To date, most merger clearances in Australia have involved a voluntary application for 'informal clearance' to the Australian Competition and Consumer Commission (the ACCC). The option of applying directly to the Australian Competition Tribunal (the Tribunal) for a merger authorisation has always existed, but has generally been regarded as impractical within the dynamic commercial context of M&A transactions.
However, on 25 June 2014, the Tribunal granted conditional authorisation for AGL Energy Limited's (AGL) high-profile Aus$1.5bn acquisition of the assets of Macquarie Generation (MacGen).1 The decision is the first merger authorisation decision under the current merger authorisation procedure. The decision illustrates that merger authorisation is a practical alternative for certain M&A transactions.
This article provides a brief overview of the AGL decision and provides key insights into the merger authorisation procedure. It will be of current or future interest to anyone involved in Australian M&A transactions that raise material competition concerns.
How does Australia screen for M&A competition issues?
Most jurisdictions around the world follow a 'mandatory pre-notification' procedure to screen M&A transactions that raise competition concerns. Under this procedure, the relevant competition authority must be notified if certain revenue, market share or asset thresholds are exceeded.
Australia is relatively unusual by global standards in that it permits voluntary notification. In Australia, the decision whether to notify the ACCC is at the discretion of the acquirer based on its view as to whether concerns arise under the merger prohibition in section 50 of Australia's Competition and Consumer Act 2010 (the Act). However, the ACCC has issued guidelines in which it 'encourages' and 'expects' voluntary notification by the acquirer if certain thresholds are exceeded.
Australia's approach to merger clearances is similarly unusual. Most M&A transactions are screened by the ACCC through a process that has no statutory basis. The outcome of a successful ACCC review known as 'informal clearance', is not statutory immunity, but rather a non-binding 'letter of comfort' that the ACCC will not injunct M&A completion.
Notwithstanding its novelty, the informal clearance process generally works well. The procedure provides flexibility to resolve any ACCC concerns and to negotiate approval conditions (or 'undertakings'). The process normally enables resolution of ACCC concerns within reasonable commercial timeframes.
The difficulties with the informal clearance procedure arise for those M&A transactions that raise significant competition concerns. While negotiation of undertakings is the standard course of action, sometimes such undertakings fail to address all of the ACCC's concerns.
What does an acquirer do if the ACCC opposes an M&A transaction, even with undertakings? Given that the informal clearance procedure has no statutory basis, there is no ability to appeal an ACCC decision. This was the difficult situation faced by AGL.
What if the ACCC opposes an acquisition?
If an application for informal clearance is opposed by the ACCC, acquirers have four options to enable a merger clearance decision to instead be made by the Tribunal or the Federal Court. Each of these options has advantages and disadvantages.
In all cases, the ACCC will continue to be involved and will likely advocate its opposition. As such, there is no guarantee that any of these options will be successful. If an M&A transaction would contravene the Act, the Tribunal or Federal Court will simply affirm this.
- Formal merger clearance: Australia enacted a formal clearance process in 2006 that does provide statutory immunity. One benefit of the formal clearance procedure is the ability to appeal an adverse ACCC decision to the Tribunal. However, if the objective of a formal merger clearance is to obtain an opportunity for review by the Tribunal, the question arises: why not go directly to the Tribunal through a merger authorisation?
- Merger authorisation: If a merger has public benefits that outweigh anti-competitive detriments, it is possible to bypass the ACCC and apply directly to the Tribunal. The Tribunal applies a different test based on net public benefit, but the process involves a quasi-judicial review.
- Declaration: In Australia, a previous informal clearance application by AGL relating to the Loy Yang power was similarly opposed by the ACCC. In that situation, AGL applied directly to the Federal Court for a declaration that the acquisition did not contravene section 50 of the Act. This method is colloquially referred to as the 'Loy Yang route'.
- Contest an injunction: In 2011, the ACCC opposed a merger clearance application by Metcash and subsequently obtained an interlocutory injunction to prevent M&A completion. Metcash successfully contested that injunction in the Federal Court and obtained judicial comfort that the acquisition did not contravene section 50 of the Act. This method is colloquially known as the 'Metcash route'.
Faced with these four options, AGL opted for merger authorisation. The practicality of this merger authorisation process is the subject of this article. The AGL application is only the second application that has been made under the current merger authorisation procedure (implemented from 2007) and the first that has been the subject of a Tribunal determination.
Merger authorisation is the only option that permits a substantively different test to be applied. As such, it has a number of clear advantages, as discussed below.
Why did the ACCC refuse informal clearance?
By way of background, the State Government of New South Wales (NSW) has been running a process to privatise its electricity generation assets.
AGL sought to acquire the electricity generation assets of MacGen, comprising some 10 per cent of total generation capacity, 12 per cent of output in the National Electricity Market (the NEM), and 29 per cent of generation capacity and 36 per cent of output in NSW. AGL made an application for informal clearance from the ACCC and offered a series of undertakings to address the ACCC's concerns. The ACCC ultimately opposed the acquisition on the basis that it was likely to substantially lessen competition in the market for the retail supply of electricity in NSW.
The ACCC reasoned that, if AGL were permitted to acquire MacGen's assets, the three largest electricity retailers in NSW would own up to 80 per cent of NSW electricity generation capacity as vertically integrated generator-retailers (so-called 'gentailers').
The ACCC expressed concern that AGL's acquisition of MacGen in such circumstances would increase barriers to entry and expansion in the market for the retail supply of electricity in NSW by:
- significantly reducing liquidity in the supply of hedge contracts to independent retailers (as AGL would instead supply electricity to itself in a so-called 'natural hedge'); and
- increasing AGL's ability and incentive to withhold competitively priced and customised hedge contracts to independent retailers.
In response to those concerns, AGL offered to supply a minimum volume of hedge contracts to market participants for a period of 6½ years following completion. The ACCC considered that this undertaking was insufficient.
The ACCC also expressed concern that aggregating MacGen's generation capacity with AGL's existing generation capacity in the NEM may substantially lessen competition in wholesale electricity markets across one or more of NSW, Victoria and South Australia, or the NEM as a whole.
Why did AGL seek merger authorisation?
As identified above, of the four options available to AGL where the ACCC had denied informal clearance, merger authorisation was the only option that applied a substantially different test. Under a merger authorisation, the Tribunal can consider wider public benefits and has a broader remit than the ACCC. The Tribunal may authorise a merger if there is 'such a benefit to the public that the acquisition should be allowed to take place'.
In applying this 'public benefits' test, the Tribunal will weigh public benefits against the public detriments of the particular acquisition. While quantification of benefits and detriments is desirable, this weighing exercise does not require mathematical precision. The Tribunal's decision suggests that the breadth of public benefits that can be submitted for consideration is very substantial and probably broader than many practitioners had anticipated. The Tribunal also generally equated public detriments with anti-competitive detriments, although public detriments arising otherwise than from anti-competitive effects may still be relevant.
The Tribunal has indicated that in order for public benefits to be recognised, there must be a causal relationship between the benefits and the conduct to be authorised. Public benefits must be of substance and have durability. There must be a real chance, not just a possibility, of the public benefits occurring: it must not be merely speculative. The estimates and assumptions underlying the public benefits must be robust and commercially realistic and must be able to be tested and verified.
The Tribunal indicated that some weighting of public benefits may occur. The Tribunal will explore other options for achieving the public benefits and discount any benefits that can be achieved in a more competitive way. If a benefit is not widely shared among the public, it can still be claimed as a public benefit but will be weighted appropriately.
In identifying and balancing public benefits, the Tribunal described its approach as having 'something of an inquisitorial character'. The Tribunal must inform itself of the issues arising and obtain evidence to support its conclusions, but is not bound by formal rules of evidence. The Tribunal will seek assistance from the ACCC in that process.
Given that the Tribunal conducts a balancing exercise, the Tribunal must identify the anti-competitive detriments of a merger as part of the public detriments. In doing so, the Tribunal will apply the same merger review analysis as applied by the ACCC. In practice, this meant that AGL had an opportunity to revisit the competition concerns expressed by the ACCC before the Tribunal.
In summary, AGL most likely favoured the merger authorisation procedure because it enabled the concerns of the ACCC to be reconsidered, while also enabling AGL to make a series of public benefits arguments to offset those concerns.
Why was AGL successful in obtaining authorisation from the Tribunal?
AGL's application for authorisation from the Tribunal was ultimately successful. On the one hand, the Tribunal considered that the public benefits of the acquisition were clear and substantial. On the other hand, the Tribunal considered that the public detriments - i.e. the anti-competitive effects - were overstated and sufficiently addressed by AGL's proposed undertakings. On balance, the Tribunal reasoned that the public benefits of the proposed acquisition outweighed any public detriments.
In relation to public benefits, the Tribunal concluded that the acquisition would produce three types of public benefit.
- The NSW public would benefit, by way of the State Government, in the sale of a deteriorating and slowly devaluing electricity generation asset that would have 'an increasing level of inefficiency and vulnerability to break down'. The funds from the sale would be allocated into the Restart NSW Fund for infrastructure projects in NSW, which would similarly benefit the public.
- AGL proposed to invest Aus$345m into the MacGen assets to increase their efficiency, capacity and longevity. In turn, this would allow those assets to generate greater volumes of electricity at more competitive prices over a longer period of time, providing a public benefit.
- AGL would be able to use the MacGen assets to compete more vigorously in the retail electricity market, thereby improving electricity prices for the public.
While the ACCC argued that these benefits could be achieved by any acquirer of the MacGen assets, the NSW Government had expressly stated that AGL was the only qualified bidder and that the MacGen assets would not otherwise be sold. The Tribunal therefore accepted that in the event that AGL did not acquire the assets, the NSW Government would retain the assets in the short term, and they would continue to devalue. The Tribunal therefore also avoided the complication, common in merger clearances involving competitive bidding, where future competitive states could be influenced by the identity of other bidders.
In relation to anti-competitive detriments, the Tribunal considered that the ACCC had overstated the likely anti-competitive effects. The Tribunal concluded that there would still be a 'substantial and adequate' hedge market for small retailers in NSW after the acquisition, assisted by AGL's undertaking to supply minimum hedge volumes.
Following the AGL decision, are merger authorisations practical for M&A transactions?
Importantly, the breadth of public benefits that was recognised was substantial and probably greater than many had expected. The Tribunal's approach suggests that there would be scope to seek merger authorisations in many circumstances since most M&A transactions will give rise to synergies and efficiencies that ultimately benefit the public.
So if merger authorisations are theoretically possible for most M&A transactions, why is the process not more commonly used?
The answer to this question is that for most M&A transactions, the informal clearance procedure is much less information intensive, less costly, and more flexible in its approach. If an informal clearance delivers a timely and successful outcome, there is no need to apply for merger authorisation.
By way of illustration, the AGL merger authorisation included the following steps:
- AGL submitted a detailed submission, accompanied by eight witness statements and three expert reports, plus supporting documents (including a pre-drafted undertaking).
- The ACCC provided an issues list and its own report, including identifying information which the Tribunal might seek from other entities.
- Third parties were permitted to intervene in the proceedings and make submissions. While a number of third parties made submissions, no third parties actually intervened. In more contentious mergers, third party intervention may add further complexity to proceedings.
- The Tribunal allocated a period of ten days for verbal hearings. During the hearings, the largely documentary evidence of AGL was presented supported by affidavits of a number of its senior management team. The ACCC also adduced some documentary material and affidavit material.
- During the hearings, where the ACCC considered that evidence might usefully be tested or challenged, or other information elicited, AGL witnesses were asked questions by counsel for the ACCC. Counsel for AGL asked questions of ACCC witnesses.
Timing is a further important consideration. While the Tribunal will seek to complete a merger authorisation within three months, it may extend this time frame to six months. The Tribunal made its AGL decision within three months. In doing so, the Tribunal stated that a prompt determination is preferred to an exhaustive and prolonged inquiry that might take many months to complete. Many commentators have seized on these comments and the timing as indicating that merger clearances could, in some instances, be faster than an informal clearance decision.
While the Tribunal's comments on timing are encouraging, we do urge some caution. The comments should be taken in context. The Tribunal's rapid decision was facilitated by the efforts of AGL and the ACCC. In turn, the ACCC's prompt response was most likely possible largely because the ACCC had already undertaken its detailed informal clearance analysis. If the ACCC had not had the relevant information at hand and an application had been made directly to the Tribunal, it is likely that the Tribunal may have sought to extend the time period in order to give the ACCC sufficient time to provide effective support to the Tribunal. The time period for consideration by the Tribunal could well have been the full six months.
Based on the AGL experience, we suspect that the three month timeline is therefore more likely only if the ACCC has previously considered the merger in the context of an informal clearance application. In the absence of informal clearance, the six month timeline is more likely.
Conclusions
In summary, the informal clearance procedure is still optimal for most M&A transactions in Australia. The AGL decision does not change that. However, there are a limited set of circumstances in which merger authorisations are practical, namely where:
- ACCC opposition is likely, as indicated by the release of a Statement of Issues;
- undertakings cannot be offered that are sufficient to resolve the ACCC's concerns; and
- there are compelling public benefits from the acquisition.
In such circumstances, the AGL decision indicates that Australia's merger authorisation procedure can work effectively to deliver a timely result.
