CMA clearance of the ABF/Hovis transaction

At first glance, this was not a deal the CMA was likely to clear unconditionally (or at all).

The merger brought together two of the three leading bakery brands in the UK (Hovis and Kingsmill) and, in some product categories, the parties had a very high (80% plus) share of supply.

However, the parties argued that the CMA should apply the so-called “failing firm” defence and take into account the fact that ABF’s bakery division, Allied Bakeries (AB), had suffered significant losses for the last 14 years and would be liquidated if the deal didn’t proceed.

What is the failing firm defence?

The failing firm defence applies where, regardless of whether the deal in question goes ahead, the competitive constraint provided by one of the merging parties as a separate competitor to the other will be lost. In those circumstances, the transaction may not be expected to give rise to a “substantial lessening of competition” and should be cleared to proceed.

To take advantage of the failing firm defence, merging parties must show that, absent the deal:

1. the relevant firm is likely to have exited the market (through failure or otherwise), and
2. there would not have been an alternative, less anti-competitive purchaser for the firm or its assets, at a price above their liquidation value.

Historically, it has been considered extremely difficult to satisfy the CMA that these conditions (particularly limb 2) are met.

What did the CMA conclude in the case of AB?

The CMA found relatively early in its Phase 2 process that AB would have exited the market in Great Britain and Northern Ireland absent the merger. In coming to this conclusion, it considered:

• ABF Board documents from 2024 which referenced only two options for the business – a merger with Hovis or exit;
• AB’s sustained losses, stemming from some AB-specific factors but also a number of market-wide factors affecting revenues and profitability across the sector, including (a) a long-term decline in demand for plant bread (i.e., pre-sliced, packaged bread); (b) a shift in sales from higher-margin branded bread to lower-margin private label bread; (c) consumer preferences shifting from plant bread to less processed bread products such as sourdough; and (d) significant cost increases which had only been partially passed on to customers, or been passed on with a delay;
• whether the business could be restructured successfully, taking into account actions ABF pursued to try to improve the performance of AB, actions considered but not pursued and possible options not considered; and
• ABF’s ability and incentive to provide continued financial support to AB.

In relation to limb 2, the CMA found that there was no alternative buyer for AB in Great Britain. In relation to Northern Ireland, however, the CMA’s interim finding was that there were financial and strategic reasons to indicate that AB Northern Ireland would be attractive to a potential purchaser. This was corroborated by interest shown by potential purchasers in the ongoing sales process for AB Northern Ireland which ABF was running in parallel to the CMA’s investigation.

However, within less than two months of the CMA’s interim report, the parties persuaded the CMA to change its mind in relation to Northern Ireland. Having gathered feedback from a large pool of potential purchasers and scrutinised the sales process conducted by ABF (which had, by that point, been running for around five months and reached final offer stage), the CMA found that the most likely scenario absent the transaction was one in which there would not have been an alternative less anti-competitive purchaser willing to pay more than liquidation value for the AB Northern Ireland business.

On this basis, the deal was cleared unconditionally.

How long was the CMA’s process and were the parties able to speed things up at all?

Having signed the SPA on 15 August last year, the CMA officially began its Phase 1 review on 19 December. The interim was spent engaging in so-called “pre-notification” discussions with the CMA, which included sharing various drafts of the merger filing with the CMA, participating in a “teach-in” session for the CMA case team and providing it with internal party documents, supporting evidence and responses to requests for information.

Shortly after the start of Phase 1, the parties applied to have the case “fast-tracked” to a Phase 2 in-depth investigation by the CMA. Although this removed the option of a Phase 1 clearance, it meant that we did not have to wait the full 40 working days to move into Phase 2. Shortly after commencing Phase 2, the CMA published an “areas of focus” document, replacing its usual Phase 1 decision and allowing the CMA and the parties to allocate resources effectively to those issues most important to the investigation.

The CMA published its interim report on 26 March and a supplementary interim report on 21 May (to reflect its revised interim findings in relation to Northern Ireland described above). We then obtained a final decision on 16 June 2026.

Had the parties not pushed the CMA to revise its interim findings, we suspect a final decision would have come sooner.

What are the key takeaways for PE firms from the CMA’s review of this deal?

The CMA showed a willingness in this case to accept a failing firm argument which would have been almost unthinkable a few years ago, particularly in such a concentrated sector.

The analysis was rigorous – almost 90 pages in the CMA’s 111-page final report are dedicated to it – but in a difficult economic climate, firms should be aware that failing firm arguments may be a way through an otherwise difficult CMA clearance process.

As always, internal documents pre-dating the deal and prepared independently of any transaction discussions will be crucial, so care should be taken to make sure that all supporting evidence stacks up before pursuing this route.

Firms should also consider if a deal may be a good candidate for the CMA’s “new” fast-track process (introduced on 1 January 2025). As mentioned above, this route removes the possibility of obtaining Phase 1 clearance. However, in more complex cases, parties may feel that their resources are best spent (largely) skipping Phase 1 and focusing on the Phase 2 process where the evidentiary threshold the CMA must apply when deciding whether to clear the deal is lower.

[1] Walker Morris advised Endless LLP and Hovis on the CMA’s investigation and Endless LLP on the wider transaction.