Aurizon’s proposed $2.35 billion purchase of One Rail from Macquarie Asset Management (part of Macquarie Group) has hit trouble after the ACCC revealed it has some concerns with the deal regarding competition.
The commission said in its statement on Thursday that these concerns were “preliminary” and Aurizon said it was still confident the deal will go ahead, but the Commission’s statement remains a headache until it tests concerns by some of the customers of both companies, especially in coal and bulk freight.
Macquarie Group should feel concerned – there $80 million in fees and other charges waiting to be picked up if the deal completes.
Among the issues raised, the Commission wants comments on whether its concerns “would be addressed by Aurizon’s proposed divestment of One Rail’s east coast business.”
The background to the deal, announced late last October, is that Aurizon and One Rail both supply rail haulage services for coal in NSW and Queensland. There are three main suppliers of coal haulage in these states – Pacific National, Aurizon and One Rail.
Aurizon is the largest supplier of coal haulage in Queensland, and the second largest in NSW. One Rail is a well-established third supplier in NSW and a recently entered third competitor in Queensland that has had a significant impact.
“By reducing the number of competitors in the supply of coal haulage in New South Wales and Queensland from three to two and removing an important competitor to Pacific National and Aurizon, we have preliminary concerns that the proposed acquisition of One Rail by Aurizon would be likely to substantially lessen competition,” ACCC Chair Gina Cass-Gottlieb said in Thursday’s statement.
The ACCC said it is also considering whether the proposed acquisition would substantially lessen competition in one or more regional markets for the supply of rail haulage services for bulk commodities, other than coal.
“While the parties do not currently compete in the supply of these services, Aurizon has publicly stated its intention to continue to grow its non-coal bulk commodity rail haulage business.
“We’re also considering the impact of this proposed acquisition on potential future competition in the supply of non-coal bulk rail haulage,” Ms Cass-Gottlieb said.
Aurizon has proposed a divestment undertaking that seeks to address the ACCC’s preliminary concerns. This undertaking proposes to divest One Rail’s east coast business, which includes its coal haulage operations in NSW and Queensland.
“The undertaking would allow Aurizon to sell the business either by a trade sale or demerging it as a new separate ASX-listed entity,” the ACCC revealed.
The ACCC has not formed a view about whether the proposed undertaking can resolve the ACCC’s preliminary competition concerns. Feedback from public consultation will assist the ACCC to reach a final decision.
“A critical issue for the ACCC is determining whether Aurizon’s divestiture undertaking will be effective in replacing the competition that would be lost because of the proposed acquisition,” Ms Cass-Gottlieb said.
To address the likely competition issues, the ACCC will need to be satisfied that any new purchaser or the demerged business would be an effective, stand-alone, long-term competitor in the supply of coal haulage and non-coal bulk commodity rail haulage.
The Commission said divestment remedies via demerger are not common and can present certain risks and complexities which need to be assessed.
“An important issue is whether the financial arrangements that Aurizon has proposed for the new entity, including its proposed debt levels, would affect the proposed demerged business’s ability to become an effective competitor,” the Commission explained.
Aurizon issued its own statement later saying it welcomed the ACCC’s statement, confirmed the proposed demerger proposal and said it “is confident that the undertaking will address any competition concerns identified by the ACCC.”
Investors took it all in their stride (on a day when the wider market fell more than 100 points) and dropped the Aurizon share price by just 0.4% to $4.18.
