ACCC v Metcash Trading Limited

[2011] FCA 967 (25 August 2011)

 

Note: The Full Federal Court rejected the ACCC's appeal against Justice Emmett's decision on 30 November 2011. The ACCC has announced it will not seek leave to appeal to the High Court.

Timeline | Facts and background | Issues | Trial | Appeal | News and Commentary

 

Timeline

July 2010 - Metcash applied to the ACCC for informal clearance to acquire share in Franklins (commenced 29 July)

22 September 2010 - ACCC issued Statement of Issues

17 November 2010 - ACCC announced it would oppose the proposed acquisition

23 November 2010 - Metcash announced it would proceed with the acquisition, despite the ACCC's opposition

27 November 2010 - Metcash agrees not to proceed with proposed takeover of Franklins until the matter is resolved in Court.

9 December 2010 - The ACCC initiated proceedings against Metcash, seeking an injunction from the Federal Court against the proposed Franklins acquisition

2 March 2011 - the Senate Economics Reference Committee released its final report on the proposed acquisition of the Franklins supermarket business, by Metcash, essentially concluding that the matter should be considered by the Court and not the Senate!

15 March 2011 - Trial begins before Justice Arthur Emmett

25 August 2011 - Decision handed down

9 September 2011 - ACCC announces it will appeal the decision

13 September 2011 - ACCC applied to the Federal Court for an interim injunction restraining the proposed acquisition by Metcash of the Franklins supermarket business

20 September 2011 - application for interim injunction denied by Justice Peter Jacobson

30 September 2011 - Metcash concludes takeover of Franklins

24-26 October 2011 - Metcash appeal heard by full Federal Court (Justices Finn, Buchanan and Yates), NSW Registry (Court 1, Level 21)

30 November 2011 - Full Federal Court Rejects the ACCC's appeal.

5 December 2011 - ACCC announces it will not seek leave to appeal to the High Court.

 

Facts

Forthcoming

 

Issues

Justice Emmett identified three broad issues for determination:

• market definition [at 127];
• the counterfactual [at 130];
• likely effect of the acquisition on competition [131]

 

Held (at First Instance)

Proceedings dismissed following finding that the proposed acquisition would not substantially lessen competition in contravention of s 50.

Market definition

ACCC alleged

There was controversy surrounding the ACCC's formulation fo market, but Emmett J observed [at 126] that "the Commission in its final submissions appeared to accept that it contended only for a market for the wholesale supply of goods consisting of packaged groceries, as defined, albeit not exhaustively and only inclusively."

Metcash alleged

[129] Metcash contends ... that there is a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. Metcash says that the suppliers in that market include Woolworths, Coles and Aldi, as well as Franklins, Metcash and SPAR. Metcash says, in the alternative, that there is a market approximately within the geographical region comprising NSW and the ACT for the supply of such grocery products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. Pick n Pay postulates a market in terms substantially similar to the terms of the market postulated by Metcash.

Application

[127] ... The first issue [for determination in the proceeding] is the definition of the relevant market. The critical elements that determine the characteristics and, therefore, the boundaries, of a market are:

• a product for which there is a demand;
• a source of supply for the product; and
• strong substitution between the actual and the potential sources of supply for buyers or sellers, if they are given a sufficient price incentive.

Each of those elements requires consideration.

[128] ... An entity may be included within a relevant market even if it does not presently supply that market, if it is such a close supply-side substitute as to be able readily to supply the market, and to do so quickly and without the need for significant new investment. ...

[more extracts to come here]

Conclusion as to market

[337] Metcash is not simply a wholesaler. Metcash is closely involved in the retail process, partlky through ownership but mainly through contract. The IGA banner or brand is a significant element in the rivalry between IGA retailers and the major supermarket chains. That banner or brand provides opportunities for IGA retailers to promote their stores. Consumers come to know and trust the brand, which helps to attract custom to all of the IGA stores. The IGA brand is owned and controlled by Metcash. Metcash promotes programmes that are designed to advance and promote the IGA brand. Thus, Metcash is intimately involved in the retail activities of the IGA stores, and those activities cannot be divorced from the other relevant activities undertaken by Metcash. Accordingly, the separation of Metcash’s wholesale activities from its activities at the retail level involves a significant degree of artificiality.

[338] On the other hand, Franklins is essentially a supermarket retailing business. Franklins owns the Franklins Corporate Stores. Its warehouse and distribution operations are largely carried out by separate firms under contract. If the acquisition of Franklins by Metcash proceeds, Metcash intends, over time, to shut down those activities. Thus, Metcash is not acquiring Franklins to acquire wholesale assets. Rather, it is buying retail stores, albeit with the hope of expanding the volume of its wholesale sales. It would be illogical, in those circumstances, to exclude the retail level from the analysis of the relevant market.

[339] The grocery industry is characterised by a high degree of vertical integration in the distribution supply chain. The major supermarket chains are wholly vertically integrated. Metcash and Franklins are vertically integrated to a lesser, but still significant, extent. Metcash has extensive integration downstream, at the retail level, by way of contracts, and Franklins has extensive integration upstream, at the wholesale level, also by way of contracts. Accordingly, constraints arising from competition at the retail level between independent retailers supplied by Metcash and supermarkets operated by the major supermarket chains are highly relevant in defining the market for the purposes of the application of s 50 of the Competition Act.

[340] Wholesalers, such as Metcash, SPAR, and Franklins insofar as it supplies the Franklins Franchise Stores, supply retailers with goods together with ancillary services. In applying the hypothetical monopolist test, it is unrealistic to speak in terms of an increase in the margin added on by wholesalers to their cost of acquiring goods from manufacturers and primary suppliers. It is meaningful, as I have indicated above, only to speak in terms of an increase in the price charged by wholesalers to their customers, the retailers. The position of the major supermarket chains, particularly Coles and Woolworths, is such that there is a very significant constraint on the capacity of independent retailers to increase price or decrease other services without the likely loss of business. That constraint also constrains the capacity of the wholesaler to increase its prices to independent retailers. I am not persuaded that an increase of between five and ten percent in the price at which goods are supplied by Metcash to independent retailers could be sustained without a resultant significant loss of business. [emphasis added]

[341] There is clearly vigorous competition at the retail level. It may be that there is a market for the supply of grocery products generally by retail. As I have said, Metcash and Pick n Pay contend for a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. The participants in that market would include the major supermarket chains, Franklins in respect of the 80 Franklins Corporate Stores, the operators of the Franklins Franchise Stores, the semi-integrated arrangements involving Metcash and the IGA bannered stores and the semi-integrated arrangements involving SPAR and the SPAR and 5 Star bannered stores. However, the Commission has not suggested that the proposed acquisition of Franklins by Metcash would be likely to have the effect of lessening competition in such a market.

[342] I am not persuaded that there is a separate market for the wholesale supply to independent supermarket retailers of packaged groceries, as the Commission defines those terms in the Statement of Claim. The Commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries, as defined. The Commission’s pleaded case as to market definition has not been made out. It follows that the proceeding must fail. [emphasis added]

Counterfactual

[130] The second issue concerns a comparison between the circumstances that will prevail in the future if the acquisition by Metcash does not proceed with the circumstances that will prevail if the acquisition does proceed. Such scenarios are often referred to as the “future without” and “future with” scenarios, and the exercise to be conducted by the Court is often referred to as the counterfactual analysis. In these reasons, I use the term counterfactual to mean a pleaded scenario that will come to pass in the future without the proposed acquisition. ...

Commission's counterfactual argument

[112] The Commission also alleges that there are high barriers to entry into the pleaded independent wholesale grocery market, by reason of the following matters:

• Capital investment of approximately $30 million, a significant proportion of which is sunk cost, is likely to be required to set up the necessary physical assets to supply the pleaded market, including warehousing, stock, and information technology and logistics infrastructure.
• Relationships would need to be established with manufacturers and primary suppliers to allow buying at competitive prices.
• The volume of wholesale sales to independent supermarket retailers would need to be at a sufficient level to achieve a return on the capital investment required.
• Securing such a volume of sales would require a significant number of independent supermarket retailers to commit to acquiring packaged groceries from any new entrant in the pleaded market.
• Most independent supermarket retailers would be unlikely to commit to a new entrant in the pleaded market that did not offer retail support services, including store branding, promotions and a pricing system, in addition to the supply of groceries.
• Many independent supermarket retailers would be unlikely to be able to commit to a new entrant in the pleaded market because a significant number of them have exclusive supply arrangements with Metcash, which holds equity in a number of the companies operating stores under the IGA banner, and which is the landlord in respect of a number of stores operated under the IGA banner.
• Many independent supermarket retailers would be likely to be unwilling to commit to a new entrant in the pleaded market unless they were satisfied that the new entrant would have long term viability, that the quality of the store branding and retail support would be adequate, that the range offered by the new entrant would be sufficient to meet requirements, that deliveries would be sufficiently reliable and frequent to meet their requirements, and that they would be able to secure suitable generic branded products from the new entrant.

[113] The Commission then alleges that the acquisition of Franklins by Metcash would have, or be likely to have, the following effects:

• Franklins would cease to operate under the agreements by which it acquires and supplies packaged groceries by wholesale, and would cease operating its retail support assets and its associated assets that assist it in acquiring and supplying packaged groceries.
• Franklins would cease to offer wholesale supply to franchisees.
• Most, if not all, of the 80 Franklins Corporate Stores would be sold to persons who would operate them as stores under the IGA banner, supplied by Metcash through its IGA-Distribution division.
• The operators of those stores would then acquire packaged groceries from Metcash.
• The number of wholesalers capable of supplying large format independent supermarkets would be reduced to one.
• Franklins, which is Metcash’s closest competitor for the wholesale supply of packaged groceries to independent supermarket retailers operating large supermarket stores, would be shut down.
• New entry into, or expansion by an existing competitor within, the alleged wholesale grocery market would be unlikely, because barriers to entry would remain high.

[114] The Commission alleges that, if the acquisition of Franklins by Metcash does not proceed, it is likely that the 80 Franklins Corporate Stores will be acquired by a third party or third parties, who would procure the wholesale supply of packaged groceries by acquiring and continuing to operate the Franklins assets, by establishing their own wholesale operations in NSW and the ACT, or by using the volume of sales generated by the 80 Franklins Corporate Stores to sponsor the establishment of a third party wholesaling operation for the purpose of supplying those stores and other independent supermarkets not committed to taking supply from Metcash.

[115] Alternatively, the Commission alleges that, if the acquisition of Franklins by Metcash does not proceed, a significant majority of the 80 Franklins Corporate Stores is likely to be acquired by a third party or third parties, who would be likely to procure the wholesale supply of packaged groceries by acquiring and continuing to operate the Franklins assets, by establishing their own wholesale operations, or by using the volume of sales generated by the stores acquired to sponsor the establishment of a third party wholesaling operation for the purpose of supplying those stores and other independent supermarket stores not committed to taking supply from Metcash.

[116] The Commission originally contended that SPAR was a viable third party acquirer of the Franklins business. The Commission has now abandoned that contention. Accordingly, the only third party put forward by the Commission as an acquirer of all or a significant majority of the Franklins Corporate Stores is a consortium of independent retailers based in NSW and the ACT. ...

Metcash's counterfactual argument

[130] ... Metcash and Pick n Pay, on the other hand, say that, if the acquisition of Franklins by Metcash does not proceed, each of the 80 Franklins Corporate Stores will be sold to one of the major supermarket chains, or sold to an independent grocery retailer, or closed. They say that Metcash will supply grocery products to the independent grocery retailers who acquire the stores.

Likely effect of the acquisition on competition in the relevant market

[Note, emphasis in the original unless otherwise noted]

[131] The third issue concerns the likely effect of the acquisition on competition in the relevant market. That issue is the ultimate issue, and is dependent upon the first two issues, in that it can only be determined having regard to both market definition and the counterfactual analysis. The Commission contends that the acquisition of Franklins by Metcash is likely to have the effect of substantially lessening competition in the relevant market, and so contravene s 50 of the Competition Act. Metcash and Pick n Pay contend, on the other hand, that the acquisition is likely to have little effect on competition in the relevant market.

[132] [Section 50] has two limbs. On the one hand, the Court might be satisfied that an acquisition would have the necessary effect. On the other hand, the Court might not be able to reach that conclusion but, nevertheless, might be able to conclude that the acquisition in question would be likely to have the necessary effect.

[133] In a sense, it may be otiose to enquire as to whether a particular acquisition would have the necessary effect, since it is difficult, if not impossible, to conceive of circumstances where an acquisition would have a particular effect but would not be likely to have that effect. ... Thus, it seems that the only enquiry that needs to be made is as to whether an impugned acquisition would be likely to have the necessary effect.

[134] ... The phrase would be likely to have may be capable of bearing two meanings. One is that it is more probable than not that the acquisition will have the necessary effect. The other is that there is a sufficiently high finite probability that the acquisition will have the necessary effect. The latter meaning may be expressed by saying that there is a real chance of the relevant effect eventuating [citing AGL at 342]

[135] The better view is that likely signifies a real chance rather than a greater probability than not (see AGL at [343]). If likely simply meant more probable than not, it would be difficult to distinguish the application of the second limb of s 50 from the application of the first limb, which, having regard to the onus of proof applicable in proceedings under Part IV, could be established on the balance of probabilities (see AGL at [347]).

[136] However, a real chance or possibility does not encompass mere possibility. The provision in s 76 of the Competition Act for substantial pecuniary penalties for contravention of s 50 of the Competition Act suggests that the phrase would be likely to refers to a relatively higher degree of probability than may. The phrase offers no quantitative guidance, but requires a qualitative judgment about the effect of an acquisition or proposed acquisition. The bar must not be set so high as effectively to expose an acquiring corporation to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone. On the other hand, the bar must not be set so low as effectively to allow all acquisitions to proceed, save those with the most obvious, direct and dramatic effect upon competition. Section 50 gives effect to a kind of competition risk management policy that must be applied in the real world. The assessment of the risk, or real chance, of a substantial lessening of competition cannot rest upon speculation or theory. The Court is concerned with commercial likelihoods relevant to the proposed acquisition. The application of the word likely, and the assessment of the substantial lessening of competition, must both be carried out at a level that is commercially relevant or meaningful (see AGL at [348]).

[137] Section 50 also calls for an enquiry as to whether there would, or would likely, be a substantial lessening of competition, were the proposed acquisition to proceed. That enquiry also requires a qualitative judgment to be made. It applies to a lessening that encompasses the hindrance or prevention of competition. In order to meet the threshold, the effect of the acquisition must be meaningful or relevant to the competitive process. Little weight should be given to short-term effects readily corrected by market processes (see AGL at [351]). As I have indicated above, in determining whether there is likely to be a substantial lessening of competition, it is necessary to consider the counterfactuals (see AGL at [352]).

More details forthcoming

 

Held (on Appeal)

ACCC appeal rejected. Details forthcoming. Until then see, for example, firm summaries outlining key issues, below.

 

 

External commentary

ACCC reaction

ACCC responds to Metcash decision
5 December 2011

ACCC considers Metcash judgment
30 November 2011

ACCC appeals Metcash judgment
9 September 2011

Metcash Franklins decision 'disappointing'
Press release on day of decision (25 August)

Firm summaries

AAR: Client Update: ACCC loses Metcash Appeal
1 December 2011

AAR: Focus: The Metcash decision
25 August 2011

Corrs in Brief: Metcash/Franklins merger - Full Court downs ACCC appeal and leaves matters of principle unresolved
2 December 2011

Corrs in Brief: The ACCC/Metcash decision – What it means in mergers
29 August 2011

Freehills: ACCC theory and speculation yield to commercial reality
30 August 2011 (Note: Freehills represented Metcash)

Mallesons: Metcrash: ACCC loses appeal
30 November 2011

Mallesons: Metcrash: ACCC fails in its attempt to block Metcash/Franklins merger
25 August 2011

News and Media

Alex Boxsell, 'Metcash ruling calls for rething' (The Australian Financial Review, 2 December 2011, p 57)

Matthew Drummond, 'Judges bought idea' (The Australian Financial Review, 2 December 2011, pp 16-17)

John Durie, 'ACCC has raised the bar on takeovers for itself' (The Australian, 2 December 2011)

John Durie, ACCC is right to challenge Metcash ruling (The Australian, 9 September 2011)

Patrick Durkin, 'Uncertainty may force regulator to seek reform' (The Australian Financial Review, 2 December 2011, p 16)

Bryan Frith, 'The competition watchdog needs to get real in its merger outings in court' (The Australian, 7 December 2011)

Stephen King, 'Mergers and Metcash' (Blog at Core Economics, 5 December 2011)

Susannah Moran, 'ACCC accepts defeat on Metcash bid but keeps test' (The Australian, 6 December 2011)

Michael Terceiro, 'Messcash: a comedy of errors" (Australian Competition & Consumer Law News, Issue 636, 14 October 2011)

Metcash win a victory for Freehills
Lawyers Weekly, 25 August 2011