British government investigates Gamestation acquisition

Back in May, the two big video game high-street retailers in the UK--Game and Gamestation--became one when Game announced its takeover of rival Gamestation for £74 million (approx $150 million).

Shortly after, the Office of Fair Trading, the UK government body responsible for "promoting and protecting consumer interests," announced that it would be investigating the deal. Both the OFT and Game were quick to point out that this was standard procedure in any business transaction of this nature.

However, the Office of Fair Trading announced today that as a result of its inquiry, it would be referring the deal to the Competition Commission (formerly the Monopolies and Mergers Commission). The Competition Commission will now launch a fuller enquiry, which is expected to conclude in January 2008.

John Fingleton, chief executive of the OFT, said the decision to refer the deal was made because the OFT thought that the two companies were in some ways their closest and only rivals. He said in a statement, "There is no doubt that the combined firm would face competition from Amazon, play.com, and eBay, and more generalist retailers like Woolworths, HMV, and Virgin. However, this merger involves the loss of competition between two parties who, in some segments at least, appear to be each other's closest competitors and in circumstances where we can not confidently rely on new companies entering the market to resolve any issues quickly."

He concluded, "Without better evidence that competition from other suppliers will be sufficient to prevent the merged firm from raising prices or cutting back services in a way that would harm consumers--in a market where retail sales amount to around £1.5 billion--we must refer to the CC for fuller inquiry."

Game responded to the decision by saying that it was "disappointed" by the move, and that it maintained that the company's acquisition of Gamestation would not "substantially lessen competition."

Game's chairman, Peter Lewis, commented, "We are disappointed that the OFT found difficulty in clearing the transaction. We firmly believe that a combination of Game and Gamestation will not give rise to any substantial lessening of competition and intend to vigorously pursue this position before the Competition Commission." He added that the company intended to fully cooperate with the investigation and that it hoped to prove that the buyout provides "very strong consumer, commercial, and employee benefits in what is an increasingly competitive market."

Game shares had plummeted 28p to 143p at the time of going to press, although the London Stock Exchange closed yesterday generally lower in response to the downturn in the market in the US. In response, Game was quick to issue a statement showing strong group sales since its last financial report at the company's annual general meeting in July. It stated that for the 26 weeks up to July 28 (including Gamestation from May 2), total group sales were up 78.7 percent and like-for-like sales (excluding Gamestation) were up 45.6 percent.

Numis Corp analyst Jose Marco-Tobares remained upbeat about the company and commented on the OFT's decision, "Trying to predict the OFT's decision is not easy. We believe it is likely it will approve the merger of the two companies, although it may force Game Group to dispose of some of its stores in the UK, as was the case with the Morrison/Safeway deal." Marco-Tobares added that Numis Corp would not be changing its 2008 forecast for the company, although added that it expected the group to incur some £3 million in fees.

The Competition Commission is expected to report its decision by January 23, 2008.