The Turkish Competition Board approves a merger in the movie services market, subject to remedies (Mars Sinema/AFM Case)
On 9 April 2012, the Turkish Competition Board made public its reasoned clearance decision on the merger of the two major cinema chains in Turkey, Mars Sinema and AFM. Following its preliminary evaluation, the Board initiated second-phase investigations in light of fears that the proposed transaction (as defined below) could raise competition concerns. The clearance decision was rendered on 17 November 2011, subject to the remedies implemented by the parties.
The Turkish Competition Board (the “Board”) recently (on 9 April 2012) made public its reasoned clearance decision on the merger of the two major cinema chains in Turkey ‑ namely Mars Sinema Turizm ve Sportif Tesisler Isletmeciligi A.S. (“Mars Sinema”) and AFM Uluslararasi Film Produksiyon Ticaret ve Sanayi A.S. (“AFM”). These companies operate numerous cinemas located in different cities in Turkey. Following its preliminary evaluation, the Board initiated second phase investigations in light of fears that the proposed transaction (as defined below) could raise competition concerns. The clearance decision was rendered on 17 November 2011, subject to the remedies submitted by the parties.
The merger clearance comprises two transactions. With the first transaction, Mars Sinema shall acquire the majority of the shares and sole control of AFM. With the second transaction, Esas Holding A.S. (“Esas Holding”) shall acquire half of the 100 per cent share held by Actera Partners L.P. (“Actera Partners”) in Spark Entertainment Ltd. Sti.; which controls Mars Sinema. As the result of these two transactions, Mars Sinema and AFM shall be jointly controlled by Esas Holding and Actera Partners (both transactions shall together be referred to as the “Transaction”).
The relevant market definition
The Board defined alternative markets within the scope of its evaluations. It identified the widest market definition as the “cinema services market”. In this respect, it distinguished cinema services from other similar services such as pay-per-view, DVDs and VCDs by considering that cinema services are seen by consumers as providing a social activity. In addition to consumer preferences and the dynamics of the cinema industry in Turkey; the Board also took into account the approach followed in a decision that the UK’s Office of Fair Trading gave regarding the same market. Accordingly, the Board acknowledged that the Transaction should be assessed within the scope of the narrowest market definition and after considering which competitors impose competitive pressure. Therefore, the Board left the smaller-sized cinemas with limited screen capacities out of the scope of these market definitions. The Board further narrowed down the market definition into two sub-markets, namely (i) multi-screen cinema services and the (ii) traditional/shopping mall cinema services.
Despite putting forward these alternative market definitions, the Board did not further elaborate on the level of competition in these markets, nor (according to the decision) did it take these market definitions into account as a basis for its evaluations. Therefore, these market definitions seem to be irrelevant to the Board’s analysis of the Transaction.
The relevant geographic market definition
As will be seen later, the Board reached its conclusions by conducting an economic analysis of the potential effects of the Transaction. Within that framework, it was crucial to identify the appropriate geographic area within which the Transaction could raise competition concerns. Therefore, since it constitutes the basis of the Board’s evaluations, the definition of the geographic market is an important element of the decision.
Cinemagoers usually choose to go to cinemas located in their hometowns. In this respect, the Board defined the relevant geographic market on the basis of cities. Furthermore, it took into account four particular cities in which both of the parties are competing. These four cities (Istanbul, Ankara, Izmir and Antalya) were identified by the Board as subject to concentration as a result of the Transaction. In addition, the Board divided the geographic market of Istanbul into two sub-markets: namely, the European side and the Asian side. The Board also found it necessary to define the geographic market by also considering the supply-side perspective. As a corollary to this, it added the geographic market of “Turkey” by considering the nature of the relationship between producers, distributors and cinema owners.
It should be noted that despite these alternative geographic market definitions, the Board made its evaluations within the scope of different geographic areas. In order to identify the areas in which concentration would occur, it further divided the four cities into 38 geographic markets on the basis of “15-20 minute isochrones” (areas within a 15/ 20-minute driving distance from AFM cinema locations). The economic analysis was carried out within the scope of these geographic markets. Within this framework, the Board did not use the geographic definitions primarily put forward in the decision as a basis of assessment.
The Board’s assessment
Under the relevant legislation, the Board makes an assessment of the notified mergers and acquisitions within the scope of Article 7 of Law no 4054 on Protection of Competition (the “Law”), which prohibits mergers and acquisitions that lead to the creation or strengthening of a dominant position that would result in significant lessening of competition. Although Article 7 stipulates that the creation or strengthening of an existing dominance must be identified, the Board did not make an explicit evaluation in this regard within the decision. On the other hand, it carried out an analysis of the potential effects of the Transaction (as regards to whether it would give rise to a concentration and hinder competition in the relevant market), on the basis of economic assessments.
The Board first analysed the market shares, the concentration levels and the market structure pre- and post-Transaction. The Board analysed the market shares of Mars Sinema, AFM and their competitors. The market shares were calculated on the basis of (i) the number of tickets sold, (ii) income generated from ticket sales and (iii) the total income generated from cinema services in general over the years 2007 and 2010 and the first quarter of 2011. In this respect, the Board asserted that this was the most accurate market share calculation method within the framework of consumer preferences, and should be used to determine the competitive power of the market players. According to the outcome of the market share calculations, Mars Sinema and AFM are the top two market players within the scope of the above-defined different geographic market definitions.
The Board further analysed the level of the HHI change by considering the above-mentioned three elements with respect to the period encompassing 2006 to 2010 and the first quarter of 2011. Further to its assessment, although the level of the HHI change and the market share figures before and after the Transaction were found to constitute indications of possible competition concerns, the Board concluded that the Transaction would not lead to a significant lessening of competition due to the high level of potential competition in the market. In that sense, the Board underlined that there are no legal or financial barriers to entry into the cinema services market.
On the other hand, the Board stated that the Transaction could nevertheless give rise to competition concerns in certain micro geographic markets (i.e. some of the above-mentioned 38 geographic markets). The Board then carried out an economic analysis within the scope of these geographic markets to analyse the potential effects of the Transaction on the consumer prices. As a result, the Board reached the conclusion that the consumer prices in five out of the 38 geographic markets would increase and determined that the Transaction would significantly impede competition in these five geographic markets.
The Board has also briefly evaluated the effects of the Transaction on the vertical relationships with suppliers. In this sense, the Board assessed whether the parties might carry out anti-competitive practices against distributors by using the high market power they would obtain after the Transaction. However, it was concluded that such anti-competitive practices would not be likely to occur due to the highly concentrated structure of the distribution market and the general nature of business practices in the industry.
Remedies submitted by the parties
Following the issues raised by the Board, the parties presented remedies in order to eliminate the competition concerns raised. They undertook to divest certain cinemas located in Istanbul, Ankara, Izmir and Antalya. Accordingly, the parties presented two lists to the Board presenting (i) cinemas to be sold to third parties and (ii) the cinemas to be closed down. The remedies include divestiture of 12 cinemas in total operated by the parties. After analysing the effects of the remedies, the Board concluded that the proposed remedies are sufficient to eliminate the competition concerns raised by the Transaction.
The Board unanimously decided to clear the Transaction conditional upon the remedies submitted by the parties and also imposed an obligation upon the parties to provide information to the Board about the ticket prices and the price changes every year at the end of January, for a period of five years.
From this point on, it seems that the Turkish Competition Authority will keep a close watch on Mars and AFM, who together now form the the largest cinema chain in Turkey. This clearance decision on the merger of the top two players in the market has drawn the attention of both competition law observers and the cinema industry and will be the subject of intense discussions. A Turkish film producer, Lutfi Kara, has already expressed his concerns. At the gala of his film, “Ayaz”, he announced the withdrawal of his film to protest the monopolisation of the cinemas. He mentioned that he could find only a limited number of cinemas to show his film and complained about the lack of support from cinemas in this regard. This remark may be the first of many to come from the cinema industry. The repercussions of the decision are yet to be fully appreciated.
For further information contact Yaprak Gönlüşen (firstname.lastname@example.org).
Source: Yaprak Gönlüşen, The Turkish Competition Board approves a merger in the movie services market, subject to remedies (Mars/AFM Case), 17 November 2011, e-Competitions, No45909, www.concurrences.com
 The decision of the Office of Fair Trading dated 23 September 2005 on the acquisition by Vue Entertainment Holdings (UK) Limited of A3 Cinema Limited (including its subsidiary, Ster Century (UK) Limited).
 Please note that the Board does not include market share information in its reasoned decisions due to confidentiality reasons.