COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 84/LM/Aug00
In the large merger between:
Aveng Limited The Primary Acquiring Firm
and
LTA Limited The Primary Target Firm
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Reasons for approval of merger
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APPROVAL
1. The Competition Tribunal issued a Merger Clearance Certificate on 27
September 2000 approving the merger between Aveng Limited (“Aveng”)
and LTA Limited (‘LTA”) without conditions. The reasons for our decision
to approve the merger without conditions are set out below.
THE MERGER TRANSACTION
2. The primary acquiring firm is Aveng, a group focused on servicing
infrastructural markets. Aveng derives 90% of its earnings from
constructionrelated activities.
3. The primary target firm is LTA, an investment holding company for a group
of firms also involved in the building industry. These activities are carried
out through its whollyowned subsidiary, Grinaker Holdings Limited. For
the purposes of our deliberations Grinaker’s activities become the focus of
our attention, although the acquisition is being made by Aveng.
4. Aveng is acquiring the entire issued share capital in LTA. The merger is to
be implemented by way of a scheme of arrangement in terms of section
311 of the Companies Act 61 of 1973, failing which in terms a general offer
to the shareholders in terms of section 440 of the same Act.
5. This transaction is part of Aveng’s growth strategy aimed at making the
firm globally competitive by broadening its construction activities. In the
opinion of Aveng this merger will broaden its scope, skills and resources
and help it achieve critical mass.
EVALUATING THE MERGER
6. If we are to evaluate this merger we need to be able to segment the
building service activities the merging parties are engaged in into sub
markets that are meaningful for competition purposes. Fortunately the
merging parties and the Commission are broadly in agreement on this
point. Their point of departure relates to the extent of these markets as we
indicate more fully below. This difference in approach however is without
significance for our purposes as neither leads to concerns that the merger
lessens or prevents competition.
The relevant product/services market
(1) The parties’ approach
7. According to the merging parties there are four markets relevant for this
transaction. Firstly the parties participate in the building construction
market. This market includes public, commercial and residential
construction. Aveng has a market share of 3 percent, and LTA 2 percent.
Approximately 83 percent of the market is in the hands of small regional
constructors undertaking projects in the residential sector.
8. Secondly there is the market for mining contracting, which includes both
underground and open cast mining. The main activities in this market are
the development of access to and extraction of ore bodies. Each of the
parties has an 8 percent share of this market. LTA is involved exclusively
in open cast mining and Aveng in both open cast and underground mining.
The merging firms are involved in an open cast mining joint venture at
Wonderwater Open Cast Mine. This joint venture alone accounts for 50
percent of the parties’ market share in the mining contracting market.
percent of the parties’ market share in the mining contracting market.
9. Thirdly there is the civil engineering market. The main activities in this
market are the development of infrastructure such as roads, dams, airports
and waterworks. There are six significant participants in this market who
share 34 percent of the market Murray and Roberts (10 percent); Concor
(6 percent); WBHO (5 percent); Basil Read (5 percent); Aveng (5 percent)
and LTA (3 percent). The remaining 66 percent of the market is held by
smaller national and regional competitors.
10. Lastly there is the market for the supply and installation of mechanical
electrical, instrumentation and piping in process plants and factories. LTA
is one of the two largest players in this market with a market share of 11
percent; Aveng’s share of the market is 6 percent.
11. In the assessment of the parties their post merger market share in the
above markets will be as follows:
LTA AVENG
(GRINAKER)
POST MERGER
Construction 2% 3% 5%
Mining Contracting 8% 8% 16%
Civil engineering 3% 5% 8%
Mechanical, electrical and
instrumentation
6% 11% 17%
(2) The Commission’s Approach
12. The Commission also found these four markets to be the relevant markets
for the purposes of this transaction. Their investigations however
suggested that there was a distinction to be made between small to
medium and large projects. Large project clients usually set stricter
conditions than small project clients. Standard requirements for large
projects are a strong balance sheet and a good track record. Clients in the
small to medium projects market have less stringent requirements. With
respect to the construction, mining contracting and civil engineering
markets the Commission found that there was sufficient justification for
treating large projects as a separate market. The Commission therefore
excluded all firms whose turnover for last year was less than R100 million.
Consequently the market shares of the parties in these three markets are
higher in the Commission’s analysis 1. The Commission also found that the
mining contracting market could be further subdivided into open cast and
underground mining. Since LTA is only involved in the latter market they
took this as the relevant market. The Commission did not find it necessary
to distinguish between small to medium and large projects in the
mechanical, electrical and instrumentation market. The market shares
mechanical, electrical and instrumentation market. The market shares
provided by the parties and the Commission are therefore the same for
this market.
13. In terms of the Commission’s investigations the market share of the parties
will be as follows after the merger:
1 Both parties however have worked off the same source material i.e. statistics prepared by the
Building Industries Federation of South Africa in 1999.
LTA AVENG
(GRINAKER)
POST
MERGER
Construction 10.50% 17.85% 28.35%
Mining Contracting (Open
cast mining)
13.8% 7.69% 20.77%
Civil engineering 5.25% 10.50% 15.75%
Mechanical, electrical and
instrumentation
10.94% 6.25% 17. 9%
The relevant geographic market and barriers to entry
14. The geographic market is South Africa. However each of the identified
markets is becoming increasingly open to global competitors. The
international publication of tenders enables foreign companies to easily
compete in the South African market. International companies can source
raw material and personnel from South Africa making entry into the market
easy. Some of the biggest international companies such as Bouygues
Group and Kvaener Group already participate in the market in South
Africa. The fact that South African companies, including the merging
parties, already conduct business outside the country as well is an
indication that foreign entry is a feature of the construction industry
generally.
Impact on competition
15. The view of the Commission is that despite the relatively high market
shares of the parties post merger the markets in question would remain
competitive. The figures used to determine the shares of the parties are
based on last year’s turnover and do not accurately reflect the state of the
market for a number of reasons. Firstly there are a significant number of
firms in each of these markets who refused to divulge their market shares
to the Commission and were therefore not taken into account in its
assessment. Secondly there are a lot of other firms in the market who
qualified to tender for projects won by the parties but chose not to do so.
Thirdly each of these markets has a significant number of participants
Thirdly each of these markets has a significant number of participants
reducing the possibility for coordination.
16. Fourthly each product market is increasingly becoming global as
evidenced by the number of foreign companies already operating in South
Africa. Finally, in the absence of collusion, the public tender process
inhibits a firm from acquiring market power, as contracts are usually
awarded to the lowest cost tender. There is also an argument that the
tender process gives the clients in these markets significant countervailing
power. The Commission concluded therefore that the structure of the
market was such that the merger raised no competition concerns. We
agree with the Commission’s analysis.
Public Interest Considerations
17. There are no public interest concerns raised by this merger. According to
the information supplied by the parties the two firms will be operated
independently of each other for the foreseeable future and hence they do
not anticipate any employment loss consequent to the merger.
23 October 2000
N.M. Manoim Date
Presiding member
Concurring: D.H. Lewis, P.E. Maponya