British United Provident Association Limited and Community Hospitals Group Plc: A report on the proposed merger; and British United Provident Association Limited, Salomon International LLC and Community Hospitals Group Plc; and Salomon International LLC and Community Hospitals Group Plc: A report on the existing mergers

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Summary

On 12 June 2000 the Secretary of State for Trade and Industry referred to us for investigation under the Fair Trading Act 1973 (the Act) the proposed acquisition by British United Provident Association Limited (BUPA) of Community Hospitals Group plc (CHG). On 8 August 2000 the Secretary of State also referred to us for investigation under the Act the acquisition by Salomon International LLC (SIL) of 26.8 per cent of the ordinary share capital of CHG. Our report deals with both references. Our terms of reference are set out in Appendix 1.1. hospital, DTI, summary, merger

BUPA is the largest provider of private medical insurance (PMI) and the second largest provider of private medical services (PMS) in the UK. CHG is the fourth largest PMS provider (measured by bed capacity) but has no PMI interests. SIL is a wholly-owned subsidiary of Citigroup Inc, of New York, and owns [ ] per cent of Salomon Brothers UK Equity Limited (SBUKE) [Details omitted].

In 1997 BUPA sought to acquire Goldsborough Health Care plc (Goldsborough). This merger was approved by the Secretary of State, subject to BUPA undertaking to divest Goldsborough’s shareholding in Independent British Health Care Limited (IBH) and not in the future acquire any interest in IBH or any interest in any company having control of IBH. In 1998 CHG acquired IBH.

On 28 April 2000 the boards of BUPA and CHG announced that they had reached agreement on the terms of a recommended cash offer for the entire share capital of CHG. BUPA had learned that there were potential rival bidders, but it could not itself buy any CHG shares while the 1997 undertaking remained in force. BUPA therefore decided to take pre-emptive action through a third party. On 5 May 2000, under an agreement with BUPA Finance Plc (BUPA Finance, a subsidiary of BUPA), SBUKE acquired 26.8 per cent of the ordinary shares of CHG at a cost of £61.75 million, met wholly by a loan from BUPA Finance. Ownership and complete control of these shares was vested in SBUKE. BUPA carried all the economic risk. Neither SIL nor SBUKE had any other PMS interests: the share purchase was intended solely to assist BUPA achieve its object of securing control of CHG when the undertaking was lifted. We considered that BUPA and SBUKE must each have an expectation that SBUKE would retain the shares until the competition authorities had reached their conclusions and that must have been the commercial reality of the matter.

We found that SBUKE’s acquisition of 26.8 per cent of CHG’s shares gave it influence over CHG’s policy that should be treated as control for the purposes of the Act and that this created an existing merger situation between SIL and CHG. We also found that the circumstances of the loan agreement and the resulting share purchase were such that BUPA and SBUKE were associated persons for the purposes of the Act and that this created an existing merger situation involving BUPA, SIL and CHG. We considered these two merger situations separately from the proposed BUPA/CHG merger situation.

The latter situation had been referred to us because the Secretary of State agreed with the Director General of Fair Trading (DGFT) that the proposed merger raised competition concerns in respect of both the PMS and PMI markets. We received submissions from 12 PMS and 8 PMI providers. All of the former, and all but one of the latter, were hostile to the proposed merger in varying degree, urging either its prohibition or the imposition of a variety of constraints if it were approved. The concerns expressed related in part to the consequences for local competition but chiefly to the reinforcement that the proposed merger would give to BUPA’s seller power in the PMS market and the vertical linkages between its PMS and PMI businesses.

BUPA said that competition should be looked at in terms of local markets and suggested that any problems could be dealt with by divestments. We conducted our own analysis of local markets and identified some areas where competition would be adversely affected. However, we found that the much more important adverse effects of the proposed merger would be a reduction of competition in the PMS market and higher prices for PMI and PMS than would otherwise have been the case, and hence that the proposed merger would be adverse to the public interest.

BUPA told us of its care to ensure the integrity of the separation of PMI and PMS functions and said that it proposed to take various measures to separate its PMI and PMS businesses still further, while retaining both within its ownership and control. We considered these arrangements carefully but in the light of our finding we concluded that nothing short of putting the businesses under separate ownership and control would meet the case satisfactorily. However, BUPA told us that it would not proceed with the merger on that basis.

We concluded, therefore, that the right course was to recommend that the proposed BUPA/CHG merger be prohibited.

We then turned to the existing SIL/CHG and SIL/CHG/BUPA merger situations. We concluded that these situations could be expected to be adverse to the public interest because the circumstances of BUPA’s involvement in SBUKE’s acquisition of the CHG shareholding, in particular the terms of the loan agreement, were widely known (from the terms of BUPA’s offer of 24 May for all CHG’s shares). These circumstances were such as to make SBUKE’s retention of the CHG shareholding a cause of concern and uncertainty, lasting for perhaps 12 months or more, to many parties involved with CHG. BUPA would be seen by them as exercising material influence over CHG. The resulting uncertainty would be damaging to CHG’s management, employees and contractors and to patients, consultants and PMI providers. Other prospective bidders for CHG would also be deterred to the detriment of a normal competitive market in CHG shares.

Accordingly, we recommend:

that SBUKE put proposals to the DGFT to reduce its CHG shareholding as soon as market circumstances are favourable and with a view in any event to complete disposal within six months from the date of publication of this report, or within such time as the DGFT thinks fit; and
that for as long as SBUKE holds CHG shares it should be prohibited from exercising its rights to vote on any matter without the consent of the DGFT.

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