On 30 April 2015, the Australian Competition and Consumer Commission (ACCC) cleared VIP Steel's proposed acquisition of National Can Industries (NCI) large steel drum assets, reducing the number of suppliers of new large steel drums in Australia from two to one. It is very rare for the ACCC to clear an acquisition that leaves only one player in the market.
Large steel drums are commonly used to store oils and petrols, hazardous waste and chemicals. NCI's large steel drum operations had been unprofitable since NCI acquired the assets from receivers in 2012. NCI had faced declining demand and the industry was suffering from excess capacity. It took steps to turn the business around, including rationalising production by closing both its Queensland and New South Wales plants, keeping only its Victorian plant in operation. NCI was unable to make the business profitable.
As part of its review, the ACCC appointed a forensic accountant to independently examine NCI's financial accounts and the ACCC reviewed confidential information and internal documents regarding NCI's sale process for the assets. The ACCC concluded that NCI's large steel drum operations were not viable (historically or in the future) and that there was no alternative acquirer of the assets in Australia. NCI received clearance within a month of it being publically announced.
The last time the ACCC accepted a 'failing firm' argument was its clearance in late 2012 of Virgin Australia's proposed acquisition of Tiger Australia. This took nearly 6 months to get through the regulator. The ACCC thoroughly and extensively tested the argument that Tiger Australia would be highly unlikely to remain in the market if the acquisition did not proceed. The ACCC undoubtedly took into account the fact that Tiger Australia had never made a profit since its entry in 2007, and that by 2013, it had accumulated losses of around A$41 million.
The ACCC's merger guidelines provide that it is only likely to accept a 'failing firm' argument if the firm is in imminent danger of failure and is unlikely to be successfully restructured without the acquisition and that the assets, including its brands, would leave the industry.
This recent clearance demonstrates that the ACCC continues to require strong evidence to demonstrate a failing firm argument. Target companies may need to be prepared to accept the ACCC's appointment of a forensic accountant to uphold the veracity of any assertions it has put forward as to the continued viability of its operations.