New Zealand: Mergers and Acquisitions series: a snapshot of recent clearance decisions

Last Updated: 23 June 2012
Article by John Land, David Campbell, Imelda-Rose Sheerin and Hayden Wilson

In this article we delve into some of the key decisions from 2012 so far and highlight the upcoming Universal Music/EMI Music decision as one to look out for.

One of the features of the clearance regime since mid 2008 has been the 100% hit rate for successful clearance applications. This trend has continued so far in 2012 with clearances being granted in relation to IAG/AMI Insurance, Canterbury SCL/MedLab South, Visy Industries/HP Industries and Pact Group/Viscount Plastic NZ (subject to a divestment undertaking).

Decisions are currently pending for Epay/Ezi-Pay and Universal Music/EMI Music.

IAG/ AMI Insurance

  • Under the proposed acquisition, IAG will purchase AMI's assets and provide claims management and administration services for claims arising from the Christchurch earthquakes. AMI's liabilities will be transferred to a Crown owned company.
  • The Commission was satisfied that the proposed acquisition would not be likely to substantially lessen competition in the national markets for house, contents, and motor vehicle insurance. The Commission considered that there would be sufficient competition from existing domestic insurance companies, along with competitive constraints provided by bank insurance distributors. This decision reinforces the significance the presence of existing competitors can have, in a market where customers have the ability to switch providers at little or no cost. In this case the Commission commented that the other main competitors, Vero, Lumley and Tower were significant, well resourced and established insurance companies with trusted and respected brands. This, coupled with the ability of customers to switch, was a key factor in the Commission's decision.
  • The Commission also considered that the proposed acquisition would not be likely to enable the merged entity to exercise market power through strengthened buying power in the windscreen/repair and collision repair markets.

Kensington Swan tip: Consider all possible markets that may be affected by the acquisition

The Commission's consideration of the windscreen/repair and collision repair markets illustrates the importance of considering all markets that may be affected by a proposed acquisition. Where a company is a purchaser of goods or services, as well as a provider of them, it is necessary to identify what other markets, in addition to the primary market the company supplies goods or services in, that may be affected. This could either be another related product/service market (eg. car repairs where the transaction is taking place in the insurance market) or another functional level of the same market (eg. the wholesale level of a market where the transaction is taking place in the retail level of the market).

Canterbury SCL/ Medlab South

  • This clearance application also arose in part from the Christchurch earthquakes, following the destruction of Sonic Healthcare's Christchurch laboratories. The proposed acquisition would result in the acquisition by Southern Community Laboratories' subsidiary Canterbury SCL of the shares of Medlab South from Sonic Heathcare. The acquisition would result in the associated transfer to SCL, of contracts with the Nelson/Marlborough and South Canterbury DHB's to provide pathology testing services.
  • The Commission considered the effect of the acquisition in the markets for pathology testing contracts to be let by South Island DHB's between 2015 and 2017 and also in the national market for the provision of cervical screening tests.
  • In relation to the pathology testing market the Commission considered that the acquisition was unlikely to reduce the ability of Sonic or other pathology providers to compete at the next tender round between 2015 and 2017. The Commission was also satisfied that in the cervical screening market, competition would continue to be provided by Sonic and that the National Screening Unit, as the monopsony purchaser of cervical screening tests, would continue to have a substantial degree of purchasing power.

Kensington Swan tip: Don't forget about the fourth and fifth dimensions of a market

This provides an interesting example of a market where the 'temporal' or time dimension of a market takes importance. Whilst the focus is often placed on the product/service, geographic and functional dimensions of the market it is always worth considering carefully whether there are temporal or customer dimensions that may affect the analysis. In this case the competitive effects of the proposed acquisition would occur when the relevant pathology contracts were next due for tender between 2015 and 2017, and so the Commission analysed competition not on a continuous basis, but at the point of time in the future when the competition would occur.

Universal Music/ EMI Music (decision pending)

The EMI Music decision, due to be released later this month will be one to look out for. The proposed transaction is part of the global split of EMI's business into two parts. The clearance application relates to the proposed acquisition by Universal of the recorded music part of the business. At this stage the Commission's statement of preliminary issues highlights several interesting issues that are likely to be considered in the decision:

  • Market definition—Should the different artist and repertoire services such as discovery of new artists, signing of record contracts and the creative development and promotion of artists be considered together as a single market? Should the distribution of recorded music on behalf of third parties be considered as a separate market?
  • Existing competition—Will independent recording labels be able to provide a competitive alternative to the major labels post acquisition?
  • Potential competition—To what extent can artists bypass record labels and record, promote and distribute their own music? What are the barriers to establishing a record label in New Zealand?
  • Impact of piracy—To what extent does music piracy constrain price of legitimate physical and digital music recordings?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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