The Australian Competition and Consumer Commission today filed proceedings in the Federal Court seeking to restrain the completion of an agreement by Wattyl Limited to acquire of the architectural and decorative paint business of Taubmans, on the grounds that it would be likely to substantially lessen competition, ACCC Chairman, Professor Allan Fels, confirmed today.
The proposed acquisition would have involved Wattyl acquiring the Taubmans' manufacturing plant at Villawood in NSW, a number of trade centres and the Taubmans brand name.
In taking this action, the ACCC particularly took into account:
the fact that the proposed acquisition would remove a large competitor from the market; the high level of concentration which would result in the national market for the manufacture of architectural and decorative paints. The ACCC estimates that the two largest paint manufacturers, Dulux and the merged Wattyl/Taubmans would account for almost 80% of total paint manufacture; high barriers to entry to paint manufacturing in the form of brand recognition which differentiates the products of the leading paint manufacturers; the apparent extent of vertical arrangements between some of the paint manufacturers and paint resellers accentuating the height of the barriers to entry and making it difficult for smaller paint manufacturers to compete successfully with the major manufacturers; the significant level of vertically integrated participation of paint manufacturers in the sale of paint to trade painters; and the absence of significant import competition.
The ACCC's application for an interlocutory injunction (which seeks to maintain the status quo until the outcome of a final hearing of the issues) has been set down for hearing on Thursday 14 March 1996.
The architectural and paint industry has been valued at $630 million annually. The major end-users are do-it yourself customers and trade painters. The ACCC concluded that these consumers would be likely to face higher paint prices as a result of the proposed acquisition.
The ACCC conducted extensive market inquiries on a national scale into the paint industry, Professor Fels said. Among those consulted were other paint manufacturers, paint resellers and raw materials suppliers. This gave the ACCC a good understanding of the likely effects of the proposed acquisition.
"The ACCC is seeking an injunction under Section 50 of the Trade Practices Act which prohibits mergers or acquisitions which are likely to have the effect of substantially lessening competition. As the parties have not sought authorisation, the questions of public benefit are irrelevant to the case."
In such a concentrated market structure the ACCC is concerned that the incentives of the prospective parties and other market participants would lie in raising prices rather than competing vigorously. Whilst there are other paint competitors in the market, these are significantly smaller than Dulux, Wattyl and Taubmans with lower levels of sales and little brand recognition. The ACCC concluded that these smaller, regional paint manufacturers would be unable to constrain the pricing decisions of the major manufacturers.
The ACCC rejected the arguments of the parties that, at present, they are not effective competitors to Dulux. It also rejected the claim by Wattyl that after the merger, the smaller regional paint manufacturers will be in a position to constrain the pricing decisions of Dulux and a merged Wattyl/Taubmans. The ACCC believes that the structure of the paint market, particularly the high barriers to successful entry as well as the widespread vertical arrangements, is such that, after the merger, the parties are likely to charge higher prices. Further, the ACCC doubts that paint resellers are likely to pass on any benefits to end users. The ACCC also rejected the parties' argument that, only after the merger, will they will be in a position to provide a full line service. Market participants view that the parties already provide such a service.
Market participants agreed that brand reputation was the most significant barrier to entry to paint manufacturing. In order to achieve this level of brand awareness paint manufacturers spend significant amounts on advertising and other promotional activities such as catalogues and on-site promotional equipment. It was also stated by retailers and manufacturers alike, that access to shelf space is difficult for less well recognised and supported products. Associated entry barriers such as government approvals and research and development costs, whilst not decisive barriers in their own right, added to the overall height of the barriers to entering the paint industry.
The ACCC also found a prevalence of vertical arrangements between paint manufacturers and paint resellers. The essence of these agreements appears to be the limiting of the reseller, so far as possible, to the stocking, promoting and selling predominantly one brand of paint. Such agreements appear to buffer the positions of the paint manufacturers that enter these agreements from the competitive efforts of new and the expansion plans of existing smaller market participants.
Taubmans currently manufactures and sells significant volumes of paint, particularly in Queensland and NSW, and competes nationally with Wattyl and Dulux. Market participants indicated that they considered Taubmans a vigorous and effective competitor in terms of the quality of its product (particularly its brand, Living Proof Silk) and the level of service it provides. This view was held despite recent poor trading results.
The ACCC also concluded that the level of countervailing power was ineffective because customers are unlikely to import paint or integrate backward directly. The parties' claim about countervailing power was also rejected in light of the vertical arrangements that exist within the industry. The ACCC believes that the existence of widespread tied arrangements in an industry is likely to suggest that the market is already not operating competitively.
The ACCC also noted that since the last major acquisition in the paint industry, namely the Dulux acquisition of British and Berger Paints in 1988, four independent paint manufactures have been acquired by either Wattyl, Taubmans or Dulux. Pascol and Solver have been acquired by Wattyl, Raffles by Taubmans and Cabots was acquired by Dulux. These acquisitions have added to overall concentration in the Australian paint industry.
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