The Australian Competition and Consumer Commission will oppose the proposed acquisition of Wattyl by Barloworld, ACCC Chairman, Mr Graeme Samuel, said today.
"The ACCC has formed the view, after a comprehensive investigation and inquiries among industry participants, that the proposed acquisition is likely to substantially lessen competition for the manufacture and supply of architectural and decorative paints in Australia", Mr Samuel said.
"Wattyl and Barloworld are the second and third largest suppliers of A&D paints in Australia, and the merged firm would account for more than half of total sales. The merged firm and Orica, which is currently the largest supplier, would together account for approximately 90 per cent of A&D paint sales.
"Market inquiries demonstrated that Barloworld and Wattyl vigorously compete for second position in the market and are each other's main competitors, but are also clearly competing with the market leader, Orica. The proposed acquisition is likely to remove this competition and lead to increased prices for consumers.
"The ACCC considered it particularly significant that brand awareness and access to resellers' shelf space would prevent existing smaller and niche competitors from expanding and preventing price increases by the merged firm. With only the merged firm and Orica to turn to for well-recognised and nationally distributed brands, paint resellers and trade painters would likely face higher prices, which would ultimately be passed on to end customers".
Based on these factors, the ACCC is of the view that the proposed acquisition would be likely to substantially lessen competition in the market for supply of A&D paints in Australia, in breach of section 50 of the Trade Practices Act 1974.
The ACCC considered Barloworld's proposal to divest certain Bristol assets, as well as other submissions made by Barloworld following the ACCC's publication of its Statement of Issues in March 2006. After consulting widely among industry participants, the ACCC formed the view that Barloworld's divestiture proposal was not sufficient to resolve the ACCC's competition concerns.
Further details regarding the ACCC's competition concerns, Barloworld's divestiture proposal, the merger parties and section 50 of the Trade Practices Act 1974 are provided below.
The ACCC will be publishing a Public Competition Assessment in due course.
Media inquiries Mr Graeme Samuel, Chairman, 0408 335 555 Dr Stephen King, Commissioner, (02) 6243 1178 Ms Lin Enright, Director, Public Relations, (02) 6243 1108, (0414) 613 520 General inquiries Infocentre 1300-302-502 Release # MR 150/06 Issued: 6th July 2006
Related register records Barloworld - proposed acquisition of Wattyl Limited Review type: Informal Review Date completed: 6th July 2006 Industry: Architectural and Decorative Paint Background The Australian Competition and Consumer Commission considered the relevant market to be the manufacture and supply of architectural and decorative paints in Australia. The experience of industrial and heavy duty coatings manufacturers, such as PPG and Wagon Paints, demonstrates that industrial manufacturers cannot readily provide an alternative to major A&D paint suppliers due to difficulties in establishing sufficient brand awareness and distribution networks.
The merged firm would account for more than half of A&D paint sales. Together with Orica, these two players would account for approximately 90 per cent of the market. The next largest supplier, Haymes, has a very small market share. Further, imports account for a very small share of Australian A&D paint demand, and potential importation of broadwall paints is unlikely to be a credible competitive threat to the merged firm.
Wattyl is a vigorous and effective competitor to Barloworld and Orica, particularly through its Solver brand. The ACCC is concerned that the proposed acquisition would remove the competitive tension currently offered by Wattyl. The major suppliers have comprehensive product ranges, strong national brands, scale advantages and extensive vertical links. This differentiates major suppliers from 'fringe suppliers' which operate in niche product categories or limited geographic areas. Although these fringe suppliers, such as Haymes and Rockcote, provide limited competition in certain product categories and geographic areas, the ACCC considered that fringe suppliers, individually or combined, are unlikely to prevent price increases on a national basis in key product categories, such as broadwall paints.
Fringe suppliers face substantial barriers to expansion that would prevent them from defeating price increases by the merged firm within the foreseeable future. The need to develop strong brand awareness to end customers and resellers limits fringe suppliers' ability to access sufficient distribution channels in DIY and trade to constrain the major suppliers. Further, the large stable of leading national brands possessed by the major suppliers would allow them to leverage their brands in ways that would make access to distribution difficult for fringe suppliers. The major suppliers are vertically integrated into paint 'retailing' through their extensive national networks of company owned stores and trade dealerships. The ACCC considered that this vertical integration creates substantial barriers to expansion by limiting fringe suppliers' access to the DIY and trade segments, including through trade dealership arrangements with, and financial incentives for, A&D paint resellers.
The ACCC considered that A&D paint resellers would be unable to counteract price increases by the merged firm and Orica due to their need to stock well-recognised national brands. The ACCC did not consider an exercise of buying power by a major reseller such as Bunnings would prevent widespread price increases to DIY consumers. Reseller housebrands are not credible substitutes for well-recognised national brands and in any event are mostly manufactured by the major suppliers.
Trade customers, such as trade painters, would be unable to counteract price increases by the merged firm and Orica because there are no alternative suppliers capable of providing the quality assurance, consumer acceptance and level of service provided by the major suppliers. Further, large DIY resellers were not considered by trade customers as being credible sources for their trade paint supply for price and non-price reasons.
The ACCC considered it unlikely that the merged firm and Orica would have an increased incentive to compete vigorously in non-price terms to the benefit of consumers. Orica already faces significant non-price competition from Wattyl, and to a lesser extent Barloworld, and there is also vigorous non-price competition between Wattyl and Barloworld for the second-ranked position. The information before the ACCC suggests that this vigorous level of non-price competition between the major manufacturers currently seen in the A&D market would likely be diminished as a result of the proposed acquisition.
The ACCC considered that the proposed acquisition is likely to provide the merged firm with the ability to unilaterally increase its prices to trade customers through the removal of Wattyl, and particularly Solver, as a vigorous and effective competitor to Barloworld. In this regard, the ACCC noted Solver's use of a low-cost structure and low prices as the primary means with which to expand sales against Barloworld and Orica. By removing the vigorous price competition offered by Solver, the proposed acquisition would likely provide scope for the merged firm to increase trade prices.
The ACCC would also be concerned if the proposed acquisition resulted in significant symmetry between Orica and the merged firm in terms of manufacturing capacity constraints and thereby reduce the incentive for these firms to engage in vigorous price competition.
In addition, the ACCC considered that the proposed acquisition would increase the incentive for coordinated conduct between the merged firm and Orica by increasing symmetry between these firms. For example, by: removing the current asymmetry and constraint upon coordination created by DIY resellers' decision to generally stock two product ranges; increasing cost structure symmetry; and increasing product range symmetry. Although price transparency may be complicated by bilaterally negotiated discounts between the remaining major suppliers and their respective customers, the ACCC considered that these firms could independently find means to overcome these coordination issues, such as by servicing their existing customers and not competing too vigorously for the other's customers. The remaining major suppliers could also tacitly seek to standardise discount structures and minimise the extent to which sales representatives were able to deviate from established price lists and discount structures. In addition, the ACCC noted that limited price transparency could be overcome through the extensive market intelligence that Orica and the merged firm would continue to gather on each other's activities and prices.
ACCC's view regarding Barloworld's divestiture proposal In May 2006 Barloworld provided a divestiture proposal and associated section 87B Undertaking for market inquiries by the ACCC. Barloworld proposed to divest the Bristol brand and certain Bristol stores.
The ACCC considered that Barloworld's divestiture proposal does not satisfactorily resolve its competition concerns regarding the proposed acquisition because divestiture of the Bristol assets would not prevent the merged firm from increasing prices. Factors informing this view included:
the divestiture assets would not, by themselves, generate sufficient sales volumes across necessary segments of the A&D paints market to facilitate market entry or expansion to a level that would provide a competitive constraint to the merged firm Bristol's brand awareness is largely limited to the eastern states. Also, the Bristol brand is not sufficiently well-recognised in the decorative (DIY) segment of the market, particularly in South Australia and Western Australia the divestiture assets would not provide adequate distribution coverage in South Australia and Western Australia a purchaser of the divestiture assets would likely require supply of Taubmans products in order to ensure the viability of the Bristol stores. However, this would undermine the purchaser's independence from the merged firm the Glen Waverley manufacturing facility proposed to be divested by Barloworld (if necessary) would be unlikely to provide sufficient volumes of paint to supply a purchaser of this facility at a cost that would enable it to constrain the merged firm's pricing, and any toll manufacturing agreement between the merged firm and a purchaser of the divestiture assets would undermine the latter's independence. The ACCC therefore concluded that Barloworld's divestiture proposal does not resolve the ACCC's competition concerns.
Time line for consideration of the proposed acquisition On 13 February 2006 Barloworld publicly announced its intention to offer to purchase all of the shares in Wattyl. ACCC commenced market inquiries.
On 23 March 2006 the ACCC published a Statement of Issues outlining its preliminary competition concerns. The Statement of Issues is available on the ACCC's website by following the link to Mergers and then the link to Mergers Public Register.
On 16 May 2006 Barloworld submitted a s.87B Undertaking relating to its divestiture proposal.
Previous acquisitions In recent years the ACCC has allowed several acquisitions by major Australian paint suppliers of smaller suppliers. For example, Barloworld now owns the Bristol and White Knight brands as well as Taubmans. In May 1996 the ACCC denied authorisation of Wattyl's proposed acquisition of Taubmans. In August 1996, Taubmans was instead acquired by Barlow Ltd.
Section 50 Section 50 of the Act prohibits mergers and acquisitions that will have the effect, or are likely to have the effect, of substantially lessening competition in a market. Section 50(3) sets out a non-exclusive list of matters that must be taken into account in determining whether an acquisition is likely to substantially lessen competition.
The ACCC conducted an informal merger assessment process in relation to the proposed acquisition in accordance with its published guidelines. The ACCC's Merger Review Process Guidelines is available on the ACCC website.
Section 87B Under section 87B of the Act the ACCC can accept court-enforceable written undertakings from parties in order to address competition concerns that arise in relation to acquisitions. For example, a company acquiring another might undertake to divest a specific business after it completes the acquisition. The ACCC takes into consideration such undertakings when assessing whether it considers an acquisition would breach section 50 of the Act.
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