SUMMARY OF LONDON CLUBS INTERNATIONAL
PLC AND CAPITAL CORPORATION PLC: A REPORT ON THE MERGER SITUATION
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 C
lubs International 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 (1) 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 internationally 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 (2) 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 demonstrate 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. Nevertheless,
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 opportunities 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 internationally-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, progressively 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 prohibition 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.
Footnotes:
1. We refer to these players as "internaionally mobile" and
other players as "Lonodon-based" recognizing that the latter
group will include people visiting London for purposes other than gaming.
2. Drop is the money exchanged
for chips.
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