ComCom reveals rationale for Vero/Tower decision

by Jordan Lynn 11 Aug 2017

ComCom reveals rationale for Vero/Tower decision

The Commerce Commission has revealed its reasons for declining the Vero deal to acquire Tower.

The deal suffered a knockback from the Government body last week as it was feared it would reduce competition in the personal insurance market. In its detailed decision the Commerce Commission noted that the deal would see Suncorp and IAG as the two largest competitors in the market, with other smaller insurers unlikely to be able to expand sufficiently within a two year timeframe to constrain the merged entity.

However, by contrast, the 2014 deal which saw IAG acquire Lumley was approved by the Commerce Commission. With comparisons being made, the Commerce Commission chose to note the differences which saw the Vero bid declined.

“The proposed merger would involve a significant aggregation in the direct to consumer channel, whereas Lumley was not as active in this particular area of the market,” the Commerce Commission response said. It also noted that the merged entity’s market share would be significantly smaller than IAG’s market share before it acquired Lumley.

“Given the materially different context, we cannot transpose the conclusions from the Commission’s earlier decisions to this application,” it said.

The fact that IAG still faced competition from both Vero and Tower upon the completion of their merger also sets that deal apart, the report noted.

Barriers of entry into the market have also risen, it states, which would deter outside entrants from increasing competition significantly.

The Commerce Commission also noted that if the merger were to proceed, it could see “coordinated effects” that could involve IAG and Suncorp raising prices and lowering the quality of their products as they could more easily determine competitor prices than several years ago.

“The merger would eliminate Tower as the competitor best placed to disrupt coordination, and leave two reasonably symmetric insurers with incentives to coordinate,” it noted.

For Tower, the future of which still remains uncertain in the absence of the Vero takeover, the Commerce Commission noted that there is “a real chance” that the business could be acquired by a third party and, if not, the business could continue to stand alone.

“In the absence of an offer from Vero to acquire Tower, there is a real chance that Tower shareholders would be open to considering offers from third party buyers at or around the price originally offered by Fairfax,” the report states.

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