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Matthew Smith has been a business and financial journalist for more than a decade. He previously worked with the Financial Times Group, reporting from New York on company buyouts and refinancing in the wake of the Global Financial Crisis. He started his career reporting on the funds management industry in Sydney.

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Rod Sims: shopping for a good deal

Published 21 March 2013 10:25, Updated 21 March 2013 11:09

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Rod Sims: shopping for a good deal

“We will look at how the internet is changing things, but we won’t be too speculative either,” says ACCC chief Rod Sims Photo: Nic Walker

There’s a very good chance that Australian Competition and Consumer Commission chairman Rod Sims will have to run his ruler over a merger in the media industry in the 3½ years he has left of his five-year term at the helm of the competition regulator.

As it stands now, the ACCC is responsible for dealing with competition policy issues relating to the media industry, and a deal between two big media companies will come under Sims’s purview. While Communications Minister Stephen Conroy’s proposed media reforms essentially lessen the ACCC’s power in deliberating over a significant media tie-up, the passage of that reform package was still hanging in the balance at the time BRW went to press.

Under Conroy’s proposed reform, a “public interest media advocate” would be designated to oversee mergers of national significance.

Speaking to Sims, it is apparent he would relish the opportunity to weigh in on a significant media merger, such as the one slated between Southern Cross Media Group and Nine Entertainment Co. Not that he’s devoted any of his professional time considering such a deal – he’s already got his hands full with the high-profile supermarket investigations, and merger deliberations such as Virgin Australia’s proposed acquisition of 60 per cent of Tiger Airways.

But the impact new technologies are having on competition by eroding the barriers to entry across various industries, leading to a redefining of the traditional definitions of market power, is a topic Sims clearly likes to think about. In the context of the media industry, Sims points out that people are watching news and other broadcasts online much more than they would have 10 or even five years ago, making the old definitions of market concentration less applicable in the current environment.

Any deal between media companies, he says, will be considered in that context. In other industries too – take the retail sector, for instance – Sims is strident in his belief the world and business is in the midst of a power shift, and any evolution of power concentration should be considered in the context of the digital landscape.

As such, a hypothetical deal between Australia’s largest retailers, Myer and David Jones – a marriage that in the past may have been unfathomable to his predecessors – should be given due consideration if it were to materialise, Sims says. He points to advancement in technology and logistics that enables online shoppers to purchase goods from overseas retailers with little or no difference in delivery time than if they made the purchase through a local retailer as an example of how technology is destabilising established competitive strongholds in retail.

“We have to be conscious that the world is changing and we have to have an open mind how it is changing. Even if [that means] we change our merger assessments over time,” he says.

While there is no such deal in either the retail or media industries to test what impact technology is having on the traditional power structures, Sims says any changes to media laws could mean a deal of this nature may be just around the corner. Conroy’s proposal to remove the 75 per cent reach rule, which currently prohibits TV broadcasters from reaching more than three-quarters of the population, could be key to unlocking deal flow in the segment, he says. Whenever legislative changes occur in the media industry, that drives merger activity, he says, adding: “I don’t expect this time to be any different.”

While Sims’s enthusiasm to test the impact of digital technologies on existing competition strongholds is apparent, he’s unlikely to get ahead of himself by over-extrapolating the role technology will play in future.

“We will look at how the internet is changing things, but we won’t be too speculative either. If you can see a trend you can rely on then you factor it in, but if you see a trend that’s more speculative, that’s more difficult to factor in,” Sims says of how he would approach a merger approval in any industry that’s been disrupted by technology.

He acknowledges that even in a dynamic industry such as media, some traditional competition concerns can still apply.

“For instance, we have two newspaper groups – Fairfax Media and News Limited,” he says. “I don’t think you could seriously suggest one could take over the other just because there are other types of media out there. [Fairfax and News] form a market segment on their own, and they themselves are constrained by a very competitive online world. There are limits as to how much you let [the influence of technology] affect you as you are assessing potential acquisitions.”

Whether Sims’s interest in discussing digital disruption is a product of work he is doing behind the scenes, or whether he is just happy for a reprieve from talking about concentration among supermarket chains, is unclear.

Certainly, since his address to the budget estimates committee in February, when he laid out the ACCC’s investigation into supermarkets based on claims of bullying by suppliers, supermarkets have been a hot political topic. And it’s no wonder: Sims is taking on what could be the most influential and wide-reaching concentration of power in Australian business in the form of Wesfarmers-owned Coles and rival Woolworths. Both are just outside the top 10 largest listed companies in Australia, with a combined market capitalisation of $94 billion. In the absence of a game-changing media deal, the supermarket investigation is likely to be the defining action of Sims’s time at the ACCC, a legacy that is still very much in the process of being written.

Based on the secret testimony of more than 50 suppliers to Coles and Woolworths, the ACCC says it has found examples of misuse of market power that, if proven, could constitute a breach of the Competition and Consumer Act and therefore result in penalties and be put before the Commonwealth Director of Public Prosecutions. While the ACCC has been working with supermarket industry stakeholders to hash out a voluntary code of practice since October, Treasury has signalled its willingness to develop its own mandatory code of conduct to give the ACCC more enforcement power over breaches.

As it stands, there are four codes of conduct relating to competition concerns that cover market segments, including franchising, oil, horticulture and unit pricing.

“Codes remain an intention of good practice and good behaviour, and most adhere to the code but there will be some who realise they can breach the code without penalty,” ACCC’s deputy chairman responsible for small business and franchises, Michael Schaper, says.

A court cannot impose pecuniary penalties against a party that breaches a code of conduct – the process the ACCC currently has to go through to enforce a code with financial penalties is to bring the case before a court for the second time and prove a breach of a prior court ruling. Publicly, Sims says the ACCC intends to pursue its supermarkets investigation regardless of any decision made by Treasury in relation to an industry code of conduct.

He has been quoted widely in the press and he reiterates in his recent conversation with BRW that the action is about the journey rather than the outcome. But it’s clear the commission would prefer an enforceable code that carries pecuniary penalties rather than a voluntary code.

A clue to this is in its submission last month to the review of the franchising code of conduct. In its submission, the ACCC outlined its argument why it should be granted wider enforcement capabilities including pecuniary penalties.

“If the government says the franchising code should carry pecuniary penalties, they will have to think whether they should apply that to other codes too,” Schaper says.

The investigation into whether Coles and Woolworths use “unconscionable conduct” to bully suppliers and misusing their market power to promote their own brands is likely to resonate, if for no other reason than its timing: while Treasury and the various market participants will discuss the proposed code of conduct in the coming months, Sims has undertaken to pursue the investigation to its full conclusion, which he expects will be towards the end of the year, in and around election time.

If Sims wants to define his legacy at the ACCC with a ruling over a media merger or another industry where technology has redefined the concentration of market power, it will have to be a significant deal to overshadow the probe into supermarket chains.

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