M&A Activity Heats Up But Antitrust Regulators Are Wary
Competition regulators in the UK rejected a proposed merger between grocery chains Sainsbury’s and Asda, citing potential harm to shoppers in the form of higher prices and less choice. Meanwhile, in the US, the Department of Justice appears poised to reject a merger between wireless networks T-Mobile and Sprint, barring some significant changes to the deal’s terms to address concerns about its impact on competition. Why are regulators hesitating to approve these big deals and what might this mean for Occidental’s $38 billion, Warren Buffett-backed bid for energy rival Anadarko?
Antitrust regulators on both sides of the Atlantic have been breaking hearts lately.
In the UK, a £7 billion deal between Sainsbury’s and Asda was blocked by the Competition and Markets Authority (CMA) on the grounds that it would make shoppers and motorists worse off. In response, Asda’s parent company Walmart has said it plans to list the struggling discount grocer on public markets.
In the US, meanwhile, the DOJ has taken a hard line on some recent mergers. It fought bitterly to block AT&T’s acquisition of Time Warner, unsuccessfully appealing a judge’s decision to allow the deal to proceed, and it is reportedly ready to block a $26 billion deal between the third- and fourth-biggest wireless carriers in the US: T-Mobile and Sprint.
According to reports, the DOJ is concerned that the tie-up would hurt consumers, especially the rural and low-income consumers who rely on prepaid service – together, T-Mobile and Sprint dominate the prepaid market. The companies are reportedly considering significant asset sales and other concessions to address the regulator’s competition concerns and clear the merger.
Antitrust regulators have a difficult task. They must predict – often with scanty evidence – how a merger or acquisition will affect consumers, both in terms of price and its impact on innovation. In the case of the Asda/Sainsbury’s and the T-Mobile/Sprint deals, regulators focused on the fact that the various players operated in the same geographies and markets and would therefore well-placed to raise prices once a deal was done.
What might this mean for the proposed deal that has markets buzzing, namely Occidental Petroleum’s aggressive bid for Anadarko Petroleum?
Occidental’s Anadarko bid
After running off rival bidder Chevron, Occidental won the hearts of Anadarko shareholders with a 78% cash offer backed by legendary investor Warren Buffett.
The purpose of the deal is to turn Occidental into the biggest producer in the Permian Basin, an oilfield in West Texas and New Mexico that recently beat Saudi Arabia’s Ghawar to rank as the world’s most productive. Occidental has long vied with Chevron for domination of the Permian, and with this deal, it looks set to take the lead in the region. Anadarko owns about 600,000 acres in the Permian and has identified 10,000 potential drill sites, which are generally expected to be highly productive and profitable.
Admittedly, the deal is by no means a sure thing. Occidental shareholders object to some of the terms – particularly the high cost of the $10 billion financing provided by Buffett as well as management’s decision to boost the cash portion of the bid, thereby avoiding a shareholder vote on the deal. Anadarko shareholders also have yet to have their say. Nevertheless, it looks likely that the next big hurdle for the deal will be regulatory approval.
On this score, the Occidental deal enjoys some advantages. Oil markets are global and highly competitive, meaning that no single company – even Saudi Aramco, the world’s largest oil firm – has the power to meaningfully affect oil prices. As for the impact on innovation, given that much of the country’s oil is found outside the Permian, in the Gulf of Mexico and elsewhere, and that – unlike the relatively concentrated media and wireless markets – the oil industry includes a large number of small firms, it seems highly likely that the deal will get the nod.
But few expected the DOJ to take its fight against the AT&T/Time Warner deal to the appellate court. When it comes to antitrust regulation, anything can happen.
Intuition Know-How has a number of tutorials that are relevant to M&A deals and the content of this article:
- Mergers & Acquisitions (M&A) – An Introduction
- Mergers & Acquisitions (M&A) – Analysis
- Corporate Valuation – Merger Analysis
- Merger Model Building – Excel Interactive
- Commodities – Oil