Watchdog sees red in $1.58 billion ACL-Healius merger

The Australian Competition and Consumer Commission (ACCC) has opposed the proposed $1.58 billion merger between Australian Clinical Labs (ASX: ACL) and Healius (ASX: HLS) after concluding it would substantially lessen competition in pathology services markets.

Shortly after this morning's announcement, which ACL described as disappointing but not unexpected, the company revealed its intention to withdraw from the offer for separate reasons, namely a deterioration in performance at Healius and the erstwhile prospective partner's recent $187 million entitlement offer to help cut debt by $150 million by mid-next year. 

The ACCC's announcement is one of several attempts from the regulator, often viewed in the past as a toothless tiger, to turn the tide on Australia's reputation as a land of oligopolies.

In August the watchdog opposed ANZ's (ASX: ANZ) $4.9 billion takeover of Suncorp Group's (ASX: SUN) banking arm - a decision which is before a tribunal - and in October it raised significant competition concerns around Woolworths Group's (ASX: WOW) acquisition of a majority of shares in the owner of retailer Petstock.

The deal, which contemplates combining 171 labs and 3,413 collection centres across the country under one group, was specifically flagged as likely to substantially reduce competition in outpatient pathology services, private hospital in-patient pathology services, and commercial pathology services.

Competing closely with one another and offering services under well-known brands, ACL and Healius both supply pathology services to the community, private and public hospitals, commercial and government customers, and veterinary clinics.

"We consider that the proposed acquisition would be likely to result in a substantial lessening of competition as it would combine two of the three largest providers of pathology services in Australia, further consolidating already-concentrated markets," says ACCC commissioner Stephen Ridgeway.

"A combined ACL and Healius would operate more than 50 per cent of approved pathology collection centres in Australia. In some regions, they are the only two pathology providers available to patients.

"We’re concerned that the proposed acquisition would impact patients and their referring doctors, potentially through longer turnaround times, shorter collection centre opening hours, reduced support for medical practitioners and increased prices for patients via increased private billing."

The ACCC notes ACL and Healius are two of the three private pathology providers that typically compete for large private hospital contracts and referrals from specialists practising at private hospitals.

Similarly, large commercial pathology customers typically have few potential suppliers, including the merger parties.

"We believe a combined ACL and Healius may be able to raise prices and reduce services for private hospital services and large commercial pathology customers, due to the limited competition it would face," says Ridgeway.

The ACCC carefully considered the level of competition provided by other pathology providers, including Sonic, 4Cyte, and public sector providers. The regulator considers it unlikely that a new or existing provider could enter or expand in a timely way and to a scale sufficient to address the loss of competition resulting from the proposed acquisition.

"New or existing providers face a range of barriers to entry and expansion. There are significant incumbency advantages in pathology services, including economies of scale in laboratory testing and courier networks, as well as relationships with healthcare practitioners," Ridgeway says.

During the review, ACL offered a court-enforceable undertaking to divest a package of collection centres across regional Victoria, Perth, and the Northern Territory.

"We concluded that the draft undertaking offered by ACL was not capable of addressing our concerns," says the commissioner.

"To compete effectively and sustainably, rivals need to have scale, a strong reputation and expertise, and established relationships with doctors. The divestment package did not address the competition concerns."

Even though it has withdrawn its offer, ACL asserts a combination with Healius would not substantially lessen competition, noting it is "now in a position to prosecute this view directly in the Federal Court".

"It is important to note that the ACCC’s decision is not a conclusive finding of law," ACL stated.

"It is important to note that the ACCC has also stated to ACL that it would be open to ACL to re-engage with the ACCC and offer a revised remedy (divestment) package following the ACCC’s decision today.

"ACL has engaged in discussions with several parties who have expressed interest in acquiring assets that would comprise a revised divestment package intended to address the ACCC’s concerns. In the event that ACL makes a new offer for Healius in the near future, it may choose to propose such a revised package to the ACCC."