State aid — United Kingdom — State aid No C 16/2005 (ex N232/2004) — Envisaged sale of the Tote to the Racing Trust — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty   (Text with EEA relevance)
Date: 2005-07-08
Institutions: European Commission
Subjects: State aid, United Kingdom, animal show, control of State aid, equidae, game of chance, restrictive trade practice

8.7.2005

EN

Official Journal of the European Union

C 168/41

STATE AID — UNITED KINGDOM

State aid No C 16/2005 (ex N232/2004)

Envisaged sale of the Tote to the Racing Trust

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2005/C 168/09)

(Text with EEA relevance)

By means of the letter dated 1 June 2005 reproduced in the authentic language on the pages following this
summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid down
in Article 88(2) of the EC Treaty concerning the abovementioned measure.

Interested parties may submit their comments on the measure in respect of which the Commission is initi-
ating the procedure within one month of the date of publication of this summary and the following letter,
to:

European Commission
Directorate-General for Competition
State-Aid Registry
B-1049 Brussels
Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

Procedure

By letter dated 27 May 2004, the UK Government notified the
envisaged sale of the Horserace Totalisator Board (‘Tote’) to a
consortium of British racing interests (‘Racing’), pursuant to
Article 88(3) of the EC Treaty. The notification was on various
occasions supplemented, most recently by letter dated 15
March 2005.

Description of the measure

The Tote is entrusted with the provision of so-called pool
betting services (subject to a statutory monopoly), but is also
active in the so-called fixed odds betting market (in competition
with other bookmakers). In the context of a proposal to open
the pool betting market to competition, the UK Government
intends to abolish the existing statutory monopoly and to
privatise the Tote. Given the unusual situation that the Tote is
not owned by anyone,
the sales process is preceded by a
transfer of the Tote's assets to a new entity held by the Govern-
ment which will afterwards sell the Tote in a closed sales trans-
action to Racing. The new Tote would, for a transitional period
of 7 years, be awarded an exclusive licence for pool betting
activities. When acquiring the new Tote, Racing would not pay
a price reflecting the market value of the Tote but only 50 % of
the so-called ‘fair value’ of the Tote to Racing. This fair value
would be established by an independent expert shortly before
the sales transaction.

Assessment

Based on the information submitted by the UK Government,
the Commission has doubts concerning the compatibility of
the envisaged sales transaction.

In line with established Commission practice, the sale of public
companies can only be regarded as being free of aid if either
the sale is preceded by an open, transparent and unconditional
procedure or if the sales price corresponds to or exceeds the
market value of the company as established by an independent
expert.
In the case at issue, the presence of aid cannot be
excluded given that Racing is to acquire the Tote at 50 % of
the ‘fair value’ instead of paying the full ‘market value’.

The UK Government has maintained that the aid is be compa-
tible under Article 87(3)(c) EC Treaty. The Commission has
doubts that the aid is necessary and proportionate. As regards
aid in favour of the horseracing sector, the Commission has
doubts because the UK Government has not demonstrated
which activities needed State support and that the aid chan-
nelled into the sector was limited to what was necessary.
Furthermore, the aid could also benefit the Tote's betting activ-
ities and thus lead to distortions on the betting market. Also in
this respect, the Commission has doubts about the compat-
ibility because the UK Government has not shown that the aid
was necessary to maintain an adequate level of pool betting
activities. The UK Government also maintained that the aid was
compatible under Article 87(3)(d) EC Treaty. However,
the
Commission has doubts that the aid resulting from the envi-
saged sales
transaction could be regarded as a measure
promoting culture. The aid is not mainly targeted at a cultural
product or project.

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Official Journal of the European Union

8.7.2005

Therefore, at the present stage of the procedure the Commis-
sion has doubts on the compatibility of the envisaged sales
transaction with the EC Treaty. Consequently, the Commission
has decided to initiate the formal investigation procedure laid
down in Article 88(2) of the EC Treaty.

Pursuant to Article 88(3) of the Treaty, the measure may not
be put into effect before the Commission has reached a final
decision. Furthermore, all unlawful aid can be subject
to
recovery from the recipient pursuant to Article 14 of Council
Regulation (EC) No 659/1999.

TEXT OF LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
on the measures referred to above, it has decided to initiate the
procedure laid down in Article 88(2) of the EC Treaty.

I. PROCEDURE

(1) By letter registered on 27 May 2004, the UK authorities
notified the envisaged sale of the Horserace Totalisator
Board (the “Tote”) to a consortium of British racing inter-
ests (“Racing”), pursuant to Article 88(3) of the EC Treaty.
The Commission requested additional information on the
notified transaction by letter of 29 June 2004. Following
an extension of
the UK Government
submitted additional information by letter registered on 9
September 2004.

the deadline,

(2) After a meeting between the UK authorities and the
Commission took place on 23 September 2004, the UK
authorities announced, by letter of 24 September, that
they would submit additional information. This informa-
tion was finally submitted by letter registered on 15
March 2005. By letter dated 13 April 2005,
the UK
Government agreed to extend the deadline for adopting a
decision on the notified transaction.

II. DESCRIPTION OF THE MEASURE

(3) The UK Government is currently in the process of moder-
nising the British gambling industry. To this end, the UK
government has brought forward the Horserace Betting
and Olympic Lottery Act, which gained Royal Assent on
28 October 2004. One of the objectives of the overall
reform is to open up the pool betting sector to competi-
tion. In this context, the UK Government is seeking to
transfer ownership of
the Tote (a public law betting
operator) to the private sector and to abolish the Tote's
current monopoly for pool betting on horseracing. The
Tote would cease to exist and all assets and liabilities
would be vested into a new company limited by shares
wholly owned by the UK authorities. In order to ensure a
smooth transition to full competition, the current statu-
tory monopoly will be replaced with a 7-year exclusive
licence for this successor company (1).

(4) The UK authorities

the

selling

successor
envisage
company in a closed sale transaction to the Racing
Consortium (“Racing”), which represents
the various
constituent parts (mainly trade associations) of the horse-
racing sector. Among the various
the
Government rejected the sale by competitive auction,
which — while likely to maximise proceeds — would
probably lead to a break-up of the Tote's business and
might have resulted in a reduction in the Tote's contribu-
tions to Racing over time.

sales options,

(5) In order to ensure that Racing will pay a fair price, the
UK authorities have instructed an independent consul-
tancy to carry out a valuation of the Tote, including the
exclusive licence, on the basis of a well established,
commonly-used methodology (2). According to the UK
authorities, the evaluation as well as the sales transaction
itself needed to take into account the various objectives
pursued by the Government, namely that the Tote was to
be sold as a single entity, that the sale should not impede
Tote's commercial development, that the sale should not
reduce horsebetting opportunities, that the financial inter-
ests of both the taxpayers and Racing were safeguarded
and that the sale should reduce uncertainty over Tote's
future.

(6) The thus determined “fair value of the Tote to Racing”
was estimated by PriceWaterhouseCoopers (in May 2004)
as being between […] (*) and […]
including an
increase due to possible synergies: […]). The UK authori-
ties recognised that the market value of the Tote which
could be achieved in an open tender would probably be
10-30 % higher (i.e. in the range between […] and […]
million, based on a calculation in May 2004). However,
there are indications that the market is willing to pay
substantially more (i.e. around GBP 500 million).

(or

(7) For reasons explained in more detail below (cf. para. 21
and 22), the Government plans to sell the Tote to Racing
at 50 % of the “fair value” as established by the indepen-
dent expert in the course of a final valuation nearer the
time of the sale. In this context, the UK Government also
explained that Racing would not and could not pay the
full market value.

III. BACKGROUND INFORMATION

A. Parties involved in the envisaged transaction

1. The Tote

(8) The Tote (Horserace Totalisator Board) was established in
1928 as a statutory corporation with no equity shares (i.e.
no owner). Since its inception, the Tote enjoys a legal
monopoly for pool betting on horseracing. The purpose
of this was to provide punters with an alternative to fixed
odds betting and to secure a stable source of income for

(1) The proposed exclusive licence would be different from the present
statutory monopoly in so far as the licence contains certain obliga-
tions imposed on the licence holder which do not exist at present
(e.g. regarding the scope of pool betting activities and relationship
to other operators).

(2) PwC performed a discounted cash flow valuation for the first ‘indi-
cative valuation of the Tote’. In a final evaluation, the results would
be crosschecked against other valuation techniques.

(*) Covered by the obligation of professional secrecy.

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the British horseracing industry. According to the UK, the
Tote was, ever since its establishment, effectively run in
the interests of the racing sector. The profits generated by
the Tote would not be paid to the Government as divi-
dends but would either remain within the corporation or
be distributed on a voluntary basis to the horseracing
in the form of direct payments to
sector (for instance,
racecourses
sponsorship
the Tote pays, as all other
programme). Furthermore,
bookmakers, the so-called Horseracing Betting Levy, plus
additional contributions as agreed with the Horseracing
Levy Board (3).

and through a

commercial

(9) In 1961, betting away from racecourses became legalised
and licensed betting shops opened throughout the UK.
From 1972, the Tote was also allowed to offer fixed-odds
bets on horseracing and other sporting events.

(10) Following a recent re-branding, the Tote is operating two
divisions: “Totesport” and “Totepool”. Totesport represents
the Tote's retail, phone and internet businesses. As part of
its retail business, the Tote owns 78 betting shops at 47
racecourses and over 450 licensed betting shops in the
UK. Totepool comprises the Tote's pool betting business
and the retailing of pool betting products on British race-
courses (4).

(11) The Tote generated a turnover (all figures for the year to
31 March 2004) of GBP 1,471 million, a profit before
taxation of GBP 11,7 and contributions to Racing of GBP
11,5 million. Pool betting on horseracing, for which the
Tote still holds a legal monopoly, accounted in that same
period for a turnover of GBP 269 million, approximately
18 % of the total turnover (5).

2. The Racing consortium

interests of

(12) The UK authorities envisage selling the Tote to the Racing
consortium (or Racing Trust) which comprises representa-
tives of the racing sector. The Racing consortium includes
the Racecourse Association (an association of owners and
organisers of racecourses that markets the supply of TV
pictures and rights), the Racehorse Owners Association (a
private company having as its principal activity the
promotion and protection of
racehorse
owners), the Jockey Club (responsible for the governance
and regulation of horseracing), the Industry Committee for
horseracing (an umbrella organisation comprising represen-
tatives from trade bodies for jockeys, trainers, stable lads,
bloodstock agents and others) and the British Horseracing
Board (BHB). The BHB's main responsibilities include: stra-
tegic planning of, and formulating policy for, British
horseracing; encouraging the breeding of bloodstock;
central marketing and promotion of British racing;
controlling the fixture list and race planning. Some of the
members of the Racing consortium are represented on the
Board of the Tote.

(3) Bookmakers have to pay a percentage of their profits to the Horse-
racing Levy Board to finance the racing industry. The Tote's
payment in respect of fixed odds betting are similar to other book-
makers whereas the payments for its pool betting operations are
settled between the Tote and the Horseracing Levy Board.

(4) Source: Tote Annual report 2004.
(5) Op. cit.

B. Markets concerned by the envisaged transaction

1. Betting market

(13) Horserace betting is available in most Member States and
generally operated by state sponsored or state run exclu-
sive pool betting operators similar to the Tote. In many
countries, these systems exist to provide financial support
to the horseracing sectors of
the respective Member
States.

(14) Horserace betting in the UK can take two distinct forms:
pool betting and bookmaking (fixed odds betting). In pool
betting, all the stakes on a race are pooled and a deduc-
tion is made to cover costs and to allow for a reasonable
profit for the betting organiser with nobody knowing the
precise return for a given ticket until after the race. The
remainder of the pool is then equally divided among the
winning tickets. Hence, pool customers bet against each
other whereas in fixed-odds betting, customers bet against
the bookmaker on the basis of fixed odds set by the
betting operator. Whereas pool betting in the UK is at
present subject
fixed odds
betting is an activity in a fully competitive environment.

to a statutory monopoly,

(15) Bookmakers operate

racecourses,

through
at horse
licensed betting offices, over the telephone and through
the Internet. Five companies account
for around two
thirds of betting turnover — Ladbrokes (26 % of off-
course turnover), William Hill
(12 %),
Stanley Racing (6 %) and the Tote (2 %). A number of
companies, known as betting exchanges, also offer
services over the Internet where consumers can accept
and offer bets on horseracing. The largest of these compa-
nies is “Betfair” (6).

(22 %), Coral

2. The racing sector

(16) The racing sector comprises various commercial activities
and markets like the organisation of racecourses, an impor-
tant spectator sport in the UK with more than five million
people attending races every year. There are 59 horse
racecourses in Great Britain where the British Horseracing
Board runs races. Half of these race courses are managed
by three large groups: Northern Racing Ltd, Arena Leisure
Plc and The Jockey Club (through their subsidiary, the
Racecourse Holdings Trust). The remaining courses are
owned independently (7).

(17) Another important activity of the racing sector is horse-
breeding. There are several thousands thoroughbred bree-
ders in the UK, though only a fraction of these, about
350, are engaged full time. The principal firms involved
in the sale of horses at auction are Tattersalls and
Doncaster Bloodstock Sales, which together accounted for
over 95 % of the market in 1999 (8).

(6) Source: ‘Horserace Betting and Olympic Lottery Bill — Regulatory
Impact Assessment’, prepared by the Department for Culture, Media
and Sport, December 2003, p. 6. These figures are based on 1997
data and the Tote's market share as of today is higher (around 5 %).

(7) Source: Op. cit., p. 5.
(8) Source: Op. cit., p. 6.

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(18) Further commercial activities in the racing sector consist
of the supply of TV pictures/TV rights, horseracing being an
important televised sport in the UK. The racing sector also
supplies pre-race data which include data for each race,
names of riders and horses running in specific races.
Bookmakers need this data to take bets on races and
broadcasters
horseracing
programmes. All players which are part of the Racing
the racing
consortium are important constituents of
sector.

prepare

their

use

to

it

(19) The Racing sector receives financial support through the
Horserace Betting Levy Board (“Levy Board”). The Levy
Board has the responsibility of collecting the betting levy
from bookmakers and Tote and to apply the funds to the
improvement of horseracing, improvement of breeds of
horses as well as the advancement of veterinary science or
veterinary education. In the context of the current reform
plans, the levy system would be abolished and replaced by
income from commercial sources (9).
the
racing sector benefited from voluntary contributions made
by the Tote, in particular in the form of sponsorships.

In addition,

IV. OBSERVATIONS MADE BY THE UK GOVERNMENT

AS WELL AS THIRD PARTIES

A. Arguments brought forward by the UK Govern-
ment maintaining that the envisaged sales trans-
action should be deemed compatible with the EC
Treaty

1. The envisaged sales transaction does not involve State aid to

Racing

(20) The UK authorities are of the opinion that the envisaged
sales transaction does not involve State aid, and, as a
subsidiary line of argument, even if there was aid, the aid
should be deemed compatible.

(21) In the notification of May 2004,

the UK authorities
argued that the closed sale to Racing for a monetary
consideration representing 50 % of the Tote's “fair value
to Racing” reflected the government's recognition of the
racing industry's stake in the Tote (10). Such a split would
also avoid potential subsequent litigation if the Tote were
not sold to Racing.

(22) In its latest submission of March 2005, however, the UK
Government clarified that, in its view, Racing was unlikely
to sustain a successful proprietary claim in the Tote in
private or public law. However,
the UK Government
maintains that — even in the absence of a legally enforce-
able claim — the racing industry had a legitimate interest
in the Tote. In the absence of any other logic, it was only
equitable to settle that interest by a “50:50 split”.

(9) However, these plans have been postponed at least until 2009,
apparently because of difficulties in finding viable solutions for
replacing the levy income with commercial revenues.

(10) As explained above (cf. para. 8), the UK Government maintained
that the Tote was, ever since its establishment, run in the interests
of Racing.

(23) As regards the envisaged payment by Racing of a consid-
eration taking into account “the fair value of the Tote to
Racing” instead of the market value, the UK Government
this was justified because Racing did not
argues that
benefit from synergies with betting activities, since it was
not yet active in the betting market. Other potential
buyers (bookmakers, alone or with financial
investors)
with purely commercial considerations would be able to
reap these synergies.

(24) Finally, the UK Government argued that the Government
would retain certain claw back rights under the terms of
the envisaged sale agreement. If Racing were to sell its
share in the successor company or
the successor
company were to sell its assets or any significant propor-
tion of them to a third party within a specified period, it
would have to pay back to the Government a percentage
of any profits the Government would have made from
such a sale had the Government not sold its stake (11).

if

2. Even if the envisaged sales transaction involved aid, this aid
should be regarded as compatible with the EC Treaty either
under Article 87(3)(c) or Article 87(3)(d) of the EC Treaty

(25) With regard to Article 87(3)(c) EC Treaty, the UK Govern-
ment stressed that the envisaged sales transaction was in
the Community interest because it was part of
the
Government's plans to open up the pool betting sector to
competition and to reduce the level of State involvement
in the industry. Selling the Tote to Racing would also
preserve the Tote as an independent player in the UK
betting industry which is dominated by three mayor
players.

(26) Furthermore, the closed sale of the Tote to Racing facili-
tated the development of certain economic activities such
as horseracing and pool betting because it ensured the
self-financing of
the horseracing sector and helped to
preserve and develop pool betting.

(27) The UK Government argued that the closed sale would
adequately address market failures arising in the horsera-
cing sector: The racing sector generates positive external-
ities for the betting industry which base some of their
activities on horseracing. On the other hand, the racing
industry is not able to reap the full benefits of these
externalities. The financing of the racing sector by means
of charging bookmakers for the value of the horseracing
products through a mandatory betting levy or other
revenues generated through the commercial exploitation
of the racing product (e.g. sale of TV pictures) have been
insufficient and/or
In the
absence of sufficient financial funds channelled from e.g.
the betting industry back into racing, an economically
inefficient level of activity in the racing sector would take
place. It was also argued that market forces alone did not
ensure a fair distribution of revenues between all stake-
holders of the racing sector (race course owners, horse
breeders, etc.).

fraught with uncertainties.

(11) The circumstances in which the clawback clause could be triggered

would still need to be negotiated with Racing.

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(28) If Racing were the owner of the Tote, it could directly
exploit some of the positive externalities which the horse-
racing product provides for the betting industry. This
would — according to the UK authorities — be an effi-
cient way to address the identified market failure. The
income from the Tote would be used for the development
of the whole horseracing sector.

(29) As regards the development of pool betting,

the UK
Government claims that the universal coverage and devel-
opment of pool betting across Britain at the end of the
seven year transitional period (after the exclusive licence
has come to an end) could only be assured if the Tote is
owned by Racing rather than by a commercial book-
maker.

(30) In addition, the UK Government maintains that the closed
sale did not affect trading conditions and competition in
the Community to an extent that was contrary to the
common interest. There were almost no negative effects
on competition and effects on Intra-Community trade
were negligible. This was in particular due to the fact that
the Tote held only a very small share of
the overall
betting market in the UK.

(31) Finally, the UK Government argued that the closed sale
was also compatible with the EC Treaty pursuant
to
Article 87(3)(d) EC Treaty, because the measure promoted
culture and heritage conservation, while not adversely
affecting trading conditions and competition in the Com-
munity. The UK Government argues that horseracing
forms an important part of British culture, being a major
national sport deeply entrenched in British society and
with an important influence on English language and art.

3. The exclusive licence for pool betting

(32) Concerning the award of the exclusive licence for pool
betting to the successor company of the Tote, the UK
authorities explained that the licence was only a technical
means to phase out
the monopoly over a temporary
period of seven years. The UK authorities underline that
the licence is not a contract but rather a regulatory act
whereby a prohibition on the provision of certain services
is relaxed in a limited period of transition from a mono-
poly to an open market for those services. Furthermore,
the licence lacks certain remedies which are typical for a
contract. Notably, if the licence holder fails to carry out
the activities covered by the licence, the grantor has no
remedy of specific performance or damage:
it can only
revoke the licence. Consequently, the UK authorities do
not consider this licence to be a service concession within
the meaning of Directive 2004/18/EC (12) and of
the
Commission's interpretative communication on conces-
sions under Community law (13). Therefore, a closed sale
of the Tote to Racing, including the exclusive licence on
pool betting was justified.

(12) OJ 2004, L 134/114.
(13) OJ 2000, C 121/2.

B. Arguments brought

forward by third parties
alleging that the envisaged sales transaction could
not be regarded as compatible with the EC Treaty

(33) Subsequent to the notification of the envisaged sale of the
Tote, the Commission received comments from several
third parties. These parties claim that the envisaged closed
including the
sale at 50 % of the so-called “fair value”,
award of an exclusive pool betting licence for a period of
7 years, was incompatible with Community law.

(34) It is claimed that the envisaged sales transaction would
enable Racing to acquire a pool betting and fixed-odds
betting business with a recognised and unique brand
without paying a market price. Competitors or other new
entrants looking to establish a similar fixed-odds business
would need to incur much higher cost. Furthermore, since
the transaction was comparable to a “leveraged buyout”,
Racing would not have to pay for the Tote but the price
for the transaction would be effectively financed through
the Tote itself. Since the debt level of the Tote would be
lower than if the Racing Trust had to pay the true market
value,
it would enjoy greater facility to borrow from
capital markets for upcoming investment programmes,
competing directly with the established bookmakers.
Hence, the transaction granted a considerable financial
advantage to Racing. With reference to estimates made by
investment banks in London, it is claimed that the value
of the Tote would be at least GBP 500 million.

(35) Moreover, some parties assert that various conflicts of
interest could arise if the Racing Trust would gain owner-
ship of the Tote as Racing provides various inputs to
bookmakers with which they, as owners of the Tote,
would compete downstream in the betting market.

(36) The aid resulting from this transaction could not be
declared compatible under Article 87(3)(c) EC Treaty
because it was doubtful whether the racing industry actu-
in addition to the existing
ally needed State support
means and revenues generated by normal commercial
activities of this sector. Moreover, the adverse effects on
competition — in particular as regards fixed odds betting
— would be severe and disproportionate.

V. PRELIMINARY ASSESSMENT

A. State aid within the meaning of Article 87(1) EC

Treaty

(37) According to the EC Treaty and consolidated case-law
there is State aid within the meaning of Article 87(1)
when:

— there is an intervention by the State or through State

resources;

— it confers an advantage on the recipient;

— it distorts or threatens to distort competition;

— the intervention is liable to affect

trade between

Member States;

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State resources

Tote through an auction would probably yield higher
revenues for the seller.

(38) Pursuant to the Horserace Betting and Olympic Lottery
Act 2004 assets of the Tote shall be transferred to the
successor company, which is wholly owned by the UK
Government. Consequently, when selling the newly estab-
lished Tote to Racing, the Government disposes of public
property. By selling the Tote below market value, the UK
Government foregoes revenues resulting from the sale of
public property, which involves State resources within the
meaning of Article 87(1) EC.

Advantage

that

(39) In accordance with established practice, the Commission
considers
the privatisation of a publicly-owned
company does not involve a financial advantage to the
acquirer within the meaning of Article 87(1) EC provided
that:

— the company is sold by a competitive tender or an
equivalent procedure, that is open, transparent and
unconditional;

— the company is sold to the highest bidder;

— bidders have enough time and information to carry
out a proper valuation of the assets on which to base
their bids (14).

to ascertain that

(40) If, on the other hand, there is no public tender the trans-
action needs to be examined for possible State aid impli-
cations. The Commission has
the
company is sold at a price corresponding to its actual
market value. The determination of the market price may
rely on studies carried out by independent experts.
Provided that the potential sales price was actually fixed at
or above the market value established by the expert, it can
be assumed that the State behaved like a private investor
operating under normal market economy conditions,
trying to obtain a maximum return from the sale without
pursuing other policy objectives,
including possible
support measures. Under such circumstances, the notified
to include State aid
measure can be assumed not
elements.

(41) Based on the information submitted by the UK authorities,
the Commission has serious doubts that the transaction
can be regarded as being free of aid because, instead of
paying the market price, Racing is supposed to pay only
50 % of what is called a “fair value” of the Tote as esti-
mated by PwC.

(42) In principle, only an independent evaluation of

the
“market value” may replace the tender as a means of
determining the “market price”, with the consequence that
“no aid” is being given. However, the estimation of the
value of the Tote is lowered by the fact that PwC takes
into account that the Tote is to be sold to a specific
buyer (15). The UK authorities admit that the sale of the

(14) XXIII report on competition policy (1993), point 402 and further.
(15) In the introduction to the interim report, PwC states that they were
asked to ‘…calculate an updated indicative valuation range of 100 % of
the equity of the Tote, which reflects the value of the Tote to Racing.’

(43) The reasons for a closed sale to Racing were concerns
about the Tote's future (in case of a sale of different busi-
ness segments) as well as concerns about a possible reduc-
tion of the Tote's contributions to racing over time (if
sold to another commercial bookmaker).
In the preli-
minary view of the Commission, these are policy consid-
erations and not those of a private investor aiming at
maximising his revenues.

(44) The UK Government argued that the envisaged “claw-
back”-clause (16) would eliminate any undue financial
advantage to Racing in case of a re-sale of the acquired
assets. The Commission does not share this view. First of
all, the “clawback”-clause is limited in time (“within a speci-
fied period”) and in scope (sale of the company or “any
significant proportion” of company's assets). Furthermore, it
would only apply in the case of a re-sale thus not elimi-
nating the advantage resulting from the ownership of the
Tote (i.e.
it would only limit the possibilities of Racing
cashing in the advantage) (17). The fact that Racing had
also benefited from financial flows from the Tote prior to
the sales transaction, and will continue to benefit from
such flows after the transaction as the new owner of the
Tote does not exclude the presence of (new) aid. The legal
position of Racing as the new owner of the Tote is more
it has the
advantageous than its previous position (e.g.
legally recognised ownership of the Tote and enjoys more
commercial freedom as regards its business activities).

(45) The Commission is therefore of the preliminary view that
the envisaged sale of the Tote to Racing at a “fair value”
instead of the market value gives Racing a financial advan-
tage.

(46) Furthermore, the Commission considers that the payment
of only 50 % of the “fair value” constitutes an additional
advantage to Racing.

(47) There may be circumstances in which a reduction of the
sales price could be regarded as not constituting aid, e.g.
conceivably where it were demonstrated that the reduc-
tion in the sales price merely reflects the recognition of
Racing's stake (ownership) in the existing Tote or where it
is demonstrated that the reduction is in fact a compensa-
tion for losses suffered by Racing due to expropriation or
similar action as a consequence of the transfer of the Tote
to State ownership (18). It may also be in line with the
behaviour of a private investor to come to an equitable

(16) According to that clause, the Government would get a certain
percentage of the profits generated by any future sale of the Tote
or a significant proportion of its assets.

(17) For similar reasoning, cf. Commission's decision of 20 January
1999 on the acquisition of land under the German Indemnification
and Compensation Act, OJ L 107/21, 24.4.1999.

(18) Cf. Commission's decision of 20 January 1999 on the acquisition
of land under the German Indemnification and Compensation Act,
OJ L 107/21, 24.4.1999.

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agreement in order to avoid costs and uncertainties linked
to possible litigation. That would be the case where the
existence of the respective claims has in principle been
demonstrated and quantified and where a proper risk
analysis has been carried out by the State authorities
leading to the conclusion that such an agreement is in the
State's interest (19). In any case, the sales price could only
be reduced by an amount which corresponds to (or is less
than) the value of the legal claim.

(48) However, the Commission is of the preliminary view that
the UK authorities have not demonstrated any such
circumstances.

(49) The UK authorities have not demonstrated that Racing
had a legal claim regarding the Tote. In the absence of a
legal obligation on the UK Government vis-à-vis Racing,
the conditions of the transaction cannot be regarded as
being free of aid. The Commission does not share the UK
Government's argumentation that also in the absence of a
legally enforceable claim a recognition of what is called a
“legitimate interest” of Racing in Tote could be regarded
as justified and thus not involving State aid. This legiti-
mate interest (i.e. the interest to continue receiving finan-
cial flows from the Tote) has neither been demonstrated
nor quantified. Even if there was such a legitimate interest
of Racing to continue to receive funding, the fact that the
UK Government honours that interest does not exclude
the presence of aid, rather the contrary.

(50) Furthermore, the UK Government explicitly stated that
the transfer of the Tote into State ownership was not a
nationalisation infringing property rights of Racing.
the sales price
the 50 % reduction of
Consequently,
cannot be regarded as a compensation for an expropria-
tion or similar action by the State.

(51) Finally, the Commission considers that, in the absence of
a legally recognised and enforceable claim by Racing, the
Government was not exposed to any financial
risks
concerning the sale of the Tote to a party other than
Racing. Therefore,
cannot be
regarded as being in the State's interest.

the 50 %-arrangement

(52) In light of these considerations, the Commission comes to
the preliminary conclusion that the envisaged payment by
Racing, that is limited to 50 % of the “fair value”, consti-
tutes an advantage to racing.

(53) In summary, based on the currently available figures it is
difficult to establish the exact amount of aid resulting
from the envisaged closed sale of the Tote to Racing.
Based on the fair value estimated by PwC, within a range
between […] and […], and the 50 % reduction, Racing
would be obliged to pay a price amounting to approxi-
mately between […] and […]. When comparing this with
the market value of around GBP 500 million estimated by
some market players, the envisaged sale would provide
Racing with an advantage of at least […].

(19) Cf. Commission's decision of 13 March 2000 regarding the settle-
ment agreement Leuna 2000/Elf/Mider (State aid N 94/98 —
Germany).

Distortion of competition and effect on trade

(54) Finally,

the Commission considers

financial
advantage to Racing and the Tote may distort competition
and affect trade on the respective markets (horseracing
and betting).

that

this

(55) In line with the Commission's assessment in previous
decisions,
the betting
the Commission considers that
market is a European market (20). The competitors of the
Tote (the three main players
in the UK Ladbrokes,
William Hill and Coral) are established in several Member
States and betting operators accept bets on foreign races
(and other sporting events). The effects on trade are also
evidenced by the fact
the Tote offers its betting
services also over the Internet, which is easily accessible
from other Member States. Furthermore, competition and
trade in the racing market and the betting market takes
place notably through the exchange of television pictures
including foreign operators.

that

(56) As regards the horseracing industry, there are many activ-
ities with an international dimension, for example the
organisation of horse racecourses (in particular of interna-
tional reputation), horse breeding or the marketing of tele-
vision rights. Any aid granted to horseracing by the envi-
saged transaction therefore can have an effect on trade.

(57) The fact that the Tote holds a small market share on the
UK betting market does not exclude effects on competi-
tion and trade. In particular given the increased commer-
cial freedom enjoyed by the new Tote, it can be expected
that the Tote will expand its competitive activities.

(58) Horseracing products are important input factors for the
betting market. The constituents of the Racing consortium
are very strong players in the racing market. The fact that
they also — moreover jointly — become active in the
downstream market of betting services, competing directly
with other betting operators (for which they provide
important inputs such as pre-race data and have access to
commercially sensitive about
these betting operators),
may lead to additional distortions of competition.

B. Compatibility under Article 87(3) EC Treaty

1. Compatibility assessment under Article 87(3)(c) EC Treaty

(59) Pursuant to Article 87(3)(c) of the EC Treaty, aid to facili-
tate the development of certain economic activities or of
certain economic areas may be considered to be compa-
tible with the common market, where such aid does not
adversely affect trading conditions to an extent contrary
to the common interest.

(20) In the Commission decision regarding PMU,

the Commission
considered the betting market to be a European market. The deci-
‘While horse-races are organised and run on
sion points out that
national racecourses, betting on such races is organised internationally’.
The Commission also stated that there was ‘…some competition in
the Community market in [the betting] sector, and it can reasonably be
stated that there is trade between Member States in the taking of bets,
notably through the exchange of television pictures’. See Commission
Decision of 22 September 1993 concerning aid granted by the
French Government to the Pari mutuel urbain (PMU) and to the
racecourse undertakings, published in the OJ L 300 , 7.12.1993,
pp. 15.

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8.7.2005

(60) In applying this Treaty provision, the Commission needs
to ascertain that
the proposed aid contributes to the
achievement of Community objectives and is necessary
and proportionate to attain those objectives.

Does the proposed aid contribute to the achievement of
Community objectives?

(61) The UK Government referred to some of the underlying
objectives of the proposed sales transaction, namely the
withdrawal of government intervention in the governance
of the Tote and the gradual opening of the pool betting
market
to competition, while ensuring an adequate
support for racing as being in the Community interest.

the attainment of

(62) The liberalisation of markets in general and the establish-
ment of a level playing field between various operators
may have positive effects for competition within the Euro-
pean Union. However, the UK Government has, in any
event, not demonstrated that the aid granted to Racing is
these objectives and
necessary for
proportionate. It has neither been demonstrated that the
smooth transition from a statutory monopoly situation to
full competition could not be achieved by requesting
Racing to pay the full market price, nor has it been
demonstrated that the aid resulting from the sales transac-
tion actually leads to a long-term decrease of State
support for the racing industry. Furthermore, there are no
safeguards against Racing and the Tote using funds
received through the envisaged transaction to distort
competition in the betting market. Finally, as regards the
use of funds for the benefit of the racing sector it has not
been demonstrated to what extent such funds are limited
to what is necessary and proportionate (for a detailed
assessment of the necessity and proportionality of the aid
measure, see below).

Is the proposed aid necessary to attain these objectives?

(63) Based on the explanations provided by the UK Govern-
ment, the Commission assessed the necessity of the envi-
saged aid both as regards the racing industry and the
betting industry.

(64) As regards the alleged necessity of

the proposed aid
measure for the horseracing industry, the Commission is
not convinced that there is a market failure as maintained
it has not been
by the UK Government. In particular,
shown that
the alleged positive externalities stemming
from the provision of horseracing are not adequately
remunerated by the betting industry through levies and
other means. Furthermore, the UK Government has not
shown which activities within the horseracing industry
actually need additional support. It has also not explained
in the necessary detail how the revenues stemming from
the Tote would be distributed to the various components
of the horseracing industry, let alone the specific purposes
for which the revenues would be used. The general refer-
ence to improvements of racecourses, horse breeding, etc.
cannot be regarded as sufficient, without
there being
detailed rules and conditions according to which revenues
would be allocated. Therefore, the Commission does not
share the UK Government's argument that the aid in ques-
tion would ensure a fair distribution of financing between
the different stakeholders of the racing sector.

(65) It appears that in particular the responsibilities of the
British Horseracing Board comprise support measures for
racing,
including e.g. general marketing, breeding of
bloodstock, training and education. Aid channelled into
these activities could be regarded as compatible provided
that the support granted is in compliance with the respec-
tive Community guidelines (21). However, the Commission
observes that the UK Government has not shown that any
such funds would be granted in compliance with the
respective Community rules. Therefore, the Commission
has, based on the currently available information, doubts
about the compatibility of any such aid for these activ-
ities.

(66) To the extent that the aid may be used to the benefit of
commercial activities carried out by the constituent parts
of Racing,
racecourses,
including the organisation of
breeding, supply of TV pictures and rights and supply of
pre-race data,
the
compatibility of such aid, since the UK Government has
not demonstrated that additional
for
these activities is necessary.

the Commission has doubts about

financial support

(67) As regards the pool betting sector, the Commission is not
convinced that the proposed aid is necessary. The UK
Government has not demonstrated that only the Tote if
owned by Racing would be a reliable provider of — what
the Government considers as — adequate pool betting
services. Neither has it been shown that commercial book-
makers would limit their offerings of pool betting services
and that a reduction of the scope of pool betting services
could not be overcome by other — in particular regula-
tory — means. Furthermore, and even assuming that only
the Tote if owned by Racing would guarantee the mainte-
nance of adequate pool betting activities, the UK Govern-
ment has not demonstrated that the envisaged aid would
be necessary to compensate the Tote/Racing for this. The
above considerations are certainly valid for the duration
of the exclusive licence. In respect of the time after the
transitional period of seven years, it has to be borne in
mind that pool betting will be organised in a different
way and not necessarily by the Tote (alone). Therefore,
after the seven year transitional period and the expiry of
the exclusive license, the aid granted to Racing cannot
now be considered to have any incentive effect. Finally,
the UK Government has not substantiated that the preser-
vation of the Tote as an independent market player could
only be achieved by means of selling the Tote to Racing
below market value.

Is the proposed aid proportionate?

(68) Since the Tote will be sold to Racing, the direct benefi-
ciary of the aid is Racing as the new owner of the Tote.
However, the assessment of the proportionality of the aid
is not limited to the markets on which the constituent
parts of Racing are present (racing sector) but extends to
the betting market on which the newly acquired Tote is
present.

(21) See e.g.

the Commission's decision regarding the Irish ‘Thor-
oughbred Foal Levy’ (State aid NN 118/02), where the Commission
declared an aid scheme pursuing the objective of providing tech-
nical assistance to breeders, breeding stock and their foals, market
development and promotion of sales of bloodstock as being
compatible with the EC Treaty.

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freedom,

(69) There is no certainty that the profits generated by the
Tote would be channelled in their entirety into the racing
sector. Part of
these profits might remain within the
such
company. With increased commercial
retentions for reinvestment (in fixed odds betting activities
competing with other bookmakers) may even increase.
With the acquisition of the Tote below its market value,
Racing as the new owner may distort competition on this
highly competitive market for fixed odds betting. It also
receives a competitive advantage as regards pool betting
allowing it
to be better prepared for the full market
opening in pool betting services at the end of the exclu-
sive licence. Under these circumstances, the Commission
considers that aid benefiting the betting activities of the
Tote cannot be regarded as compatible.

2. Compatibility assessment under Article 87(3)(d) EC Treaty

(70) It is recalled that the Treaty of Maastricht introduced an
article which defines the role of the Community in the
field of culture (Article 151) and a possible compatibility
clause for State aid aimed at promoting culture (Article
87(3)(d)).

(71) In accordance with Article 151(4) of the Treaty, the Com-
munity is to take cultural aspects into account in its
action under other provisions of the Treaty, in particular
in order to respect and to promote the diversity of its
cultures.

(72) Pursuant to Article 87(3)(d) EC Treaty, aid to promote
culture and heritage conservation may be considered to
be compatible with the common market, where such aid
does not affect trading conditions and competition in the
Community to an extent that is contrary to the common
interest.

(73) It should be recalled that this exemption needs to be inter-

preted in a restrictive manner (22).

(74) The Commission has doubts

that

the proposed aid
resulting from the closed sale of the Tote to Racing can
be regarded as justified under Article 87(3)(d) EC Treaty
as a measure promoting culture. This measure would not
seem to be mainly targeted at a cultural product or
project and the award of the proposed aid does not seem
to be linked to the alleged cultural value of horseracing.

Any funds generated by the measure which would be allo-
cated to the horseracing industry would not primarily
benefit activities which could be regarded as related to
culture and/or heritage conservation.

VI. CONCLUSIONS

In the light of the foregoing considerations, the Commission
has doubts about the compatibility of the proposed closed sale
of the Tote to Racing. Based on the information submitted by
the UK authorities and other interested parties in the course of
the preliminary investigation, the Commission has come to the
preliminary conclusion that the proposed transaction contains
aid. Furthermore,
the
proposed aid can be declared compatible under Article 87(3)(c)
or (d) of the EC Treaty.

the Commission has doubts

that

Consequently, the Commission, acting under the procedure laid
down in Article 88(2) of the EC Treaty, requests that the
United Kingdom submit its comments and to provide all such
information as may help to assess the measure, within one
month of the date of receipt of this letter. It also requests that
the UK authorities forward a copy of this letter to the potential
recipient(s) of the aid immediately.

The Commission wishes to remind the United Kingdom that
Article 88(3) of the EC Treaty has suspensory effect. It would
also like to draw the United Kingdom's attention to Article 14
of Council Regulation (EC) No 659/1999, which provides that,
where negative decisions are taken in cases of unlawful aid, the
Commission shall decide that the Member State concerned shall
take all the necessary measures to recover the aid from the
beneficiary, unless this would be contrary to a general principle
of Community law.

The Commission wishes to remind the United Kingdom that it
inform interested parties by publishing this letter and a
will
meaningful summary of it in the Official Journal of the European
Union. It will also inform interested parties in the EFTA coun-
tries which are signatories to the EEA Agreement, by publica-
tion of a notice in the EEA Supplement to the Official Journal of
the European Union and will
inform the EFTA Surveillance
Authority by sending a copy of this letter. All such interested
parties will be invited to submit their comments within one
month of the date of such publication.’

(22) See for example in para. 26 of the Commission's communication
on State aid in the field of public service broadcasting, where it is
stated: ‘It should be recalled that the provisions granting exemption from
the prohibition of State aid have to be applied strictly. Therefore, the
notion of “culture” within the meaning of Article 87(3)(d) must be inter-
preted restrictively.’