The Australian Competition Tribunal today adjourned the hearing of Wattyl and Taubman's application for a rehearing of the Commissions determination to refuse authorisation of the purchase of the Taubmans architectural and decorative paint business until 9 November 1996.
As announced by the ACCC yesterday, Taubmans has been sold to Plascon Taubmans Pty Limited, a subsidiary of Barlow Limited, a South African industrial company.
The sale to Plascon will maintain three significant participants in the Australian architectural and decorative paint market. It alleviates the ACCCs concerns raise in its determination that the reduction in the number of large paint manufacturers to two is likely to result in an increase in prices to consumers.
"Wattyl first approached the Commission to express its interest in acquiring the Taubmans business in July 1995. Since that time it has dithered and delayed at some cost to its shareholders," ACCC Chairman, Professor Allan Fels, said today.
"The ACCC was always of the opinion that other potential bidders were likely to be interested in Taubmans and was puzzled by Wattyl's slowness.
"One source of delay came from Wattyl's indecision and 'tactical' manoeuvring - particularly as to whether it would pursue its legal rights through a hearing before the Federal Court or authorisation and possible hearing before the ACCC's review body, the Australian Competition Tribunal.
"Wattyl also chose:
- not to make the acquisition public for three months after the initial contact with the ACCC, thereby preventing market inquiries which would have led to a speedier resolution; and
- not to apply for authorisation, which is time-limited to a maximum of 45 days in complex matters, for approximately eight months after initial contact with the ACCC.
"Other sources of delay by Wattyl and Taubmans included the following:
- the failure of Wattyl and Taubmans to put on any evidence in the section 50 proceedings till one month after the deadline for the production of that evidence. Therefore, even though Wattyl and Taubmans had been arguing that the matter was extremely urgent and that a tight timetable was necessary, they were unable to abide by their own timetable. This contrasts to the Commission which had filed and served over 40 witness statements at the same time in the proceedings. The Tribunal was critical of the failure of Wattyl and Taubmans to provide evidence.
- Wattyl, in particular, and to a lesser extent Taubmans failed to provide adequate, timely information in support of their authorisation application.
Professor Fels also refuted claims that Wattyl and Taubmans were 'denied their day in Court' by the ACCC.
"Rather they were denied an opportunity to have a 'day in Court' by their own inaction," he said.
"At every stage in the process the ACCC has provided Wattyl and Taubmans with speedy and detailed responses.
"The ACCC's attitude to Wattyl's and Taubman's authorisation prospects have been incorrectly reported. The ACCC neither encouraged nor discouraged an authorisation application. The authorisation application was inspired by the parties' own legal advisers.
"The ACCCs Determination concerning Wattyl's acquisition of the Taubmans is currently before the Tribunal for rehearing. As stated earlier, an adjournment has been granted until 8 November 1996. Therefore it would be inappropriate for the ACCC to embark on a discussion of the merits of the case in the media, as others have sought to do.
"However the ACCCs reasoning and decision in this matter are a matter of public record. A detailed explanation on the ACCC's decision to deny the authorisation is available in the ACCC Determination in the Application for Authorisation by Wattyl (Australia) Pty Limited, Courtaulds (Australia) Pty Limited, Taubmans Industries Limited; and Pinchin Johnson (Australia) Pty Limited, dated 17 May 1996.
"However given the public debate which surrounds this issue and in an effort to correct a number of instances of misinformation contained in a couple of press articles, I will simply restate the ACCCs views as contained in its publicly available report.
"The ACCC gave the acquisition full and fair consideration under the authorisation provisions of the Act. The arguments advanced by Wattyl and Taubmans were considered in detail and at great length. Independent experts were retained to assess many of the claims, particularly in relation to claimed cost savings, international competitiveness and Australian ownership issues."
Anti-competitive detriment: Some aspects
Paint imports are low. Based on Wattyl estimates it was likely that imports of architectural and decorative paints represented less then 3 per cent of the architectural and decorative paint market in 1995. Further, imports of water based paints of which architectural and decorative paints would be the dominant part, have actually fallen over the past few years.
The Commission concluded that entry barriers were high. While capital costs are not substantial for limited entry, entry at a level sufficient to be a competitive threat to the duopolists was likely to involve considerable capital outlay. Further, large scale entry would increase supply to an extent likely to lower prices and thereby make large scale entry non-viable.
Product differentiation barriers were substantial. While Wattyl claimed that brand recognition was not a significant barrier to entry, market evidence and internal records of the parties convinced the Commission otherwise. In the DIY retail market, market evidence suggested that consumers are very hesitant in using a generic or housebrand. Internal reports to the Board of Wattyl stated that one of the main reasons for Wattyl's interest in Taubmans is its established brand name and reputation and that the costs of advertising to establish brand identity would limit the number of competitors in the market. The Commission identified a large number of reports and informed opinions all of which state unequivocally that brand identification is extremely important in the paint market.
Brand recognition is of considerable importance to resellers. Small resellers concentrate on sales of nationally advertised brands to the extent that non branded or poorly imaged products will have little opportunity of access to retail outlets. Mass merchandisers stock almost exclusively the brands of the three national manufacturers.
Any new entrant or existing small firm would have considerable difficulty contesting the market segment supplied by the branded manufacturers, a segment representing the majority of the market.
The Commission found that each of the major paint manufacturers had established a range of vertical agreements which in the Commission's view restricted competition in the industry. The acquisition would have re-enforced such agreements and reduced external competitive pressures.
The vertical agreements established between Dulux, Wattyl and Taubmans and the various paint resellers vary considerably. However, generally they tend to restrict the opportunity of resellers to sell competing brands by imposing conditions such as minimum sales targets and/or floor/shelf space requirements, prohibition on competition for certain customers, and prohibitions on the sale of competing brands.
Higher prices and profit margins
The Commission gave considerable attention to the claim that competition will be enhanced by a duopoly market structure but found such an argument implausible.
The Commission was of the view that there are a wide range of structural and behavioural factors which would lead it to conclude that competition was likely to be reduced rather than enhanced by the acquisition.
Further there was little evidence of substantial differentiation between the products of the three leading suppliers. All are recognised in the market as suppliers of the quality premium priced paint.
Similar market shares combined with similar cost structures would have enhanced the likelihood of non competitive behaviour..
It is generally accepted in the industry that following the Dulux acquisition of British and Berger Paints in 1990 paint prices rose significantly. The Commission was unable to oppose this acquisition under the dominance test which applied at this time. With the acquisition of Taubmans by Wattyl, the Commission believed that the potential for price increases was even greater due to the fact that a number of independent paint companies have been acquired by Wattyl, Dulux and Taubmans since that time (including Pascol, Solver, Cabots, Granosite, Raffles).
Accordingly, the likelihood that prices would rise following the merger was considered high.
Features of the market which the ACCC believed would be conducive to the exercise of coordinated market power, which would be enhanced by the merger, were:
- it would have been substantially easier for two rather than three players to reach terms of coordination and to detect and punish deviations from those terms in the absence of the uncertainty caused by a third player
- Dulux and Wattyl each regularly publish price lists, from which individual trade and retail discounts are calculated, which could serve as the mechanism for coordination
- post-merger, both players would be similar in terms of market share, breadth of product lines, geographic spread of production and capacity utilisation, making it more likely that their interests would coincide and be interdependent
- the merger would eliminate a significant part of Taubman's current excess capacity, such that the merged firms incentive to take sales from Dulux would have been diminished
- especially in relation to branded products, orders are frequent, regular and small, which would have reduced the incentive to cheat and made detection more likely
- retail prices are visible and easily compared and there is substantial market intelligence in relation to trade sales, such that deviations from coordinated terms would have been easily detected, and
- any deviations were likely to be swiftly met by the other firm, resulting in lower prices and profits, but no increase in sales.
Public benefit claims
The ACCC accepted that efficiency gains of the magnitude indicated, if realised, would have been a substantial public benefit from the merger. However, the ACCC doubted that even if such savings were realised, that lower costs would be passed on to the consumers in the form of lower prices. It was also possible that the envisaged efficiency gains would have been dissipated if the merger resulted in a lessening of competitive pressures. For example, the pressure to avoid cost increases and/or to avoid management inefficiency is reduced as competitive pressures decline.
Recently there has been much discussion of the issue of globalisation, and particularly the relationship between globalisation and domestic merger laws. Clearly globalisation is a relevant consideration in merger analysis and a factor which has been accorded significant weight by the Commission in both its Draft Merger Guidelines and the final Merger Guidelines issued in July 1996.
Wattyl had raised the argument that Australian ownership should be considered a public benefit. The Commission accepted that Australian ownership is a public benefit, but believed that in this case the benefits from Wattyl acquiring Taubmans were not so large as to outweigh the Commissions other concerns about the acquisition, particularly its likely effect on paint prices. Indeed, it is not clear that the acquisition of Taubmans by Wattyl would have resulted in any net gain in Australian ownership: Courtaulds were likely to re-invest the sale proceeds in Australia and in the absence of the merger Wattyl could make alternative investments in Australia.
Furthermore, the ACCC has a limited role in relation to the issue of foreign ownership. The high level of foreign ownership of Australian business is largely attributed to the fact that Australia is a capital importing country. Also its foreign debt has sharply increased. Also it has a small population. If, nevertheless, there is concern about foreign ownership the appropriate instrument of policy is the Foreign Investment Review Board, but government has not used this to heavily restrain foreign ownership in recent years. The Trade Practices Act should not be distorted unduly by excessive concern about the achievement of Australian ownership.
History of the proposed acquisition
27 July 1995 Wattyl first approached the Commission concerning its interest in acquiring the architectural and decorative paint business of Taubmans.
9 August 1995 Commission advises Wattyl that there was a strong prospect that the proposed acquisition would be likely to have the effect of substantially lessening competition
23 October 1995 Proposed acquisition made public and market enquiries commenced
6 December 1995 Commission advises Wattyl and Taubmans that in its view the proposed acquisition would be likely to breach the Trade Practices Act
9 January 1996 Wattyl met with Commission to discuss a possible resolution of the matter
11 March 1996 Wattyl decided to proceed with the acquisition
14 March 1996 Commission successful in obtaining interlocutory relief
3 April 1996 Wattyl and Taubmans lodged authorisation applications
17 May 1996 Commission issues determination refusing to grant authorisation
6 June 1996 Wattyl and Taubmans seek a hearing before the Australian Competition Tribunal to review the Commissions decision
21 August 1996 Courtaulds and Wattyl seek adjournment till mid-October 1996 pending completion of contract with Plascon
22 August 1996 Tribunal grants adjournment of hearing until 8 November 1996