Focus: The Metcash decision
25 August 2011
In brief: In its eagerly awaited decision, the Federal Court has dismissed the ACCC's attempt to block Metcash from acquiring Franklins. Partners Fiona Crosbie (view CV), David Brewster (view CV) and Lawyer Sally Keenan report.
How does it affect you?
- In determining whether an acquisition is likely to be anti-competitive, the effects of the transaction must be considered by comparing the likely competitive environment if the transaction proceeds (the 'with' world) to the likely competitive environment if the transaction does not proceed (the 'without' or 'counterfactual' world).
- The Metcash decision makes it clear that before opposing a merger, the ACCC must have strong and credible evidence supporting the counterfactual for which it contends.1
On 1 July 2010, Metcash entered into an agreement with Pick n Pay to acquire Franklins for $215 million.
Metcash is Australia's largest wholesaler and distributor of grocery products servicing independent supermarkets throughout Australia. Metcash also provides branding and other support services to independent supermarkets that operate under the IGA brand, which is owned by Metcash.
Franklins, a wholly owned subsidiary of Pick n Pay, operates a grocery business in NSW involving both wholesale and retail activities. It owns and operates 80 supermarkets, and has 10 supermarkets operated under franchise. Through its distribution business, Franklins supplies wholesale grocery products to Franklins-branded supermarkets.
On 17 November 2010, the ACCC announced it would oppose the acquisition. Metcash sought to proceed. On 8 December 2010, the ACCC commenced proceedings in the Federal Court, seeking a final injunction to prevent Metcash from completing the acquisition.
Three key issues arose for determination.
The ACCC argued that the relevant market was one for the supply of wholesale packaged groceries to independent supermarkets in NSW and the ACT. The ACCC submitted that in this market, Franklins provides a close competitive constraint on Metcash, while Woolworths and Coles do not because they are vertically integrated.
Justice Emmett rejected the ACCC's narrow market definition. His Honour found that Metcash was not simply a wholesaler but was closely involved in the retail process. Further, just as the major supermarket chains are vertically integrated, so are Metcash and Franklins to a lesser, but still significant, extent. Justice Emmett accepted that there may be a market for the supply of grocery products generally by retail. Participants in that market would include, among others, Coles, Woolworths, Franklins-branded stores and IGA-branded stores.
The ACCC contended that if the acquisition did not proceed, the Franklins stores (or a significant majority of them) will be acquired by a third party or third parties, and Franklins' wholesale activities will continue (albeit in a different form and under new ownership), thereby providing a restraint on Metcash. The ACCC argued that KKK, a consortium of independent supermarket owners, was a credible alternative buyer of the Franklins assets.
Justice Emmett was not persuaded that it is 'more likely than not that a third party... will make an offer to acquire the whole, or a significant majority, of the Franklins assets, that will be accepted by Pick n Pay'. His Honour held that the uncertainties surrounding the terms of any potential offer, such as that by KKK, made the ACCC's counterfactual a 'matter of pure speculation'.
Justice Emmett accepted the respondents' counterfactual that if the acquisition is blocked, Pick n Pay will dispose of the Franklins assets by a store sale process.
Substantial lessening of competition
The ACCC contended that Franklins provides a material constraint on Metcash, which limits its ability to charge significantly higher prices or provide inferior services to the independent supermarkets it supplies. As the acquisition would remove that constraint, it would substantially lessen competition.
Justice Emmett disagreed. His Honour considered it 'quite likely' that the acquisition of Franklins by Metcash will strengthen the capacity of independent retailers operating under the IGA banner to compete more vigorously with the major supermarket chains, thus promoting competition.
- This Focus article is based on the Summary of Conclusions published on 25 August 2011. Full Reasons for judgment will be published on 26 August 2011.
- Fiona CrosbiePartner,
Ph: +61 2 9230 4383
- David BrewsterPartner,
Ph: +61 3 9613 8707
- Carolyn OddiePartner,
Ph: +61 2 9230 4203
- Jacqueline DownesPartner,
Ph: +61 2 9230 4850
- Kon StelliosPartner,
Ph: +61 2 9230 4897
- Ted HillPartner,
Ph: +61 3 9613 8588