Groundbreaking Australian merger clearance - lessons from the Tatts/Tabcorp decision

In only the third merger authorisation by the Australian Competition Tribunal since direct applications were permitted, approval has been given for Tabcorp Holdings Limited to merge with Tatts Group Limited (Re Tabcorp Holdings Limited, ACT 1 of 2017 - Clayton Utz acted for Tatts).

It's arguably the most significant Tribunal decision to date, given the scale of the merged firm ($11bn), the complexity of the competition and efficiency issues considered and the weight of opposition from an array of intervening parties and the Australian Competition and Consumer Commission.

The key lessons are that:

• in complex merger matters, attracting widely divergent opinions from a broad set of industry stakeholders, an open hearing in the Tribunal is clearly a superior forum to the ACCC process, to enable the facts and theories to be tested
• the powers of the Tribunal to compel the merger parties and third parties, including competitors, to reveal their own confidential strategies assessments and plans provides a much more valuable and informed setting to assess the future effects of a merger than a typical ACCC review which tends to be reactive and omit key information;
• the fast track system for a Tribunal hearing and decision is a proven advantage compared to open ended timelines used by the ACCC; and
•  for so long as the direct avenue to the Tribunal remains open it's not necessary to wait for the ACCC to reach a decision.

A major proposed merger in Australian wagering

Tatts and Tabcorp are two major players in the Australian wagering market. In March 2017, Tabcorp took the merger approval directly to the Tribunal, short-circuiting an application for informal clearance which had been pending before the ACCC since October 2016, and in relation to which the ACCC had issued a "phase 2" Statement of Issues.

Under the Competition and Consumer Act 2010, the Tribunal may grant authorisation for a merger or acquisition if satisfied that it will result in sufficient public benefits, including efficiencies. It must weigh the risks of a detrimental loss of competition from the merger against the public benefits and efficiencies from the merger.

The shape of the Australian wagering market

The Australian wagering market is growing strongly and undergoing digital disruption through rapid technological change and vigorous new entry from offshore operators. The Tribunal was satisfied there is one national market for all forms of wagering regardless of whether betting occurs through retail, by telephone or by digital devices.

The licensed off-course retail model has operated in Australia since the 1960s. Each Australian State and Territory permits one exclusive retail licensee to operate bricks and mortar off-course wagering operations. All of those licences are owned by either Tabcorp or Tatts (except Western Australia).

As the Tribunal accepted, there was an "imbalance" between the contributions of these State "TABs" - the parties in the main action - and those of the corporate bookmakers to the funding of the racing industry.

Corporate bookmakers' lower contributions and wagering taxes allowed them to spend significantly on advertising and promotion, which has seen them win significant market share in recent years via online betting, with leading corporates including SportsBet, CrownBet, Ladbrokes, William Hill and Bet365.

The opposition to the Tatts/Tabcorp merger

The application for authorisation was strongly contested by a number of intervenors, including the ACCC, CrownBet, Racing Victoria and Racing.com. The opponents' concerns largely focused on the alleged advantages of the exclusive retail licences held by each of Tabcorp and Tatts, whether Tatts was the only other likely bidder against Tabcorp for a new Victorian wagering licence in 2024, the advantages Tabcorp has through owning the racing vision provider Sky Racing and whether the future growth of online bookmakers might slow, given speculation as to future tax and regulatory changes.

Access to racing vision

Tabcorp owns Sky Racing which is the sole provider in Australia of "wall to wall" racing vision across thoroughbred, harness and greyhound racing to pubs and clubs. Access to racing vision is considered a key input to betting.

The gist of these concerns was that the merger could give Tabcorp the ability and incentive to increase the prices of racing vision, and/or decrease the availability and quality of the racing vision services it supplies, in the States in which Tatts is currently the exclusive licensee in particular. Another concern was that the merger would remove Tatts as a potential "counterweight" in negotiations between Tabcorp on the one hand, and racing authorities looking to licence their media rights, even though Tatts had never sought to acquire those rights in the past.

Racing.com has established a rival racing media service to Sky Racing, both online and on free to air, providing thoroughbred racing and has successfully bid against Sky Racing for thoroughbred content rights in Victoria and South Australia.

The Tribunal fast track

The Tribunal was required if possible to hear and determine the application for authorisation within three months. In complex cases, the Tribunal can extend the period for its decision by a further period of three months. This was the first matter in which the Tribunal has extended the period, in recognition that the scale and breadth of this application was much more significant than the two previous matters heard by the Tribunal (AGL/MacGen and SeaSwift). However, the decision was delivered within three months and about two weeks of the application being filed.

The Tribunal heard the application during a three week hearing in Melbourne in May 2017. While the evidence of over 70 witnesses was received by the Tribunal, the case was run on a fast-track basis and allowed the Tribunal to hear a wide range of company, industry and economic evidence. There were seven economic experts called to give evidence through a series of four 'hot tubs', that is concurrent evidence from four economists at a time.

The key findings of the Tribunal were:

• the merger would not substantially lessen competition in any market;
• the merger would be likely to generate substantial public benefits through efficiency savings and gains, part of which would be shared with the racing industry;
• given the wide range of objections raised by intervenors, the appropriate test for considering the future state of competition in the wagering market, having regard to the trends toward digital wagering as well as future regulatory changes, including the possibility of a national consumption tax on wagering was to focus on likely commercial realities, rather than speculation;
• the wagering market was competitive and not defined by particular channels; retail, online and telephone betting was ubiquitous. These channels overlapped and offered similar products notwithstanding that only Tatts, Tabcorp and the Western Australian TAB, called RWWA, offered a pure totalisator product;
• there were different consumer preferences for different betting types and events but consumer substitution across all these types was strong, despite considerable product differentiation;
• a market share snapshot at a point of time was not a good measure of the merger's likely effects;
• differences between how the retail and online operators operated, their cost base and their respective advantages and disadvantages did not mean they were not strongly competing with each other;
• in bidding for future State licences, the Tribunal concluded there were several parties other than Tatts likely to be strongly interested and able to bid;
• in relation to Sky's racing vision, Tatts' role was not significant and so its removal did not change the competitive dynamics around access to vision, except that Tabcorp was likely to be even more reliant on bidding for future rights deals with racing bodies than pre-merger;
• the efficiency gains from the  merger were significant; some of these will be a result of the merged firm's winning greater market share from competitors, and others from cost savings by eliminating duplication, and revenue improvements that would not be achieved in the absence of the merger.
• The merged firm's ability to improve the yields from fixed odds wagering should be seen as a public benefit, despite criticism that a yield improvement comes at the expense of increased winnings from betting by certain punters who might be able to achieve better outcomes in fixed odds bets with Tatts than they could with Tabcorp.

Lessons for the future

The key lesson is that exposing a full picture of the competition across a dynamic and differentiated market requires robust processes and is best served by a Tribunal process - rather than a purely administrative review, of the kind typically undertaken by the ACCC.

In this light, proposed amendments to the Act now before Federal Parliament to prevent direct applications to the Tribunal and to limit the Tribunal role on appeals are likely to lead to poorer outcomes. Those changes present a seriously retrograde step for Australian M&A practice.