The rare decision by the ACCC to publicly investigate Petstock's historical acquisitions of competitor petstores signals a more interventionist approach to merger clearances by the ACCC, which is advocating for merger reform, including mandatory notification.
According to the ACCC, the deals under investigation had not been notified to the ACCC. While Australia's merger clearance is unusual in that it is voluntary, this investigation is a reminder that the ACCC can investigate with a view to seeking remedies or taking legal action if there has been a likely breach of the merger laws. The ACCC has the power to seek a court-ordered divesture of shares or assets for up to three years after the completion of the transactions and can seek penalties orders for a period of six years.
In reviewing a proposed acquisition of a 55% interest in Petstock, the ACCC identified significant competition concerns regarding Petstock's previous acquisitions between 2017 and 2022. The ACCC initiated an investigation into four of these acquisitions on concerns that they may have contravened section 50 of the Competition and Consumer Act 2010 (Cth).
In response to these concerns, and before the ACCC has completed its investigation, Petstock and the proposed buyer have offered undertakings for Petstock to divest several assets and locations previously acquired.
Petstock's series of acquisitions
PETstock Pty Limited is the second largest omni-channel Australian specialty pet retailer. Between 2017 and 2022, Petstock acquired several specialty pet retailers including: Best Friends Pets (2022), Pet City (2022), Animal Tuckerbox (2021) and Pet and Aquarium Warehouse in Eltham, Victoria (2021). Petstock did not notify the ACCC of these acquisitions at the time.
The ACCC recently scrutinised these past acquisitions when reviewing a third party's proposed acquisition of a 55% interest in Petstock.
The ACCC was concerned that these acquisitions contravened section 50 of the Act, which prohibits a corporation from acquiring shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market.
In response to these concerns, Petstock offered to provide a court-enforceable undertaking to divest 41 specialty pet retail stores, 25 co-located vetinary hospitals, four brand and two online retail stores. The third-party buyer also provided a court-enforceable undertaking to support the divestment and help complete its acquisition of Petstock.
The ACCC has decided to publicly consult on this proposed divestiture. However, it has stated that the public consultation should not be construed as the proposed divesture being the ultimately accepted remedy.
Competition concerns
The ACCC is concerned that Petstock's past acquisitions may have impacted competition at two levels.
The first is retail chain-on-chain competition at a nation or state-wide level. The ACCC submit that the acquisitions removed some of the other pet specialty retail chains that competed with Petstock. The ACCC states the market has appeared to consolidate towards an omni-channel duopoly.
The second is the competition that exists between individual specialty pet retail stores at a local level. The ACCC contends there are a number of local markets where Petstock appeared to have acquired local competitors, reducing the number of available specialty pet retail stores available to consumers.
If the proposed undertakings are not considered to adequately address the potential competition concerns, it is possible that the ACCC could seek an order from the Court to divest shares or assets acquired in the previous transactions. It may also seek significant pecuniary penalties.
Justification for merger reform?
There is no mandatory notification system in Australia, as there are in other jurisdictions globally. The ACCC's proposed merger reform would be to move towards a formal clearance model, where merger parties must demonstrate to the satisfaction of the ACCC that their transaction is not likely to substantially lessen competition before they can proceed. The move to a formal model would include a mandatory requirement for the ACCC to be notified of mergers above specified thresholds, a requirement for transactions to be suspended from completion without ACCC clearance, and upfront information requirements.
The ACCC's unusual step of publicly investigating previously completed, but non-notified transactions, by Petstock, may seek to bolster the ACCC's stance on merger reform in Australia.