The Federal Court handed down its decision in these proceedings on 25 August 2011 in favour of Metcash. Full reasons were released on 26 August 2011.
In July 2010 Metcash, Australia's largest grocery wholesale distribution and marketing company, entered into an agreement with Franklins' owner, Pick n Pay, to buy Franklins. Following a review of the proposed acquisition, the ACCC announced in November 2010 that it opposed the acquisition and undertook to commence proceedings to restrain the proposed acquisition.
Proceedings were commenced in December 2010. The hearing took place in March and April 2011.
The ACCC alleged that the effect on competition of the proposed acquisition was that it would reduce the number of suppliers and increase barriers to entry, resulting in a substantial lessening of competition. Metcash and Pick n Pay argued that the proposed acquisition would have little effect on competition.
In finding against the ACCC, the Court has recognised that integrated supermarket operators (such as Coles, Woolworths and Aldi) do competitively constrain grocery wholesalers, contrary to the position pursued by the ACCC for a significant time. This decision may have significant ramifications for other vertically integrated industries where the ACCC has traditionally been reluctant to recognise the competitive constraint imposed across functional levels by integrated suppliers.
The ACCC appealed the decision on 9 September 2011, stating that it was doing so for 2 main reasons -
- the adverse effect of the proposed acquisition on independent supermarket retailers, consumers and competition in the NSW and ACT grocery sector. Metcash, with this proposed acquisition, will have an ability to increase prices and/or reduce service to independent supermarket retailers; and
- if left unchallenged, the Court's interpretation of some fundamental principles of merger analysis could have serious implications for the ACCC's ability to block anti-competitive mergers.
On 11 September, Metcash gave notice to the ACCC that after the expiry of five business days, Metcash considered itself free to agree with Pick n Pay to waive the condition requiring ACCC approval for its proposed acquisition of the Franklins supermarket business.
Following this, the ACCC applied to the Court for an interim injunction restraining the proposed acquisition in order to preserve the existing state of affairs until the appeal is heard and determined. The Court refused to grant the injunction, giving the following reasons:
- the ACCC had lost comprehensively at trial and couldn't point to any "glaring errors or obvious oversight in the primary judgment";
- the appeal would not be pointless if the injunction is refused as one of the reasons for the ACCC appeal is to challenge the primary judge's interpretation of some fundamental principles of merger analysis;
- the status quo was unlikely to be preserved until the determination of the appeal as Franklins is struggling in these economic times;
- there was no evidence that a third party will be able to purchase Franklins' shares and operate the wholesale assets;
if Metcash had to sell Franklins' shares to independent purchases then reversing these arrangements might prove difficult but these difficulties are ameliorated to some extent by the expedited hearing of the appeal;
- 5 the Court could not assume that Metcash and Pick n Pay would further extend the deadline for completion even though they had in the past; and
- Pick n Pay had made it clear that it intends to complete the agreement and cease to carry on business in Australia. The sale agreement provides Pick n Pay with the ability to make a certain exit from the business which is of considerable commercial benefit to it. In light of the matters referred to above, the Court did not consider that the sale should be further delayed. Although the matter is under appeal, some weight should be given to the primary judge's finding that the transaction is pro-competitive.
The appeal was expedited and will be heard from 24 October 2011.