Aurizon Rail One deal still on track after ACCC tick

The ACCC says it will not oppose the proposed $2.35 billion purchase of One Rail by ASX-listed rail giant Aurizon (ASX:AZJ) after accepting a court-enforceable undertaking from Aurizon to sell One Rail’s east coast business.

The announcement yesterday in effect accepts an undertaking Aurizon made at the time of the bid late in 2021.

The ACCC had delayed a final decision on the deal in March as it examined likely competition issues raised by some coal miners and other customers.

The news of the conditional approval had no impact on Aurizon shares which dipped 1.5% to $3.77 yesterday.

Yesterday ACCC Chair Gina Cass-Gottlieb said that “Without the divestment of One Rail’s east coast business, the ACCC considered that the proposed acquisition would reduce the number of main competitors in the supply of coal haulage in New South Wales and Queensland from three to two, likely resulting in higher prices or decreased service levels.”

Aurizon and One Rail both supply rail haulage services for coal in New South Wales and Queensland and are the two of the three main suppliers of coal haulage in these states, along with Pacific National.

Aurizon is the largest supplier of coal haulage in Queensland, and the second largest in NSW. One Rail is a well-established third supplier in NSW and has recently emerged as a third competitor in Queensland where it is having a significant impact.

Aurizon offered a proposed undertaking to the ACCC early in the process to divest One Rail’s east coast business, which includes its coal haulage operations in NSW and Queensland.

The undertaking allows Aurizon to sell the business either by a trade sale or demerging it as a new separate ASX-listed entity.

“The divesture ensures that there will remain three main suppliers of coal haulage in New South Wales and Queensland,” Ms Cass-Gottlieb said.

The ACCC said it also considered the impact of the proposed acquisition on competition in one or more regional markets for the supply of rail haulage services for bulk commodities, other than coal.

“We are also satisfied that the divestment of One Rail’s east coast business would preserve it as a potential competitor to Aurizon for the supply of non-coal bulk rail haulage in the future, and Aurizon would continue to be constrained by a number of existing bulk rail haulage competitors,” Ms Cass-Gottlieb said.

Divestiture remedies generally involve the divestiture business being sold to a purchaser approved by the ACCC. In this case, the undertaking includes an option for the divesture to occur by demerging the east coast business as a new separate ASX-listed entity.

The ACCC said that divestitures of this type are not commonly accepted as a merger remedy as they present certain risks and complexities beyond a standard divestiture undertaking and therefore require careful scrutiny.

“After thoroughly assessing these risks, and changes to the undertaking offered by Aurizon since it was first proposed, we are satisfied that in this instance, a demerger remedy option alongside a trade sale option would be acceptable,” Ms Cass-Gottlieb said.

Following the acquisition, Aurizon will retain One Rail’s bulk haulage operations and rail network assets in South Australia and the Northern Territory.

Concerns were raised with the ACCC that One Rail’s ownership of rail networks in South Australia and the Northern Territory allow it to continue to favour One Rail’s bulk rail haulage services to the detriment of competitors.

Concerns were also raised about the ability of the regulation in place to adequately address the competitive impact of vertical integration in these regions.

“Our merger assessment is limited to competition effects that are the result of the proposed acquisition and cannot address concerns with the existing rail industry or its regulation,” Ms Cass-Gottlieb said.

“We are however satisfied that the transaction does not result in Aurizon having a greater ability and incentive than One Rail currently does, to prevent or impede a rival rail operator from competing on the SA and the NT networks.”