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Life in a parallel universe: Metcash and the merger counterfactual

Feature Articles

Cite as: March 2013 87 (3) LIJ, p.34

According to the  Australian Competition and Consumer Commission, an adverse decision by the Federal Court has made its job in regulating corporate mergers much harder. But do the facts justify  this claim?

By Dr Alexandra Merrett

The Federal Court’s decisions regarding the Australian Competition and Consumer Commission’s (ACCC) challenge to the Metcash acquisition of Franklins have turned the spotlight on the use in such cases of the counterfactual. This involves consideration of the future with, and the future without, the proposed merger. The ACCC has claimed that it must now satisfy stringent requirements when presenting a counterfactual, making it significantly harder to prove that a merger substantially lessens competition in contravention of s50 of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act). Although this case suggests a high degree of specificity may be required in constructing the counterfactual, it is submitted that this was largely due to the particular facts of the case and the nature of the ACCC’s argument.


In July 2010, Metcash entered into an agreement with Pick’n’Pay to acquire all issued shares in Franklins for $215 million. In September 2010, the ACCC issued a Statement of Issues, 1 outlining concerns that the proposed acquisition would have the likely effect of substantially lessening competition. By mid-November, the ACCC had resolved to oppose the acquisition, 2 and it subsequently commenced proceedings.

Franklins’ main assets were 80 company-owned grocery stores in New South Wales. Metcash, by contrast, is principally a wholesaler; indeed, it is Australia’s largest independent grocery, fresh produce and liquor wholesaler and distributor (notably via the IGA banner). The ACCC’s concerns, however, did not relate to Metcash’s expansion from wholesaling into the retail sector. Instead, it focused on Franklins’ limited wholesaling operations, as supplier to a small number of franchised stores operating under the Franklins banner. 3

The ACCC alleged that Metcash’s acquisition of Franklins would substantially lessen competition in the market for the supply of wholesale packaged groceries to independently owned supermarkets in New South Wales and the ACT. By definition, the 10 franchise stores were included in the market, but the 80 company-owned stores were specifically excluded. This very focused market definition resulted in only two competing suppliers: Metcash and Franklins.

The case appeared to be largely based on Franklins’ wholesaling potential. The ACCC asserted that the acquisition meant “the number of wholesalers capable of supplying large format supermarkets would be reduced to one”, in a market with high barriers to entry. 4 Absent a sale to Metcash, the ACCC argued, there was a real chance that an alternative purchaser would acquire Franklins’ assets and continue its wholesale operations or sponsor someone else who would. Initially, the ACCC identified several parties who might do this, but ultimately it pressed only one.

Decision at first instance

Emmett J’s decision in Australian Competition and Consumer Commission v Metcash Trading Limited 5 at first instance gave rise to three basic areas of controversy (and, unsurprisingly, three broad bases for the ACCC’s subsequent appeal). They were:

  • the meaning of “likely”;
  • market definition; and
  • the counterfactual analysis.
Meaning of “likely”

This issue, which ultimately remained unresolved, has been considered by the author elsewhere. 6 In short, Emmett J struggled to reconcile the generally accepted meaning of “likely” (“real chance”) with the applicable onus of proof (the balance of probabilities, or more likely than not). The Full Court muddied the waters further, casting significant doubt on the “real chance” approach.

In the end, however, Emmett J’s decision turned on market definition. Accordingly, it is appropriate to examine this issue before returning to the main topic of discussion, the counterfactual.

Market definition

The ACCC’s market definition was carefully constructed and, when teased apart, found to be artificial. The proposed definition excluded key aspects of Metcash’s operations, the vast majority of Franklins’ operations, and – critically for Emmett J – Coles and Woolworths. The ACCC submitted that, as the major supermarket chains did not (and were not likely to) supply independent retailers, they were not a relevant constraint. Consequently, it argued that Franklins was a close constraint on Metcash, but the chains were not.

Emmett J, however, found that Coles and Woolworths were the “true competitive constraints” on Metcash; while those constraints were indirect, they were “powerful, and . . . much closer and more effective than the constraints imposed by Franklins” (at [269]). 7 Consequently, they had to be considered. Either there was a separate wholesale market as alleged, which (contrary to the ACCC’s case) had low barriers to entry; alternatively, there was a single market incorporating wholesale and retail functions (at 271]). In rejecting the ACCC’s market definition, Emmett J in fact rejected the ACCC’s entire case (at [342]):

“The Commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries . . . The Commission’s pleaded case as to market definition has not been made out. It follows that the proceeding must fail.”

The ACCC could never win once Emmett J had determined the market in this way.

Counterfactual analysis

Notwithstanding his view on market definition, Emmett J closely examined the ACCC’s proposed counterfactual. While often the “future without” reflects the status quo, here everyone accepted that Franklins’ owner – Pick’n’Pay – was exiting the market. Consequently, the “future without” needed to address alternative buyers. The ACCC pleaded a number of options; at trial, however, only one was developed – a consortium of independent retailers known as the KKKL Consortium.

The ACCC’s “future with” was as follows: Metcash would acquire Franklins, sell most or all company-owned stores to independent retailers and then require those retailers to enter into wholesaling arrangements with Metcash (at [346]). In a “future without”, however, “the Franklins assets [would] continue to be available for use as a close and direct competitive constraint on Metcash, albeit in a different form and under new ownership” (at [347]). Specifically, the ACCC submitted there was a real chance that the KKKL Consortium would acquire the assets and continue to provide wholesaling functions.

While the consortium had submitted a non-binding indicative offer for Franklins, Emmett J considered that its position was bedevilled by uncertainties, including (at [396]–[416]):

  • whether it was even likely to submit a credible bid; 8
  • whether it had adequate funding, or the capacity to acquire such funding;
  • the identity of its final make-up;
  • whether any offer, if actually made and deemed credible, would exceed the price that could otherwise be obtained (e.g. if each store were sold separately); and
  • given the ACCC’s case theory, whether the consortium would establish “a viable and sustainable wholesale operation in competition with Metcash” (at [413]).

Emmett J considered that:

“[T]he proposed consortium’s interest is, at best, speculative . . . [and] substantially undeveloped. Its primary goal to date has been . . . to block the Metcash acquisition without spending the money and resources that would be required to demonstrate that it is itself in a position to make a serious, binding offer” (at [419]).

Thus, he was not satisfied that it was “more likely than not” that the consortium would make an offer for the Franklins assets that Pick’n’Pay would accept (at [425]). Indeed, Emmett J didn’t think it even had a real chance of success.

The ACCC appeals

The ACCC promptly announced an appeal. 9 It considered that Emmett J had erred in relation to important issues of principle, specifically market definition and the counterfactual. On the latter, ACCC chairman, Rod Sims, stated:

“The Court’s approach, through its application of an onerous test, would make it an unrealistic task for the ACCC in future matters to establish what is likely to happen in the market if a merger doesn’t proceed. For example . . . where the ACCC contended that a consortium of independent retailers was likely to acquire all or a large part of Franklins if the Court stopped the Metcash acquisition, the Court appeared to expect that the consortium satisfy stringent and commercially unrealistic standards”. 10

After the ACCC unsuccessfully sought an injunction staying the transaction, 11 the matter promptly proceeded to the Full Court. There, Emmett J’s approach was resoundingly upheld.

Before considering whether the ACCC’s criticisms were valid, it is first necessary to outline the appeal court’s findings. Yates J, with whom Finn J concurred, wrote the lead judgment. In upholding Emmett J’s decision, his principal focus was the counterfactual. Yates J observed that only the KKKL Consortium had been seriously propounded as a credible option to purchase and develop the wholesale assets. 12 Yates J considered that Emmett J’s findings were set out in a “methodical and comprehensive way” and noted that his primary findings were not in fact challenged; rather, the ACCC disputed “the weight to be given to, and the conclusions to be drawn from, those findings” (at [212]). Ultimately, Yates J considered that Emmett J’s findings were “compelling and fully supported his conclusions” (at [233]).

Buchanan J mainly focused on the applicable standard of proof (again, readers are referred elsewhere for consideration of that issue). 13 On the counterfactual, however, he clearly endorsed Emmett J’s conclusions. For example, in considering the claim that Franklins’ wholesale assets could be used to create a platform for a substantial competitor to Metcash, Buchanan J stated:

“[T]here was no adequate foundation for the supposition that a new wholesale business, of a kind not earlier existing, would come into existence, based somehow on the acquisition of the ‘wholesale assets’. If it did, it would not reflect what had been done by Franklins. Franklins had failed. Any competition it represented was at an end, independently of anything Metcash did” (at [17]).

Implications and observations

As indicated above, the ACCC considered that Emmett J’s judgment had severe implications for the ongoing administration of merger reviews. 14 In addition to its concerns about the meaning of “likely” and considerations of market definition, the ACCC was clearly unhappy with Emmett J’s approach to critiquing the counterfactual. Given the Full Court’s resounding support of Emmett J’s judgment, one must consider whether the ACCC’s concerns are well-founded.

Emmett J was certainly very specific when outlining the deficiencies of the ACCC’s proposed counterfactual. Nonetheless, in the circumstances, this approach seems warranted:

  • As Pick’n’Pay was exiting the market, any alternative buyer had to be viable within a limited timeframe. This was not a case where a prospective purchaser might emerge over a reasonable period of time – they had to be apparent straight away.
  • The ACCC was arguing that, although Pick’n’Pay hadn’t been able to grow Franklins’ wholesale business, there was an alternative buyer who could. But there would be few players “ready, willing and able” to pay a substantial purchase price (between $100 million and $250 million) for a struggling business in a faltering economy.
  • Emmett J’s approach seems influenced by the ACCC’s focus on such a limited aspect of Franklins’ business – but demonstrating that a bidder for a small part of a business is likely to succeed over parties more interested in the “core” assets is a difficult starting point.
  • Finally, Emmett J applied a higher standard of proof than the ACCC considered appropriate. Nonetheless, he also tested the counterfactual against the test submitted by the ACCC (“real chance”). In finding that the ACCC failed against this standard too, it is understandable that he went into considerable detail.

It is certainly true that Emmett J spent a lot of time – perhaps excessive time – discussing the sale intricacies. 15 Some findings regarding the inadequacies of the consortium were extremely specific. But there was no suggestion that he regarded every observed limitation as critical. Here, the consortium’s membership was uncertain; the price it was prepared to pay unsettled; its funding undetermined; its capacity to outbid other players unclear; and its ability to operate a wholesale business completely unknown. It seems rather ambitious, therefore, for the ACCC to claim it was “inherently improbable” to conclude that its counterfactual had no real chance of eventuating. 16

One must remember that courts are quite familiar with conducting a counterfactual analysis. The facts here were unusual: Pick’n’Pay’s planned exit meant the “future without” would differ significantly from the status quo and thus required a degree of invention. There were many aspects of the ACCC’s counterfactual that, prima facie, seemed unlikely. Where such a counterfactual is presented, it is inevitable that more details will be required than may ordinarily be the case. Although the ACCC claimed the decision makes its task more difficult where there are multiple counterfactuals, 17 in truth, there were only two competing counterfactuals argued in this case: Metcash and Pick’n’Pay’s store-by-store process as against the ACCC’s KKKL Consortium. Had the positions been reversed, it seems unlikely that the ACCC would have needed to specify the how and why for each proposed purchaser of a store.


Rod Sims observed that Metcash has “meant that [the ACCC has] sometimes felt an increased need to be vigilant to ensure that all [its] decisions are grounded in commercial reality”. 18 Indeed, the ACCC is now reviewing its merger processes. 19 Whatever the outcome of that review, there is no doubt that the ACCC faces an extremely difficult task when trying to deliver robust merger assessments in a timely and efficient manner. It is doubtful, however, whether Metcash has made that task harder: simply put, the ACCC failed to adduce sufficient evidence to support a difficult argument. It has always been tough to establish a substantial lessening of competition to a court’s satisfaction. Consequently, one should not give undue weight to the construction of the counterfactual in this particular case. The approach to the counterfactual in Metcash was very specific to its facts and, with the grace of hindsight, it is unlikely to be viewed as having raised the bar.

DR ALEXANDRA MERRETT is a competition lawyer, senior fellow at the Melbourne Law School and editor and publisher of The State of Competition (

1. The Statement of Issues is available at:

2. Australian Competition and Consumer Commission (ACCC), “ACCC to oppose Metcash proposed acquisition of Franklins supermarkets”, Media Release No 250/10 (17 November 2011).

3. There were eight such stores at the time of the Statement of Issues, and 10 by the time of the trial.

4. Australian Competition and Consumer Commission v Metcash Trading Limited (2011) 282 ALR 464, [113].

5. Note 4 above.

6. Together with Rachel Trindade, I examined this issue closely in “Metcash and beyond . . . Likelihoods & the standard of proof”, The State of Competition, Issue 3 (July 2012),

7. See also at [330].

8. Emmett J listed many factors requiring resolution before a binding offer was possible. Some factors appear unnecessarily detailed (e.g. the process for obtaining landlord consents to a change of control), but others were basic including (at [398]): the identity of the consortium’s members and its corporate structure; the precise assets to be acquired; the price to be paid; and how the purchase would be funded.

9. ACCC, “ACCC appeals Metcash judgment”, Media Release No. 167/11 (9 September 2011).

10. Note 9 above.

11. Australian Competition and Consumer Commission v Metcash Trading Ltd [2011] FCA 1079 (20 September 2011) (Jacobson J).

12. Australian Competition and Consumer Commission v Metcash Trading Limited (2011) 198 FCR 297, [154].

13. As discussed in “Metcash and beyond . . .”, note 6 above.

14. This was apparent both in its Full Court submissions (as outlined in the judgments) and in the press release announcing the decision to appeal Emmett J’s decision: note 9 above.

15. See, for example, note 8 above.

16. The ACCC’s position, as summarised by Yates J: note 12 above, at [231].

17. As summarised by Yates J: note 12 above, at [222].

18. Rod Sims, “Looking back, looking forward – the ACCC’s approach to making markets work for Australian consumers” (speech to Law Council of Australia’s Competition and Consumer Law Workshop, 25 August 2012, Canberra).

19. This review is the subject of Issue 6 (September 2012) of The State of Competition,


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