- On 26 August 2022, a consortium of superannuation and infrastructure funds (led by Spirit Super and Palisade Investment Partners) abandoned their proposed acquisition of the Port of Geelong in the face of ACCC concerns.
- The ACCC released a Statement of Issues on 31 March that identified concerns associated with the role of Palisade Investment Partners, which would have acquired 49% of Port of Geelong and which already owned 100% of another Victorian bulk port, Port of Portland. The ACCC expressed concerns that Palisade’s stakes in both ports may – over the medium to long term – reduce competition between Portland and Geelong in relation to servicing bulk cargo customers.
- While the ACCC did not make any final decision, its preliminary concerns have potentially important consequences for the growing interest of superannuation and managed funds in directly acquiring infrastructure assets.
- Commenting on the withdrawal in a speech to logistics stakeholders on 1 September, ACCC Chair, Gina Cass-Gottlieb, stated:
“Superannuation and other investment funds have interests in many of Australia’s infrastructure assets. The issue of common fund management and ownership among competing firms, including via minority interests, has increasingly become a focus of regulators and policy makers.
Parties proposing to acquire interests in Australia’s critical infrastructure can expect a careful and thorough ACCC review as the long-term consequences for competition can be very significant.”
- For infrastructure, superannuation funds and private equity funds - the development highlights the ACCC focus on cross-ownership interests (including minority interests) for deals, especially those that involve major or crucial infrastructure. It follows a similar ACCC review of the acquisition of Sydney Airport by the Sydney Aviation Alliance in late 2021, where cross ownership of other major East Coast airports by members of the consortium were carefully considered. It also follows the recent Commonwealth Parliamentary Inquiry report released in March 2022 into common ownership and capital concentration, which called for greater regulatory scrutiny of common ownership and minority interests.
- For others involved in the port and logistics sector – this is another example of the ACCC taking an increasingly active role in the sector. The ACCC highlighted competition issues in global and domestic supply chains as one of its enforcement priorities earlier this year. The Port of Geelong outcome also follows a range of other recent port-related matters, including ACCC enforcement action against TasPorts for misuse of market power in relation to access charges and an unsuccessful challenge to arrangements entered into between NSW Ports and the State of NSW in connection with the privatization process for Port Botany and Port Kembla (appeal decision pending). The ACCC has also flagged an intention to seek to widen the scope of its current monitoring of container stevedoring, which has been in place since 1999.
What was the proposed acquisition?
On 18 January 2022, the ACCC commenced a public informal clearance review of the proposed acquisition of 100% of the Port of Geelong by a consortium of investors comprised of Spirit Superannuation, Commonwealth Superannuation Corporation (CSC) and the Palisade Diversified Infrastructure Fund (PDIF) managed by Palisade Investment Partners (Palisade) (together, the Consortium).
The Port of Geelong is a freehold diversified bulk commodity port in Victoria, located approximately 75km south-west of Melbourne. It is Victoria’s largest bulk commodity port, handling approximately 40% of Victoria’s bulk freight.
The Port of Portland is also a diversified bulk commodity port located in south-west Victoria, approximately 290km west of the Port of Geelong. The Port of Portland handles approximately 20% of Victoria’s bulk freight. Investors managed by Palisade have a 100% interest in the Port of Portland.
The Consortium’s proposed acquisition would have resulted in minority common ownership between the Port of Geelong and the Port of Portland, with Palisade managing 49% of the Port of Geelong (through a combination of held and managed interests) and 100% of the Port of Portland. Accordingly, Palisade would have had an interest in over 50% of bulk trade in Victoria.
What were the ACCC’s concerns?
On 31 March 2022 the ACCC published a Statement of Issues (SOI), which outlined its preliminary competition concerns. The ACCC expressed concerns that the deal may substantially lessen competition in the supply of port services for bulk cargo in Victoria and the future supply of port services to long-term bulk cargo port users.
These concerns mainly centered around Palisade, due to its ownership interest in the nearby Port of Portland.
The ACCC considered there to be very few bulk port options in Victoria and that the market structure was unlikely to change in the foreseeable future. The ACCC also noted that the Port of Geelong and the Port of Portland collectively handle over half of Victoria’s bulk cargo, with overlap in the grain, timber, fertiliser and wind farm industries. The ACCC stated that some market participants had raised strong concerns about losing the benefit of competition between the Port of Portland and the Port of Geelong for the best prices and terms.
The ACCC was of the preliminary view that the overlapping ownership may reduce the competitive tension between the two ports, leading to reduced future investments to secure customers and increased prices or reduced quality of services for particular commodities and segments of customers. The ACCC was of the view that this could occur because Palisade would be in a position to “exert influence over decision making” at the Port of Geelong and further, Palisade’s minority shareholding at the Port of Geelong may also reduce the incentive for Port of Portland to win customers from Port of Geelong.
The ACCC’s SOI raised a number of interesting issues regarding potential competition between ports (stating it may be limited to certain customers or commodities), the role of regulation and the appropriate timeframe for the ACCC to consider potential future investments. With respect to the latter, the SOI focused on long-term bulk cargo port customers as existing long-term customers of the two ports may not be contestable in the short term, due to take or pay contracts or sunk investments.
The ACCC’s competition assessment focused on those long-term customers that are foreseeably contestable in the next 10-20 years.
A primary takeaway is the ACCC’s focus on potential competition issues arising from Palisade’s common ownership between the Port of Geelong and the Port of Portland.
Whether common ownership (including through minority interests) leads to anti-competitive harm has been rigorously debated overseas in recent years (see for example the 2017 discussion by the Organisation for Economic Co-operation and Development) and was recently the subject of a Standing Committee on Economics Inquiry in Australia (Inquiry):
- On one side of the debate, proponents of stricter oversight argue that common ownership reduces incentives to compete and may lead to explicit or implicit collusion between firms (including through sharing of competitively sensitive information). OECD research has suggested that institutional investors have the ability to influence the decisions of a company’s management including through direct engagement to prompt or discourage a course of action or through voting blocs, whereby a number of shareholders agree to vote the same way. Other research, which has been the subject of academic and industry criticism, has suggested that common ownership in oligopolistic markets may lead to higher prices and management incentives being oriented towards industry performance rather than firm performance.
- On the other side of the debate, investors highlight the limited ability of minority shareholders to influence management decisions; the passive nature of investment funds and the fiduciary and legal duties of company directors to act in the best interests of their individual companies.
In a submission to the Inquiry, the ACCC stated that “there appears to be no consensus in the research on the effects of common ownership on competition,” and further noted that over the two years to August 2021, they had not identified any complaints in relation to common ownership adversely affecting competition in any market. However, the ACCC expressed support for the view that the potential impact of common ownership needed to be placed in sharper focus.
Despite this, the Inquiry’s final report, released in March 2022, concluded that “common ownership has the potential to undermine competition within the Australian economy [and] to prevent any such outcome, it is critical that Australia’s market regulators are proactive in understanding the risks associated with this phenomenon.” The final report also referenced the significant growth of the funds management sector in Australia and highlighted the “added risk of the power concentrated within superannuation funds, which, if they continue to grow at their current rate, will soon be larger than the value of the entire Australian share market.”
While the ACCC stated that it was “not seeking any legal change to take into account common ownership in merger decisions” and that the test under section 50 of the Competition and Consumer Act 2010 (Cth) allows the ACCC to “give consideration to an acquisition which gives rise to common shareholdings across rival firms, whether or not the interest delivers control”, the Inquiry committee recommended the introduction of an explicit legislative requirement for the ACCC to actively monitor the extent of common ownership in Australian markets, and that the ACCC also be empowered to take common ownership implications into account when assessing merger applications.
Regardless, the ACCC has power to prohibit an acquisition of a minority interest and the ACCC has long articulated potential theories of harm resulting from minority interest acquisitions based on an ability to influence the conduct of a target company or acquire a blocking stake (preventing others from acquiring control). This review put a spotlight on acquisitions of critical infrastructure assets and reinforces the view that common ownership across potentially competing assets has the potential to raise competition issues. These issues are more likely to arise in concentrated industries, such as ports, internet and mobile telecommunications, energy, gas, domestic air travel, insurance, pathology services, banking and supermarkets – which were all highlighted by the ACCC in its Inquiry submission. Competition issues may also arise in transactions involving common ownership across assets that operate in different parts of a supply chain.