The Australian Competition Tribunal (Tribunal) has yesterday released its determination outlining the reasons for its authorisation of Tabcorp Holdings Limited’s (Tabcorp) proposal to acquire Tatts Group Limited (Tatts). The transaction will combine the two wagering companies, creating a diversified gambling entertainment group with operations in wagering, racing media, lotteries and Keno.
Gilbert + Tobin, as co-competition advisors with Herbert Smith Freehills, advised Tabcorp on the competition clearance and Tribunal process and strategy.
Tabcorp was successful in having the transaction authorised. The Tribunal was satisfied ‘in all the circumstances that the proposed merger would result, or would be likely to result, in such a benefit to the public that the acquisition should be allowed to occur.’ The Tribunal noted that the public detriments identified by the ACCC and the interveners are unlikely to either arise or are not of significance.
The proceeding was the largest merger clearance authorisation in recent times. The hearing ran for three weeks and involved six different parties, approximately 82 statements from 69 lay witnesses, an additional 15 third party submissions and 12 expert reports from 7 different economists. The documents before the Tribunal ran to over 44,000 pages.
This is also a legally significant decision by the Tribunal. It marks the third time in the past three years that the Tribunal has granted authorisation to a transaction in the face of ACCC opposition. In each case the Tribunal has found, contrary to the position of the ACCC, that the transaction would lead to no public detriments other than those directly addressed through remedies offered to the Tribunal by the acquiring party.
This update provides a brief summary of the case and the Tribunal’s decision, and outlines our views of the broader implications of this case for future transactions involving complex or contentious competition issues. In summary, we conclude that:
- in hearing and granting Tabcorp’s application in just over three months, the decision reinforces that merger authorisation can be an effective route to secure competition clearance for acquisitions involving public benefits and that the Tribunal has continued to show a clear intention to deal with applications in a timely manner;
- the ability to rigorously test alleged competitive harm and directly challenge opposing evidence in an open forum before a judicial body has been crucial to the success of authorisation applicants to date;
- while the test applied before the Tribunal is different to the ACCC informal merger clearance process (in that the Tribunal applies a ‘net public benefit’ assessment rather than an assessment that focusses only on any risk of a merger substantially lessening competition), the Tribunal has not yet found a need to balance public benefits against anti-competitive detriments because the Tribunal has found no anti-competitive detriment, including in this case;
- the decision once again reinforces that the Tribunal finds concrete arguments based on evidence of industry participants more persuasive than theoretical economic arguments, as has been the case in each of the previous two merger authorisations;
- in approaching the analysis of competition in a rapidly changing market characterised by digital disruption the Tribunal emphasised the need to look at long term trends and not to place weight on an analysis of static market shares; and
- the Tribunal case saw a number of shifts in the way the issues were approached by the ACCC, influenced by the different test, the involvement of interveners and the use of independent economists – this shift is something that parties involved in future Tribunal processes can expect to occur.
The decision is also important because the Federal Government recently indicated that it intends to accept a recommendation of the Harper Review to give the ACCC an ability to authorise mergers applying the same public benefit assessment currently applied by the Tribunal – and before such authorisations can be referred to the Tribunal.
Tabcorp and Tatts Background
Tabcorp and Tatts provide a range of gambling services across Australia. Under a Merger Implementation Deed entered into by Tabcorp and Tatts in October 2016, Tabcorp proposed to acquire the issued share capital of Tatts by means of a scheme of arrangement. The merger was conditional on competition approval.
Tabcorp has three main business divisions, wagering and media, gaming services, and Keno. Wagering and media is the dominant business division, contributing 85% of Tabcorp’s revenue in FY 2016. Tabcorp has retail wagering licences in Victoria, NSW and the ACT and supplies wagering services nationally via telephone and the internet.
Tatts supplies lotteries, wagering services, and gaming products and services. Its largest division is lotteries, accounting for 72% of its revenue in FY 2016. Tatts has retail wagering licences in Queensland, South Australia, the Northern Territory and Tasmania and also supplies wagering services nationally via telephone and the internet.
The parties described the transaction as largely complementary because Tatts was primarily a lotteries business (something which Tabcorp does not supply) and because the parties did not overlap in their retail wagering offering.
ACCC engagement
In November 2016, Tabcorp applied to the ACCC for informal merger clearance of the proposed acquisition. On 9 March 2017, the ACCC issued a Statement of Issues (SoI) in which the ACCC outlined its preliminary views of the competition issues arising from the potential merger.
In this SoI, the ACCC only characterised one issue as likely to raise concerns, in relation to the supply of electronic gaming machine services in Queensland (which was addressed by Tabcorp’s divestiture offer). The SoI outlined a number of other concerns, including in relation to licence bidding, wagering services and the supply of media services.
Tribunal application
On 13 March 2017, Tabcorp applied to the Tribunal for merger authorisation. This had the effect of bringing the informal clearance process to an end. Tabcorp announced that it took this action to deliver greater transaction certainty. This was because of the ability of the Tribunal to take into account the public benefits of a transaction and because the Tribunal considers applications within a statutory timetable.
In support of Tabcorp’s application, Tatts sought and was granted leave to intervene in the proceeding. Three other parties were granted leave to intervene (CrownBet, The Victorian Racing Industry and Racing.com), each of whom opposed the transaction.
Tabcorp’s application was supported by witness statements filed by Tabcorp and Tatts from various market participants including representatives from the racing industry in every state other than Victoria and representatives from retail wagering venues and peak retail bodies, and associations representing jockeys and trainers. Tabcorp’s application was also supported by expert economic evidence. The ACCC provided a report to the Tribunal, in addition to lay and expert evidence. Each of the interveners provided additional lay evidence and two provided expert economic evidence. In total, approximately 82 statements from 69 lay witnesses, an additional 15 third party submissions and 12 expert reports from 7 different economists were filed in the proceedings.
The matter was heard across three weeks from 16 May to 2 June 2017.
The Tribunal’s determination to grant authorisation is subject to only one condition, that Tabcorp must divest its Odyssey Gaming business in Queensland, which will be the subject of an agreed undertaking by Tabcorp given to the ACCC.
The Tribunal process
The Competition and Consumer Act 2010 (Cth) (CCA) provides for parties to apply to the Tribunal for merger authorisation. The Tribunal process is an alternative to seeking informal merger clearance where a merger may otherwise give rise to competition issues under s 50 of the CCA (which prohibits a merger likely to result in a substantial lessening of competition).
The Tribunal may grant authorisation if it is satisfied in all circumstances that the proposed acquisition would or be likely to result in public benefits (the “net public benefits” test). In assessing the net public benefit, the Tribunal considers the world both “with and without” the proposed acquisition.
A grant of authorisation operates as an effective statutory exemption from the application of s 50.
The Tribunal is required to hear and determine the application within a three month time period from the date the application is filed, but the Tribunal is able to extent for up to an additional 3 months either because of the application’s complexity or because of other special circumstances. The information submitted to the Tribunal, whilst not subject to the normal rules of evidence, is subject to a full hearing before the Tribunal, including a rigorous testing of the evidence through oral cross-examination of witnesses.
Tabcorp’s submissions to the Tribunal
Tabcorp, supported by Tatts, argued that the transaction would deliver significant public benefits because it would:
- deliver substantial merger synergies in the form of cost savings and revenue increases;
- provide significant benefits to the racing industry, as existing funding agreements means that racing industries across Australia would receive a portion of the synergies;
- enhance customer experience through the introduction of new products and additional investment in retail and digital wagering; and
- remove a commercial barrier to combining pari-mutuel pools.
Tabcorp also argued that the transaction would lead to no competitive detriments, primarily because:
- corporate bookmakers and RWWA would continue to be a significant competitive constraint in the supply of wagering services;
- there would be a range of other parties willing and able to bid for retail wagering licences, and any bidding process is significantly under the control of the relevant state government;
- the merger would lead to no material changes in the acquisition or supply of racing media as Tatts had never and was not likely to acquire or supply such media; and
- the proposed Odyssey divestment would eliminate any potential concerns in relation to the supply of gaming services in Queensland.
Submissions of the ACCC and non-party interveners
The ACCC and the interveners, other than Tatts, each opposed the proposed transaction and argued that the Tribunal should not grant authorisation. The primary arguments of these parties were as follows:
- ACCC: The ACCC submitted that the proposed transaction would result in competitive detriment in the supply of wagering services, as Tabcorp would be the only exclusive retail and totalisator licence holder in all states and territories (excluding Western Australia). The acquisition would also eliminate the only credible bidder for exclusive wagering licences and increase vertical integration of Tabcorp’s Sky Racing.
- CrownBet: CrownBet argued that Tatts and Tabcorp are each other’s closest competitors in the supply of wagering services and that the proposed merger would remove the significant constraint Tabcorp and Tatts impose on one another and this would result in a substantial lessening of competition in the wagering market.
- Victoria Racing Industry: The Victorian Racing Industry contended that there would be significant public detriments arising from the transaction, particularly due to a loss of competition in the market for licences to operate retail wagering businesses.
- Racing.com: Racing.com argued that the proposed merger would substantially lessening competition in the market for the acquisition of media rights and the distribution of racing media content.
Findings of the Tribunal
The Tribunal agreed with Tabcorp that the transaction would lead to significant public benefit and no material detriments:
[539] The benefits to the public which the Tribunal has found to exist, and which it has taken into account, are substantial. There are no material detriments weighed in the balance which are of significance or likely to arise that outweigh the benefits.
[540] The proposed merger is consistent with the trend towards industry consolidation, with the Merged Entity reaching a sufficient scale to compete. The creation of the Merged Entity will lead to greater competition particularly in online wagering. This increased competition brings about competition benefits to the racing industry and to consumers, and the net effect of the proposed merger will likely be positive.
[541] Consequently, the Tribunal is satisfied that the proposed merger should be authorised and it is hereby granted under s 95AT of the Act.
This conclusion was premised upon the Tribunal’s findings in relation to each of the claimed areas of public detriment.
Wagering services
All of the parties before the Tribunal agreed that there is a single national market in Australia for the supply to consumers of wagering on horse races and other sporting events. The Tribunal agreed with this market definition.
The Tribunal found that a ‘snapshot of market share arising from the proposed merger’ was not sufficient to demonstrate a substantial lessening of competition (at [213]). The Tribunal did find market shares relevant, in that historic declines in Tabcorp and Tatt’s market share demonstrated that the merged entity would ‘continue to come under substantial pressure’ (at [214]).
The Tribunal also rejected the contention of the ACCC and some of the interveners that attention should be paid to particular product segments in which Tabcorp and Tatts were said to offer uniquely differentiated products (at [220]).
The Tribunal concluded that there would be no detriment to the public arising from a loss of competition in the consumer wagering market (at [230]).
Bidding for licences
It had been argued that the proposed transaction would lead to a lessening of competitive rivalry between Tabcorp and Tatts for future retail wagering licences or businesses. Concern about a loss of this type of competition was one of the reasons why the ACCC opposed Tabcorp’s acquisition of UNiTAB in 2006.
The Tribunal accepted the economic framework for assessing competitive effects in this area that Professor Menezes had presented to the Tribunal, on behalf of Tabcorp (at [232] – [234]). Under this framework, the proposed transaction was only likely to lead to anti-competitive effects if it could be shown that Tatts was likely to be the second highest bidder for the relevant business / licence in the counterfactual (at [241]), it being accepted that Tabcorp was likely to be the highest bidder.
The Tribunal was not satisfied that Tatts was likely to be the second highest value bidder or that governments would suffer negative outcomes due to the possible loss of bidding rivalry between Tabcorp and Tatts. This was primarily due to
- the significant changes that were occurring in the wagering market (e.g. at [244] and [248]);
- the likely interest by other bidders such as corporate bookmakers in these assets (at [247]); and
- the ability of governments to act strategically to counter the increased power of a merged entity (at [291]).
As a result, the Tribunal concluded that no public detriment was likely to arise in the market for wagering licences (at [314]).
Racing media
The ACCC and interveners raised a number of concerns about the impact of the merger in media markets.
However, consistent with Tabcorp’s arguments, the Tribunal ultimately concluded that:
[373] The merger materially changes nothing in respect of the media landscape other than putting Tabcorp in a weaker bargaining position vis-à-vis the PRAs [rights-holders] by reason of Tabcorp’s increased dependence on obtaining those media rights.
Conditions of authorisation
The Tribunal authorised the merger subject to one condition, the divestiture of Odyssey. Tabcorp and the ACCC had both agreed that this divestiture should occur in order to address competitive detriment arising in the supply of wagering services in Queensland.
A number of other possible conditions of authorisation had been suggested to the Tribunal by the ACCC, the interveners and Tabcorp itself. The Tribunal found that none of these conditions was necessary to address competitive detriment arising from the transaction and did not consider the need to accept any of the other suggested conditions (at [136]). There was evidence from industry stakeholders that the conditions were unnecessary and may negatively impact them (particularly media rights holders).
Broader implications of the decision
Utility of the Tribunal process
This is now the third Tribunal determination of an application for merger authorisation since the process was introduced in 2007. By deciding Tabcorp’s application only one week after the expiry of the initial three month statutory period, the Tribunal reinforced that merger authorisation can be an effective route by which to secure competition clearance.
In responding to each of these decisions, the ACCC has emphasised the different nature of the merger authorisation test. For example, in its media release following announcement of the Tribunal’s decision to authorise the Tabcorp / Tatts merger, the ACCC stated ‘The Tribunal’s net public benefit test requires a weighing of the likely detriments and benefits and is a vastly different one to the substantial lessening of competition test which the ACCC applies in its informal merger clearances’.
While it is correct that the Tribunal’s test is different, the potential for the Tribunal to weigh up significant public benefits against material, but smaller, detriments and therefore decide that a transaction is, on balance, in the public interest has not been critical in any of the merger authorisations to date. In contrast to the claims of the ACCC in each case, the Tribunal has found that there has been no material competitive or other detriments associated with the transaction.
The feature of the Tribunal process that has been most important and beneficial from the applicant’s perspective is that it has required the ACCC and intervening parties to formally present their evidence of potential competitive harm. This has allowed that evidence to be directly and rigorously tested. This is in contrast to the informal merger clearance process where ‘The ACCC will not ordinarily publicly disclose the submissions it receives during a review from the merger parties or third parties’. During an informal clearance process, the ACCC generally only provides details about the evidence it is basing its decision on to the merger parties in a high level, summary form.
There are important changes to the merger authorisation process in the proposed legislation (currently before parliament) implementing the recommendations of the Harper review of competition policy. Following implementation of these reforms:
- it will no longer be open to merger parties to directly apply to the Tribunal for merger authorisation;
- the ACCC will gain the power to authorise mergers on the net public benefit standard (which it does not currently have);
- if a party applies to the ACCC for merger authorisation, the ACCC has 90 days from the initial application to make a determination (unless extended by consent);
- the ACCC’s decision can be reviewed by the Tribunal at the end of this period and the tribunal has an additional 90 days to make its decision, unless it receives new evidence not considered by the ACCC in which case the period is extended to 120 day; and
- as per the existing process, the Tribunal may also extend its period for decision by up to a further 90 days due to complexity or special circumstances.
It will remain to be seen how this new process plays out in practice. It is interesting to note that the overall timing is similar to what most merger parties experience in the existing process – for example, Tabcorp was involved for approximately 3.5 months in the ACCC review process prior to moving to the Tribunal, which made its decision slightly more than 3 months later.
Implications for analysis of competition in changing markets
Many sectors of today’s economy are being disrupted by technological change. This includes:
- bricks and mortar retail businesses facing competition from internet suppliers;
- business involved in producing or distributing advertising or those which rely on advertising as a source of revenue facing pressure as advertising moves away from traditional channels; and
- companies in energy markets facing changes driven by new technologies and climate change.
Tabcorp and Tatts are the incumbent suppliers of retail wagering in physical venues in Australia, and still earn a significant proportion of their revenue from bets placed in retail venues. By contrast, their major corporate bookmaker competitors – who are more recent entrants into the Australian market – exclusively supply services online and by telephone.
This meant that while Tabcorp and Tatt’s market current shares in the market were relatively high, it was clear that long term trends were against them. The Tribunal noted that ‘Whether one describes the current position of the wagering industry as ‘dynamic’, there is no doubt that the wagering industry has been in recent years, and will continue to be for the relevant time frame the Tribunal is considering, in a rapidly changing environment’ (at [101]). These trends influenced the Tribunal’s analysis:
[213] A substantial lessening of competition in the consumer wagering market is not demonstrated by a snapshot of market share arising from the proposed merger.
[214] The Tribunal whilst mentioning market share makes the following observation. The Tribunal agrees with the proposition, put by Tabcorp, that a firm in a growing market cannot simply accept a continuing decline of market share on the basis that it is holding its historic revenues stable in absolute terms. The fact that this decline is driven in the two fields of endeavour in which the Merger Parties hold their exclusive licences – retail and pari-mutuel wagering – indicates that the business models of the Merger Parties will continue to come under substantial pressure.
In markets subject to digital disruption or technological change, consolidation is often an important way to respond to the new competitive environment, as it allows for the merger parties to achieve cost reductions and scale efficiencies. The Tribunal’s findings in this respect are of broad importance to companies operating in sectors subject to this type of change, as its approach emphasises the importance of looking past the legacy position and grappling with these long term trends.
Visit Smart Counsel