Essilor, Luxottica teeter toward in-depth EU probe amid ‘bundling’ fears

27 September 2017 1:31pm

15 September 2017. By Dafydd Nelson and Natalie McNelis.

Essilor International's plan to merge with Luxottica Group risks veering toward an in-depth probe in Brussels, amid concerns that the deal could see customers wanting Luxottica eyeglasses frames forced to buy Essilor lenses — or induced to do so by tempting discounts or rebates.
A second-phase investigation could push the EU review into 2018, derailing the companies' plans to close the deal this year.
From the day the two European eyewear companies announced their nuptials in January, they have emphasized the "complementary" nature of their products: Luxottica is best known for its designer frames, such as Ray-Bans and Oakleys, and its Sunglass Hut retail chain. Essilor produces lenses, including the Varilux varifocal brand.
But while "complementarity" can bring about efficiencies, it can also have disadvantages. European Commission case handlers are understood to be worried that the combined entity could distort the market by "bundling" Luxottica frames together with Essilor lenses.
This could hurt opticians who make their own lenses, for example. It could also, in theory, cut into the business of independent lensmakers.
In short: regulatory concerns over the impact of bundling could shoot holes in the companies' complementarity claims.
The European Commission currently has until Sept. 26 to decide on the deal. That deadline would be extended by 10 working days if the companies offer to make concessions by midnight on Tuesday, Sept. 19.
This week the EU merger officials held a "state of play" meeting with the parties in Brussels to express their reservations about the deal. That move indicates that, in the absence of a phase I remedy, the commission could start an in-depth probe of the transaction, lasting around four months or more.

No easy fix

EU misgivings about mergers that combine makers of complementary products can be tricky to resolve.
Essilor and Luxottica could make a commitment to sell their frames and lenses separately and not offer package deals. Companies can also take other measures to break the link between their offerings.
This was one of the ways that Microsoft managed to convince EU officials to approve its $26.2 billion takeover of professional social network LinkedIn last year.
One of the remedies in that review allowed computer manufacturers and distributors the freedom not to install LinkedIn on Microsoft's Windows operating system.
But that kind of fix might be less effective for Milan-based Luxottica and Charenton-le-Pont, France-based Essilor. Customers, particularly opticians, could be incentivized to accept a bundle of Luxottica's frames and Essilor's lenses if it came at a discount or involved a juicy rebate — a practice the EU calls "mixed bundling."
Another fix could see Luxottica agree to divest some of its brands, diluting its market power. But that would seem like a counterintuitive measure for a deal that is supposed to address the "increasing need for corrective and protective eyewear and the appetite for strong brands."
The all-share deal has already been approved in India, Russia and New Zealand. US and Canadian authorities have both opened in-depth investigations.
Luxottica is listed on the New York Stock Exchange and the Borsa Italiana. The company is controlled by its billionaire founder, Leonardo Del Vecchio, whose family holding company, Delfin, owns a 62 percent stake in the Italian eyewear maker. Essilor is listed on Euronext.
The combined entity would be headquartered in Paris and listed on the Paris stock exchange. Delfin would be the largest shareholder, with between 31 percent and 38 percent of the new EssilorLuxottica.
The commission's case file number for the review is M.8394.

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