2016: The Year In Mergers
The ACCC completed 33 public merger reviews in the 2016 calendar year. These reviews and their outcomes are summarised in the table at the bottom of this article.
Although the ACCC did not oppose outright any merger during 2016, it published a statement of issues (“SOI”) in one third of the reviews it undertook (11) and, in roughly half of those instances (6), the parties abandoned their proposed merger.
There were four instances in 2016 where the ACCC cleared an acquisition subject to the parties giving court enforceable undertakings. Two of those undertakings effectively unwound the transaction that was under review.
The past year also saw the Australian Competition Tribunal (“the Tribunal”) authorise Sea Swift’s acquisition of Toll Marine Logistics Australia’s Far North Queensland (“FNQ”) and Northern Territory (“NT”) marine freight assets, which the ACCC had opposed in 2015.
Trends and developments
There were several trends and/or developments that stood out for us in 2016:
1. The ACCC remains strongly focused on concentrated market structures
The ACCC remains wedded to a theory of harm that mergers which reduce the number of players in a market from three to two, or two to one will substantially lessen competition because they will allow the merged entity to increase prices and/or reduce service levels.
DYWIDAG-Systems International’s (“DSI”) terminated its proposed acquisition of Jennmar Australia after the ACCC raised concerns that the transaction would result in a “two to one” merger between the largest Australian suppliers of rock bolts to soft rock mines. Similarly, the Borg Group discontinued its proposal to acquire the manufacturing assets of Alpine MDF Industries Pty Ltd following concerns that the transaction would cause a reduction in the number of raw medium density fireboard (“MDF”) manufacturers from “three to two”.
The ACCC accepted a court enforceable undertaking from Primary Health Care (“Primary”) to address its concern that Primary’s completed acquisition of Healthscope’s Queensland pathology business had removed a significant third player in that state and that this change in market structure was likely to result in increased prices and reduced service levels. Primary undertook to divest the pathology assets it had acquired from Healthscope to an ACCC-approved purchaser (Medlab), which was intended to maintain the three player market structure. The ACCC’s Chairman, Rod Sims, remarked that this “may be the first time the ACCC has largely reversed a completed transaction without taking court action”.
The ACCC also accepted a court enforceable undertaking from Iron Mountain to resolve concerns that its proposed merger with Recall Holdings would remove its closest competitor for physical document management services from the market. Iron Mountain undertook to divest its entire Australian business, other than its local records management customers in the Northern Territory and its data protection business to an ACCC-approved purchaser. The effect of this was that the proposed transaction in Australia was carved out from a broader cross-border deal.
2. The ACCC is increasingly concerned by the vertical effects of a transaction
One of the most high profile reviews undertaken by the ACCC in 2016 was its review of the Asciano acquisition. The ACCC initially considered two separate proposals to acquire Asciano, one by a Brookfield-led consortium and the other by a Qube-led consortium.
The ACCC published an SOI in October 2015 in relation to the Brookfield-led consortium’s acquisition and expressed strong reservations about the proposal due to perceived vertical effects.
Prior to the ACCC publishing an SOI, the Brookfield-led consortium had proposed behavioural undertakings in conjunction with existing third party access regimes to address vertical integration concerns arising from the transaction.
The ACCC’s SOI emphatically rejected that approach, providing: “the ACCC’s strong view is that the only way to avoid the risks to competition that are likely to be created by vertical integration is to avoid the creation of a vertically integrated market structure altogether.” In respect of existing regulatory regimes for access to upstream infrastructure, it concluded that “relying on an access regime to mitigate the competitive detriments arising from vertical integration between a monopolist and a participant in a related (competitive) market is a second best solution compared to preventing such situations of vertical integration in the first place.”
This “high watermark” regarding concerns arising from vertical integration caused the parties to put together an alternative deal structure.
Following the restructuring, the ACCC continued to express concerns regarding the acquisition of the Patrick Container Terminal business by the Qube and Brookfield parties (including issuing a SOI on 26 May 2016). However, the ACCC ultimately identified several constraints on Patrick’s ability and incentive to discriminate against Qube’s competitors.
Although the ACCC proceeded to clear the deal in July 2016, its approach (both pre and post restructuring of the deal) indicates a keen focus on the vertical integration aspects of an acquisition and a strong preference to prevent upstream monopolists from arising, rather than relying on behavioural commitments and/or access regimes to manage their existence.
3. Authorisation may be an effective alternative to the informal process for complex cases
As referred to above, 2016 saw the second successful application for merger authorisation since the authorisation procedure was introduced in 2007.
The Tribunal’s authorisation of Sea Swift’s acquisition of Toll’s FNQ and NT freight assets demonstrated how the quasi-judicial nature of the Tribunal process (and its emphasis on factual evidence) may force a reconsideration of the ACCC’s adherence to a theoretical analysis of the static and structural aspects of a market.
The ACCC had opposed the acquisition in 2015 on the basis that the transaction would eliminate competition between Sea Swift and Toll and increase the barriers to entry.
However the Tribunal relied on factual evidence – received from over 40 witnesses and seven experts – which “fatally undermine[d] much of the ACCC’s theory of harm”. This evidence supported the Tribunal’s findings that:
- the relevant counterfactual was that Toll would exit from the FNQ and NT markets and that Sea Swift would become the provider to base load customers in the short term;
- there was no competitive detriment with the proposed acquisition which would not exist without (with the exception of access to one site, in respect of which Sea Swift gave an undertaking); and
- undertakings by Sea Swift gave remote communities certainty regarding services and prices, which provided public benefits.
The Tribunal proceeded to authorise the transaction, subject to conditions which guarded against the ACCC’s concerns regarding prices and service levels.
The implication for parties seeking clearance of complex and contentious mergers is that authorisation may be an effective alternative to the informal clearance process and the rigid theories of harm they are likely to encounter during that process.
4. The ACCC continues to cooperate with international agencies, but there is evidence of independent outcomes
The ACCC continued to engage with its international counterparts in 2016 during complex, multi-jurisdictional merger reviews.
For example, the ACCC worked closely with competition regulators in the United States (“US”), the European Union (“EU”), Brazil and India during its review of the proposed Haliburton and Baker Hughes tie-up, which proposed to bring together the second and third largest oilfield service providers globally. Due to concerns raised by various regulators, including the ACCC (which published its SOI in October 2015), the parties abandoned the deal, which included a USD 3.5 billion break fee.
At the same time the ACCC was reviewing ChemChina’s merger with Syngenta, regulators in other jurisdictions – including the US and the EU – were assessing the transaction. Each of the regulators were simultaneously reviewing other cross-border transactions in the same industry. Significantly, the ACCC made a decision not to oppose the ChemChina/Syngenta deal without requiring remedies, prior to regulators in other jurisdictions issuing their decisions. This demonstrates that the ACCC may take a “first mover” position, where the evidence before it supports it doing so.
Table 1: 2016 Completed ACCC Merger Reviews
(click on the table to enlarge)
Picture: Courtesy Pixabay / senjinpojskic