Sabre faces uphill battle to get CMA's Farelogix merger block quashed

08 June 2020 19:37


Sabre faces an uphill battle to get the UK antitrust regulator’s block of its Farelogix buyout quashed. After all, the UK’s antitrust court has never overruled a merger decision by the Competition and Markets Authority in full.

The Competition Appeal Tribunal last week confirmed that the US airline technology provider had lodged its anticipated challenge, accusing the CMA of a catalog of errors that culminated in an "unlawful" decision.

Its appeal focuses principally on the regulator's assertion that it had jurisdiction to review the deal at all, according to the CAT's summary of Sabre's application. It is also challenging the CMA’s finding that the deal would lead to a substantial lessening of competition in merchandising and distribution.

Should Sabre’s suit succeed, the impact on its deal with US rival Farelogix is unclear, given that it abandoned its $360 million merger last month, blaming the CMA's block on the deal in April.

Whether Sabre could hope to revive it without another intervention by the CMA would depend entirely on the details of the judgment, as would whether there was any retroactive impact for the enforcer’s original probe.

— Past challenges —

No company yet has successfully persuaded the CAT to overrule a CMA decision. This is largely because the bar for appealing merger decisions in the UK is high, as the CAT is bound by a judicial review standard — meaning that a CMA decision will be allowed to stand unless it is shown to have been somehow illegal, irrational or procedurally flawed.

This year has already seen two direct challenges of a CMA block fail. Tobii saw its appeal against a veto on its buyout of Smartbox Assistive Technology thrown out in January after the CAT struck out the majority of its case; and cleaning chemicals company Ecolab was forced to sell off Holchem after the CAT dismissed its criticism of the CMA’s competitive assessment and rejection of concessions.

Indeed, the CAT has never required the CMA to change its findings or any remedies it has proposed.

Its only pushback has been sending part of a decision back to the CMA to consider — over ICE's buyout of Trayport in 2016 — where the regulator had to reconsider whether the parties should have been forced to terminate a particular agreement as part of a remedy. In that case, the CMA reached the same decision again and required the companies to unwind the agreement.

— Jurisdiction challenges —

The last challenge specifically on the UK competition regulator's jurisdiction to review a deal was made by Groupe Eurotunnel in 2015. Despite early promise in the courts, it failed.

In 2013, the Competition Commission, a forerunner of the CMA, blocked the channel tunnel operator's completed purchase of three ferries from Sea France, which had gone into liquidation. Eurotunnel appealed, arguing that it shouldn’t be subject to national merger-control laws because it didn’t amount to the acquisition of an “enterprise” and the UK regulator therefore had no right to review its case.

The Court of Appeal backed Eurotunnel's challenge, but the Supreme Court later sided with the regulator and overturned the lower court's ruling, saying that the merger-control provisions of the Enterprise Act 2002 weren't limited to acquiring a business that was a “going concern.”

The top court's judges said: “The possession of 'activities' is a descriptive characteristic of an enterprise under the act. An enterprise is subject to merger control if the capacity to perform those activities as part of the same business subsists.”

Similarly, in 2011 the CAT rejected a challenge by Ryanair over the jurisdiction of another predecessor of the CMA, the Office of Fair Trading, to investigate a minority stake purchase in Aer Lingus. Ryanair spent years taking the case through the courts to no avail (see case file here).

— Sabre’s challenge —

But Sabre’s challenge focuses on a currently untested area of jurisdiction: The CMA’s application of its "share of supply" test. This is controversial and there is a question mark over how much autonomy the CMA enjoys under it.

Under UK merger law, the CMA has jurisdiction to examine a deal in two situations. The first is when the UK revenue of the acquired enterprise exceeds 70 million pounds ($85 million). The second is when the two parties involved supply or acquire at least 25 percent of the same goods or services in the UK, and the merger increases that share of supply — known as the share-of-supply test.

The regulator used the latter to establish jurisdiction in Sabre-Farelogix, but Sabre believes the watchdog overstepped its regulatory parameters. This is because Farelogix has no direct British airline customers, or UK customers at all, it appears.

The CMA asserted jurisdiction on the basis of Farelogix’s supply to American Airlines and, consequently, to British Airways through a partnership arrangement between the two carriers. Both airlines are members of the Oneworld alliance, which offers customer benefits through codeshare agreements that connect flights between member airlines.

Farelogix “derived value” from the agreement, which “provided more” than a mere technical bridge between the airlines, the CMA said. It also said that supporting documents showed British Airways took active and conscious steps and made a clear choice to receive supply of Farelogix services.

While the revenue increment from this was small — as only a small number of tickets including a British Airways interline segment were processed through Farelogix's FLX Services product, and the revenues received and receivable from these bookings were therefore small — the CMA maintained that the law “does not require a minimum increment.”

So it found that its test — a 25 percent share of supply in the UK, increased by the merger — was met on the basis that both companies “supply IT solutions to UK airlines for the purpose of airlines providing travel services information to travel agents, to enable travel agents to make bookings."

— A question for the courts —

The question for the CAT, therefore, is whether the test is as flexible as the CMA claims, or whether the watchdog overstepped its boundaries.

Sabre is contesting the CMA’s position on four grounds, including that its single description of services across the two merging parties is “not a lawful basis on which to apply the share of supply test to two highly disparate supplies in the absence of any underlying rationale."

What makes Sabre’s battle harder here — beyond the history of failures other challengers have had — is that the CAT has tended to defer to the CMA, forced in part by that stringent judicial review standard.

But the stakes in this case are unusually high. With the UK set to officially leave the EU when its transition period ends in December, how the CAT rules in this case will be a crucial marker over the limits of the CMA’s powers as it unfolds to fill the space left by the European Commission.

It also has knock-on effects for merging companies weighing up whether they should notify their deals in the UK. Should the CAT side with the CMA, that judgment call arguably becomes all the more tricky.

That said, the CAT will be fully aware of the significance of the upcoming appeal. Sabre, for its part, may well have taken note of comments made by the tribunal's chairman Peter Freeman earlier this year, when he hinted that it might have to shift from its current “light-touch” judicial review approach should the CMA become more interventionist.

A scenario where probes become "more interventionist, more agile," he said, risks upset from parties that have their mergers blocked, "and they also may feel — because everything's up in the air — they have much less to lose from testing the approach in the courts. So the incentive for having a go may be stronger."

Sabre may face tough opposition, but never rule out a curveball.

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