The Australian Competition and Consumer Commission (the Commission) has applied to the Federal Court of Australia for a final injunction to prevent Metcash Trading Limited (Metcash) from acquiring Interfrank Group Holdings Pty Limited (Franklins).
Franklins is a wholly owned subsidiary of Pick n Pay Retailers (Pty) Ltd (Pick n Pay), South Africa’s largest retailer.
First application for order to prevent a merger since 1997
This is the first time the Commission has applied to the Court to block a merger since 1997 when it sought to block FOXTEL’s proposed acquisition of Australis in the Australian pay television industry. Australis went into administration before the case completed.
In addition to the FOXTEL/Australis proceedings, the Commission was the respondent in proceedings brought by AGL in 2003 for a declaration that AGL’s acquisition of a c.35% stake in the Loy Yang A power station would not be likely to substantially lessen competition. In that matter, the Court made the declaration sought by AGL, thus effectively overturning the Commission’s findings that the acquisition would have been likely to breach the Trade Practices Act 1974.
Significance of the ACCC’s application to injunct Metcash
The outcome of the Commission’s application to injunct Metcash is likely to be significant:
the low frequency of applications to the Court by the Commission to block mergers is symptomatic of the shift in power towards administrative decision making; and
the findings of the Court may have significant implications for other relatively concentrated markets in Australia. This may be so irrespective of whether the Court accepts the Commission’s contention that there is a separate market for the wholesale supply of packaged groceries to independent supermarkets, where Woolworths, Coles and ALDI do not exert a competitive constraint on Metcash or Franklins.
Metcash’s proposal to acquire Franklins
On 1 July 2010, Metcash entered into an agreement with Pick n Pay to acquire 100% of Franklins.
Metcash is Australia’s largest wholesaling and distribution company servicing independent grocery retailers throughout Australia, including those under the IGA and Supa IGA banners.
Franklins operates 78 corporate owned and 10 franchised Franklins supermarkets in New South Wales.
Commission’s review of Metcash’s proposal to acquire Franklins
On 29 July 2010, the Commission commenced an informal review of Metcash’s proposed acquisition of Franklins.
On 17 November 2010, the Commission announced that it would oppose Metcash’s proposed acquisition of Franklins, primarily for the reason that the acquisition was likely to result in a substantial lessening of competition for the wholesale supply of packaged groceries to independent supermarkets in New South Wales.
The Commission indicated that other parties, whose bids would not raise the same competition concerns as Metcash’s bid, had expressed strong interest in acquiring the entire Franklins business. The other bidders may be able to deliver a better outcome for future competition than would be the case if Metcash were to acquire Franklins because independent supermarkets would have a real choice of wholesaler suppliers of packaged groceries.
Pick n Pay said in response that it had not received any credible offers and was surprised by the Commission’s claims.
Commission’s request for an undertaking from Metcash
On 23 November 2010, Metcash advised the Commission that it intended to complete the acquisition of Franklins but not before 30 November 2010.
It is likely that Metcash did so in response to a request from the Commission for a written undertaking that Metcash would not take any further steps towards completing its acquisition of Franklins without giving the Commission at least 5 business days’ written notice.
Commission’s decision to commence proceedings
On 29 November 2010, Metcash announced that the Commission had undertaken to commence proceedings in the Federal Court of Australia to seek an injunction to prevent Metcash completing its proposed acquisition of Franklins.
The Commission lodged its application in the Federal Court of Australia on Wednesday 8 December 2010 seeking a final injunction to prevent Metcash from acquiring Franklins.
We understand that the Commission, Metcash and Pick n Pay agreed to delay completion pending a final hearing and determination of the Commission’s application.
The alternative would have been for the Commission to first seek an interim injunction to prevent Metcash from completing the acquisition pending a final hearing and determination. However, an interim injunction would not result in any of the substantive issues in dispute being adjudicated by the Court, including whether there is a separate market for the wholesale supply of packaged groceries to independent supermarkets (in which Woolworths, Coles and ALDI do not compete) and whether alternative bidders to Metcash would be likely to deliver a better outcome for competition.
Graeme Samuel, Chairman of the Commission, said that the parties “have got the right to try to proceed earlier but if they do, they’ll just end up with an interim injunction.”
We also understand that the Commission and Metcash agreed to seek expedition of the final hearing, which is likely to occur early in 2011 with judgment delivered between April and June 2011.
The cut-off date for Metcash’s agreement to acquire Franklins is 30 June 2011.
The Commission’s key claims
The Commission’s key claims are:
independent supermarkets (that is, not Woolworths or Coles) in New South Wales or the Australian Capital Territory can only operate by acquiring wholesale packaged groceries from Metcash, Franklins or SPAR Australia Ltd (SPAR);
SPAR is a Queensland-based wholesaler, is small, and poses a weak competitive constraint on Metcash (in part because of the costs of shipping groceries from Queensland to New South Wales);
in contrast, Franklins constrains Metcash (and is Metcash’s only real competitor for the supply of wholesale packaged groceries to independent supermarkets in New South Wales and the Australian Capital Territory);
if the proposed acquisition is allowed to proceed:
Metcash will sell Franklins’ 78 corporate supermarkets but only to acquirers who agree to acquire their wholesale packaged grocery needs from Metcash;
the 78 corporate stores will become IGA-branded stores; and
Metcash will enter into agreements with Franklins’ 10 franchise stores for those stores to become IGA-branded stores receiving supply of wholesale packaged groceries from Metcash.
there is a separate market for the supply of wholesale packaged groceries to independent supermarkets in New South Wales and the Australian Capital Territory (the independent wholesale grocery market). (Importantly, Woolworths and Coles are not in that market and Metcash is not constrained by them);
new entry into, or expansion within, the independent wholesale grocery market is unlikely because:
barriers to entry are high (in part because any new entrant would need a network of independent supermarkets to supply groceries and Franklins is the last remaining substantial network of independent supermarkets); and
Franklins’ wholesale volume will be tied to Metcash (whether by leasing arrangements and/or exclusive supply arrangements or otherwise); and
if the proposed acquisition does not proceed, Franklins is likely to be acquired by someone who would compete with Metcash.
In essence, the Commission is contending that the proposed acquisition would be a merger to near-monopoly, where independent supermarkets in New South Wales would have to purchase their groceries from Metcash.
Next steps
At the first directions hearing on 10 December 2010, Justice Emmett made orders requiring the Commission to file its lay (ie non-expert) evidence by 31 January 2011, together with an outline of the issues it expects will be the subject of expert evidence. The matter is set down for further directions on 2 February 2011, with the hearing provisionally set to commence on 14 March 2011.