Competition watchdog names raft of issues in Z-Chevron merger proposal

The Commerce Commission has identified a raft of competition issues it will need to be satisfied about before it will tick off the proposed merger of Z Energy [NZX: ZEL] and Chevron NZ, the operator of the Caltex chain of petrol stations.

The competition watchdog says it is "generally concerned with the ability of the merged entity to raise prices" right across the New Zealand fuel distribution and retail system, starting at the Marsden Point oil refinery and including aviation, shipping, trucking and retail petrol and diesel fuel sales. The commission is calling for submissions by August 21.

In heavily redacted submissions published on the commission's website, Z argues there is virtually no overlap on either a two kilometre or five kilometre radius between Z and Caltex sites and that in markets that involve commercial or wholesale purchases of transport fuels, there are competitive forces already at play that will remain if the merger goes through.  It plans to run the Z and Caltex brands separately, preserving a business model under which Caltex petrol stations are set by individual petrol station owners, unlike Z's, which are set by head office.

It plans to run the Z and Caltex brands separately, preserving a business model under which Caltex petrol station prices are set by head office, unlike Z's, which are set by reference to local competitors' pricing.

The commission outlined four broad areas it will consider, along with the potential for existing coordination between major players in the transport fuel sector to be enhanced because of a Z-Chevron tie-up.

It made no findings in today's announcement and says it intends to report by December 18 on whether to allow the merger, while warning "this date may change as our investigation progresses."

Z and Chevron are working to a November merger plan, with Chevron staff assured they will keep their jobs for at least a year.

The commission says it will examine the extent of current competition between Z and Chevron, including "whether customers view the product or service that Z and Chevron offer as being close substitutes".

"Z and Chevron might not be as close competitors as other rivals if, for example, they offer a differentiated service or do not supply customers in a certain area."

The second area of investigation will be the constraint provided by other competitors, mainly BP and Mobil, and in some areas discount fuel brand Gull Petroleum. This will include the extent to which competitors might be willing to replace lost competition and how much constraint distribution of fuel from rival firms creates.

Also to be considered is the ease with which new competitors can enter the market or expand, including an assessment of "whether the terms under which major fuel firms obtain refined product from the refinery makes it hard for rivals (such as Gull and/or a potential entrant) to profitably import."

Finally, it will consider whether customers have any countervailing power to resist price increases.

Elsewhere, the commission will examine whether the merged entity will have any capacity to raise rivals' costs, perhaps through arrangements at ports, airports and the management of storage capacity for bulk fuel.

Of particular interest is the potential for existing coordination in various parts of the transport fuel supply chain to be used to raise prices to all fuel consumers.

"Unlike a substantial lessening of competition which can arise from the merged entity acting on its own, coordinated effects require some or all of the firms in the market to be acting in a coordinated way," the commission says. "We will need to assess whether the merger increases the potential for coordination or whether the merger will be likely to enhance existing coordination."

Among factors to consider in this part of the investigation will be whether; the products are homogenous; there is little innovation and stable demand; competitors' prices are easily observable; there is repeated interaction; there will be rivals in the market or a vigorous competitor eliminated; the firms in the market are similar in size, cost or structure and will have similar incentives to coordinate and enhance that incentive by merging; the threat of a new entrant or countervailing customer power will disrupt coordination attempts.

"We will need to consider whether coordination is already occurring," the commission says. "If this is the case then we must assess the extent to which the merger will enhance this coordination."

Z shares last traded at $5.81, and have gained 25% this year.

(BusinessDesk)