ACCC seeks submissions on Stone & Wood takeover

The Australian Competition and Consumer Commission is asking for industry submissions on the proposed acquisition of Fermentum Pty by Lion.

The ACCC is undertaking a public informal merger review of the takeover of Stone & Wood’s parent company by the major brewer after the deal was announced two weeks ago.

In its request for submissions, the ACCC said it wanted to focus on the impact of the merger on competition, as Fermentum and Lion both manufacture and distribute a range of alcoholic and non-alcoholic beverages including beer, cider, alcoholic seltzer and kombucha.

The Commission is seeking views on whether Lion and Fermentum compete closely for the supply of beer, the likely impact of the proposed acquisition on the price or service levels for the supply of beer, and the availability of alternatives to customers and the ability of these alternatives to expand.

The legal test with the ACCC applies, it says, in Section 50 of the Competition and Consumer Act 2010 which prohibits acquisitions that are likely to have the effect of substantially lessening competition in the market.

What is an informal merger review?

According to Rob Nicholls, associate professor in regulation and governance at the UNSW Business School, there are two processes available in Australia during a merger process.

“There is an informal review and a formal review, although for all intents and purposes formal reviews don’t happen often. They have happened but they are so rare, that in a competition law course they don’t have to teach them.

“For most mergers the informal review is done very quickly, and there’s not often consultation with the public or interested parties, although it’s not unusual.

“The idea behind the Australian system is that it’s quick, cheap and in the vast majority of mergers, it ends up with a letter from the ACCC that they don’t see any reason at this time why the merger would lead to a lessening of competition.”

In the case of Fermentum and Lion’s takeover, there is a consultation being undertaken.

“The only test the ACCC will look at in this merger is asking the question, ‘will the acquisition of assets lead to a substantial lessening of competition in any market?’

“In most cases, the ACCC gets a brief from the merger parties and it might come up with a few issues that there is little chance of lessening of competition, but probably not, and that gets waved through.

“Where there’s anything contentious, and clearly there’s contention in this area, then the ACCC will do what is called a market inquiry, and that’s what this is.”

Part of this consideration of competition will be a substitution test of the whole market.

“Is Carlton Draught a substitute for Coopers? Is Coopers a substitute for Carlton Draught? Probably not, or not necessarily. And that absence of substitution is what defines markets.

“It would be feasible and possible for a series of craft breweries or the trade association to put in a submission that draws out the distinctions between craft and classic beers.”

Following the ACCC’s consultation, the next step is the organisation releasing a statement of issues.

“This is where you get some potential for change. Once the ACCC has received submissions and analysed them, they come up with a statement of issues, which has the competition issues, and they’re coded as red, amber or green.

“Green indicates that they have looked at the issue but it’s not a problem. The amber ones indicate where there’s a risk of substantial lessening of competition, but include potential mitigation of that risk and they indicate what that might be.

“If it’s red, and the ACCC says there is no mitigation, that’s when the ACCC will try and injunct the merger.

“If the statement of issues is green it won’t oppose, if it’s a mix of amber and green, the merger parties will come up with a fix for the amber ones. Usually that’s an undertaking, and that’s a promise to do something to mitigate the issue which could lead to a lessening of competition.”

This was also the case following the acquisition of Carlton & United Breweries by Asahi Beverages.

The ACCC also sought industry views about the deal, and as a result, Asahi Beverages was required to offload Stella Artois and Becks as well as a number of cider brands to Heineken in order to ensure it satisfied the conditions imposed by ACCC.

But one of the issues that will be considered is whether, if the transaction did not go ahead, would Fermentum still expand with the planned $50 million brewery at Murwillumbah, and the role of tap contracts in their relationship following the revelation that Lion was excluding Stone & Wood from tap contracts.

“One really neat answer to that is no, it wouldn’t, because Lion is potentially engaging in anti-competitive behaviour in terms of kegs which means Fermentum had no choice but to agree to the merger.

“It’s that kind of submission the ACCC might scratch its head about.”

Wider competition landscape

While the likelihood is that the ACCC will not object to this merger, it does sit in an interesting time for the competition market, explained Nicholls.

“In this case, it has a very big context. Three weeks ago, Rod Sims [chair of the ACCC], made a major speech to the Law Council of Australia calling for a substantial review of the merger clearance laws in Australia.

“That included making and having a requirement to notify about mergers [which is currently not the case].”

In the speech, Sims said that the current merger laws were “failing to adequately protect competition” saying that the ACCC does not have the ability to approve mergers – only to not disagree with them.

“We have serious concerns about the level of competition in our economy and our ability under the current law to prevent further consolidation via anti-competitive acquisitions,” Sims said.

Sims raised a key issue, explained Nicholls – that of ‘killer acquisitions’.

“[This is when a] very big company buys a very small company and does one of two things.

“They might invest heavily using the branding of that small company to increase the availability of the product and increase cost of the product, or never letting it see the light of day.

“They are competing things – if small upstarts threaten big players, and have the option of buying them out, that could limit the extent of competition.

“On the other hand, if I want to sell out for a lot of money, I want to be able to sell to a major company, because no one has the money to buy me out at those sorts of multiples. So you’ve got this odd balance.”

“So Rob Sims has called for significant changes to the merger laws and in effect this is the first merger that has gone through the public process since that speech.

“The speech and this merger are not unlinked,” Nichols said.

“But this is precisely the type of non-big tech merger that should be thought about more clearly.”

Nicholls said it could be an opportunity for the craft beer industry to raise issues around competition in the sector.

“The marketing enquiries letter isn’t the only thing, the ACCC will do its own research, but it reasonably relies on other people who are going to be affected saying this is what’s going on.

“It’s not a case where sitting back will lead to a different outcome.

“If you have a position, if you have a view, if you have some evidence, it’s important to submit.”

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