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News Update: The Stars Group have released the following statement on the CMA action:
“UK CMA review is common in such acquisitions, particularly within a sector where there has been previous consolidation. We proactively took steps to put into place processes and safeguards to comply with CMA guidelines and any potential Initial Enforcement Order that the CMA might issue. The Stars Group submitted its pre-notification filing with the CMA prior to closing and will continue to work closely with the CMA to comply with the IEO, including operating The Stars Group and Sky Betting & Gaming businesses separately until CMA approval is obtained.”
The Stars Group announced that it had completed the deal to buy Sky Betting and Gaming (SBG) a few days ago, and all seemed rosy in the garden.
Suddenly, the UK’s Competition and Markets Authority (CMA) has called a complete halt to any further action to merge the two companies.
The CMA has issued an “initial enforcement order” which is the first step in launching an investigation into the Stars Group’s acquisition of SBG.
The order sets out draconian restrictions on relations between Stars and SBG
The order commands that the two companies halt any and all activity that might progress the merger of the two companies. They may not take any action without the prior consent of the CMA which might:
“(a) lead to the integration of the Sky Betting & Gaming group business with the Stars business;
(b) transfer the ownership or control of the Stars business or the Sky Betting & Gaming group business or any of their subsidiaries; or
(c) otherwise impair the ability of the Sky Betting & Gaming group business or the Stars business to compete independently in any of the markets affected by the transaction.”
Furthermore, among other restrictions, the two companies are to:
Finally, and particularly onerous when both sides are itching to get working together, the CMA orders that:
“no business secrets, know-how, commercially-sensitive information, intellectual property or any other information of a confidential or proprietary nature relating to either of the two businesses shall pass, directly or indirectly, from the Sky Betting & Gaming group business (or any of its employees, directors, agents or affiliates) to the Stars business (or any of its employees, directors, agents or affiliates), or vice versa.”
The CMA has a considerable amount of statutory power under UK law. It can halt the merger entirely, or propose that approval will be given only if certain assets are divested.
In this case, it seems certain that the CMA is concerned about the possibility of “abuse of market power.” While the CMA can act unilaterally, it is more likely that another operator or organization has filed a formal complaint.
The abuse of market power occurs when a dominant company in the market uses its power to restrict competition or raise barriers to entry to prevent other companies from competing with it.
In this case, the concern will be that adding SBG’s online poker customer base to the PokerStars player base will lead to an uncompetitive market.
Both Stars and SBG have online casino and sportsbook products, but their combined market share would not give rise to categorizing the merged group as dominant.
On the face of it, the merger of PokerStars and SkyPoker will make a minimal difference to Stars’ current dominant market position.
Adding the SkyPoker player pool to that of PokerStars increases the Stars Group’s player base by only three percent.
PokerStars has approximately 63 percent of the global online cash game poker market, but its share of the UK market may be slightly higher, and certainly its share of the online poker tournament market is higher.
The CMA may be concerned about the Stars Group’s share of the UK market, and whether the group has used its dominance to restrict competition, but it is hard to see how the acquisition of SBG would change anything.
Bottom line: Investors shouldn’t worry overly that the CMA action will derail the takeover. It looks more like a precautionary investigation than one which will uncover substantive reasons to deny permission for the merger to go ahead.