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THE latest exchange of hostilities between Toll Holdings and its target over Patrick Corporation's continued interest in acquiring FCL Interstate Transport Services provides another insight into the defence strategy that Patrick's Chris Corrigan is developing.
Last month the Australian Competition and Consumer Commission announced its opposition to the proposed acquisition of FCL by Patrick, largely because of its belief that it would increase the ability and incentive of the Pacific National Ltd rail joint venture between Toll and Patrick to raise prices and discriminate against independent freight forwarders.
Despite the ACCC's stance, Patrick is believed to be in discussions with FCL to gain an exclusive 12-month option to buy the group, a development that has caused some agitation in the Toll camp.
The revival of the prospect of Patrick acquiring FCL, subject to eventual ACCC approval, follows the eruption of a dispute between the PNL partners over the terms of a Queensland contract between PNL and Toll, which Patrick claims improperly favour Toll.
The claims have resulted in Patrick formally triggering dispute resolution procedures, which could lead to the break-up of the PNL partnership if an arbitrator decides the dispute notice involves matters that are reasonable and material. The arbitrator could produce a decision within a month.
The significance of the PNL dispute is that, if Patrick is successful, it could cause the dissolution of the joint venture and an auction between the partners for PNL's assets.
Corrigan's problem in responding to the Toll bid is that he lacks leverage over the bidder, largely because the capital and cash flows within PNL, which represent a significant amount of Patrick's value, are trapped within the joint venture. PNL is a deterrent to a counter-bidder and, because Toll isn't going to pay a control premium for a business it operates, depresses the overall value of Patrick.
If Corrigan could break up PNL, the field of potential bidders would open up. There are financial players that would be interested in Patrick's stevedoring operations.
The concept of dissolving the partnership, which would free Patrick to build its own freight-forward operations and integrate them with its ports operations in competition with Toll, also provides the option of an independent Patrick with growth prospects that Corrigan can put forward as an alternative to the Toll bid.
The continued dalliance with FCL seems to take the "break-up as defence strategy" a step further.
With the market generally favouring the merger of the companies to create one of the world's larger transport and logistics groups, the biggest obstacle to Toll's bid probably isn't at this point Corrigan but the ACCC.
The commission will be very wary about the extent to which Toll would create a vertically integrated group with the ability to leverage its dominance of segments with low levels of competitive intensity — the very issue at the centre of the rejection of Patrick's initial attempt to acquire FCL.
Corrigan has offered the ACCC and his shareholders a different vision for the industry, where the competition issues posed by PNL disappear and Patrick emerges as a fierce competitor to Toll. By replicating Toll's own vision of a complete supply chain service for big customers, Patrick is giving the commission an invitation almost too good to refuse.
While there is any prospect of the PNL partnership being unwound, the ACCC will be very reluctant to clear the Toll bid or, indeed, to expedite its own response to the bid. If the commission opposes the offer and refuses to contemplate undertakings from Toll to protect competitors, Toll will almost certainly head for the Federal Court. The longer the commission takes, the more time Corrigan will have to deal with the bid. The continuing interest in FCL is a neat demonstration of his commitment to a competitive future.
Corrigan achieved his first objective of forcing Toll into the dispute resolution procedures earlier this month, which ensures the PNL dispute will be determined before Toll's bid can succeed. Even if the arbitrator rules against him, the falling-out of the two partners is so severe that the only realistic outcomes seem to be either Toll removing the source of friction by succeeding with its bid or PNL being broken up.
Whether Patrick's tactics will result in anything other than delay is an open question, although it does help Corrigan provide an alternative to Toll's offer to his shareholders. Delay is, by itself, of value to a defender, particularly one confronted with a complex and largely paper-based bid.
The longer Corrigan can stretch the bid timetable, and the more obstacles, diversions and threats to the bid he can create, the more leverage he has to extract, as a minimum, a better offer from Toll in circumstances where he started with little leverage.
Whether or not he can blow up the PNL joint venture, Toll would be conscious of the possibility that he might succeed, of the damage being done to PNL in the meantime and the reality that, from its perspective, there is only downside to the dispute.
There would be an enormous loss of value if PNL were broken up. Patrick could recover some of that value by building an integrated business into Toll's space and at Toll's expense. Toll, however, is facing only value destroyed.
Given the difficulty of restoring a working relationship with Patrick at PNL if the Toll offer fails, Toll's need to succeed is rising in line with the acrimony and risks the bid is generating.
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