The ACCC has been kept busy by informal merger clearances, despite recently clearing a trifecta of high profile transactions. On 17 October 2014, the ACCC published a Statement of Issues setting out its concerns in relation to Rheem Australia Pty Ltd’s proposed acquisition of Dux Manufacturing Ltd’s water heater assets. Based on its inquiries to date, the ACCC considers that the proposed acquisition may substantially lessen competition in the supply of large storage water heaters in Australia. It appears that the ability of imports and other types of water heaters to effectively constrain Rheem post-acquisition will be key factors in the ACCC’s decision.
Rheem, Australia’s largest manufacturer and supplier of water heaters, proposes to acquire Dux, the second largest manufacturer and supplier of water heaters in Australia. Each party manufactures and supplies electric and gas storage water heaters, solar storage water heaters and heat pump water heaters and also imports and distributes continuous flow water heaters.
The ACCC’s primary concern relates to storage water heaters, in which Dux’s market share is the largest. Post-acquisition, Rheem would become the sole manufacturer of vitreous enamel storage water heaters in Australia, and the likelihood of new entrants and imports appears to be limited. The ACCC expressed concern that:
- the proposed acquisition would likely substantially lessen competition in the supply of electric and gas storage water heaters by increasing Rheem’s market power and removing Dux as a competitive constraint;
- potential new entrants would face high barriers to entry in relation to establishing manufacturing facilities and relationships with wholesalers and installers;
- imports may not provide a sufficient competitive constraint as importation of large storage water heaters is difficult and costly, particularly as the Australian dollar continues to fall;
- Dux is an effective competitor to Rheem – in its 2009 assessment of Rheem’s acquisition of the Aqua-max water heater business, the ACCC noted that Dux would act as “a significant constraint” on the merged firm;
- customers’ ability to exercise countervailing power depends on ability to import large storage water heaters, which market inquiries suggest is difficult and costly;
- end-users have limited ability (or incentive) to switch from large electric storage water heaters to other types of water heaters (The ACCC noted that the reduction or removal of government rebates for energy efficient water heaters and plans to phase out electric storage water heaters could mean that the market is now narrower than the “Australian market for the manufacture and supply of water heaters” on which the ACCC based its 2009 assessment of Rheem/Aqua-Max); and
- a monopolist supplier of electric storage heaters would be able to price discriminate between electric and gas storage heaters, as purchasers of electric storage heaters cannot access gas or otherwise prefer to replace existing electric heaters with another of the same type.
The ACCC also noted possible competition concerns regarding the supply of continuous flow water heaters – market inquiries suggest that the acquisition may increase Rheem’s ability and incentive to offer rebates to wholesalers and installers based on the bundling of continuous flow water heaters with storage water heaters and the ACCC notes that competition may be limited by the ability of consumers to access reticulated gas.
Market responses to the ACCC’s Statement of Issues are due by 31 October 2014 and the ACCC expects to announce its final decision on 20 November 2014.
Rheem CEO Matt Sexton has since stated that consolidation of the local industry was inevitable if Australia wants to retain a competitive local manufacturing industry, arguing that a strong local manufacturer is important to compete with imports, which currently account for 45% of the market .
The informal merger process has been the subject of a lot of submissions to the Harper Panel, with concerns expressed about the timeliness and transparency of the process. However, the Panel has recognised that, as an administrative process, it is a fragile creature and considers that any attempts to regulate it would not be sensible.