IN THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 83/LM/Jul00
In the large merger between:
The TongaatHulett Group Limited
and
Transvaal Suiker Beperk, Middenen Ontwikkeling (Pty) Ltd, Senteeko (Edms)
Bpk, New Komati Sugar Miller’s Partnership, TSB Bestuursdienste
Reasons for the Competition Tribunal’s Decision
APPROVAL/PROHIBITION
1. We prohibit the transaction between the TongaatHulett Group Limited and
Transvaal Suiker Beperk. The reasons for our decision are set out below.
BACKGROUND
2. In this section we first describe the transaction. Secondly, we provide a brief
overview of the major players in the South African sugar industry. Thirdly, we
identify key features of the regulatory regimes that characterize the sugar industry
both in South Africa and abroad.
The Transaction
3. The proposed transaction involves the acquisition of the Transvaal Suiker Beperk
(TSB) group of companies by the TongaatHulett Group Limited (THG).
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4. The TSB group of companies include:
• Transvaal Suiker Bpk,
• Middenen Ontwikkeling (Pty) Ltd,
• Senteeko (Edms) Bpk,
• New Komati Sugar Millers Partnership and
• TSB Bestuurdienste (Pty) Ltd.
5. THG will acquire the sugar, molasses and animal feed business of TSB as a going
concern. Tongaat will also acquire the issued share capital of TSB Bestuurdienste
(Pty) Ltd.
6. THG is controlled by Anglo South Africa (Pty) Ltd, which, in turn, is controlled
by the Anglo American Corporation of South Africa Ltd and, ultimately, by
Anglo American PLC. Tongaat Hullett Sugar (THS) is the South African sugar
division of THG and is involved in a wide range of activities in the sugar industry.
Apart from its mills in South Africa it also owns 100% of Triangle Sugar Ltd in
Zimbabwe and its parent, Anglo American PLC, owns 51% of Hippo Valley
Estates Ltd in Zimbabwe. The group has recently invested in packaging
operations in Namibia and has also acquired interests in two sugar mills in
Mozambique.
7. The Rembrandt Group Ltd, through Hunt Leuchars & Hepburn Holdings Ltd
(HL&H), ultimately controls the TSB group of companies. TSB primarily
conducts business within the sugar industry and, to a lesser extent the citrus
industry. It is not selling its citrus business. TSB does not have sugar producing
assets in any other country.
8. Rembrandt informed the Tribunal that it was selling TSB because it has not
achieved satisfactory returns on investment due to, inter alia, its inability to
achieve economies of scale, the deregulation of the sugar industry since 1994 and
a drop in the world sugar price. It has therefore decided to disinvest from sugar
because it believes that TSB is too small to obtain the critical mass necessary to
because it believes that TSB is too small to obtain the critical mass necessary to
achieve acceptable returns. The Tribunal was informed that HL&H had, over the
past decade, unsuccessfully attempted to merge TSB with other sugar companies.
9. THS, for its part, informed the Tribunal that the reason for the transaction was
that for a number of years it has been implementing a strategy to expand and
rationalize its production base to achieve lower costs of production. In line with
this strategy it has, via its land sale program and longterm cane supply
agreements, reduced its exposure to cane growing in South Africa by 30% since
1996. However, the major milling assets remain within the same geographic area
(KwaZulu Natal North Coast) and cane supply is largely rain fed. The acquisition
of TSB therefore gives rise to further opportunities for THS to shift its production
base to lower cost areas, whilst at the same time realizing value for redundant
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assets to partfund the acquisition and reducing the risks of dryland farming.
Key players in the South African Sugar Industry
The primary sugar industry – the sugar cane growers
10. In South Africa sugar is produced almost exclusively from sugarcane. The high
bulk/low value of sugar cane and the fact that the cane must be milled
immediately after cutting creates a regional relationship between cane growers
and millers. Growers, the parties assert, are bound to a single regional miller thus
eradicating competition at the level of cane procurement. 1
11. In South Africa primary cane production is undertaken by more than 53 000
registered cane growers comprising approximately 2000 largescale farmers,
farming on freehold land, and approximately 51 000 small scale growers. South
Africa has 15 mills with a total milling capacity of more than 2.5 million tons.
The smallscale growers are responsible for 18% of the total average cane
production of 22,2 million metric tons.
12. Milling companies currently own about 16% of the land under cane. It appears
that most of this land was purchased defensively to avoid it being lost to timber
production. Two of the milling companies have already introduced schemes to
dispose of portions of their land to create new opportunities for the development
of mediumscale black farmers. 2
13. The South African sugar industry alone employs about 130 000 people directly
and a further 110 000 indirectly.
The secondary sugar industry – the millers
14. Illovo is the largest of the South African sugar producers and produces 1,2 million
tons of raw sugar per annum. The geographical spread of Illovo’s mills in South
1 The relationship between the growers and the millers is highly regulated with the Equitable Proceeds
arrangement (see below) responsible for distributing the proceeds of the sale of milled and refined sugar
between the millers and growers. While the relationship of the growers to the millers has not been a central
feature of this investigation we are not prepared to accept the assertion that the regional relationship
between cane growers and millers necessarily implies that there always be a single regional mill. We
return to this issue below.
2 See Board on Tariffs and Trade – ‘Revision of the Tariff Dispensation and Maximum Price Dispensation
for Sugar’ Report No. 4039, June 2000
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Africa range from Pongola in the north of KwazuluNatal to Umzimkulu on the
lower south coast. Illovo operates seven sugar mills, four of which have refining
facilities. Approximately 15% of Illovo’s cane is irrigated and 85% is rainfed.
Illovo has significant access to preferential markets in the EU and USA, by reason
of its investments in Swaziland, Malawi, Mauritius and Tanzania.
15. THG’s sugar division, THS, is the second largest in South Africa and produces
approximately 900 000 tons of raw sugar per annum in five mills all located on
the KwaZulu Natal north coast between Durban and Richards Bay. It has a
central refinery based in Durban with a capacity of 650 000 tons of refined sugar
per annum. Like Illovo its cane supply is largely rainfed with some 13% of its
supply being irrigated. THS is internationally cost competitive due to the scale of
its refinery and its predominantly larger sized mills. However it faces a higher
exposure to world market prices than Illovo. Less than 1% of THS’s production
receives preferential market prices compared with Illovo’s 21%. Less than 1% of
TSB’s output receives preferential market prices. THS has recently acquired
interests in two mills in Mozambique and it owns 100% of Triangle Sugar Ltd in
Zimbabwe. It is also invested in packing operations in Botswana and Namibia.
• TSB is the third largest sugar producer in South Africa and has two
sugar Mills in Mpumalanga, Malelane and Komati, together producing
440 000 tons of sugar per annum i.e. 17% of South African
production. Its entire cane supply is irrigated and after the Maguga
dam is completed in 2002 it will have two years water security from
dams on all the major rivers in the area. The Malelane mill has an
annexed refinery with a capacity of 320 000 tons including offcrop
refining. It also farms 8000 ha of cane land, producing 850 000 tons of
cane.
The Regulatory Framework
cane.
The Regulatory Framework
16. Across the world, the production and consumption of sugar is subject to massive
regulatory intervention. In evaluating this merger considerable attention has been
given to the interplay between regulation and competition, between regulation in
the rest of the world and regulation in South Africa, and between competition in
the rest of the world and competition in South Africa.
General Characteristics
17. The sugar industry, internationally, is influenced by the following:
• 75% of sugar produced worldwide is consumed in the countries in which it is
produced with only the balance, or surplus, entering world trade. As such, the
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world sugar market is considered to be a residual market, that is, a market into
which only sugar surplus to domestic needs is sold, and from which sugar is
bought only if domestic production falls short of domestic requirements. The
residual nature of the market combined with the vagaries of agricultural
production makes sugar the most volatile of all commodity markets;
• The domestic markets of netexporter sugar producers are regulated and
protected from the volatility of residual world market prices by tariff and/or
nontariff barriers. World prices are below average production costs in the
majority of sugar producing countries;
• Domestic market prices in netexport sugar producing countries are higher
than the world market price;
• Preferential trade agreements distort the market. The EU and the US operate
the largest preferential access arrangements. South Africa does not benefit at
all from the European agreement and it has a token preferential allocation into
the US market;
• Farmer support, such as the Common Agricultural Policy (CAP) in the EU,
the Farm Bill in the USA and the fuel alcohol program in Brazil, together with
high domestic prices, enable high cost producers to sustain export production
– one of the largest exporters (the EU) is also one of the highest cost
producers;
• Government sanctioned export quotas exist in one form or another in all net
exporting sugar producing countries. Many achieve this via singlechannel
export regulations.
General Features of the South African Regulatory Regime
18. The South African industry is a world class, cost competitive producer of high
quality raw and white sugar. It is a diverse industry combining the agricultural
activities of sugar cane cultivation with the production of sugar, syrups, specialty
sugars, and a range of byproducts. It has sophisticated research and training
facilities that are available to other SADC sugar producers.
19. Sugar cane is grown in fifteen cane producing areas extending from Northern
Pondoland in the Eastern Cape Province through the coastal belt and Midlands of
KwaZulu Natal to the Mpumalanga Lowveld. Of the 424 444 hectares currently
under sugar cane production, about 68% is grown within 30 km of the coast, 17%
in the Midlands of KwaZulu Natal and 15 % is grown in the northern irrigated
areas that comprise Pongola and the Mpumalanga Lowveld.
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20. There are 16 mills, 8 are owned by Illovo Sugar Ltd, 5 by TongaatHulett Sugar
Ltd, two by Transvaal Suiker Beperk and 1 by a cooperative. Four of the Illovo
mills and one TSB mill have refineries attached to them. TongaatHulett Sugar
owns a standalone refinery in Durban.
21. According to 1998 International Sugar Organization figures, South Africa is the
eleventh biggest producer of sugar, the eighteenth biggest consumer of sugar and
the ninth lowest cost exporter in the world, with sugar mills currently attaining the
highest capacity utilization by international comparison. Two of its neighboring
industries, Zimbabwe and Swaziland, are respectively ranked second and third
lowestcost exporters in the world.
22. The South African Sugar Industry is protected against sugar imports from:
• Swaziland, by an intergovernmental accord on access by Swazi producers to
the South African market as members of the Southern African Customs Union
(SACU).
• Zimbabwe, by an import tariff on direct imports of sugar, and via value
addition criteria in respect of sugar imported from that country into Namibia
and Botswana (both members of SACU) under bilateral trade agreements with
those two countries.
• The rest of the world, by an import tariff. South African sugar producers are
not protected from imports by nontariff barriers as is the case with many
other producer nations. Consequently, for as long as domestic sugar is priced
at or below the cost of imported sugar – being the sum of the world price, the
tariff and various other transport and transaction costs, in other word, the
import parity price it will not be economically viable for any person to
import sugar into South Africa. However this is the ceiling price, that is,
should the domestic sugar price exceed import parity, South African
producers will be acutely vulnerable to international competition.
producers will be acutely vulnerable to international competition.
23. Swaziland is in a unique position in the context of the South African Sugar
Industry. Swaziland forms a part of SACU and as such Swaziland’s sugar exports
to South Africa are not subject to duties or other importation restraints. The South
African and Swaziland sugar industries have reached an accord in terms of which
Swaziland sugar enjoys access to the South African market, achieving a share of
18,2% of the SACU market in 2000/01 sugar season, equal to some 243 000 tons
sugar sales into South Africa.
24. The South African Sugar Association (SASA) is an autonomous organization and
operates in terms of the Sugar Act and Sugar Industry Agreement. It administers
the interface between the Cane Growers’ Association and the Sugar Millers’
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Association, each of whom have 11 members on the council of SASA. It provides
specialist services to the industry and determines the notional price, used in
calculating the equitable sharing of proceeds, as well as the quantities of sugar
required for the local market and the export market.
25. The Sugar Act, 1978, provides for the establishment of a Sugar Industry
Agreement that constitutes subordinate legislation and enables the industry to
regulate itself and to take decisions on key marketing questions such as the
volume of sugar to be exported in terms of the single channel export market. The
Minister of Trade and Industry has approved a review of the Sugar Act, the aim of
which is to ensure that the Sugar Act only provides for or enables government
approved intervention in the sugar industry.
26. The Sugar Industry Agreement 2000, which was published in May 2000,
addressed some deregulation and restructuring issues such as:
• The replacement of the maximum industrial pricing system with a
notional pricing system,
• The replacement of a cane payment system based on sucrose
content with a system based on the recoverable value of cane,
• The selling of sugar on an exmill basis instead of a freeonrail
Durban basis, which allows for competition based on geographical
location and mill efficiencies; and
• The limitation of sugar exports undertaken by the Sugar
Association in terms of the singlechannel export provision to
indirect consumption raw sugar, with refined sugar being directly
exported by refineries themselves.
27. The provisions of the Sugar Act are supported by three regulatory ‘pillars’. These
are, firstly, the tariff that protects the domestic market against low world sugar
prices. Secondly, the equitable proceeds arrangement that provides for the
prices. Secondly, the equitable proceeds arrangement that provides for the
equitable sharing of industry proceeds, or, expressed differently, equitable
exposure to the world market, as between cane growers and millers and between
the various millers. Thirdly there is the single channel export arrangement. A
maximum price arrangement was maintained until the end of September in order
to prevent the industry from exploiting the market through inflated prices caused
by artificially created shortages in domestic supply. It was, however, abandoned
after the implementation of a new duty structure at the end of September 2000.
The Tariff
28. Before September 2000 the formula for determining the tariff was designed to
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achieve import parity at Durban freeonrail for refined sugar. The world price
indicator used was the London Futures Market No. 5 contract for refined white
sugar. Added to this was an amount of $33 for freight and insurance. Any
adjustment to the tariff level was triggered when the 20day moving world price
was changed by 10% as world market prices declined, the duty would
compensate by rising, and viceversa. It was also triggered when the domestic
price was changed by more than 4%.
29. The only limit to the level of the duty is South Africa’s agreed WTO
commitments, set out in schedule XVIII of the Agreement. South Africa bound
itself to a maximum ad valorem duty of 105% of the 20day moving world price
average.
30. The new tariff is a dollarbased reference price system to protect the industry
against imports. The new system no longer caters for domestic price increases.
The domestic sugar price is derived from the longterm average world price of
sugar. The tariff is calculated in relation to a reference price of $330. The $330 is
based on a longterm world price average of $300, adjusted upwards by $60 to
compensate for perceived “distortions” in the world market, and adjusted
downward by $30 for transportation costs. A trigger mechanism is employed, i.e.
an adjustment occurs if the difference between the 20day moving average of the
London No. 5 world price for refined sugar and the 20day moving average of the
same price on which the previous trigger was based amounts to more than $20 for
20 consecutive trading days. The tariff is then the difference between $330 and
the 20day moving average price on which the duty was triggered, in ZAR,
converted at the prevailing exchange rate on the day of the trigger.
The Equitable Proceeds Arrangement
31. The equitable proceeds arrangement refers to a formula through which revenue
31. The equitable proceeds arrangement refers to a formula through which revenue
that accrues to the sugar industry is allocated to the millers and growers. The
Division of Proceeds calculation is a notional calculation, and, whilst representing
industry income, does not reflect actual revenues. Proceedsharing is practised
horizontally, between the millers based on their production, and vertically,
between the millers and growers based on the ‘recoverable value for cane’ pricing
system.
32. Export quotas are calculated by the industry and allocated to producers on the
basis of their respective production capacities. Price competition in the domestic
market is expressly disincentivised insofar as the equitable proceeds arrangement
provides that increases above the allocated domestic market share are penalized
through calculations based on the difference between the notional price, which is
calculated by the industry, and the world price for sugar. Sugar producers selling
more than their allocated quota on the domestic market have to pay the ‘under
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performing’ producers the difference between their ‘over performance’ and the
world price. South Africa exports roughly 50 % of its national sugar production.
The Single Channel Export Arrangement
33. Surplus production is removed from the domestic market via a singlechannel
export arrangement for raw sugar. This is effectively a component of the
equitable proceeds arrangement. SASA is the single channel exporter of raw
sugar, with sugar refiners being responsible for export of refined sugar. This is
presently under review. It appears that government intends to assume
responsibility for the export marketing of South Africa’s raw sugar surplus.
THE COMPETITION ANALYSIS
The relevant market
34. The identification of the relevant market always occupies a central place in anti
trust analysis. In this case the decision with respect to the relevant market, in
particular the relevant geographic market, powerfully influences the outcome of
the enquiry. As we shall outline, the relevant market enquiry is, in this matter,
focused not on the impact of subtle segmentations within a broader market, not on
nuanced enquiries regarding the substitutability of one similar product for
another. It centers on the interplay between domestic producers and consumers of
sugar, on the one hand, and, on the other hand, the production and consumption of
sugar in the rest of the world. In short, we are required to decide whether South
African sugar production and consumption takes place within an international
market or whether it is contained within the boundaries of a domestic market
effectively isolated from the vagaries of production and consumption elsewhere,
from, in other words, the vagaries of international trade. Are South African
producers properly viewed as proverbial big fish in a small pond, or tiny minnows
in a veritable ocean?
in a veritable ocean?
The product market
35. The following sugar products have been identified: raw sugar, brown sugar, white
sugar, specialty sugars, molasses, bagasse and animal feeds. However, since
white sugar accounts for 90% of sugar produced and sold in South Africa, we
accept the Commission’s view that it (white sugar) will act as an adequate
barometer of the transaction’s impact on competition. We treat the white sugar
supplied by the South African sugar millers/refiners as absolutely homogenous. 3
3 It does appear that there are quality differentials in white sugar. It appears that South African sugar is of
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36. In the domestic market, white sugar is distributed to two customer groups,
namely, industrial customers (notably carbonated soft drink and confectionary
manufacturers) who only buy in bulk, and direct customers such as wholesalers
and retailers who sell prepacked sugar to ultimate consumers.
37. Retail customers trade in packages of 25 kg or smaller. In addition to the refiners’
brands – Huletts, Illovo and TSB’s Selati sugar is retailed under a number of
distributors’ and retailers’ brands such as Econo, Spar, Right Value, Woolworths,
DB, Clarks, Cake Prides, Blue Crystal, Marathon and Makalani. These retail
house brands are packed by one or other of the refiners.
38. Customers in the industrial sector trade in bulk (3032 ton shipments) or in 1ton
packages. Industrial users do not purchase 25kg packages of sugar even though
the price per ton of 25kg packages is slightly lower than the price of a 1ton
package because the handling costs of 25kg packages are too expensive.
Similarly, wholesalers and retailers do not want bulk or 1ton packages of sugar
because they would have to repackage it themselves.
39. The millers appear to view industrial and direct sales as separate product markets
and SASA grants rebates to the bottlers and confectionary industry, the largest
customers in the industrial market. It has never given rebates to the direct market.
40. High Fructose Corn Syrup, commonly referred to as HFCS, a sweetener product
manufactured from maize is, according to the Objectors, a suitable substitute for
sugar in its industrial usage. However, the cost of establishing a HFCS plant in
South Africa is prohibitively high (capital expenditure in the order of R1.5 billion
was suggested). Moreover, an HFCS plant would have to be built close to an
adequate source of maize, which would be inconvenient for the supply of HFCS
adequate source of maize, which would be inconvenient for the supply of HFCS
to many parts of South Africa. The barriers to entry by HFCS are accordingly
viewed as prohibitive.
41. The Tribunal, therefore, defines the product market as the market for white sugar,
which can be divided into two submarkets, the industrial market for white sugar
and the retail or direct market for white sugar. We note the Commission’s
recommendation that the two submarkets be viewed as separate relevant markets
and the case law cited in support of this view. 4 For the purposes of this analysis,
we do not consider it necessary to decide this issue. We note however that the
merger will deepen a clear separation in the sugar market characterized by
Illovo’s focus on the industrial market and THS’s focus on the direct or retail
a particularly high quality and is able to command something of a premium on world markets. It also
appears that South African sugar is of a higher quality than Swazi sugar. For the purposes of the present
analysis we have ignored these quality differentials.
4 British Sugar/Tate & Lyle/Napier Brown/James Budget – Case IV/F3/33 708
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market. The conspicuous extent of this separation suggests either that there are,
indeed, two, well segmented relevant markets or, if not, then an agreement
between the parties to divide a single relevant market.
The relevant product market is that for refined white sugar.
Geographic market
42. The delineation of the relevant geographic market involves the identification of
the area over which merged firms and its rivals currently supply, or could supply,
the relevant product and to which consumers can practically turn. Identifying the
geographic market has proved to be the most complex and, arguably, the most
critical step in this evaluation. It inevitably involves another brief excursion – not
for the last time – into the regulatory regimes governing sugar.
43. From one perspective, the sugar market appears to be a clear example of a
perfectly competitive international market – there are a great many producers
located across the globe none of whom are large enough to influence world
supply; the product is absolutely homogenous and is already highly traded;
international institutional arrangements for trading sugar are well developed; there
is a quoted international price; there is a highly developed international transport
infrastructure. Looked at from this perspective we would have to conclude that
the relevant geographic market for refined sugar is the world and that, in this
context, South African producers, like their counterparts elsewhere, are not
possessed of market power. 50% of South Africa’s sugar output is exported and
on this market South African producers are price takers.
44. However, this depiction omits a crucial reality. As already elaborated, sugar is
produced and traded in a highly regulated market, regulated not by an
produced and traded in a highly regulated market, regulated not by an
international public governance structure or even by an international cartel but
rather via the uncoordinated interventions of national states or regional economic
blocs, which structure the international market for sugar and all its key outcomes.
45. The bare bones of the various regulatory regimes have already been outlined.
Suffice for present purposes to note that the most important outcome of the
regulatory regime is an international sugar price depressed below the price that
would have prevailed in the counterfactual, that is, in an unregulated, perfectly
competitive, international market.
46. This invites a regulatory response from the economies of efficient sugar producers
anxious to protect their producers from the consequences of the artificially
depressed world price. Hence, South Africa, in international terms a relatively low
cost producer, has responded by imposing a tariff on imported sugar.
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47. The Commission argues that ubiquitous trade barriers have transformed the single
international market into a series of isolated national markets, of which the South
African market is one. For the Commission then the relevant geographic market is
South Africa.
48. The parties have proffered several alternative relevant market definitions. Their
most explicit statement with respect to the relevant market asserts that ‘the
relevant market context in which the merger should be contemplated is SACU’.
Argument presented in the hearings suggest that they accept the view that an
international market has effectively been fragmented or segmented by regulatory
interventions into a discrete number of national or, as in the case of the various
common market and customs union areas, multinational markets. 5 The crucial
rider that the parties append to this argument holds that, in order to effect the
transformation from relevant international market to relevant national market, the
authorities have been compelled to put in place a regime that eliminates all
competition in the domestic market.
49. However, the parties also argue that there are discrete regional (that is sub
national) markets segmented by transport costs.
50. We cannot accept the argument that there are relevant subnational or regional
markets. In support of this claim, the merger parties cite evidence showing that
one or other of the millers dominate key regions or provinces of South Africa.
This is attributed to transport costs that, it is argued, effectively segment the
country into a number of regional markets. In opposing this argument, the
Commission observes that there are regions in which each producer trades and
that Swazi Sugar has a presence throughout the country. In our view, the
dominance of important regions of the country by single companies, or,
conversely the striking absence of, for example, THS from Gauteng, suggests, as
with the divide between the retail and industrial markets, the influence of inter
firm coordination rather than transport costs. 6
51. We must then decide whether the geographic market is the world or South Africa.
5 The parties continue to insist very strongly that the international price disciplines the domestic price
although they appear to stop short of arguing for a single international market. It appears that international
rivals would, in the parties’ analysis, be characterized as extremely likely entrants in the event that local
producers priced uncompetitively. For present purposes the treatment of imports, whether viewed as part
of the relevant market or as very likely new entrants, is identical and we have decided to deal with the issue
in this section.
6 Producers generally accept that, because, in part, of the existence of transport costs, their returns from
trading in their domestic markets will be higher than those from trading in geographically distant markets,
whether markets in other countries or in regions of their home country far away from the production
location. But, only in exceptional cases, does this prevent trade from taking place. We repeat: it is difficult
to accept that the geographical division of the South African market is rooted in a series of independent
decisions driven by transport cost considerations.
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52. We deal with two conflicting positions here. The first view notes that there are no
sugar imports into South Africa and, while it is conceded that there is an identical
product available on the international market, it holds that the tariff ensures that
consumers cannot practically turn to this source of supply. The second argument
concedes that there are no imports into South Africa. However it holds that this is
explained by competitive pricing on the part of South African producers vis a vis
the international price. Were South African pricing not competitive then domestic
producers would lose their local market to their international rivals.
53. It is difficult, in this instance, to separate the relevant market enquiry from the
market power enquiry. Suffice to say that while the fact that sugar is priced in the
domestic market at import parity gives the appearance that the international price
(lurking immediately above the present domestic price and preventing any
increase) acts as an effective discipline in the domestic market, in reality the
ability of domestic producers to price up to import parity thereby taking full
advantage of the tariff is symptomatic of their monopoly power in a domestic
market rather than their lack of power in an international market. Moreover, by
adjusting the tariff to the reference price of $330, and given the maximum bound
rate of 105% it would take a catastrophic drop in the world price, even from the
current trough, before it became commercially viable to import sugar, or,
expressed otherwise, before the international price actually weighed down upon
the domestic price. 7
54. This was amply demonstrated by Coca Cola’s rather theatrical importation of a
token volume of sugar. Thanks to the tariff, sugar available on the international
market was commercially nonviable, and, as such, beyond their practical reach.
market was commercially nonviable, and, as such, beyond their practical reach.
55. In summary then, despite an active international market in sugar, the presence of
the tariff places it beyond the practical reach of South African consumers. We
conclude then that the relevant geographic market is South Africa.
56. Note that the merger parties argue for the inclusion of Zimbabwe (via bilateral
trade agreements with Southern African Customs Union members, Botswana and
Namibia) and Swaziland’s share of South African consumption thus extending the
relevant market to SACU. While clearly some allowance has to be made for
Swaziland and Zimbabwe’s shares of the SACU market, since both are subject to
quota arrangements they cannot be uncritically incorporated into the market share
figures. Moreover it appears that, South Africa, in common with other sugar
7 As outlined above, the duty adjusts upwards and downwards depending on the difference between the
reference price and the actual world price. A document submitted by the Objectors – the Coca Cola
bottlers – calculates that it is only at $161 (at an exchange rate of R7.23/$) that the 105% ad valorem bound
tariff becomes effective. Such a world price would be below the fourteenyear lows recently reached. The
objectors further calculate that by adjusting the tariff to the reference price of $330 the world price would
have to fall to $107,67 (versus the long term average price of $305) to transport, land and clear imported
sugar to match the current SASA rebated price of R2522 per ton.
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producers, is obliged to import a small quantity of sugar duty free each year.
Imports from Swaziland are utilized to meet this obligation. In any event, we are
not of the view that incorporating these into the market share figures materially
affects the outcome of this evaluation.
The Impact of the Transaction on Competition
57. The Commission has provided detailed measures of the extent of concentration in
the South African sugar market. The parties have a somewhat different basis for
their HHI calculations and arrive at somewhat lower scores. The HHI and CR3
are extremely high. They are tabulated below. The Commission’s calculations
show that the merger will increase THS’s share of total sugar sales from 36% to
54% followed by Illovo at 31% and Swazi Sugar at 15%. THS’s share of direct
sales will be at 64% with Illovo at 19% and Swazi Sugar at 17%. Illovo will
retain the largest share – 53% of industrial sales, followed by THS at 36% and
Swazi Sugar at 11%. As a result of the merger the HHI in respect of total sales
will increase by 945 – from 2629 to 3574, while in the direct sales segment the
HHI increases by an astronomical 1806, from 2940 to 4746. Note that the
Commission’s HHI calculations incorporate Swazi Sugar’s market share. At the
risk of stating the obvious, the concentration measures and the changes in these
measures as a result of the merger all exceed the thresholds accepted in other
major jurisdictions.
HHI AND CR3 CONCENTRATION MEASURES – THE COMMISSION’S CALCULATION
Product
Market
CR3 HHI Change
in
HHI
Pre
merge
r
Post
merge
r
Pre
merge
r
Post
merge
r
Total sales 85 100 2629 3574 945
Direct sales 83 100 2940 4746 1806
Industrial
sales
89 100 3578 4179 601
14
58. The merger parties incorporate Swaziland and Zimbabwe shares of Southern
African Customs Union into a SACU based market share. As noted above we
have not taken a final view on the parties’ argument that the relevant market be
defined as SACU rather than South Africa. As already intimated, although the
market share and concentration measures are obviously reduced in consequence
of expanding the market to incorporate SACU, they still exceed thresholds
generally employed in merger evaluation. The merger parties also include
artificial sweeteners in their concentration calculations. We are of the view that
these are not part of the relevant market – there are a wide variety of uses in
which sweeteners are not a substitute for sugar. However, even with the inclusion
of artificial sweeteners the HHI scores are prima facie grounds for concern.
HHI MEASURES – THE MERGER PARTIES’ CALCULATIONS
COMPAN
Y
MARKE
T
SHARE
PRE
MERGER
HHI
MARKE
T
SHARE
POST
MERGER
HHI CHANG
E
IN HHI
Illovo 30.4% 924.16 30.4% 924.16
THS 27.1% 734.41 40.8% 1664.6
4
TSB 13.7% 187.69
Swaziland
Sugar
Associatio
n
16% 256 16% 256
Zimbabwe
Sugar
Sales
4.3% 18.49 4.3% 18.49
Artificial
15
Sweeteners 7.2% 51.84 7.2% 51.84
TOTAL 100% 2172.5
9
100% 2915.1
3
742.54
59. The parties have also submitted HHIs for other national sugar markets. These
latter calculations seek to demonstrate that concentration levels in the South
African sugar market are not unusual. These measures approximate to the
concentration levels reflected in the Commission’s calculation.
60. The parties do not, in any event, construct their defence of the transaction on the
basis of a denial of high levels of concentration. Their principal rejoinder to the
Commission’s findings derives rather from the impact of the regulatory system.
The parties argue that, in consequence of regulation, competition in the market,
that is in the relevant domestic market, has been eliminated. In the premises,
then, the transaction cannot be held responsible for a ‘substantial lessening of
competition’ there being no competition to ‘lessen’.
61. While the Commission – as well as the objectors and the DTI – agree that
competition in the domestic sugar market has been severely compromised by
regulatory intervention, they find evidence of nonprice competition that, they
fear, will be eliminated by the removal of TSB from the market. Secondly, they
argue that the regulatory system is in flux, that progressive deregulation will
permit the introduction of competition, and, hence, that while the transaction may
have, in the current regulatory environment, a limited impact on competition, it
will, by permitting of higher levels of concentration, serve to preempt efforts to
intensify competition through progressive deregulation. In a word, they are
concerned that the structure of the market postmerger will permit private
regulation to replace public regulation thus frustrating the positive impact that
regulation to replace public regulation thus frustrating the positive impact that
deregulation will have on the level of competition in the sugar market.
62. For their part, the merging parties insist that there is little prospect of fundamental
change in the domestic regulatory system and hence little prospect of intensified
competition without prior deregulation of the European and US markets. Were
deregulation to follow the removal of European and US subsidies and trade
barriers then the possibility of a perfectly competitive international market will
have been realized and the question of dominance in the South African, or any
other, domestic market would not arise.
63. In order to evaluate the proposed transaction’s impact upon competition, we are
required to examine, once more, the regulatory regime.
64. The tariff represents one of the regulatory pillars. It is common cause that South
16
African producers cannot increase their price above the tariff adjusted world
price, that is, above the import parity price. This ceiling is absolutely effective
regardless of the structure of the South African market. Hence if the ability to
increase price in the wake of the merger were indicative of the extent of the
market power, then we would have to conclude that the merger does not give rise
to such power. However, as intimated earlier, the fact that domestic producers are
able to price at import parity may indicate that market power has already been
exercised. Accordingly, while a lessening of competition may not be reflected in
a price rise, the introduction of competition may result in a price decrease. This is,
indeed, our conclusion. The basis for the monopolistic conduct that underpins,
inter alia , import parity pricing is found in regulation. Moreover, there is
considerable evidence of coordination that goes beyond the regulatory
framework, most significantly, the geographical division of the South African
market and the division, between Illovo and THS, of retail and industrial sales.
65. The regulatory instrument that effectively constitutes the ceiling price, the import
parity price, as a floor price, is the equitable proceeds arrangement. This
arrangement is described above: in summary it ensures that all producers have an
equivalent exposure between the international and domestic markets. An ‘over
performer’ on the domestic market (that is, an ‘underperformer’ on the
international market) will compensate an ‘underperformer’ on the domestic
market.
66. While it appears that the equitable proceeds agreement would effectively dis
incentivise any effort on the part of any of the producers to gain domestic market
incentivise any effort on the part of any of the producers to gain domestic market
share there nevertheless is evidence of nonprice competition. Coca Cola has
provided evidence of the successful attempts by TSB to increase its share of the
soft drink producer’s considerable purchases. Coca Cola has characterized TSB as
a maverick competitor, as the producer most likely to deviate from industry
‘standards’ with respect to, for example, credit terms. Correspondence in which
Coca Cola requests a meeting with THS in order to consider the apparently
superior terms and conditions offered by Illovo is further evidence of some
semblance of competition between domestic producers. Moreover, there are, as
mentioned above, a large number of active retail brands. Each of the three
producers retails under a separate brand name with TSB’s Selati’s brand said to
be a strong brand. Several of the large national grocery chains and manufacturers
of bakery products retail sugar under their own brand names. While we have not
been provided with evidence of inter brand competition and while this is
undoubtedly dampened by the regionallybased producer monopolies in the retail
market, it is clear that certain of the retail chains stock several brands of sugar and
that there are price differences between the various brands.
67. In general though we must recognize that the equitable proceeds agreement does
severely limit incentives to compete for domestic market share. Accordingly, the
17
parties were specifically asked to explain this evidence of nonprice competition.
THS conceded that the organization of production at particular mills necessitated
a certain mix of industrial and retail sales and that, at times, this constituted the
basis of competition between the various producers.
68. However, as already mentioned, even within the limits of the equitable proceeds
agreement, the extent to which competition has been comprehensively eliminated
remains striking. In particular we are struck by the extent to which each of the
producers has specialized in particular regions of the country. As striking is the
division between THS and Illovo of the retail and industrial markets. The
proposed merger strengthens each of these submarket specializations. The parties
have offered several unconvincing explanations for this – a long history in a
particular market giving rise to efficient distribution systems is one explanation
offered, transport costs are another. No evidence has been presented in support of
the claim that the absence of distributions facilities accounts for market
segmentation. Nor are we persuaded that transport costs are prohibitive. 8 This
division of the geographic and product markets does not appear to be an
inevitable consequence of the equitable proceeds arrangement. Nor is it
accounted for the alternative explanations offered by the parties. Rather it smacks
of the exercise of private market power facilitated by the unusual freedom that the
industry has been given to regulate itself.
69. But, we repeat, the regulatory regime has undoubtedly undermined the extent of
competition. In essence the tariff holds international competition at bay while the
equitable proceeds arrangement eliminates the incentive to compete for domestic
market share. That there is evidence of nonprice competition should not serve to
market share. That there is evidence of nonprice competition should not serve to
understate the extent of the limitation imposed upon competition by the regulatory
regime. In the face of this reality the parties argue that the merger will not ‘
substantially lessen or prevent competition’, the principal test imposed by the Act
in evaluating a merger.
70. The Commission, on the other hand, argues that the conduct of trade policy and
the imposition of related regulations should not determine the outcome of a
competition evaluation. The Commission insists that the task of those responsible
for upholding the Competition Act is, in this instance, to ensure that the
possibility of introducing competition is not undermined by the underlying
structure of the market. The Commission is supported by the Department of
Trade and Industry, which, in asking for the transaction to be prohibited, states its
intention to review imminently the regulations governing the sugar industry
principally with a view to introducing greater competition.
8 As noted above, i t is one thing to argue that trading in export markets or in distant parts of the domestic
market may, in consequence of transport and other transactions costs, generate somewhat lower returns
than trading in one’s own backyard. It is quite another thing to argue that the presence of transport costs
prevents trade from taking place.
18
71. For their part, the parties to the merger insist that the industry cannot be
deregulated without preceding deregulation by the industrialized countries whose
interventions, the merging parties argue, are principally responsible for the
depressed international sugar price. Deregulation along these lines will, they
argue, effectively constitute the introduction of the perfectly competitive
international market referred to earlier. In the context of this market structure
South African sugar producers, as with their counterparts elsewhere in the world,
are price takers – the relevant market will be international and the question of
domination of national markets by national firms will not arise. In the documents
submitted by the parties to this enquiry they advance the view that progress in the
WTO will result in sugar deregulation in the foreseeable future, although in the
hearings they appear to have conceded that this assessment is unduly optimistic.
72. The parties argue that piecemeal amendment of the South African regulatory
regime is not feasible. In particular they argue that the artificially depressed sugar
price will ensure the maintenance of tariff protection. The Commission and the
DTI share this latter view. However the Commission holds that it is conceivable
that the equitable proceeds agreement be reviewed and amended so as to permit
competition between domestic producers for the domestic market. Were the
parties free to compete for domestic market share then this would serve to reduce
the price below import parity. In short, the Commission argues, the equitable
proceeds arrangement is the regulatory instrument that allows for monopolistic
pricing, for import parity pricing. The boost that competition will receive in the
absence of this arrangement will be compromised by an industrial structure
capable of underpinning postderegulation monopolization. Accordingly the
Commission recommends that the proposed merger be prohibited.
73. The parties insist that the equitable proceeds arrangement will remain in force.
They argue that if South African producers were to compete for domestic market
share, this process would immediately force the domestic market price down to
the world price – in other words the import parity price would be forced down to
the export parity price. This flies in the face of the objective of tariff protection
itself, which, all agree, will be a feature of the sugar market for as long as the
world price remains artificially depressed. The tariff is intended to raise the
domestic price above the world price – why, ask the parties, maintain a tariff if
the mechanism necessary for holding price above the world price, namely the
equitable proceeds agreement, is eliminated. Moreover the parties point out that
although the DTI is committed to reviewing the regulation of the sugar industry it
has clearly stated that the equitable proceeds arrangement will remain.
74. The DTI’s arguments are confusing and halfbaked. It has insisted that tariff
protection will be retained and, under close questioning from the parties, it has
19
conceded that it does not intend eliminating the equitable proceeds arrangement. 9
It nevertheless continues to insist that it is beginning the process of reviewing the
various regulations governing the industry with the express intention of
strengthening competition. It, in part, rescues its argument by suggesting that,
while the equitable proceeds arrangement will not be terminated in toto,
competition will be introduced by changing the mode of implementation and
management of the various regulatory instruments, specifically including the
equitable proceeds arrangement. It has, however, not been able to elaborate its
intentions leaving the distinct impression that the DTI’s thinking on this matter
has not moved much beyond a general desire to strengthen competition. The DTI
must grasp the following nettle: introducing international competition means
lowering the tariff to a level that gives South African consumers practical
access to sugar imports; while introducing domestic competition of any
significant degree, presupposes a very hard look at the equitable proceeds
arrangement.
75. We are left then with the task of interpreting the DTI’s stance – on the one hand it
wants to strengthen competition and, for that reason, has taken the serious step of
opposing the transaction; on the other hand it disavows any intention to remove
either of the regulatory pillars that compromise competition, although it insists
that it intends to explore the introduction of competitionfriendly mechanisms of
managing the key regulatory pillars. 10
76. We are satisfied that the DTI’s input does demonstrate a clear commitment to
maintaining the tariff, to protecting domestic producers from international
competition. Given, the lack of clarity that pervades the rest of the DTI approach
to regulation and competition, it appears that the best approach is to ask whether
to regulation and competition, it appears that the best approach is to ask whether
the equitable proceeds arrangement is necessary in order to protect South Africa
sugar producers from the world market price? After all tariff protection is not, as
a matter of course, accompanied by the imposition of monopolistic pricing
structures and practices in the domestic market. 11 In other words, we are aware
9 In the evidence presented to us, DTI endorsement of the equitable proceeds arrangement is most
forcefully articulated in its strategy document, ‘A Strategy for the Optimal Development of the South
African Sugar Industry within SACU and SADC Context’ (DTI, March 1999). Note however, that in this
context the DTI’s overriding concern is that a SADC Free Trade Agreement , particularly in the context of
the review of major preferential trade agreements such as Lome, may suddenly boost the supply of sugar on
the South African market thus depressing prices on the national market. Because in an FTA the tariff is no
longer available as a mechanism for protecting national producer interests, alternative mechanisms which
offer a certain degree of protection of sensitive national interests within the common market (in the case of
the equitable proceeds arrangement, in the form of a negotiated share of the market within the free trade
area) come to the fore. Hence the perceived requirement for a separate sugar protocol, one that effectively
reserves the lion’s share of national markets to national producers, within the tarifffree trading area.
10 The change in the mode of determining the tariff, in particular the elimination of an allowance for a
domestic price increase to determine the tariff does bear out the DTI’s undertaking to manage or implement
that regulatory pillar in a more competitionfriendly manner.
11 Quite the contrary. For obvious reasons, in the context of tariff protection that blunts or, as in this case,
20
that the coincidence of tariff protection and a domestic monopoly leads to import
parity pricing; but, in this instance, the monopoly is imposed by regulation, by the
equitable proceeds arrangement. We understand the role of the equitable proceeds
arrangement in supporting import parity or monopoly pricing. But is the equitable
proceeds arrangement needed in order to protect the domestic market from
international competition; is it needed, in other words, to protect the domestic
market from the world price?
77. There are several factors present in the sugar and other commodity markets that,
despite the presence of a tariff, may, in the absence of a market allocating
mechanism, lead to a severe drop in domestic prices. These are, the homogeneity
of the product (in other words, price is the sole basis for competition), the explicit
twotier price structure, and surplus production in the domestic market. The latter
feature – production surplus to domestic requirements despite an unattractive
international market – is, in part, a consequence of certain technical
characteristics of sugar cane that make it difficult for cane growers to respond to
short term changes in demand. In brief, cane has a growing cycle of several years
with a single planting harvested over several seasons. However, the ability to
respond to this undeniable problem by constant excess production, excess, that is,
in relation to domestic demand, is a function of the ability to crosssubsidise
periodic low earnings in the international market from protected earnings
available in the domestic market. In other words, given the present operation of
the equitable proceeds arrangement there is absolutely no incentive to reduce
excess supply. 12 13
excess supply. 12 13
that eliminates international competition, industrial policy specialists would generally insist on intensified
vigilance in maintaining robust competition between domestic producers.
12 This should be clearly appreciated. We repeat: the manner in which the equitable proceeds arrangement
is operated provides no incentive for producers to reduce excess supply. They will always be able to sell
their excess production on the international market at a more or less attractive price; and they will, because
of the operation of the equitable proceeds arrangement (including single channel marketing), always be
able to maintain the domestic market price at import parity. Hence even when prices are low
internationally they will have the cushion of the domestic market and when prices increase internationally
they will earn a windfall. Hence there is no incentive to reduce excess supply – on the contrary there is
every incentive to expand supply ad infinitum while continuing to deny domestic consumers any advantage
from this expansion in output. Whenever domestic regulators question the equitable proceeds arrangement
they will be met with the same refrain: ‘if we divert our excess supply to the local market it will cause a
catastrophic drop in price’ the likelihood is that this excess supply will continue to expand thus rendering
this argument increasingly powerful. But it is a selffulfilling prophecy. However should the responsibility
for allocating the share of output between the domestic market and the international market be taken out of
the hands of the producers, this may blunt the current incentive to simply continue expanding output. If
government or another responsible regulatory agency made it clear that persistent increases in excess
supply would be penalized by placing additional supply on the domestic market this would offer some
prospect of disciplining the producers. This was hinted at by both the Commission and the DTI as a
possible amendment to the application of the equitable proceeds arrangement.
13 Note also that ‘South Africa’s marginal milling costs are 0,7 US c/lb, making it profitable at the margin
even at the current low world market prices to mill cane within existing capacity’. (Submission by Merger
Parties to the Competition Commission, Annexure E – ‘Report Assessing the Transaction with Respect to
Competitive Conditions’ p11) Our understanding is that South Africa’s competitive position will have
21
78. In the wake of the elimination of the equitable proceeds arrangement there would
be an immediate incentive for each producer to divert product from the
international market to the relatively lucrative domestic market. This would have
no impact on the international price, that is, it would not result in an increase in
the international price, but it would immediately depress the domestic price. The
refiners, faced with a drop in the domestic price and freed from the strictures of
the equitable proceeds arrangement, would offer a lower price to the growers.
The fall in price would be arrested by the inevitable reduction in capacity caused
by the exit from the market of the least efficient growers and millers. 14
79. There can be no doubt then that eliminating the equitable proceeds arrangement
would alter the face of the sugar industry. Even, changing the mode of
implementation of the agreement along the lines suggested above would have a
considerable impact. But these are nevertheless conceivable options and are
consistent with the objective of reserving the South African market for domestic
producers, with, in other words, the purpose of the tariff. Faced with the realistic
prospect of European and EU induced distortions extending into the foreseeable
future, it is conceivable that government elects to use a tariff in order to reserve
the domestic sugar market for local producers while discontinuing the
arrangement whereby production for the international market is effectively
subsidized by South African consumers. This may, depending on the trajectory of
the world price, be a somewhat smaller industry; the process of restructuring the
industry in this way will likely lead to the exit of certain producers and,
conceivably, to a further process of concentration. However, the merits of
consolidation under that scenario will be evaluated under conditions different to
those prevailing now.
80. The merging parties have not considered this prospect. Their argument essentially
holds that only the two ends of the regulatory spectrum are feasible: no regulation
and a perfectly competitive international market; or the current system in a
domestic market from which competition is all but eradicated. In their refusal to
countenance any alternative to these polarities they are supported by
government’s stated commitment to the equitable proceeds arrangement but are,
nevertheless, undermined by government’s simultaneous commitment to
improved significantly since the compilation of this as a result of further Rand depreciation. While the
international price is undoubtedly depressed below its competitive equilibrium in the deregulated
counterfactual, South Africa’s exceptionally low refining costs ensure that, even in the current price trough,
the international market remains commercially viable.
14 Note that, while (as already suggested) the homogeneity of the product may exacerbate price
competition (there being few other bases for competition), homogeneity may also serve to arrest a price
decline insofar as it lends itself to forms of cooperation generally referred to as ‘price leadership’ or
‘conscious parallelism’ that will fall short of fullblown cartelisation and, in any event, may be difficult to
detect but that will nevertheless be effective in holding the actual price above the competitive price. The
merger would certainly facilitate this type of price formation, although we have little doubt that even the
present structure of the market would lend itself to this conduct.
22
introduce greater level of competition into the industry. Implicitly they assume
that government would not contemplate a step that would result in the
restructuring of an industry as important as the sugar industry. But stranger things
have happened as trade policies and technologies have changed. In the context of
further rapid globalization and the introduction of new technologies, including
agrobased technologies, we cannot dismiss a future in which the domestic and
international sugar industry develops along lines distinct from those that prevail
currently. It is not for competition authorities to secondguess future trade and
industrial policy by permitting the development of an industrial structure that
would render attempts at greater liberalization a nullity in an important domestic
market, the more so when trade and industrial policies are, in general,
increasingly directed at strengthening competition in the domestic market. Bear
in mind that the consequences for the industrial structure of permitting this merger
are well nigh irreversible.
81. The Commission has urged a similar view upon us. It has argued that the
responsibility of the competition authorities is simply to defend a more
competitive industrial structure against a merger that provides for a possible
exercise of market power in the industry. The Commission’s view is essentially
that the introduction of regulation that diminishes competition is the prerogative
of the executive and legislature. While this regulation may, in particular
circumstances, be laudable, and, in any event, is beyond the reach of the
competition authorities, the latter should still remain alert to the power, actual or
potential, of private regulation of markets. While regulation in the sugar industry
potential, of private regulation of markets. While regulation in the sugar industry
is farreaching, government has stopped short of actually licensing participation in
the industry. 15 Entry and exit is not subject to the decision of a licensing
authority, so that even within the current framework the possibility of a number of
competing participants is clearly countenanced. This has undoubtedly been
compromised by the imposition of regulations that diminish the prospect of
competitive outcomes. However these regulations do not preclude the possibility
of maintaining a competitive structure. The Commission effectively urges us to
secure the latter, albeit that the competition authorities have, given the regulations
in force, limited power to secure more competitive outcomes.
82. The merging parties, on the other hand, insist that should not adopt a formalistic,
blinkered approach to our task, one that is narrowly focused on competition to the
exclusion of the environment within which competition plays itself out. We are,
they argue, adjudicating competition in the real world and, where that real world
is characterized by a regulatory framework that impacts on the level of
competition, then our decisions must reflect that reality.
15 Our understanding is that, until relatively recently, the planting of cane and the establishment of new
mills was subject to certain licensing requirements. However in order to permit greater freedom of entry
these provisions were scrapped by Sugar Industry Agreement of 1994. (see Board on Tariffs and Trade –
‘Revision of the Tariff Dispensation and Maximum Price Dispensation for Sugar’ Report No. 4039, June
2000).
23
83. While we broadly concur with the approach taken by the parties, it leads us to a
conclusion diametrically opposed to that suggested by them. If we are to evaluate
the future of competition in a real world that includes regulation, then so too are
we obliged to take a view on the future of regulation in that real world. As
already indicated the parties’ conclusions are implicitly rooted in the view that
there are certain given, immutable parameters in the regulatory framework.
Experience shows otherwise. The interplay of new technologies, trade and
investment liberalization and regulatory reform has seen entire industries re
invent themselves or relocate or, even, disappear. The agricultural sector is
certainly not immune from the pressure emanating from new technologies and
trade reform. Timehonoured modes of regulation are, in consequence, being
called into question. Under these fluid circumstances it would be a brave or, more
likely, foolish competition regulator that predicated its decisions on the claimed
permanence of a given regulatory structure. There are credible scenarios for the
sugar industry in which regulatory reform may promote competition in domestic
markets despite the gross distortions in the surrounding global market. Moreover,
this scenario seems to reflect most accurately the reality of South Africa’s
commitment to introducing greater competition in the domestic economy, and the
continued commitment of the EU and the US to closed agricultural markets and
farmer support programs. In this scenario the industrial structure will matter and
this potential is an important consideration in our decision to prohibit this
transaction.
84. Our Act obliges us to consider whether or not a merger ‘is likely to substantially
84. Our Act obliges us to consider whether or not a merger ‘is likely to substantially
prevent or lessen competition’. In prohibiting this transaction are we meeting that
standard? As indicated there is evidence of nonprice competition. In a
competitive market it would not be regarded as significant, however, in this
market it is all the competition that exists and this must influence the application
of our standard. Furthermore, there is a strong suggestion of cooperation – as,
for example, in the allocation of the domestic market by product and region – that
extends beyond that necessarily implied by the regulatory arrangements in force.
The merger will consolidate the concentrations created by these allocations and
this too has been considered in the decision to prohibit. Above all, though, is the
potential for competition. We have explained our stance in respect of potential
competition and we are satisfied that it complies with the standards established by
the Act – competition analysis, and particularly merger analysis is always
concerned with the construction of plausible counterfactuals. In the counterfactual
developed here, a counterfactual that accords with the overall trajectory of
deregulation, while it may be difficult, given the low baseline, to assert with
confidence that competition will be ‘ substantially lessened’, we are satisfied that
potential competition will be ‘prevented’ by this merger. Accordingly it falls to
be prohibited.
24
85. The Act requires that we consider a number of factors that may ameliorate the
exercise of market power postmerger. The Commission and the merger parties
have considered the range of evaluation criteria listed in Section 16(2) of the Act.
We refer to two that, on the face of it, may have influenced the outcome of this
evaluation:
86. First, with respect to ‘the ease of entry into the market’ , the Commission points
out that there has been no new entrant for the past 20 years – indeed consolidation
rather than new entry has been the norm. It believes that there will be no new
entry in the foreseeable future. 16 The parties concur and point out that access to
cane is a substantial impediment to new entry. 17 We, too, do not believe that the
dim, even absent, prospect of new entry will constrain the exercise of market
power. It appears that the SADC protocol will allow new entry from our
neighbouring countries but this will, as in the Swaziland case, be regulated by
quota arrangements.
87. The only prospect of a new entrant – and given that this will be entry via an
acquisition it does not constitute new capacity or new ‘entry’ as such – is if TSB
is purchased by any firm other than THS or Illovo, the two incumbents. TSB
avers that it had, some years back, discussed a possible sale to Tate and Lyle, the
British sugar multinational, but this came to nothing. A local empowerment
initiative, Tswelopele Sugar Distributors, has expressed some interest in
purchasing TSB but this too has come to nought. We note, however, that
HL&H’s Chairman, in response to Tswelopele’s expressed interest in the sale of
TSB, had specifically refused to countenance alternative offers while talks with
THS were in progress. Hence the possibility of another buyer may now be
canvassed afresh.
canvassed afresh.
88. A senior representative of Rembrandt, TSB’s ultimate controlling shareholder,
informed the Tribunal that, in the event that we prohibited the transaction,
Rembrandt would, in preference to seeking a new buyer, consider ‘harvesting’ its
asset, reaping what returns it could from its existing investment but making no
new investment. This is, of course, the prerogative of TSB’s shareholder to
whom this may represent the most commercially attractive alternative. However,
although we accept, that sugar is a volatile market, and that the international price
has plumbed new depths, we cannot accept that there are not potential buyers for
a firm whose product is protected from international competition, has a
guaranteed share of the domestic market, and can sell everything else produced in
the international market. We should note, moreover, that it is common cause that
16 Note, again although the parties at times appear to treat the import question under the relevant market
analysis and at other times under new entry, conceptually the treatment is, for purposes of this enquiry,
identical and we have elected to deal with it under the relevant market analysis
17 Note that the Tribunal was told that there is significant potential for planting new cane in (irrigationfed)
Mpumulanga. There appears to be no sound reason why THS, given its desire for irrigationfed cane,
should not make the investment necessary to enter that area of the country. We return to this below.
25
this is a technologically sophisticated, well managed firm with access to
particularly attractive, irrigation fed, cane fields. Our reading of this transaction
is that Rembrandt, a company increasingly identified with highend luxury good
markets, is exiting a market for which it, by its own admission, has no further
appetite. It is going through a major restructuring and TSB has no place in that
new structure. Moreover, Rembrandt, in common with other leading
multinationals, is not the sort of company that remains forever in national markets
in which it is destined to occupy, at best, third place. For these reasons, and, we
note with interest, because, of ‘deregulation’, Rembrandt is exiting. We can,
given the market power that will accrue as a result of the transaction, understand
that THS will be willing to offer a premium over other potential purchasers. But
we cannot believe that there are no other potential buyers on the horizon.
89. The merger parties have asked us to consider the existence of ‘ countervailing
power’ in the market, in particular to consider the size and power of their
customers and their inability to exercise market power against these purchasers of
their product. On the face of it this is a credible argument by the parties.
90. A relatively small number of retail and wholesale groups and industrial
companies account for a very large share of the parties’ sales. According to the
parties very little sugar, if any at all, is sold directly by the miller or refiner to the
end consumer. 60% of the domestic demand for sugar is sold to the wholesale and
retail trade, 30% of domestic demand to industrialists for further processing as an
ingredient and 10% of domestic demand for repacking in neighbouring states.
91. Furthermore, approximately 60% of the wholesale/retail sector is represented by 6
91. Furthermore, approximately 60% of the wholesale/retail sector is represented by 6
customers, 70% of the industrial sector by 5 customers and 90% of the repacking
business by 3 customers, which means that 14 customers represent the buying
power of approximately 70% of demand.
92. However, in spite of this concentrated buying power, industrial customers cannot
negotiate with millers for rebates. SASA interposes itself as the negotiating forum
between the customer and the millers by determining a fixed rebate per ton of
sugar supplied by its member producers or distributors recognized by it. This
arrangement favours the millers because they share any rebates granted by SASA
with the growers in the same ratio as revenues. SASA has, therefore, effectively
neutralized rebates as a potential source of competition between millers.
93. This goes a long way towards explaining why the largest and apparently most
powerful of their industrial customers – Coca Cola – participated in this enquiry
by lodging an objection to the transaction. While we did not always agree with
Coca Cola’s argument, the absence of countervailing power, even in the hands of
a company that accounts for a significant share of all sugar consumption in this
country, is striking. A large proportion of the rebate that Coca Cola enjoys in
26
common with all other industrial purchasers, is subject to a loyalty requirement.
Coca Cola could not persuade the sugar producers to participate in a tender for its
business. And, on an occasion, when Coca Cola was obliged, for technical
reasons, to shift part of its custom from THS to Illovo, the former displayed a
marked lack of urgency in winning back this business.
94. The wholesalers and large retail groups have also informed the Competition
Commission that they are unable to negotiate price with sugar suppliers. This is in
contrast with other agricultural products such as dairy products, meat and
vegetables where quantity discounts are granted. This too suggests the absence of
countervailing power.
95. We find, then, that this transaction will result in the merged firm having market
power, and that it is likely to substantially prevent or lessen competition in the
relevant market, namely the South African market for refined white sugar.
Technological, efficiency or other procompetitive gain
96. Because we have found that the transaction is likely to ‘substantially prevent or
lessen competition’ we are required, in terms of Section 16(1)(a)(i), to determine
whether there are any offsetting technological, efficiency or other procompetitive
gains attributable to the merger and which would not occur were the merger to be
prohibited.
97. Note that, in balancing a lessening of competition with procompetitive gains, the
only limit drawn by the Act is that the claimed efficiencies, in addition to
offsetting the effects of a lessening of competition, should be attributable to the
merger and that, in the absence of the merger, would not have occurred.
However, despite the absence of a clear set of criteria in effecting the trade off
between a lessening of competition, on the one hand, and procompetitive gains,
between a lessening of competition, on the one hand, and procompetitive gains,
on the other, we, nevertheless, hold that an accurate reading of the Act requires us
to set a high standard for establishing possible countervailing efficiency gains. 18
98. What, after all, are these ‘effects’ arising from a prevention of competition and for
which the efficiency gains must compensate? They are precisely the boost that
competition gives to efficiency. The objectives of the Act require us ‘to promote
18 Clause 16(2)(a)(i) of the Competition Act – the efficiency defence in mergers – is effectively identical
to Subsection 96(1) of the Canadian Competition Act. The problems of balancing efficiency gains and a
substantial lessening of competition is discussed by the Canadian Tribunal in The Matter of the Acquisition
by Hillsdown Holdings (Canada) Ltd of 56% of the common shares of Canada Packers Inc (CT91/1). The
Tribunal essentially also argues for a high standard to be set for successful efficiency defences in the case
of anticompetitive mergers. In particular the Canadian Tribunal holds that a wide view must be taken of
the anticompetitive consequences of the merger, including allocative efficiencies and distributional effects
(that is, distribution from producers to consumers) thereby raising the hurdle that must be cleared by any
claim to a countervailing efficiency.
27
and maintain competition in the Republic in order …to promote the efficiency…
of the economy’. Competition is, in other words, not deemed neutral with respect
to efficiency – on the contrary the Act seeks to promote competition precisely
because it is efficiency enhancing. Conversely, the Act presumes that a lessening
of competition diminishes efficiency. The standard in establishing an efficiency
gain that outweighs the efficiency loss generally presumed to flow from a ‘bad’
merger must accordingly be set very high indeed – an efficiency gain has to
offset, it must compensate for, the efficiency that is sacrificed by the lessening of
competition.19
99. Moreover, we concur with the Commission that the onus in demonstrating the
efficiency gains rests with the merger parties – it is for the Commission to
establish a lessening of competition; it is for the parties to establish that the
efficiencies sacrificed by an anticompetitive merger are countervailed by
efficiency gains. 20
100.The skeptical stance adopted by the US Courts towards efficiency defences in
merger evaluation is evident in the following extract from the judgment in United
States v Philadelphia National Bank 21:
101.‘We are clear, however, that a merger the effect of which may be substantially to
lessen competition is not saved because, on some ultimate reckoning of social or
economic debits and credits, it may be deemed beneficial. A value choice of such
magnitude is beyond the ordinary limits of judicial competence, and in any event
has been made for us already, by Congress when it enacted the amended Section
7. Congress determined to preserve our traditionally competitive economy. It
therefore proscribed anticompetitive mergers, the benign and malignant alike,
fully aware, we must assume, that some price might have to be paid.’
fully aware, we must assume, that some price might have to be paid.’
102.Our Act does not allow us the latitude assumed by the US Courts. The
Competition Act clearly contemplates that there may be a price – measured in
19 The Act uses the terms “greater than” and “offset” which imply that the efficiency gains must outweigh
the anticompetitive effects likely to result from the merger. According to the Concise Oxford Dictionary
the term “greater than” implies that it must be considerably above average and the term “offset” means to
counterbalance or to compensate for. Therefore the efficiency gains must be considerably more than the
anticompetitive effect to neutralize the diminution of efficiency caused by an anticompetitive merger.
20 The Canadian Tribunal, in The Matter of the Acquisition by Hillsdown Holdings (Canada) Ltd of 56%
of the common shares of Canada Packers Inc (CT91/1) has this to say on the question of burden of proof:
‘Counsel for the respondents (the merger parties) seemed to argue that once they had established the
claimed efficiency grounds on a prima facie basis, that was sufficient to transfer the onus of proving them
to the Director (the competition authority). He argued that if on the balance of probabilities there was
uncertainty, the doubt should be resolved in the respondents’ favour. The Tribunal does not accept that
argument. The respondents have the onus of proving the existence of the efficiencies claimed, or the
likelihood of their existence when the merger has not been consummated, on the balance of probabilities in
the normal way.’ (p84)
21 374 U.S. 321, 371 (1963)
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foregone efficiency – too great to pay for prohibiting an anticompetitive merger.
But that price must be very great indeed. At very least, payment, as it were, must
be extracted in the same coin: the economic efficiency sacrificed by permitting an
anticompetitive merger must be compensated, or rather ‘overcompensated’, by
proefficiency gains expressed in the same terms, in economic welfare terms
rather than purely commercial terms. Many of the gains usually identified as
‘procompetitive’ or ‘efficiency enhancing’ generally represent an assessment of
the commercial merit of the transaction. This falls beyond the scope of our
competence. Our task is not to secondguess the commercial wisdom of the
deal.22 Nor should the efficiency defence be invoked simply to place the
acquiring company on a commercial footing preferable to its current situation. An
efficiency defence that simply equates to enhancing the commercial prospect of a
successful firm is not an efficiency gain as contemplated in the Act, it cannot, in
other words, countervail the antiefficiency consequences presumed to flow from
a merger that substantially lessens competition. 23
103.An efficiency gain contemplated in the Act, one that may compensate for the
anticompetitive consequences of a merger that otherwise falls foul of the act, is
one that, for example, evidences new products or processes that will flow from
the merger of the two companies, or that identifies new markets that will be
penetrated in consequence of the merger, markets that neither firm on their own
would have been capable of entering, or that significantly enhances the intensity
with which productive capacity is utilised. This is, by no means, intended to be
an exhaustive listing of possible efficiency gains – it is merely intended to
demonstrate that much that is presented as a countervailing efficiency gain falls
outside of this ambit and firmly into the ambit of firm level commercial gains.
104.The merging firms start their efficiency defence from a particularly high plateau.
THS, in particular, is a worldclass, leading edge firm, in its own words, ‘a low
cost producer in international terms, thus being well positioned if world protection
should fall away’. This is evidenced by the fact that it has lowered, in real terms,
its production costs per ton of sugar every year since 1992. Indeed, the costs of
refining sugar in South Africa are the lowest in the world. Granted this has much
to do with the high levels of capacity utilization achieved, in large part, because of
the particular nature of the cane harvesting cycle, but clearly it is also attributable
to the exceptional competence of South Africa’s leading refiners. THS is hard put
to establish that it requires the merger in order to boost its efficiency – its record
suggests that it already performs to the very highest level of efficiency.
22 Were we to do this we would, of course, be obliged to take account of the strong evidence that suggests
that many mergers are not, in fact, commercially successful.
23 The converse is, by way of analogy, also provided for in the Act. There is a particular provision in
merger evaluation criteria designed to deal with commercial failure – the ‘failing firm’ defence provided
for in Section 16(2)(viii). However, it is there not in order to save a firm from its own commercial folly or
bad fortune – it is there because failure, and the consequent elimination of capacity that flows from it, may
diminish competition.
29
105.Nor is THS’s efficiency simply attributable to the quality of South Africa’s
natural resources. The parties aver that ‘THG is recognized as being one of the
most technically advanced sugar companies in the world’. THS technology is
widely diffused both in this country – one of the TSB mills is a THG design – and
abroad. There is no claim that its ability to produce cuttingedge technology is in
any manner strengthened by the merger. Although TSB, for its part, is clearly a
wellmanaged firm, with some technical expertise and experience of its own – its
experience in irrigation technology and management is cited – it adds little, if
anything, to THS’s technological armoury. To the extent that TSB wishes to
benefit from THS’s superior technological expertise, it will find this available on
the open market. Nor should it be assumed that an R&D joint venture between the
companies would fall foul of the Act – a full merger may not be necessary for
supporting technological development. It appears that SASA already plays a role
in developing and diffusing efficiencyenhancing technologies across the
industry, including amongst SADC producers.
106.For these and other reasons both THS and TSB are cost competitive producers.
There will be no integration of plant and little rationalization of plant loads and
throughput. Consequently the scale and other production efficiencies frequently
claimed in transactions of this nature are absent. The Commission in fact points
out that no significant production efficiencies with respect to the core business of
milling and refining have been claimed. 24
107.From THS’s perspective it appears that the most important efficiency rationale
for the transaction derives from its current reliance upon rainfed cane resources.
By contrast, TSB’s cane supply is irrigationfed. We have no cause to dispute the
By contrast, TSB’s cane supply is irrigationfed. We have no cause to dispute the
claim that greater diversification of THS’s source of cane supply would lower the
relatively greater risk that, the parties aver, attaches to the company’s earnings.
However, we are compelled to pose an heretical question: if THS so urgently
requires diversified cane resources why does it not invest in a new mill suitably
proximate to the irrigationfed cane resources and compete for the supply of that
cane? We will no doubt be referred to the equitable proceeds arrangement, to the
sanctity of the ‘partnership’ between the millers and growers which, we will be
assured, underpins the stability of the industry and is as much in the interest of the
relatively atomized growers as it is of the monopsonistic miller. We are,
however, not inclined to accept these arguments at face value. In the Tribunal’s
short life, it has become apparent that, in diverse corners of the agricultural sector,
the processors’ claim of mutuality of interest between themselves and the
24 There are highly regarded authorities that would limit an efficiency defence to this category of factors.
In the Canadian Tribunal’s survey of views on efficiency defences it notes: ‘Areeda and Turner would limit
the defence to certain certain types of efficiencies (i.e. plant size and plant specialization where there is
product complementarity) which they feel are most likely to result in significant cost savings. Former FTC
Chairman Miller similarly would recognize an efficiencies defence, but only for efficiencies related to
economies of scale.’ (see reference in footnote 11)
30
growers, is frequently not shared by the growers themselves. 25 As noted above,
the Sugar Agreement of 1994 scrapped licensing requirements regulating the
planting of cane and the establishment of new mills. This can only have been
done to attract new investment in growing and milling. 26 This may be the pro
competitive alternative to a merger that simultaneously addresses THS’s
diversification requirements.
108.Note that the parties also submitted transport cost savings as representing
efficiency gains from the transaction. Since the revised Sugar Agreement came
into effect in June 2000 sugar is sold on an exmill basis instead of freeonrail
Durban, which, according to the DTI, was introduced precisely to allow for
competition in transport cost. The efficiencies will be realized by THS
transporting its sugar to the Northern parts of the country from the Malelane Mills
rather than from their Durban Mills. The efficiency gain, therefore, only relates to
transport in the northern parts of the country and not the country as a whole.
109.Balanced against the above efficiencies is the anticompetitive effect of
eliminating the second largest player in direct sugar sales that is also the main
supplier to the Northern half of the country and a competitor in the Western Cape.
Moreover, if we keep in mind that Illovo, the remaining miller, is focused on the
industrial market and is not regarded as a competitor in the direct market the net
effect of the merger is that there remains one player in each of the two product
markets. Furthermore, the competitor that is being eliminated is projected by THS
to grow its sugar production by 2% in the year 2001.
110.We, accordingly, find that the technological, efficiency or other pro
competitive gains arising from the merger will not offset the negative impact
of the transaction on competition.
of the transaction on competition.
Public Interest
111.We have determined that the merger will prevent competition, certainly it will
forestall any attempt by the authorities to introduce greater competition in a
deregulated or partly deregulated market. We have also found that the
technological, efficiency or other procompetitive gains arising from the
transaction will not offset the negative impact of the transaction on competition.
We are finally required to examine whether or not the merger can be justified on
substantial public interest grounds. Section 16(3) specifies that the public interest
evaluation must consider the effect of the transaction on a particular industrial
25 See Jakobus JP Bezuidenhout & Another v Patensie Sitrus Beherend Ltd (66/IR/May00) and South
African Raisins (Pty) Ltd and Johannes Petrus Slabber v SAD Holdings Ltd and SAD Vine Fruit (Pty) Ltd
(04/IR/Oct99)
26 Note that the parties acknowledge that ‘there is substantial opportunity for increasing cane production in
Mpumalanga’.
31
sector or region, on employment, on the ability of small businesses or firms
controlled or owned by historically disadvantaged persons to become competitive,
and on the ability of national firms to compete in international markets. The
parties have entered a public interest defence under each of these categories.
112.The transaction will give rise to approximately 165 redundancies, all at middle to
senior management level and mostly employed at head office. The parties aver
that the ‘merged firm, by virtue of its economies of scale and the opportunities
available to it, will be in a position to expand its operations and thereby offer
additional employment opportunities with a potential for the creation of over 3000
additional jobs’. This latter appears to derive from the projected sale of the TSB
cane plantations to small farmers.
113.The parties claim that the transaction will impact positively on the Mpumalanga
region as well on the Southern African region. Mpumulanga, it is averred, will
benefit from THS’s undertaking to continue procuring imputs for the
Mpumalanga operations from local suppliers. It also intends to sell a portion of
TSB’s 8000 hectares of cane land to smallscale growers from historically
disadvantaged communities. However, these benefits are not sufficiently
substantial to countervail the negative impact of the merger on competition, nor is
it at all clear that they will not occur in the absence of the merger. While the
sophisticated South African sugar industry undoubtedly impacts positively on the
development of the sector in Southern Africa, the merger will have no impact, one
way or another, on the ability of South African firms to play a positive role in the
region.
114.Finally, the parties argue that the merger will enhance the ability of the firm to
compete on international markets. Again, we stress, the parties are making this
compete on international markets. Again, we stress, the parties are making this
argument from a very high plateau. The South African sugar industry is a low
cost producer well set up to compete successfully on international markets.
Moreover, the argument that the transaction will boost the cost competitiveness of
the merged entity is rooted in the notion that South African firms are small by
international standards and that the merger will enhance scale economies. These
arguments are not borne out by the data. Illovo and THS are sizable enterprises
by world standards. TSB is significantly smaller than its two fellow South
African millers and, obviously, than the large scale international firms. However,
as the Commission points out, TSB is larger than the second largest European
miller and refiner and larger than the third largest Australian refiner in terms of
refining capacity. It is also noteworthy that TSB, by a significant factor the
smallest of the South African companies, is generally recognized as the lowest
cost producer in South Africa. Clearly, and not surprisingly, productive
efficiencies have little to do with the size of the firm. Cost competitiveness may
be considerably influenced by the size of the productive units, however the
merger has no direct influence on this there being no consolidation of any
32
productive capacity.
115.In general we are skeptical of arguments that insist that a precondition for
successful international competition is domination of the domestic market. In
select instances scale economies and rationalization of production units may
support this argument. However, to the extent that broad generalizations assist
merger analysis, we incline to the view that the most aggressive and successful
international competitors are those who face robust competition at home.
116.The Tribunal finds that the public interest factors cited do not countervail
the substantial lessening and prevention of competition caused by the
proposed transaction.
D.H. Lewis
Concurring: M. G. Holden and C. Qunta
27 November 2000
33