The Federal Court's decision about the proposed Tabcorp/Tatts merger has provided significant clarification about the public benefit test for authorisations. This is timely in light of the legislation before the Senate that proposes to combine the Tribunal authorisation process with the formal ACCC merger clearance process. Partner Jacqueline Downes and Lawyer Hanna Kaci look at the key lessons from the decision.
Tabcorp originally sought informal merger clearance from the ACCC on the grounds that the merger would not have the effect of substantially lessening competition. On 9 March 2017, the ACCC identified a number of preliminary concerns with the merger in its Statement of Issues. However, before the ACCC issued its final decision, Tabcorp sought authorisation from the Tribunal (for a summary of the Tribunal determination see section 'Tribunal decision' below) on the basis that the public benefits outweighed the public detriment. The Tribunal authorised the merger on 22 June 2017. On 10 July 2017, the ACCC appealed to the Federal Court, alleging that the Tribunal made reviewable errors in:
- reasoning that detriment will only occur where there would be a substantial lessening of competition resulting from the merger;
- failing to compare the likely future state of competition both with and without the proposed conduct in its consideration of whether the proposed acquisition was likely to result in any detriment; and
- the weight the Tribunal placed on internal cost savings and revenue synergies.
The Federal Court found in favour of the ACCC (for further discussion see 'Appeal' section below), clarifying certain aspects of the public benefit test applied by the Tribunal. Under this test, the Tribunal must be satisfied that the merger would be likely to result in such a benefit to the public that the acquisition should be allowed to occur, ie the public benefit outweighs the public detriment. This differs from the test for formal or informal clearance from the ACCC, which considers whether a merger will substantially lessen competition.
The Federal Court's decision is important in two main respects. First, it found that the public detriment need not be a substantial lessening of competition but may be any public detriment (including a competitive detriment) arising out of the merger. This is a significant clarification in the law in relation to the public benefit test and highlights a distinction between seeking informal or formal clearance on the basis that there is no substantial lessening of competition and seeking authorisation of a merger. In an informal or formal clearance, the merger is only prohibited if there is a substantial lessening of competition. However, in an authorisation context, any detriment must now be considered (although that detriment will then be weighed up against the public benefit, which is not available in an informal or formal clearance).
Second, the court accepted that internal efficiencies such as cost savings and revenue increases are relevant to the assessment of public benefit and indicated that the Tribunal is not required to explicitly give weight to each benefit. Despite not conducting a weighting exercise, the Tribunal had indicated that it may be appropriate to grant a greater weighting to revenue increases which flow to the community more broadly.
These clarifications are timely as the Competition Policy Review Bill currently being considered by the Senate proposes to combine the Tribunal authorisation process with the formal ACCC merger clearance process. Under this new regime, the ACCC will now be able to approve a merger either on the basis that it does not substantially lessen competition or on public benefit grounds at first instance. The Tribunal will have the power to review ACCC decisions by affirming, setting aside or varying the ACCC determination on the information before the ACCC (subject to the Tribunal being able to consider new information it is satisfied was not in existence at the time of the ACCC's determination or information sought by the Tribunal to clarify information before the ACCC). This effectively removes the option for merger parties to 'by-pass' the ACCC and seek authorisation directly from the Tribunal.
While seeking authorisation directly from the Tribunal has been an attractive option for merger parties in recent times, with the clarification that any detriment must be taken into account by the Tribunal and with the ACCC as the first-instance decision maker, which may increase timeframes, it remains to be seen if this will eventuate.
Tabcorp supplies wagering and media products, gaming services and Keno. Tatts supplies lotteries, wagering services and gaming products and services.
The Tribunal found that consumer wagering, wagering licences, racing media, gaming services, lotteries and keno constitute separate product markets and analysed net public benefits in these different markets.
The Tribunal found that the benefits to the public were substantial and included:
- costs savings from the de-duplication of operations such as marketing, bookmakers, call centres, radio services, technology, corporate and procurement (although it may be appropriate to weigh revenue increases more highly if they flow to the community more broadly);
- increased fees for governments and the racing industry; and
- the combined entity reaching a sufficient scale to compete which would lead to greater competition particularly in online wagering.
The Tribunal maintained that there were 'no material detriments weighed in the balance which are of significance or likely to arise that outweigh the benefits', as it considered that:
- the merger will not result in a substantial lessening of competition in the consumer wagering market due to trends of industry consolidation and the rapid growth of corporate bookmakers;
- doubts as to the future viability of Tatts if the merger does not proceed and several other potential bidders (including large, well-credentialed overseas wagering operators) meant that the Tribunal formed the view that no public detriment was likely to arise from any substantial lessening in competition in the market for wagering licences;
- the merger will not result in a substantial lessening of competition in the delivery of racing media services or the bidding for racing media rights given the contestable nature of the bidding process and the ability of public racing authorities to set bidding contest parameters;
- any concerns with respect to a substantial lessening of competition in any market for gaming services were dealt with by Tabcorp's undertaking to divest its Odyssey gaming business; and
- the parties did not overlap in the lotteries and keno product markets.
In addition to the ACCC's grounds outlined above, corporate bookmaker Crownbet, a competitor in wagering and racing media who intervened in the Tribunal proceedings, also lodged an application for judicial review on the basis that the Tribunal decision was unreasonable having regard to the conclusions reached by the Tribunal, including that:
- the merger was necessary for the merger parties to compete effectively in the market;
- there are doubts to the future viability of Tatts if the merger does not proceed;
- the merger would lead to increased competition; and
- revenue increases should be considered as contributing to cost savings.
On 20 September 2017, the Federal Court handed down judgment in favour of the ACCC, ordering that the Tribunal decision be set aside and the matter be referred back to the Tribunal for consideration.
The Federal Court accepted the ACCC's first ground of review that the Tribunal only considered whether there would be a substantial lessening of competition. The court found that the Tribunal failed to take into account the detriment advanced by the ACCC in the consumer wagering services market being that the merged entity would no longer be constrained by Tabcorp in setting its takeout rate in Queensland, Tasmania, South Australia and/or the Northern Territory and it would be unconstrained in its ability to increase that rate to its legal maximum. Accordingly, the Court concluded 'the Tribunal failed to carry out its task and made a jurisdictional error by omitting to deal with a central issue raised by the ACCC'.
The court rejected the other two grounds and the 'unreasonableness' ground advanced by Crownbet. The court found that the submission that the Tribunal failed to conduct a 'with or without analysis' was a submission that the Tribunal failed to consider whether the merger 'would result or be likely to result' in a benefit to the public including relevant detriments. On this point, the court concluded that the Tribunal did not fail to consider whether the merger would, or would be likely to, result in a net public benefit due to its error in not taking into account the ACCC's pleaded detriment. This suggests the Tribunal will be required to undertake this analysis when it reconsiders this matter.
In rejecting the third ground, the court also found that the Tribunal was not required to expressly weight each public benefit.
The Tribunal has set down the matter for rehearing on 24 and 25 October 2017. We will keep you updated on future developments.