Why the Foodstuffs merger decision is likely headed to the High Court

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Foodstuffs North Island chief executive Chris Quin says he’ll wait until the Commerce Commission releases full reasons for declining the company’s merger application before taking any next steps.
ANALYSIS

Chris Quin chose his words carefully in describing the next steps Foodstuffs will take following the rejection of his firm’s merger application by the Commerce Commission. But it is clear court action is now a likely next step for disappointed supermarket giants Foodstuffs
South Island (FSSI) and Foodstuffs North Island (FSNI).

The chief executive of FSNI told the Herald based on what he’s heard from the Commerce Commission so far, he doesn’t understand why a Foodstuffs merger hasn’t passed the legal test – under the Commerce Act, the merger cannot go ahead if it would have the effect of substantially lessening competition.
”Look, what we got with the commission’s determination today is a press release. We’ll wait for October 23 and the full determination, and we’ll properly assess… but based on the Statement of Unresolved Issues [the last step in the regulator’s consideration process], we believe that we should have been allowed to merge.”
The two Foodstuffs entities are co-operatives, owned by retailer members, and they already work together in a variety of ways; they share the same supermarket banners and don’t compete at the retail level.
On Tuesday, after nearly 11 months and several extensions, the commission declined the merger application and briefly sketched out its reasons in a press release.
It said a merged Foodstuffs would result in structural change from two buyers to one buyer, in the purchasing of goods from suppliers. The commission said a merged entity would have greater buying power, and lessen competition in “many acquisition markets”.
It also said there is a “real chance” the stronger buying power of a merged Foodstuffs would make it harder for other grocery retailers to compete and grow; and a merger “increases the risk” of price co-ordination between Foodstuffs and its main competitor, Woolworths.
On October 23, the commission will release the full reasoning behind its decision. Thereafter, Foodstuffs has 20 days to lodge an appeal of the regulator’s decision in the High Court. Pushing ahead with an appeal requires board approval from both the South Island and North Island entities.
Quin declined to point to exact areas where he and his legal team think the regulator has erred. But any objection may hinge on grocery suppliers’ ability to reach a customer base in the North Island and in the South Island, which Quin argues is important and would not change after a merger.
It would be surprising if Foodstuffs walks away quietly. The companies have been hatching the merger plan for several years, and their respective boards have given it considerable time and effort, as has Quin, who has promoted it as an effort to wring greater efficiencies from the businesses and improve food and grocery prices for customers. He might have performance pay tied to a favourable outcome.
By Foodstuffs’ own account, it’s already spent over $7.5 million on merger costs. That figure was supplied by Foodstuffs and is certainly low; it covered both entities’ costs only to the end of the last financial year, which ended for FSSI at the end of February and for FSNI at the end of March.
The company hired specialist economists from the German competition consultancy Dusseldorf Competition Economics, and Australian consultancy Houston Kemp, also a specialist in economics and competition, to help make its case.
The analysis provided by both shops has augmented considerable work by law firm Chapman Tripp and Foodstuffs’ in-house lawyers, chiefly Mike Brooker, who’s in the process of leaving as FSNI’s general counsel, but who remains in a consulting role to help with the merger.
An appeal of the regulator’s decision would consider the step-by-step process the Commerce Commission followed, its determinations and the arguments made by submitters. To that extent, much of Foodstuffs’ investment in an appeal has already been made.
It also goes without saying that any further cost in testing the commission’s decision in court would be tiny in the context of the companies’ size – revenue for both entities was nearly $13 billion in the last financial year.
Much now rests on the full reasons the commission releases later this month. It is very likely the regulator also spent heavily on outside help in reaching Tuesday’s decision. It’s a point on which it’s been extraordinarily secretive.
In August, the commission declined a Herald Official Information Act request to provide its spending on outside providers of work related to the merger application; it also declined to list these providers, claiming even their names were protected by legal privilege.
Perhaps the commission was reluctant to release even this most anodyne information because of the scrutiny that’s likely to come next.
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