THE AUSTRALIAN Competition and Consumer Commission has released a statement of issues outlining what it calls “preliminary competition concerns” with Aurizon’s proposed $2.35-billion acquisition of One Rail Australia.

The ACCC is looking for public comment on whether its concerns would be addressed by Aurizon’s divestment of ORA’s east coast business.

ORA comprises bulk rail haulage and general freight assets in South Australia and the Northern Territory; the 2200-kilometre Tarcoola-to-Darwin railway line; and a haulage business in New South Wales and Queensland called East Coast Rail (ECR).

The ACCC pointed out that Aurizon and One Rail both supply rail haulage services for coal in New South Wales and Queensland. There are three main suppliers of coal haulage in these states: Pacific National, Aurizon and One Rail.

The competition watchdog said 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 a recently entered third competitor in Queensland that has had a significant impact.

ACCC Chair Gina Cass-Gottlieb said: “By reducing the number of competitors in the supply of coal haulage in New South Wales and Queensland from three to two and removing an important competitor to Pacific National and Aurizon, we have preliminary concerns that the proposed acquisition of One Rail by Aurizon would be likely to substantially lessen competition”.

The ACCC is also considering whether the proposed acquisition would “substantially lessen competition” in regional markets for rail haulage services for bulk commodities other than coal.

While the parties do not currently compete in the supply of these services, Aurizon has publicly stated its intention to continue to grow its non-coal bulk commodity rail haulage business.

“We’re also considering the impact of this proposed acquisition on potential future competition in the supply of non-coal bulk rail haulage,” Ms Cass-Gottlieb said.

Aurizon has proposed a divestment undertaking that seeks to address the ACCC’s preliminary concerns.

This undertaking proposes to divest One Rail’s east coast business, which includes its coal haulage operations in NSW and Queensland. The undertaking would allow Aurizon to sell the business either by a trade sale or demerging it as a new separate ASX-listed entity.

The ACCC has not formed a view about whether the proposed undertaking can resolve the ACCC’s preliminary competition concerns. Feedback from public consultation will assist the ACCC to reach a final decision.

“A critical issue for the ACCC is determining whether Aurizon’s divestiture undertaking will be effective in replacing the competition that would be lost because of the proposed acquisition,” Ms Cass-Gottlieb said.

To address the likely competition issues, the ACCC said it would need to be satisfied that any new purchaser or the demerged business would be an effective, stand-alone, long-term competitor in the supply of coal haulage and non-coal bulk commodity rail haulage.

Divestment remedies via demerger are not common and can present certain risks and complexities which need to be assessed.

An important issue is whether the financial arrangements that Aurizon has proposed for the new entity, including its proposed debt levels, would affect the proposed demerged business’s ability to become an effective competitor.

Aurizon welcomed the ACCC’s announcement that it was seeking market feedback on the deal.

“Aurizon acknowledges that public consultation is an important part of the ACCC’s process for assessing a proposed undertaking in the context of merger transactions,” the company said in a statement to the ASX.