The UK’s competition watchdog has raised serious concerns about JD Sports’s (JD.L) proposed takeover of rival trainer and sportswear shop Footasylum, suggesting the deal could be blocked unless both companies take action.
The UK’s Competition and Markets Authority (CMA) said an in-depth investigation of the deal found it “could leave shoppers worse off, both in-store and online.”
The CMA’s ‘Phase 2’ investigation found the £90m ($116m) deal would “substantially lessen competition nationally” and warned it could lead to fewer Black Friday discounts and clearance sales for shoppers.
JD Sports and Footasylum have two weeks to try and alleviate concerns but the CMA warned on Tuesday that “its current view is that blocking the deal by requiring JD Sports to sell the Footasylum business may be the only way of addressing these competition concerns.”
Shares in JD rose 2.2% in early trade despite the findings.
“We're currently concerned that shoppers could lose out after the merger, for example through fewer discounts and less choice in stores and online,” Kip Meek, chair of the independent inquiry group leading the investigation, said on Tuesday.
“This could particularly affect younger customers and students, who shop in JD Sports and Footasylum.”
The CMA’s conclusions follow an in-depth probe of the deal that included surveys of 10,000 customers, documents and financial records from both companies, and submissions from suppliers and competitors.
Consumers spend £5bn each year on sportswear and Meek called it “a large and growing market in the UK”.
JD Sports responded strongly to the CMA’s findings, charging that the regulator had “lost sight of its objective to protect consumer interests.”
Executive chair Peter Cowgill called the CMA’s conclusions “fundamentally flawed” and said the watchdog didn’t understand the market.
“The competitive landscape described by the CMA is one which neither I, nor any experienced sector analyst, would recognise,” Cowgill said in a statement.
“Just take a walk down any major UK high street or search for Nike or adidas trainers on Google and you can see for yourself how competitive this marketplace really is.
"The CMA's provisional findings do not reflect the objective evidence, with excessive weight being placed on surveys asking hypothetical questions of a small sample of selected customers equivalent to less than 25% of the footfall of one JD store in Manchester for one week, rather than assessing the reality of how consumers actually shop on a national scale.”
Greg Lawless, a retail analyst at stockbroker Shore Capital, said he was “surprised and disappointed” by the CMA’s findings and backed Cowgill’s analysis of the deal. However, he said the CMA appeared newly empowered since Brexit.
“We have seen in the last year or so the CMA eviscerate the Sainsbury Asda merger on competition grounds, probably quite rightly,” Lawless wrote.
“In recent months we have seen the CMA launch a Phase 2 investigate into Amazon acquiring a minority stake in Deliveroo and now this latest decision on the wider sports retail market.
“It appears that an encumbered CMA now that the UK has left the EU continues to bear its teeth in consumer land acquisitions.”
JD Sports announced a deal to buy Footasylum for £90m in March 2019. The watchdog started investigating the deal in May of last year and raised official concerns in September last year. JD Sports and Footasylum failed to address the issues and the regulator launched a more in-depth inquiry as a result.
JD Sports has 375 shops across the UK and already owns brands like Size?, Scotts, Tessuti, and Footpatrol. Footasylum has just 70 stores.
The two businesses have close links: Footasylum’s founder David Makin cofounded JD Sports in 1981 and JD’s cofounder John Wardle was chairman until 2015. JD’s former chief executive is executive chairman of Footasylum.