Plan B for the ACCC

The Metcash court case has rebalanced the relationship between the ACCC and companies pursuing sensitive mergers, and the watchdog's fallback plan of delay will likely meet successful resistance.

The Australian Competition and Consumer Commission chairman, Rod Sims, gave an interview this week which raises the prospect that, having had its preferred strategy for stopping mergers it is uncomfortable with demolished by the courts, the commission may now revert to Plan B.

In an interview with The Australian Financial Review, Sims said that as a consequence of last year’s lost appeal against a Federal Court judgment rejecting its arguments against Metcash’s acquisition of the Franklins supermarket business, the ACCC will not be taking on theoretical points in future but would be making "proper, commercial assessments.”

The full bench of the Federal Court, in rejecting the ACCC appeal, criticised the commission for defining markets too narrowly and dealing in hypotheses rather than real and evidence-based assessments of markets.

Sims rejected any suggestion that there needed to be a ‘root-and-branch’ review of the commission’s approach to assessing mergers.

When the decision to appeal the original Metcash judgment was announced, however, he said it was because: ‘’If left unchallenged, the court’s interpretation of some of the fundamental principles of merger analysis could have serious implications for the ACCC’s ability to block anti-competitive mergers and so protect consumers in the future.’’

The appeal court essentially agreed with critics of the ACCC’s approach to large and sensitive mergers in recent years, where it has used increasingly narrow market definitions (like the "substantial lessening of competition in the market for retail investment platforms for investors with complex investment needs" that it cited in opposing NAB’s bid for AXA Asia Pacific) and increasingly hypothetical and distant competition scenarios.

That approach, Plan A, essentially enabled the commission to reject any merger it disliked.

Plan B, often operating in conjunction with Plan A, was a strategy of delay. It was that combination that killed off the NAB/AXA deal.

Big, complex mergers involving listed companies are exposed to volatile markets and investors wanting certainty and there is a limit to their tolerance to time and risk. NAB may well have been successful had it challenged the ACCC in the courts, but having pursued the deal for nearly a year, it couldn’t contemplate further lengthy delays tied up in the Federal Court and potentially the appeal court.

Sims’ comments that the commission would need to make proper and commercial assessments and look for evidence to back up those assessments (hasn’t it been doing that previously?) are being interpreted by competition lawyers as signalling that the commission will take even longer to assess deals.

‘’If part of the accusation was that we didn’t collect enough evidence in the past, well don’t be surprised if we collect evidence in the future. If that’s what we need to do that is what we will do,’’ Sims said.

There are a number of deals before the commission that have already been in the pipeline for some time, most notably the proposed merger of Foxtel and Austar that was announced in May last year. The commission has signalled that it has "issues” with that merger.

The time that assessment is taking may relate to the Metcash case and the commission’s desire to understand how the courts would rule on its approach to mergers, which is understandable, if somewhat frustrating for Foxtel and Austar.

Certainly the Metcash judgments have improved their prospects of getting the deal up and, with Foxtel unlisted, Austar controlled by US billionaire John Malone and Foxtel the only bidder likely to pay Malone’s asking price, time isn’t as big an issue for them as it would be for two listed entities.

The commission is now aware that it can’t use the approach it followed to block the NAB/AXA deal and with which it tried to stop the Metcash/Franklins deal without inviting litigation and further embarrassment and cost – both financial and to its authority.

It would, one assumes, also be aware that companies don’t have to take any notice of its concerns. They could stymie or at least truncate the timelines for a Plan B strategy based on lengthy delays as deal-killers by simply going ahead with the deals and challenging the commission to try to stop them in the courts.

The Metcash judgements have re-balanced the relationship between the ACCC and those involved in large and sensitive deals and will encourage proponents of a deal to be more aggressive in prosecuting them.

That prospect by itself should discipline, not just the ACCC’s deployment of the preferred approach it developed in recent years, but any other strategy for obstructing mergers where it has no real evidential basis for its opposition.

The commission should now only be able to block mergers that are anti-competitive, not ones that it considers might have an impact on hypothetical competition within markets that may or may not emerge sometime in future or markets that are too small to be of any material competitive consequence. That’s a good thing.