PE roll-up strategies face regulatory heat with focus on consumer industries – analysis
12th April 2023
Large, sector-focused portfolios in the spotlight
CMA flagged as active regulator on roll-ups
Funds need to assess collective impact of serial acquisitions
Multiple sector acquisitions by private equity (PE) funds – or ‘roll-up’ strategies – are increasingly drawing the attention of competition authorities, with a spotlight on large portfolios in consumer-facing industries, lawyers have told this news service.
Amid a slowdown in PE platform deals due to the debt crunch, General Partners (GPs) have turned their attention to existing portfolio companies focusing on roll-up strategies, as reported by Mergermarket. At the same time, top competition officials have been making statements about roll-up deals being an enforcement priority.
Roll-up strategies have been raising eyebrows at competition agencies, particularly in those industries dominated by funds that own controlling stakes in multiple companies, said Clemens York and Michael Okkonen, both partners at Dechert. With longer holding periods anticipated due to delayed sponsor exits amid the financing drought, some PE portfolios have become so large – with an increasing sector-specific focus – that they are attracting greater attention from the regulators, York said. As dealmaking picks up again, roll-ups will be scrutinised more carefully and more often in heavily consolidated industries, Okkonen said.
Recent examples come from the UK, where the head of the Competition and Markets Authority (CMA), Sarah Cardell, recently flagged roll-up deals as an enforcement priority, particularly where they impact consumers.
The CMA has conducted merger reviews of several roll-up deals in the past few years where remedies – in the form of divestments – have been required in order to secure approvals, noted Patrick Harrison, partner at Sidley Austin. The CMA has typically been focused on roll-ups involving goods and services, especially where local markets are involved, said Thomas McGrath, partner at Freshfields Bruckhaus Deringer. In cases involving local markets, for example dental care, there may be concentration in smaller catchment areas like individual towns, whilst market shares at a national level remain modest, he noted.
The CMA is currently reviewing Core Equity Holdings: Portman Healthcare / Dentex, in which the CMA found that the merger will substantially lessen competition in certain local areas within the NHS and private dental treatments.
Several CMA cases have led to Phase 1 divestments, typically those that provide goods and services to consumers, Harrison said, including CD&R/Morrisons (2022), CapVest Partners: Riviera Bidco / Dental Partners Group (2022); BDT Capital Partners LLC: Culligan / Waterlogic (2022); and TDR Capital LLP: Bellis Acquisition Company 3 / Asda Group (2021).
Veterinary services are among sectors that have received CMA scrutiny, as reported. Last year CVS’s acquisition of Quality Pet Care (also known as The Vet) was one example. CVS sold the business following the investigation. BC Partners-backed VetPartners‘ acquisition of Goddard Veterinary Group in March 2022 resulted in Phase 1 divestment remedies and the CMA noted that larger corporate groups buying smaller independent businesses resulted in anti-competitive situations. The CMA is also investigating whether seventeen completed acquisitions by CVC Capital Partners-backed Medivet Group of independent veterinary businesses could lessen competition.
Going forward, GPs will need to assess plans for serial acquisitions more strategically from the outset, McGrath said. “It is important to analyse the collective impact of serial acquisitions rather than only assess the risk profile of each individual deal on a standalone basis. Regulators are no longer thinking about every bolt-on independently, but the aggregate effect of them on the market as a whole,” he said.
“The CMA can and does use its share of supply test extremely flexibly to review deals that may be of substantive interest”, said McGrath. The UK agency is “very well-positioned to look at any and all deals,” compared to other regulators, he said.
According to McGrath, similar cases will be brought by authorities in EU member states. Regulatory obstacles for PE firms are increasing overall, said York, who flagged that in addition to merger control, GPs also need to consider the Foreign Subsidies Regulation and Foreign direct investment (FDI) screening in the EU.
Camille Paulhac, partner at Paul Hastings, noted that clients increasingly seek M&A advice early in the deal process to determine if competition law will be an issue. The increased scrutiny from regulators may further delay PE exits, as bids that have an attractive offer but raise competition concerns that put closing in jeopardy, may be seen less favourably by the sellers than a lower bid with more certainty on closing, York said. Where a deal raises substantive issues, GPs often look for contractual protection to make sure that the deal does go through and that they are sufficiently compensated if one of the regulators does not see any viable remedy to its competition concerns, other than blocking the deal, he noted.