COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 29/LM/Mar00
In the large merger between
Distillers Corporation (SA) Ltd
and
Hygrace Holdings (Pty) Ltd
Reasons for the Competition Tribunal’s Decision
Approval
The Competition Tribunal issued a Merger Clearance Certificate on 4 April 2000
approving the joint venture between Distillers Corporation (SA) Ltd and Hygrace
Holdings (Pty) Ltd without conditions. The reasons for our decision to approve
the merger are set out below.
The merger transaction
The transaction entailed the creation of a 50/50 joint venture, which consists of
the following transactions:
(a) The restructuring of the Hygrace operations into a new holding company,
Lusan Holdings (Pty) Ltd, with 3 subsidiaries n amely an operating
company, Lusan Premium Wines (Pty) Ltd and two property owning
companies, Hyfarm Investors (Pty) Ltd and Evergrace Farm (Pty) Ltd.
South African Distilleries and Wines (SA) Ltd and Hygrace Holdings each
hold 50% of the shares in Lusan Holdings (Pty) Ltd.
(b) The restructuring of Hygrace implied the disposal of all the shares in and
claims on loan accounts against Neetlingshof Estate (Pty) Ltd, Olives
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farm, Hillendale farm and Stellenzicht Vineyards, including the land, stock,
trade marks and fixed assets to the new holding company.
(c) In return for one half of the shares in Lusan Holdings (Pty) Ltd, South
African Distilleries and Wines (SA) Ltd, disposed of the land, stock, trade
marks, and fixed assets of Le Bonheur, Alto and Uitkyk, to compan ies in
the Lusan Holdings Group.
(d) A distribution agreement was concluded in terms of which Distillers
Corporation Limited will handle the sales, marketing and distribution of the
trademarks of Lusan Holdings.
Background
Rembrandt and KWV jointly own Rem brand – KWV Investments. This company
was created in 1979/80 as part of a Government sanctioned restructuring of the
liquor industry. The sole purpose of the company was to manage the two
companies’ combined 60% interest in Distillers and South African Win e Farmers
Limited (SFW). In an effort to promote competition the two companies were listed
individually on the JSE, with KWV and Rembrandt retaining their 30% shares
each in the listed entities.
Evaluating the merger
The Tribunal regards this joint venture as a merger in terms of section 12(1)(b) of
the Competition Act, 1998.
The transaction entails a joint venture in the market for natural still wine in South
Africa. In this narrow market Lusan (the joint venture) operates in a small sub -
market, the market for high price natural wine. The parties have indicated that the
purpose of the merger is to compete more effectively in international markets
through the effective utilization of joint facilities such as storage space, bottling
lines, distribution facilities and marketing. All employees were transferred to the
joint venture.
As a result of the merger the two brands previously belonging to Hygrace,
Stellenzicht and Neetlingshof, will form part of the brands comprising the broader
Distillers/SFW grouping. These brands are Alto, Le Bonheur, and Uitkyk. Whilst
Distillers/SFW grouping. These brands are Alto, Le Bonheur, and Uitkyk. Whilst
we make no finding of fact that all these companies form one controlling group,
for the purpose of evaluating this merger we have made this assumption.
The wine market has been deregulated and restructured over the past decade to
such an extent that the joint market share of South African Wine Farmers Limited
(SFW) and Distillers, according to the Cape Wine and Spirit Institute, decreased
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from 75% in 1979 to 35,5% in 1999. Moreover, approxim ately 60% of all wine
sales were by suppliers such as producers, wine estates and co -operatives other
than the four major producer wholesalers, SFW, Distillers, Gilbeys and Douglas
Green Bellingham.
Furthermore, according to the Beverage Business Year Bo ok 1999 ”..producing
wholesalers of leading brands [Graca (SFW), Chateau Libertas (SFW),
Bellingham Johannesberger (Douglas Green Bellingham), and Nederburg Paarl
Cabernet (SFW)] face growing competition from vibrant new entrants and value -
for-money imports as well as the problem of continuity of supply of grapes largely
from co-ops. Now that the markets are more flexible, more co -ops and former co-
ops are producing and bottling under their own labels for the local and export
markets”.
Vertical integration is being controlled by the new Liquor Act 1998, which
regulates the licensing of participants at the producer, intermediary and retail
levels. However, indications are that SWF and Distillers are gradually exiting the
retail market. They have already sold off a number of outlets and they jointly hold
less than 5% of the retail market.
Furthermore, we agree with the Competition Commission that adequate
countervailing power exists in the market in the form of large grocery store
groups.
Therefore, in light of the above information and the fact that the merger does not
raise any public interest concerns, the Tribunal finds that this merger will not
substantially prevent or lessen competition in the South African market for natural
still wine.
29 March 2000
D.H LEWIS Date
Presiding member
Concurring: N.M. Manoim and S. Zilwa