JUDGMENT: Pacific National Pty Ltd – Aurizon Holdings Limited (Target)
First instance
At first instance, the Federal Court of Australia refused the ACCC's application to block Pacific National Pty Ltd's (PN) proposed acquisition of intermodal assets from Aurizon Holdings Limited (Aurizon), subject to an undertaking offered to the Court by PN.
PN was an intermodal freight and steel freight operator. It offered Australia's largest network of interstate rail freight capabilities.
Aurizon was a large rail freight operator. It moved a range of commodities, including mining, agricultural, industrial and retail products across Australia.
Aurizon proposed to exit its intermodal rail haulage business through the proposed sale of 1) its Acacia Ridge Terminal (ART) to PN (together with a terminal services agreement pursuant to which PN would operate the ART once a previous terminal services agreement with Qube expired); 2) the sale of its Queensland Intermodal Business (QIB) to PN, following which the pick-up and delivery side of the business would be transferred to Linfox; and 3) the closure of the remainder of its intermodal business. Following an informal merger clearance process, the ACCC opposed the transactions and brought proceedings in the Federal Court to block them.
After the ACCC successfully obtained an injunction to prevent Aurizon from closing down the QIB, Aurizon entered into a separate transaction to sell the QIB to Linfox. The ACCC's allegations in relation to the QIB accordingly fell away, and the Court case focused on the ART transaction and the terminal services agreement.
Following Aurizon's exit from the intermodal business, PN was one of only two rail linehaul operators servicing the North-South interstate rail line from Melbourne to Brisbane, and also the East-West interstate rail line from Melbourne to Perth. The other operator was SCT.
The key concern for the ACCC was that the proposed acquisition of the ART and the terminal services agreement to operate the interstate side of the ART would have the effect of substantially lessening competition in the supply of rail linehaul services by raising the barriers to entry for any new rail linehaul operator seeking to enter the North-South and/or East-West rail markets, since any new entrant would have to deal with PN at the ART. The ACCC did not consider that the access undertaking offered by PN in relation to the terminal would be sufficient to address its concerns, including that PN would discriminate against any new competitor.
PN and Aurizon argued (among other things) that the transaction would not substantially lessen competition because there was no real chance that, in the absence of the transaction, any new entrant would seek to enter the market in the upcoming years, given the lack of attractiveness of the market and the high barriers to entry. Furthermore, new rail terminals were expected to be constructed within a number of years in response to the Inland Rail project, and from that point in time new entrants would not require access to the ART to compete.
The Federal Court considered that the appropriate market in which to assess the transaction was the market for the supply of intermodal rail services to customers who could not switch to road or sea freight services. This was because any anti-competitive effects of the merger would be limited to those customers who could not simply switch from rail services to road or sea freight services in the event of a rise in the cost of rail services.
Ultimately the Court concluded that while the company that the ACCC identified as a likely new entrant (Qube) was not in fact likely to enter in the relevant period, the Court could not exclude the possibility that some other (unnamed) competitor might do so.
Nonetheless, the Federal Court still approved the proposed acquisition, on the basis that the access undertaking offered by PN would remove any significant ability for PN to discriminate when providing other rail operators access to the ART.
The Court also concluded that the terminal services agreement did not have the purpose or likely effect of substantially lessening competition.
Link to judgment at first instance
Judgment on appeal
The ACCC appealed the first instance judgment on the basis that the trial judge did not have the power to accept the PN undertaking or alternately, that the trial judge erred in concluding that the PN undertaking would be effective to prevent PN from engaging in anti-competitive conduct. PN and Aurizon cross-appealed on the basis (among other things) that the proposed acquisition would not have substantially lessened competition even in the absence of the access undertaking, because there was no evidence on which the Court could find that a new entrant might emerge.
On appeal, the Full Federal Court held that the trial judge was correct in his definition of the market but erred in finding that, absent PN's proposed undertaking, the acquisition was likely to result in a substantial lessening of competition. While it was ultimately not necessary for the Court to determine, the Full Court also concluded that the trial judge did have the power to accept the undertaking.
The Full Court found that the prospect of new entry in the market for interstate intermodal rail services was no more than speculative, regardless of whether the acquisition proceeded. Consequently, the Full Court held that the acquisition was not likely to lead to a substantial lessening of competition. Consequently, the transaction was approved by the Full Court without conditions.
The decision link below is to the Full Court judgment.
Link to decision on appeal
Special leave application
The ACCC applied for special leave to challenge the Full Court's decision before the High Court of Australia. The grounds of appeal related to the evidence heard in relation to the prospect of new entrants into the market and the competitive "discipline" on Pacific National post-acquisition. On 8 December 2020, the High Court of Australia dismissed the ACCC's application, finding that there were insufficient prospects of success to warrant the grant of special leave to appeal.
The decision link below is to the High Court transcript of the hearing.