London Clubs International Plc and Capital Corporation Plc: A report on the merger situation

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Summary

On 7 April 1997 the Secretary of State for Trade and Industry referred to us (see Appendix 1.1) the proposed acquisition of Capital Corporation PLC (Capital) by London Clubs Interna-tional plc (LCI). LCI and Capital are both casino operators. LCI owns seven casinos in London (and operates several others outside the UK); its turnover in 1996/97 was £197 million. Capital owns two casinos in London; its turnover in 1996 was £43 million.

We have concluded that arrangements are in contemplation which, if carried into effect, will result in the creation of a merger situation qualifying for investigation.

Market definition

For the purposes of this inquiry we took the test of the relevant market to be whether a hypothetical monopolist could profitably impose a non-transitory 5 per cent increase in price or equivalent reduction in quality. Applying this test we found that casino gaming was a separate market from other forms of gambling and that London was a separate market from other parts of the UK.

LCI claimed that the more up-market London casinos were in competition with casinos overseas. It pointed to the substantial increase in the size and geographical spread of the global casino industry in recent years and argued that this had had the effect of taking custom away from London casinos. Capital and other casino operators denied that there was an international market. They argued that the foreign customers of London casinos came to London primarily for purposes other than gaming.

We conclude that there is not an international market for the majority of players in up-market London casinos, but there is an international dimension to the market for some players. Although such players are likely to be a small proportion of total customers, they provide a substantial part of the revenue of up-market London casinos.

In our view, it would be feasible for a casino operator to discriminate between inter-nationally mobile players and others, particularly in the provision of complimentary food and drink which is currently a significant area of cost for casino operators. Applying our market definition test, we conclude that the relevant market consists of casinos in London rather than casinos throughout the world.

There was broad agreement among those who gave us evidence that London casinos could be segmented and that the proposed merger would affect the segment which contained the more up-market casinos. The various parties defined the segments in different ways, but the various definitions did not make a great deal of difference to market share or other issues material to our inquiry. On the basis of factors such as location, quality of facilities and drop per head we conclude that the relevant market consists of five of LCI's seven London casinos, both of Capital's casinos and three casinos owned by third parties; we refer to these casinos together as the `upper segment'. On this definition, LCI's share of the market in 1996/97, calculated by reference to drop, was 48 per cent and Capital's was 31 per cent.

Critical features of the market

The British casino industry is highly regulated. Would-be casino operators have first to obtain a certificate of consent from The Gaming Board for Great Britain (the Gaming Board) and then a licence from the local licensing authority. To obtain a licence, operators must demonstrate that there is unsatisfied, unstimulated demand for the kind of facilities they propose to provide. The way in which licensed operators run their businesses is also closely controlled. For example, gaming odds are fixed by law and there is a prohibition on advertising in Great Britain.

Some relatively minor deregulation measures have been introduced recently; further measures have been proposed, but their implementation and timing are uncertain.

Barriers to entry to the relevant market are high, the main one being the need to demon-strate the existence of unsatisfied demand. The Gaming Board told us that for London as a whole, existing casino capacity was sufficient to meet demand. Entry to the upper segment is particularly difficult because of constraints on location. There has been very little entry to the relevant market since 1983, either from new casinos being started or from existing casinos being repositioned up-market.

Although regulation severely limits the scope for competition, within these limits competition is vigorous. Casinos compete on matters such as the quality of their premises and services, maximum and minimum staking limits, and the waiving of ancillary charges, particularly through the provision of complimentary food and drink.

Effects of the merger

The merger would increase LCI's share of the relevant market by drop from 48 to 79 per cent. As entry barriers are already high, any effect of the merger on entry will necessarily be at the margin. Never-theless, we believe it would increase entry barriers by making it easier for an enlarged LCI both to absorb small increases in demand and to ensure that there are no gaps in the market, thus reducing opportun-ities for new entrants and existing operators with casinos in other segments, and by discouraging new entrants who would perceive this to be the case.

The merger would substantially reduce competition by removing LCI's largest competitor from the relevant market. As international competition affects only the relatively small number of inter-nationally-mobile players, it would not offset the loss of domestic competition for London-based players.

Were the merger to go ahead, the limited level of domestic competition would be the only commercial constraint on LCI's freedom of action to reduce quality or raise charges for its London-based customers. We believe this gives these customers inadequate protection, and the majority of us conclude that it is probable that LCI would seek, progress-ively and selectively, to reduce the net costs it incurred on complimentary services to its London-based customers, with a consequent reduction in standards for those customers.

The merger would reduce the number of casino groups between which a customer could choose. As customers sometimes feel badly treated by a casino operator and want to game elsewhere, we think that having fewer casinos groups from which to choose would be adverse to their interests.

Vigorous competition frequently leads to innovation, providing customers with new choices. We believe innovations that were primarily attractive to London-based customers would be less likely to occur if the merger went ahead, because of the reduction in domestic competition.

The Gaming Board told us that it did not believe the merger raised any regulatory problems. In our view, there must be some risk of complacency about compliance by a single company if it controlled nearly 80 per cent of the market. However, we think that the impact of the merger on regulatory control is unlikely to be substantial.

LCI claimed that the merger would enable it to promote itself more effectively abroad, attracting additional custom to London casinos. We think that LCI and Capital acting separately are more likely to stimulate competition for and attract overseas customers than would LCI acting alone.

We find that the merger would have no public interest benefits to offset the adverse effects identified in paragraphs 1.12 to 1.16. We therefore conclude that the proposed acquisition of Capital by LCI may be expected to operate against the public interest.

Recommendations

We considered a range of possible remedies other than prohib-ition of the merger. We concluded that none of them would deal adequately with the adverse effects of the merger. We therefore recommend that the merger be prohibited.

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