The ACCC's Tough New Stance on Merger Clearance
By Laura Hartley, Partner
7 June 2010
The ACCC is increasingly identifying concerns with mergers or acquisitions which have a substantial impact on competition in a local or regional market. A recent example is the ACCC's consideration of Murray Goulburn's (MG) proposed acquisition of Warrnambool Cheese and Butter Factory Company (Warrnambool), which resulted in MG's withdrawal of its request for merger clearance on 2 June 2010.
This paper summarises the key competition concerns raised by the ACCC in its consideration of MG's proposed acquisition of Warrnambool and identifies recent amendments to the mergers provisions of the Trade Practices Act 1974 (Cth) (TPA) that may increase the ACCC's scrutiny of acquisitions that impact on competition in local and regional markets in the future.
MG's Proposed Acquisition of Warrnambool
In February 2010, MG provided a submission to the ACCC seeking clearance of its proposed acquisition of Warrnambool under the TPA.
The operations of MG and Warrnambool overlap primarily in the acquisition of raw milk from farmers, the wholesale supply of various dairy products to customers such as supermarkets and food service providers, and the wholesale supply of bulk raw milk and bulk cream which are used as inputs by downstream manufacturers of food products.
Among other markets, the ACCC defined separate markets for the acquisition of raw milk in:
- south-western Victoria;
- south-eastern South Australia; and
- the central region of South Australia.
On 22 April 2010, the ACCC issued a Statement of Issues in relation to MG's proposed acquisition. The ACCC's preliminary view was that MG's proposed acquisition was likely to have the effect of substantially lessening competition in the three regional markets for the acquisition of raw milk identified above.
The ACCC's market inquiries indicated there was strong rivalry between MG and Warrnambool in these markets.
The ACCC considered that in the south-west Victorian market and the south-east South Australian market, the proposed acquisition would result in the aggregation of two major competitors in markets that were already highly concentrated.
The ACCC considered that in the central South Australian market, National Foods remained as a major acquirer of raw milk, however, the proposed acquisition would aggregate the only two other sizeable acquirers of raw milk.
In its Statement of Issues, the ACCC noted the presence of other existing competitors in each of the relevant markets. However, the ACCC suggested that these other existing buyers of raw milk were not viable alternatives to a merged a MG and Warrnambool because these other buyers:
- had insufficient spare processing capacity to acquire additional milk from farmers in large volumes, following a decrease in raw milk prices; and/or
- faced insufficient incentives to invest in additional processing capacity, as
- demand for downstream products in domestic markets was insufficient to provide necessary returns on investment in new capacity; and
- export markets provided insufficient certainty of a return on investment.
The ACCC suggested that many farmers benefited from the competition between MG, Warrnambool and their competitors. Benefits to the farmer included the receipt of tangible financial benefits from price competition and other non-price benefits. The ACCC considered that the removal of Warrnambool to MG would result in a permanent change to the structure of the relevant regional markets and competitive dynamics in those markets.
The ACCC raised lesser concerns in relation to the markets for the bulk supply of raw milk to dairy product manufacturers and the supply of bulk cream.
On 2 June 2010, the day before the ACCC was due to publicly release its final view in relation to the proposed acquisition, MG withdrew its bid for Warrnambool.
Recent changes to section 50 of the TPA
On the 27 May 2010, the Federal Government introduced the Competition and Consumer Legislation Amendment Bill 2010 into Parliament. The purpose of the Bill is to clarify the operation of the merger provisions of the TPA.
Section 50 of the TPA, as it is currently drafted, applies only to substantial markets in Australia, or a State, or Territory, or region, of Australia. The amendments to section 50 proposed under the Bill, make it clear that the ACCC has the power to block mergers or acquisitions that will impact on competition in small local or regional markets which may not be "substantial" in the traditional sense of the word.
So for example, a medium to large business acquiring a small competitor in a suburb or regional area may find itself in breach of the mergers provisions of TPA if the effect of this acquisition is a substantial lessening of competition in the local geographic area.
The issue is most likely to arise in industries that supply local retail markets. Examples include supermarkets, pathology businesses, taxi businesses, waste management providers, optometrists and funeral houses.
The amendment is also designed to demonstrate more explicitly that the ACCC and the Courts are able to consider the competitive effects resulting from an acquisition in any market meaning that mergers could be blocked if a substantial lessening of competition occurs in a secondary market, not just the primary market in which a target operates.
This issue may arise where the two businesses are the most significant acquirers of manufacturing inputs in a local or regional geographic area, as was the case with MG's proposed acquisition of Warrnambool.
The changes to the legislation make it clear that if there is the risk that a merger or acquisition will have a substantial impact on competition in a market of any size, a business should approach the ACCC for merger clearance.
Conclusion
The ACCC has the power to block mergers that will substantially lessen competition even in small regional or local markets. This has been clarified in recent amendments to section 50 of the TPA and in recent ACCC merger reviews.
Businesses need to keep the mergers provisions of the TPA in mind when they are looking to acquire another business or the assets of another business. Businesses should approach the ACCC for merger clearance if there is any risk that their proposed acquisition may substantially reduce competition in a market of any size - local, regional, state or national.
The assistance of Simone Vrabac, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated