Eleanor Swanson, Analyst 

“I have no hesitation in favouring consumers over the shareholders” – Rod Sims, Chairman of the Australian Competition and Consumer Commission (ACCC).

In Australia, there are on average 300 domestic company mergers and acquisitions (M&A) each year. Based on our analysis, we expect the ACCC to get much tougher on mergers in the future. This research insight covers the highly concentrated nature of Australian industries, why the ACCC is about to get tougher and finally, why current outdoor advertising market mergers are unlikely to proceed.

What is the purpose of the ACCC?

The ACCC is the guardian of the consumer. It is responsible for ensuring that a merger will not have the effect of substantially lessening competition in a market or that likely public benefit from a merger outweighs the likely public detriment.

Australia industries are concentrated

Only a handful of players dominate industries that are used by the average Australian every day. But just how concentrated are Australian industries?

The best way to measure market concentration is using the Herfindhal-Hirschman Index (HHI). It is a metric used by regulators in assessing whether competition in an industry would be significantly reduced post-merger. It is calculated by squaring the market share of each player and summing them together. For example, 3 players with 33% share each would produce a HHI score of 3,267.

More concentrated markets have higher HHI scores. The below chart shows the HHI of five industries, contrasting Australia against the less concentrated US market.

Chart 1: Concentration Australia vs US – HHI of select industries

ACCC merger approval is getting tougher

There are three reasons we believe the ACCC is increasing its focus on contentious M&A activity.

Firstly, the ACCC is reducing the number of public reviews undertaken each year. In the past, ~50% of mergers underwent public review, this has dropped to just 11% in FY17. Less volumes of reviews give the ACCC more time to focus their efforts on specific cases.

Secondly, the ACCC is increasing the number of notices issued as part of its evidence gathering process. In the past year, the ACCC has doubled the number of notices issued. The success of improved evidence gathering was recently proven by the outcome of the proposed sale of Aurizon’s Queensland intermodal business to rival Pacific National. The sale was terminated by Aurizon after the ACCC released its statement of issues which alleged the deal would substantially reduce competition on interstate routes. Deals between APN Outdoor and oOh!Media, South 32 and Metropolitan as well as Camp Australia and JAG were similarly abandoned in 2017 due to ACCC objections.

Thirdly, the ACCC is now the only regulatory authority that has the power to approve a merger. Prior to the recent parliamentary reforms, approval for a merger could also be granted by the Australian Competition Tribunal (ACT) and the Federal Court. That meant merger participants could bypass the ACCC. The ACT has failed to block a merger in over 20 years and was thus an attractive option for merger parties desperate to get a deal done.

Implications for proposed mergers in the Outdoor advertising market

During 2018, two mergers have been proposed in the Outdoor advertising space, which if approved would see the industry consolidate from four players to two. oOh!Media has bid for Adshel. JCDecaux has bid for APN Outdoor.

The Outdoor ad market is 5% of the total Australian advertising market. The Outdoor ad market includes billboards, street furniture, transport locations and retail locations.

The key to the ACCC’s assessment of these two proposed deals is how they define the market in which these companies operate. Based on ACCC commentary, we believe the review will consider:

  • Collective Impact – The impact on competition of the mergers collectively, rather than separately
  • Outdoor ad market – It is likely the review will focus only on the Outdoor market. That means, the ACCC is unlikely to consider the broader advertising market including TV, online and print.

Applying these two assumptions, we calculated the HHI of the outdoor ad industry pre and post- merger. As shown in the below chart, the concentration of the outdoor ad market would increase 63% if both mergers were approved.

Chart 2: Concentration of the Australian Outdoor industry pre and post-merger vs European outdoor market – HHI

Given the industry is already highly concentrated, with an HHI above the ACCC’s 1,800 threshold it appears unlikely the two mergers will get through as proposed. Greater market concentration and reduced competition in the Outdoor ad market not only impacts the rate advertisers pay but also the rental rate the ad space property owners can realise.

Conclusion

The ACCC clearly has renewed focus and power to block contentious M&A activity in the Australian market. Given the high level of concentration within Australian industries, we believe this focus is likely to result in the ACCC blocking more M&A. Most notably, major consolidation in the outdoor advertising market is unlikely to be approved in the current form.

Will the ACCC continue its crackdown on future M&A? We think so.

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