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The consumer watchdog has raised preliminary competition concerns over the sale of Downer EDI's (ASX: DOW) Spotless Laundries business to competitor Alsco as it would combine two of the largest garment laundry suppliers in Australia.
According to the Australian Competition and Consumer Commission's (ACCC) preliminary assessment, the sale of Spotless Laundries to Alsco would be anti-competitive.
"This transaction combines the two largest garment laundry suppliers in most states and the only two major suppliers with a presence across the country," said ACCC commissioner Stephen Ridgeway.
"Alsco and Spotless Garments operate in an already concentrated industry, and few other garment laundry suppliers provide these services with a similar scale and geographic reach.
"The ACCC is concerned that this transaction will remove an important constraint on Alsco. Garment customers that operate across Australia with large volume requirements will have no comparable alternatives."
In addition, the ACCC's preliminary investigation found that new players may be unwilling to enter into garment laundering, while small existing suppliers may face difficulties in expanding due to material upfront costs.
The watchdog says it will also explore whether existing suppliers in linen focused laundry suppliers would constrain Alsco post-acquisition before its final decision is made.
Meanwhile, South Pacific Laundries (SPL) is separately bidding to acquire Spotless Laundries from Downer.
In late-August the ACCC raised preliminary concerns over SPL's bid, saying if the bidder was successful it could increase market concentration in the commercial laundry space.
The watchdog said in Sydney, Adelaide, Melbourne and Perth, a combined SPL and Spotless Laundries would be the largest supplier with substantial market shares and a significant gap to its next largest rivals.
"This transaction would combine the two largest commercial laundry suppliers in Sydney and Adelaide, and two of the biggest suppliers in Melbourne and Perth, increasing market concentration where there are already a limited number of comparable suppliers," said Ridgeway at the time.
"SPL historically focuses on linen services for accommodation providers and Spotless Laundries focuses on linen and garments services to healthcare and industrial customers. However, it seems that switching between different customer types can occur and most other commercial laundry suppliers do operate across more than one specialisation.
"As major laundries with established reputation and expertise, SPL and Spotless appear to be well placed to expand. The transaction would remove the possibility of closer competition between SPL and Spotless in the future."
Downer announced it was looking to sell the Spotless Laundries business in July this year, alongside the disposal of its hospitality and mining businesses.
Spotless Laundries' earnings fell in half in FY20 to $9 million, but Downer noted it was performing well at the beginning of the new financial year with hospital volumes returning strongly.
The ACCC's notice comes after Downer completed the total acquisition of Spotless yesterday, with all shares in the hospitality and services business now owned by DOW.
Shares in DOW are up 4.44 per cent to $4.94 per share at 11.27am AEDT.
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