Australia: Is Toll and Sea Swift merger the exception or a new normal?

On 1 July 2016, the Australian Competition Tribunal (ACT) granted Sea Swift Pty Limited (Sea Swift) authorisation to acquire Toll Marine Logistics Australia's (Toll) marine freight operations in the Northern Territory and Far North Queensland (the acquisition).

The authorisation is subject to requirements that, for a period of five years:

  1. Sea Swift maintain a minimum level of scheduled services to locations in remote communities (remote community service condition); and
  2. Sea Swift comply with price caps for certain categories of freight in those remote communities (remote community price condition).

In addition, Sea Swift must give an undertaking regarding access to the Gove Wharf at Nhulunbuy and dispose of some of its vessels.

This authorisation follows the Australian Competition and Consumer Commission's (ACCC) decision to oppose to the acquisition following Sea Swift's application for informal merger clearance in July last year. It also represents the second merger authorised by the ACT in the last couple of years.1 While this may not seem like many, it is significant given the absence of applications between 2007 (when merger authorisation was first introduced) and 2013.2

ACCC MERGER REVIEW

Following a 6 month review, which included a detailed Statement of Issues, the ACCC announced that it would oppose Sea Swift's acquisition on 9 July 2015.

The ACCC's three principal concerns were that:3

  1. Sea Swift and Toll are the two largest providers of marine freight services in the Northern Territory and Far North Queensland and on many routes they are the only two providers.
  2. While the parties offered undertakings under which Sea Swift would maintain a base level of services and set a cap on price increases, this was seen as a second best option, as it would result in a competitive market becoming a regulated monopoly.
  3. Even if Toll shut down its marine freight business, this would provide opportunities for new competitors to enter the market, for example, by acquiring Toll's assets or customers.

ACT MERGER AUTHORISATION

Dissatisfied with the outcome, Sea Swift applied to the ACT for merger authorisation on 21 September 2015. The application was later withdrawn and the parties filed a new application on 4 April 2016.

Unlike informal (or formal) merger clearance, authorisation relies on a net public benefit test. An acquisition will only be authorised if the public benefits of the proposed transaction outweigh any anti-competitive detriment.

Parties to the proceeding included Sea Swift, Toll (as intervenor) and the Maritime Union of Australia (as intervenor). Consistent with 'Hardiman'4 principles and its legislative role, there was important input and assistance from the ACCC. Interestingly, the ACT also received submissions from the Department of Prime Minister and Cabinet, the Department of the Chief Minister of the Northern Territory, the Torres Strait Island Regional Authority, the Hon. Warren Entsch MP and a number of other witnesses.5 This reflected the importance of the social issues raised by the matter.

Public benefits cited by Sea Swift included:

  • an orderly handover of Toll's customers to an existing serve provider with the option of maintaining their current contractual arrangements or choosing a different supplier;
  • certainty about the price and availability of cargo services in remote locations due to Sea Swift's continued baseline service levels and price caps; and
  • enabling Toll to exit a failing business at low cost while Sea Swift can achieve an efficient scale.

The ACCC submitted that these public benefits were either poorly defined, contradicted by the evidence or would occur in the absence of the acquisition (including because of new entry).

In particular, the ACCC argued that honouring existing contracts provided a short-term benefit to a very narrow class of the public. Disagreeing with Sea Swift's view on the counterfactual (the future 'without' the acquisition), the ACCC submitted that Toll's exit from the market would provide a rare opportunity for entry or expansion by Sea Swift's competitors.

The ACT's reasons indicate that it took a different view, in part because it accepted that Toll would exit the market irrespective of the outcome of its review. In addition, it appears to have had greater confidence than the ACCC in the utility of the behavioural undertakings given by Sea Swift.

ACCC REACTION AND BROADER IMPLICATIONS

The ACCC expressed disappointment with the ACT's decision,6 sparking speculation that it may seek judicial review. It has also commented that the decision is unlikely to apply to many other transactions given the unique circumstances of this transaction.7

While it is true that Sea Swift's acquisition of Toll was unusual in terms of the risks and benefits for remote communities, aspects of it may also be significant for other sectors. These include airlines/airports, rail, telecommunications and shipping, where relatively high upfront capital expenditure and ongoing operating expenses together with the absence of scale economies in some cases can make duplication of certain infrastructure or services uneconomic. This is particularly so where externalities such as social benefits to the community can be cited.

As a result, it will be interesting to see if the ACT's decision leads to greater recourse to the ACT in transactions involving national infrastructure where public benefits may be more apparent and arguable.

Footnotes

1 The first ACT determination was the authorisation of AGL Energy Limited's acquisition of Macquarie Generation in March 2014. See here for our article.

2 The first ACT merger application was by Murray Goulburn in December 2013 for its proposed acquisition of Warrnambool Cheese and Butter. This application was withdrawn in 2014.

3 ACCC, Q and A: Sea Swift proposed acquisition of Toll Marine, 10 July 2015

4 R v Australian Broadcasting Tribunal; Ex parte Hardiman (1980) 144 CLR 13

5 Australian Competition Tribunal, Application by Sea Swift Pty Limited [2016] ACompT 9, Background to the Tribunal's Determination, 1 July 2016

6 ACCC Media Release: Sea Swift's acquisition of Toll Marine's NT and FNQ marine freight assets authorised by the Australian Competition Tribunal, 1 July 2016

7 ACCC Media Release: Sea Swift's acquisition of Toll Marine's NT and FNQ marine freight assets authorised by the Australian Competition Tribunal, 1 July 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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