What do you need to know?
- On 1 July 2016 the Australian Competition Tribunal (Tribunal) authorised Sea Swift Pty Ltd’s (Sea Swift) acquisition of the marine freight business of Toll Marine Logistics Australia (Toll) in the Northern Territory (NT) and far north Queensland (FNQ). Merger authorisations can be granted where a proposed acquisition produces a “net public benefit” under s 95AT of the Competition and Consumer Act 2010 (Cth) (the Act).
- In contrast, in July 2015 the ACCC opposed the proposed acquisition under its informal clearance process (which does not consider public benefits). The ACCC concluded the transaction would be likely to “substantially lessen competition” in circumstances where Sea Swift and Toll were the two largest providers of marine freight services in the NT and FNQ and competition between them was beneficial for consumers.
- This case is the second completed merger authorisation since the process was introduced in 2007 and the second positive determination for the parties.1 The Tribunal again completed the process within the three month statutory period, thereby reinforcing that where public benefits can be demonstrated, merger authorisation can be an effective and relatively quick alternate route to securing competition clearance for a transaction.
Sea Swift and Toll are both providers of scheduled marine freight services to the NT, FNQ and coastal communities including the Torres Strait Islands where there is limited or no road access.
Communities in these remote regions rely on regular freight services to replenish supplies, with these services being utilised by large and small retailers and individual consumers requiring delivery of household items. Freight services are generally provided to these communities by way of a regularly “scheduled service”.
Sea Swift and Toll entered into an asset and share sale agreement in respect of the proposed acquisition in November 2014, seeking ACCC clearance. In July 2015, the ACCC announced its opposition to the proposed acquisition. Sea Swift, with Toll’s support, subsequently filed an application for merger authorisation with the Tribunal in September 2015. The application was withdrawn in November 2015 and re-lodged in April 2016.
Both Sea Swift and Toll submitted that the proposed acquisition would not result in any competitive detriment and would provide significant public benefits. The ACCC argued that significant anti-competitive detriment would arise, without sufficient off-setting public benefits. The Tribunal’s reasons for its decision to authorise the acquisition are not yet publicly available, which means it is not yet possible to analyse the weight given to the competing arguments. However, some insights can be garnered from the submissions of the parties.
In ascertaining the competitive detriment associated with the proposed acquisition, a key point of contention was the nature and extent of barriers to entry and expansion. The competing submissions can be summarised as follows:
- The ACCC argued that barriers to entry and expansion were already high and would increase as a result of the proposed acquisition. In particular, it submitted that should the acquisition proceed, Toll’s existing customer contracts would not be readily “contestable” by other operators, resulting in enhanced market power for Sea Swift and a less competitive market. In contrast, without the acquisition potential competitors would have a “one off” opportunity to compete to acquire the contracts (and other assets and vessels).
- The merger parties submitted that any barriers to entry or expansion would not be increased (and might potentially be reduced) as a result of the proposed acquisition. In making this claim they relied on evidence of contract contestability from a range of other operators who already provide certain scheduled services or had the capability of providing such services and pointed to the on-going ability of customers to re-tender or otherwise move their contracts between operators. Indeed, they argued the transaction could improve the operation of the market by allowing Toll to exit in a way that minimised costs and such an outcome would give potential competitors confidence to contest the market knowing that an exit by way of merger remained an option.
The ACCC and merger parties also took issue over the alleged counterfactual or “future without” the proposed acquisition. While all parties accepted that Toll would exit the market, the nature of that exit and how it might manifest was the subject of disagreement, with the merger parties arguing certain scenarios posited by the ACCC were contrary to specific evidence from Toll executives.
The ACCC’s view was that the proposed acquisition provided short term or no public benefits, arguing that the assurances offered by Sea Swift would not resolve competition concerns or offer meaningful protection to the affected coastal communities. The ACCC argued that any benefit would only last as long as the contracts with customers remained in effect, and must be considered against the detriment to the majority of customers who did not have ongoing contracts with Toll.
Against this, the merger parties submitted that the authorisation would:
- facilitate a smooth handover to an existing service provider and delivery of the price and service commitments that Sea Swift was willing to offer;
- ensure customers, both commercial and individual, would continue to receive the benefits of their current services, including certainty of supply to remote communities in the NT and FNQ; and
- enhance the operation of the market by allowing Toll to exit a failing business in a cost effective manner.
Conditions of authorisation
The Tribunal’s decision to authorise the proposed acquisition is subject to certain conditions offered by Sea Swift in support of its application. Those conditions include Sea Swift maintaining a minimum level of scheduled services, maintaining up-to-date shipping schedules on their website with parameters in place in respect of pricing of those scheduled services.
What does this mean for you?
- The Tribunal’s timely process again demonstrates that where parties are contemplating mergers that involve large existing market players and public benefits exist, merger authorisation should be kept in mind as a genuine alternative to (or potentially second stage following) an ACCC informal clearance process.
- You should also note that while we are yet to discover the emphasis placed on various arguments by the Tribunal, the submissions suggest that the counterfactual and whether alternative sale processes existed was an important issue in this matter (along with barriers to entry and expansion). It is clear that an examination of possible alternatives to a proposed transaction remains a critical step when approaching regulatory clearance.
- Finally, merger authorisation applications direct to the Tribunal will no longer be available if the 2015 Harper Review recommendations are ultimately introduced. Instead, merger authorisations will be decided by the ACCC at first instance, with the Tribunal granted a limited right of review.
In its media release shortly after the decision was handed down, the ACCC expressed its disappointment and went on to say that the regulator will continue to oppose acquisitions that it considers are likely to substantially lessen competition. You can read the ACCC’s press release following the Tribunal’s determination here.