Lessons from recent ACCC merger reviews - how to get your deal through

Articles Written by Sar Katdare (Partner), Johanna Croser

Three recent ACCC merger informal clearance decisions reinforce the ACCC's view that 3:2 mergers will be presumed to be anti-competitive unless the parties can clearly demonstrate that structural or behavioural outcomes as a result of the transaction would not substantially lessen competition in any market.

The recent decisions show that:

  • an acquisition is more likely to receive ACCC approval if it can be shown that the target company is a "failing firm" that would exit the market if the transaction were not to proceed;
  • long term quasi-structural undertakings may resolve the ACCC's competition concerns; and
  • the effect of a transaction on non-price dimensions such as "innovation" can be as important as price effects.

Failing firm - Virgin/Tiger

On 2 November 2012, Virgin Australia sought informal clearance from the ACCC for its proposed acquisition of 60% of Tiger Australia. The acquisition would result in the market for Australian domestic air passenger transport services going from three players (Qantas/Jetstar, Virgin and Tiger) to two players (Qantas/Jetstar and Virgin/Tiger).

The parties initially argued that the acquisition would be pro-competitive because a merged Virgin/Tiger would be a more formidable competitor to Qantas/Jetstar.

The ACCC, however, expressed its concern that reducing the number of major airline competitors in Australia from "three to two" may increase the likelihood of coordinated conduct in the market (i.e. the two airlines coordinating their pricing, capacity and/or related commercial decisions due to tacit conditioning from their repeated interactions over time).

On 23 April 2013, the ACCC ultimately decided not to oppose Virgin's proposed acquisition on the basis Tiger was a "failing firm" (Note: This deal should actually be characterised as a 2:2 merger because the correct analysis is the future with the merger (rather than the status quo) compared to the future without the merger. In both cases, Tiger has exited.). Chairman Rod Sims stated:

Essential to reaching this view was the ACCC's assessment, made after thorough and extensive testing of the issue, that Tiger Australiawould be highly unlikely to remain in the market if the proposed acquisition didn't proceed. Absent this conclusion the acquisition raised considerable competition concerns.

The ACCC's Merger Guidelines provide that the ACCC is only likely to accept a "failing firm" argument if it can be shown that the target company was in "imminent danger of failure and was unlikely to be successfully restructured" without the acquisition and that its assets, including its brands, would leave the industry.

Undertakings - Nestlé/Pfizer

On 24 May 2012, Nestlé sought informal clearance from the ACCC for the proposed acquisition of Pfizer Nutrition as part of a global merger. The deal represented a 3 player (Nestlé, Pfizer and Nutrica) to 2 player (Nestlé/Pfizer and Nutrica) merger in the highly concentrated national markets for the wholesale supply of infant formula and toddler milk.

The ACCC initially expressed concern that the proposed acquisition would result in a substantial lessening of competition because of the increase in concentration in already concentrated markets where barriers to entry and expansion were high and countervailing power was weak.

The merger parties offered the following novel undertakings to the ACCC to alleviate its concerns:

  • an exclusive ten-year licence of Pfizer's Australian infant nutrition business' brand portfolio to an independent ACCC approved purchaser;  followed by
  • a further ten-year 'black out' period during which Nestlé would undertake not to reintroduce any of Pfizer's brands.

The undertakings are designed to enable a third player to successfully enter the market and become a viable, independent competitor.

Taking out the "maverick" innovator - Heinz/Rafferty's Garden

On 19 October 2012, Heinz sought informal clearance from the ACCC for its proposed acquisition of Rafferty's Garden. The transaction would result in a reduction from three players (Heinz, Rafferty's Garden and another) to two players (Heinz/Rafferty's Garden and another) in the national markets for wet and dry infant foods.

The parties argued that the supermarkets' private label brands and their countervailing power would be sufficient to prevent an exercise of market power by the merged entity (i.e. the merger would not result in higher prices, reduced output).

On 6 June 2013, however, the ACCC announced that it would oppose the proposed acquisition on the basis that it would remove a vigorous and effective competitor in the market which has led innovation in non-price aspects of wet infant food (e.g., its pouch-and-spout packaging, branding, product quality and flavours).

The ACCC's decision reiterates that the ACCC will not approve mergers where the parties are unable to demonstrate an effective competitive constraint on the merged entity, and that the ACCC may place as much emphasis on innovation when addressing the competitive impact of the merger as it will on the price effects of a merger. 

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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