases.

Investigation impact

If the CMA launches an investigation, it may look at market shares and competitive conditions at the present date rather than at the time of the original transaction. If multiple deals have been executed, acquirers will be exposed to less predictable and potentially unfavourable outcomes.

The CMA also has powers to impose initial enforcement orders (IEOs) and appoint monitoring trustees on completed and anticipated deals to force the parties to operate separately during the investigation and include onerous asset maintenance provisions. The IEO process can be highly disruptive for PE buyers, especially when the most onerous provisions are imposed on the entire PE group instead of only the overlapping portfolio companies. Breaching IEOs can result in fines of up to 5% of global revenues of the entire acquiring group.

Seeking certainty

The CMA is seeking to flex its enforcement powers in the context of PE deal-making and continues to take an expansive view on jurisdiction. For sponsors seeking certainty, employing risk mitigation strategies at the outset by assessing available CMA strategies (e.g., submission of a briefing paper or even a full merger filing to the CMA) may offer solutions. Sponsor deal teams will find that expert legal counsel and a proactive approach to strategically manage merger control risk at the outset is essential to navigate the tougher enforcement landscape.

The authors would like to thank Anna Victoria Delahey for her contribution to this article.


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