Mergers in Australia: Significant Trends & Challenges
By Linda Evans, Elizabeth Richmond & Alexia Takis
Posted: 20th August 2013 08:38
There has been a significant downturn in the number of Australian mergers in the past few years. Investors are cautious and are looking for greater certainty of success before commencing a transaction. Recent trends in the regulatory environment in Australia have added to the uncertainty for investors and present challenges for merger parties.
Background: Merger Review in Australia
In Australia, companies are prohibited from buying shares or assets if the acquisition would have the effect, or likely effect, of substantially lessening competition in any market in Australia. Unlike some jurisdictions, there is no obligation to notify a transaction to the regulator, the Australian Competition and Consumer Commission (ACCC), however, parties are encouraged to do so if they consider the transaction might raise competition issues.
The usual process is for the ACCC to assess the proposed merger by undertaking a public market inquiries process. It forms a view on whether or not there are competition concerns likely to arise from the transaction. If not, it will issue a letter of comfort to the effect that it will not take any action. If there are competition concerns, the ACCC indicates that it intends to oppose the transaction and must then take steps in the Federal Court of Australia to prevent the parties from proceeding with the transaction.
Procedural Trend: Increased Uncertainty in Timing of Merger Review
The ACCC has merger review process guidelines which provide merger parties with a guide as to the processes the ACCC will use when conducting a review. Those guidelines indicate that:
(a) the first stage of an informal review could take between 2 - 8 weeks after which the ACCC will decide either not to oppose the merger or to issue a statement of issues (SOI) setting out the ACCC's concerns about the transaction; and
(b) if a SOI is issued (second stage), a further timeline would be issued providing for a further period of public consultation and review, sometimes up to six months depending on the complexity of the issues.
In the past few years, the ACCC has also developed a practice of conducting "pre-assessments". This process involves a very high level preliminary review of the issues to determine whether or not a more fulsome review is required and is intended to efficiently deal with the large number of non-contentious matters which are notified to the ACCC. Parties are usually notified of the ACCC's views within 2 to 3 weeks. The Chairman of the ACCC, Rod Sims, noted in a speech earlier in 2013 that the introduction of pre-assessments has meant that the ACCC is dealing with a large proportion of the reviews very quickly.
Despite this, it has become apparent that the length of time the ACCC is taking to review all other matters is increasing. This is particularly the case if a SOI is published. Despite a decline in merger activity, once a SOI is published, the informal process is becoming more protracted. Since 2008, there has been a dramatic increase in the proportion of cases requiring substantive review taking longer than the ACCC guideline of 8 weeks.
Rod Sims has acknowledged this issue in a speech in February 2013 when he said that "the length of time our reviews take, and the potential impact on the parties' commercial timeframes, is something we are acutely aware of and we are taking a number of steps to address". He stated that this was an issue which is being addressed through revision of the merger guidelines.
The proposed draft of the revised merger guidelines has recently been released and for the most part attempt to align the guidelines with current practiceand emphasise the need for greater transparency on timing and indicative timeframes.
Significantly, the following changes have been proposed:
(a) the formal introduction of the pre-assessment practice; and
(b) a move away from setting standard periods for review and to set more "realistic" timeframes. For public reviews, the revised guidelines contemplate a pre-SOI period of 6 to 12 weeks and a post-SOI period (if required) of 6 to 12 weeks.
Effectively, these changes mean that merger parties can expect a total review period of anywhere between 6 and 24 weeks (cf 2-8 weeks in the earlier guidelines for the first stage of the review).
The revised guidelines also require the ACCC to provide a "provisional" decision date when commencing a review. While parties may get some comfort from this provisional decision date, the revised guidelines allow for great flexibility for the ACCC to change this date.
Substantive Trend: 3:2 Mergers and the Approach to Concentrated Markets
The ACCC has also indicated that where a merger reduces the number of key players in a market the parties should not be surprised if the ACCC carries out a full review and potentially blocks the transaction. Rod Sims has publicly stated the ACCC's concerns with such transactions, saying that "with only two principal players remaining in a market, each will learn to anticipate the actions and reactions of the other". That is, the two remaining firms will have the ability to tacitly coordinate, raise prices and reduce quality more easily. Given the maturing market in some industries in Australia, this increased scrutiny of mergers is a further challenge faced by business in getting a deal over the line.
A recent example of the ACCC's approach was in relation to the proposed acquisition by Heinz of Rafferty’s Garden. The transaction would have resulted in a merger of the two major players in the national markets for wet and dry infant foods. Other competitors were significantly smaller. Although the parties argued that, in Australia, the private label brands owned by the supermarkets, and the countervailing power of the supermarkets would be sufficient to prevent an exercise of market power by the merged entity, on 6 June 2013 (some eight months after the informal review process started) the ACCC announced that it would oppose the transaction on the basis that it would remove a vigorous and effective competitor in the market which had created some innovative products thereby effectively competing with the other players.
This decision demonstrates the ACCC's approach to transactions of this type where the parties are unable to effectively demonstrate that a competitive constraint on the merged entity will continue to exist post transaction.
Currently the challenges to transactions not only exist in the economic climate, but also in clearing the competition hurdles involved in achieving clearance. Timing uncertainty, particularly in a complex transaction that presents challenges of its own, is real issue for companies that need to approach a transaction with confidence. While the revised merger review process guidelines are intended to create more transparency and certainty for business, it remains to be seen whether this will be achieved in practice.