The ACCC, whose chair Rod Sims has recently complained the law is not on the regulator’s side in merger review challenges and is in need of reform, will face off against two of Australia’s most esteemed competition groups.

Vodafone filed the high-stakes challenge in Federal Court on Friday, entrusting the case to the competition team at Allens, led by partner Jacqueline Downes, while Herbert Smith Freehills, whose Australian competition group is led by partner Liza Carver, will represent TPG.

The parties are seeking to have the case handled on an expedited basis and have requested a case management hearing for the week of May 27. A judge has not yet been assigned to the case.

Telcos bring on competition aces for landmark case

Both Allens and Herbert Smith Freehills, which are Chambers ranked Band 1 for competition matters in Australia, have impressive resumes in both merger clearance and disputes. On Friday, Allens won a significant victory against the ACCC when the Full Federal Court upheld its win on behalf of PZ Cussons in the regulator’s case over an alleged laundry detergent cartel.

Downes has worked on some of Australia’s largest mergers, including Westfarmers’ $19.3 billion acquisition of Coles, as well as the Australian aspect of global transactions, such as DuPont’s merger with Dow and Oracle’s acquisition of Sun Microsystems. She is also representing ANZ in the high-stakes cartel case against it, Citigroup and Deutsche Bank and over a $2.5 billion share placement. Herbert Smith Freehills is representing Citigroup in that case.

Carver is also a formidable opponent for the ACCC, having notched multiple victories against the regulator when merger reviews have turned contentious. A former ACCC Associate Commissioner, in 2004, Carver successfully fought back the ACCC’s opposition to the acquisition of Loy Yang Power by AGL in a Federal Court. She also successfully led the first merger authorisation case in the Australian Competition Tribunal under the current regime, winning approval for the merger of AGL and Macquarie Generation in June 2014 after the ACCC refused to grant informal clearance.

ACCC amplifies calls for reform amid TPG-Vodafone showdown

The ACCC claims the TPG-Vodafone merger, which would combine the country’s third and fourth largest telecommunications providers, would substantially lessen competition in the already concentrated market for mobile and broadband services in Australia. Telstra, Optus and Vodafone have a combined 87 per cent share of the mobile services market, while Telstra, TPG and Optus control 85 per cent of the fixed broadband market.

The case will be one of just four merger challenges ever heard by the Federal Court under the current substantial lessening of competition test. All three of the challenges that have been heard by the Federal Court so far have ended in losses for the ACCC.

The court’s latest decision stemmed from the ACCC’s challenge of Pacific National’s proposed $205 million acquisition of competitor Aurizon’s Queensland freight terminal, and resulted in a stinging courtroom defeat for the regulator and calls by ACCC Chair Rod Sims for changes to the country’s merger laws. 

In prepared remarks delivered at the 2019 Competition Law Conference in Sydney this weekend, Sims renewed his calls for reform, hinting at a merger review test that would place greater weight on preserving the competitive process and the potential benefit to consumers which would result from a target not being acquired. While the comments were made specifically in relation to acquisition of start-ups by larger platforms like Facebook and Google, Sims has used similar language when discussing the TPG-Vodafone merger.

“In my view, merger law should focus on whether the acquisition interferes with the competitive process and recognise that the process of competition for the market is not the same as the process of competition within the market,” Sims said, echoing comments made about the TPG-Vodafone deal.

“Wherever possible, market structures should be settled by the competitive process, not by a merger which results in a market structure that would be subject to little challenge in the future. This is particularly the case in concentrated sectors, such as mobile services in Australia,” Sims said in announcing the regulator’s opposition to the TPG-Vodafone tie-up.

In his speech over the weekend, Sims pointed to a “balance of harms” approach recommended by American economic Jason Furman as one possibility. This approach which would “take into account the magnitude of the foregone benefits to competition the target could bring, and the likelihood of these benefits being achieved”, Sims said.

“The question is whether [the current merger review test] is sufficient to capture acquisitions where the likelihood of a lessening of competition may be low or uncertain, but if the acquisition does lessen competition, the lessening is likely to be very substantial indeed,” Sims said 

“If the prospect that the target will become an effective competitor is small, but the potential increase in competition and consumer welfare is large, greater weight should be put on the potential for competition,” Sims said.

The ACCC’s case against TPG-Vodafone merger

In weighing the effect the Vodafone-TPG merger would have on competition, the court will have a chance to clarify the standard of proof required to show a merger would substantially lessen competition — that is, whether the “real chance” test or the “balance of probabilities” test should apply.

Sims’ opposition to the TPG-Vodafone merger is predicated on the regulator’s belief that if the merger does not move forward, “there is a real chance TPG will roll out a mobile network”, despite the telco abandoning its plans to do so in January.

TPG began plans to roll out its own mobile network in 2017 using Huawei equipment, following a nearly $2 billion investment — including $1.26 billion on mobile spectrum and a $600 million investment in equipment — but in January said it would drop the rollout after Australia blocked Huawei from 5G development on security grounds.

Despite the setback, the ACCC has insisted TPG is capable of resolving the technical and commercial challenges surrounding the rollout.

“TPG is the best prospect Australia has for a new mobile network operator to enter the market, and this is likely the last chance we have for stronger competition in the supply of mobile services,” Sims has said.

The ACCC has also expressed concerns the deal would lead to price increases for mobile plans, saying it would effectively eliminate the incentive for TPG’s competitive pricing strategy and usher in stable, rational pricing by the dominant players.

“If TPG remains separate from Vodafone, it appears likely to need to continue to adopt an aggressive pricing strategy, offering cheap mobile plans with large data allowances,” Sims said.

“Our preliminary view is the merged TPG-Vodafone would not have the incentive to operate in the same way, and competition in the market would be reduced as a result. A mobile market with three major players rather than four is likely to lead to higher prices and less innovative plans for mobile customers,” Sims said.

Over the weekend, Sims said commentators on the deal had conflated scale with competitiveness.

“In the commentary on this matter, I think there is reflected a belief that the scale or financial strength of a competitor determines their competitiveness. We don’t agree with this. A stable three-player market facing no threats will likely lead to stable and so-called rational pricing.”

“[W]e should never confuse rational pricing with the consumer interest. Consumers need the benefits of vigorous competition in order to obtain competitive pricing and the innovation that is in their interests,” Sims said.

Vodafone is a dominant mobile services provider and has begun supplying broadband services through the NBN, while TPG provides broadband and mobile services and has started to develop its own mobile network.

In announcing the deal in August last year, Vodafone said the merged company would be “a more powerful challenger to Telstra and Optus in Australia, with an integrated fixed and mobile offering” and a greater capacity to invest in next-generation telecom services.