Britain’s Competition and Markets Authority has provisionally cleared Amazon’s (AMZN) investment in online restaurant food delivery group Deliveroo.
The CMA said in a statement on Friday 17 April that the decision was made “in light of a deterioration in Deliveroo’s financial position as a result of coronavirus (COVID-19).”
While the extent of Amazon’s stake has not been publicly disclosed, it was the lead investor in a $575m (£457m) funding round announced by Deliveroo in May last year.
“These wholly unprecedented circumstances have meant reassessing the focus of this investigation, reacting quickly to the impact of the coronavirus and deciding what it would mean for the businesses involved in this transaction and, in turn, for customers,” said Stuart McIntosh, chair of the CMA’s independent inquiry group.
“Without additional investment, which we currently think is only realistically available from Amazon, it’s clear that Deliveroo would not be able to meet its financial commitments and would have to exit the market.
“This could mean that some customers are cut off from online food delivery altogether, with others facing higher prices or a reduction in service quality. Faced with that stark outcome, we feel the best course of action is to provisionally clear Amazon’s investment in Deliveroo.”
The investment’s controversy
In October last year, the CMA launched the first phase of an investigation into Amazon’s investment in food delivery company Deliveroo.
It was considering whether the e-commerce giant’s investment might constitute a merger, and whether there could be “a substantial lessening of competition” within the UK as a result. Both companies have insisted that Amazon has only taken a minority stake, but the authority’s initial investigation found that the investment, in its current form, could harm competition in two ways.
Then in December last year, the CMA said that Amazon’s investment in Deliveroo “raises serious competition concerns” and may require an in-depth investigation.
In today’s statement, the CMA confirmed those concerns again, saying that after Phase 1 of the investigation, it found that “the deal could damage competition by discouraging Amazon from re-entering the online restaurant food market and further developing its presence within the online convenience grocery delivery market in the UK.”
The regulator said during its in-depth, Phase 2, of the investigation, “it has become clear that the coronavirus pandemic is having a significant negative impact on Deliveroo’s business,” which led to its provisional clearance of the decision.
“The CMA’s investigation has found that Deliveroo is, in many respects, a highly successful company which has grown strongly and now accounts for a significant share of the online restaurant platform market in the UK. As a developing business, Deliveroo is, however, particularly reliant on continued investment to be able to support its operations,” it said.
The impact of the coronavirus lockdown
The number of people who have died after contracting coronavirus has risen to 14,576 in the UK, up by 847. There are also 108,692 confirmed cases, up 5,599 from the amount published by the Department of Health on Thursday.
The UK has been in lockdown for four weeks and the government has extended it by another three weeks. The lockdown has had a significant impact on businesses, including restaurants, with many either closing, laying off or furloughing staff of collapsing.
The IMF said the global pandemic is likely to cause the worst recession since the Great Depression of the 1930s and do lasting damage to the global economy.
Also this week, the UK’s independent budget watchdog, the Office for Budget Responsibility (OBR), said that the UK economy could contract by as much as 35% in the second quarter of 2020 if the current lockdown persists for three months. In this scenario, unemployment is expected to rise to 10%, compared with 3.9% at the start of the year. That would equate to 2 million extra people out of work.
The CMA said that the ongoing lockdown has hit Deliveroo, resulting in a significant decline in revenues and while it had tried to diversify its business by delivering groceries, it has not been enough to mitigate losses.
“As a result, Deliveroo recently informed the CMA that the impact of the coronavirus pandemic on its business meant that it would fail financially and exit the market without the Amazon investment. Deliveroo’s submission was supported by evidence from the company’s financial advisers,” said the regulator.
“The CMA has been considering this new evidence as a matter of urgency. It has provisionally concluded that Deliveroo’s exit from the market would be inevitable without access to significant additional funding, which the CMA considers that only Amazon would be willing and able to provide at this time,” it added.
“While securing additional funding from other sources may have been possible before the coronavirus outbreak, the pandemic has severely limited the availability of finance for early-stage businesses such as Deliveroo. The CMA currently considers that the imminent exit of Deliveroo would be worse for competition than allowing the Amazon investment to proceed and has therefore provisionally found that the deal should be cleared.”
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