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Do not expect a different, or lenient approach to merger assessments during this crisis. Our objective will be to protect the competitive structure of the economy, and not to see anti-competitive increases in market power, or the rise of so-called ‘national champions’.
In 2020-21 we will pay particular attention to the potential for opportunistic purchases of distressed or failing firms caused by the worsening economic climate to ensure that acquisitions of assets or businesses do not substantially lessen competition
2020 has been the most extraordinary, distruptive year in recent memory.
But has that disruption been felt in Australian merger administration?
In this article we look at the key developments in the ACCC’s enforcement of the Australian merger law in 2020, including the impacts of the COVID-19 pandemic.
We conclude that, despite the adjustment to working during lockdowns, it has largely been business as usual for the ACCC, and this is something that it should be commended for.
Nevertheless, the ACCC has also lost two significant merger cases in Federal Court this year, with the Court in both cases finding that the ACCC had failed to establish that the proposed transactions were likely to substantially lessen competition when compared with the counterfactual - what would occur absent the merger. ACCC Chair, Rod Sims, has flagged that the ACCC will put forward its proposals for changes to the merger laws early next year. We anticipate robust debate on this issue in 2021.
Contents:
Overview of informal merger reviews with public market inquiries completed in 2020 and their duration
Figure 1: Calculated to 23 November 2020
Outcomes
Similar volume of informal merger reviews in 2020
For the last few years, around 90% of informal merger reviews that the ACCC has dealt with have been via confidential pre-assessment.
Although information as to how many confidential pre-assessments the ACCC has conducted so far this year is not fully available yet, we do know that as at 23 November 2020, the ACCC has completed public informal reviews of 28 proposed mergers.
The ACCC has continued to receive merger notifications during the pandemic, and compared to 2019, there has not been a reduction in the number of informal merger review applications subject to public market inquiries. In fact, the ACCC has completed more public inquiry merger reviews in 2020 than it did in 2019. There are also 6 mergers currently under consideration.
Of the 28 informal merger inquiries completed this year, the breakdown of outcomes is as follows:
One formal merger authorisation application in 2020 so far
The ACCC received one formal merger authorisation application this year, being Gumtree AU Pty Ltd’s proposed acquisition of Cox Australia Media Solutions. Gumtree lodged its application on 14 January 2020, and authorisation was granted on 30 April 2020, being 107 calendar days. Both Gumtree and Cox supplied online automotive classified advertising to private and commercial advertisers in Australia, and space on their websites and mobile applications to display advertising. The ACCC considered that the acquisition would not cause a substantial lessening of competition in any market and granted authorisation under the first limb of the test.
The only other application for formal merger authorisation that the ACCC has received since the process was reformed in November 2017 was AP Eagers Limited’s proposed acquisition of Automotive Holdings Group in 2019 which took 87 calendar days. This is slightly lower than the average calendar days in both 2019 and 2020 so far for the ACCC to complete public informal merger reviews (being around 104 in 2019 and 108 in 2020). This was also decided on the basis that the proposed acquisition would not cause a substantial lessening of competition, taking into account an undertaking that AP Eagers would divest its existing new car retailing dealerships and related business sites in Newcastle and the Hunter Valley, where the ACCC had competition concerns. AP Eagers and Automotive Holdings both supplied new and used cars, trucks and buses and associated services in various parts of Australia.
While for completeness in both decisions the ACCC outlined the public benefit arguments made by the respective applicants, it did not grant authorisation under this limb of the test. It appears that we will need to wait until at least 2021 for an authorisation decision that really grapples with the public benefits test.
No transactions opposed outright in 2020
The ACCC has opposed at least one merger outright every year for which there are records available on the public register , except 2016. So far in 2020 it has not opposed any mergers outright. In 2019 it opposed two mergers:
TPG’s proposed merger with Vodafone, where the ACCC opposed and the parties successfully challenged the opposition in Federal Court, obtaining a declaration that the merger was unlikely to result in any substantial lessening of competition; and
B&J City Kitchen’s proposed acquisition of the business and assets of Jewel Fine Foods.
But the ACCC continues to raise and resolve competition issues
Most often, if the ACCC raises an ‘issue of concern’ that it considers means the proposed transaction is likely to result in a substantial lessening of competition (or ‘red light’) issue in a Statement of Issues, the merger parties will either seek to resolve the ACCC’s concerns with a court-enforceable undertaking (usually to divest part of the business) or will abandon the transaction altogether, so that the ACCC is not required to actually oppose the transaction.
This has been the case in the majority of merger reviews completed in 2020 where the ACCC identified a “red light” issue (in some cases releasing the SoI in late 2019):
However, the ACCC has:
released fewer Statements of Issues (SoIs); and
identified fewer “red light” issues,
in 2020 than in 2019.
While this is an interesting decrease, we can’t say that this is because of any change within the ACCC. The ACCC considers each merger on a case-by-case basis and does not appear to have relaxed its approach because of the pandemic. Most likely, a high number of particularly complex mergers happened to be notified in 2019.
ACCC still seeking divestitures over behavioural undertakings
Three mergers have been cleared this year subject to undertakings following an in-depth review: Mylan N.V. / Upjohn (10 September), Elanco Animal Health / Bayer Aktiengesellschaft’s animal health business (9 July), and Asahi / Carlton & United Breweries (1 April).
All of these clearances involved structural divestiture undertakings. The ACCC therefore does not appear to have taken a lenient approach to remedies (i.e. by accepting behavioural undertakings where it otherwise would have insisted on divestiture) during this period. This is consistent with Mr Sims’ comments highlighted above.
ACCC maintaining timeframes in 2020
So far this year we have noticed that, overall, public informal merger reviews have taken on average less than 1 calendar week longer and around 20 more ACCC review days [1] than they did in 2019. This includes transactions that continue to a “Phase 2” review (being where a SoI is issued).
The ACCC does not count non-business days, and it ‘stops the clock’ when it is waiting for information from the parties.
In 2019 the ACCC did not publish its ACCC Review Days for TPG Telecom Limited (TPG) - proposed merger with Vodafone Hutchison Australia Pty Ltd (VHA), which took 226 calendar days, so it is not included in the average ACCC Review Days for 2019. If it were included we expect that the 2019 figure would be higher.
These figures do not count mergers that were withdrawn, where the ACCC did not make a final decision, or investigations of completed acquisitions.
This means that initial fears that the pandemic would cause major blowouts in the ACCC’s review timeframes have not materialised. In fact, you can see from our first table above that there have been several mergers that the ACCC has reviewed in 2020 in relatively tight timeframes.
Drilling further down into the data, we can make the following points:
The number of ACCC review days is also closer to total calendar days than usual, which suggests that on average the ACCC may have had to ‘stop the clock’ less.
ACCC continues to lose cases in the Federal Court
This year the ACCC lost two contested merger cases:
TPG / Vodafone
TPG had announced in 2017 that it would build Australia’s fourth mobile network, but it abandoned those plans after the Federal Government banned the use of Huawei’s equipment in 5G networks. The ACCC opposed TPG’s acquisition of Vodafone in May 2019, as it was concerned that, without the proposed merger, there was still a real chance that TPG would become a competitive fourth mobile network operator even without Huawei’s equipment. Vodafone then applied to the Federal Court for a declaration that the transaction was not likely to substantially lessen competition, arguing that TPG no longer had the ability or intention to roll out its own mobile network but the merged entity could offer consumers a better mobile service.
In February 2020 the Federal Court found in Vodafone’s favour, acknowledging that ‘there is no commercially relevant or meaningful real chance that TPG will roll-out a retail mobile network or become an effective competitive fourth [mobile network operator] . The rational and business-like solution is for Vodafone and TPG to merge, with the result that both companies will be enhanced and will be a stronger competitive force against Telstra and Optus. ’ The ACCC later announced that it would not appeal the Court’s decision.
Pacific National / Aurizon
Pacific National is the largest provider of rail linehaul services in Australia. It entered into a sale agreement to acquire the Acacia Ridge intermodal terminal (a rail terminal located in Queensland) from Aurizon. In July 2018 the ACCC refused to grant informal clearance for the acquisition and commenced Federal Court proceedings alleging, amongst other things, that the acquisition would have the effect of substantially lessening competition in certain geographic markets for interstate rail linehaul services. The ACCC was concerned that the proposed acquisition would give Pacific National the ability and incentive to discriminate against third parties seeking to access the terminal in favour of its own rail linehaul operations, and that it would materially raise barriers to entry that would deter a new entrant from providing interstate rail linehaul services in competition with Pacific National.
In May 2019, the Federal Court found that the Proposed Acquisition would have had the likely effect of substantially lessening competition and therefore contravened s 50 of the Competition and Consumer Act (Cth) 2010 if it were not for the s 87B undertaking proffered by Pacific National during the hearing . Pursuant to the undertaking, Pacific National would have been required to provide third parties access to the Acacia Ridge Terminal on a non-discriminatory basis.
The ACCC appealed the decision to the Full Court. It challenged the primary judge’s acceptance of, and reliance upon, the undertaking in determining that the Proposed Acquisition would not likely have the effect of substantially lessening competition, among other arguments. The Full Court dismissed the appeal and went further than the trial judge in finding that even in the absence of the undertaking, the Proposed Acquisition would not have had the likely effect of substantially lessening competition. The trial judge had found that if the proposed acquisition did not proceed then there was a possibility of a new entrant in a key rail linehaul market in about 5 years’ time. The Full Court considered that prospect to be speculative, and found that given the speculative prospect of new entry within the relevant timeframe, “the competitive constraints facing Pacific National in that timeframe will not differ in any real or substantive way whether Pacific National acquires the ART or does not acquire the ART. ”
The ACCC is seeking special leave to appeal to the High Court. The special leave hearing is listed for 8 December 2020.
This continues a long trend of the ACCC losing contested merger cases in court. Stay tuned for our next article on this topic, which will delve into to these cases in more depth, examine exactly why the ACCC lost and put them in the context of the ongoing merger law reform debate that we expect will continue for some time.
What’s happening overseas?
Regulators around the world have had to adjust to working under lockdowns but have largely continued to accept and review merger filings as usual, taking the view that continuing to assess and facilitate mergers - to the extent that they do not raise competition issues - is important for economies struggling to deal with the COVID-19 pandemic.
For example:
UK: In April 2020 the CMA released guidance advising that while it would continue to adhere to statutory timeframes and would not relax its substantive assessment standards, it understood that some businesses would have difficulty responding to information requests and was unlikely to impose penalties for a failure to comply. It acknowledged that its pre-notification process could take longer than usual and encouraged merger parties to consider whether filings could be delayed. The CMA also published a summary of its position on the failing firm defence to be read in conjunction with its guidance on merger reviews during COVID-19. The summary reiterates that the CMA assesses such arguments on a case-by-case basis. CMA Chairman Andrew Tyrie later said in the CMA’s FY19-20 annual report that:
In spite of the practical challenges of the crisis, and the urgent competition and consumer issues that coronavirus has raised, the CMA has largely managed to maintain business as usual, continuing to progress its significant caseload to protect UK consumers.
In spite of the practical challenges of the crisis, and the urgent competition and consumer issues that coronavirus has raised, the CMA has largely managed to maintain business as usual, continuing to progress its significant caseload to protect UK consumers.