COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 17/AM/Mar01
In the matter of
FOOD AND ALLIED WORKERS UNION Applicant
And
THE COMPETITION COMMISSION First Respondent
McCAIN FOODS (SA) (PTY) LTD Second Respondent
HEINZ FROZEN FOODS (PTY) LTD
Represented by HEINZ SA (PTY) LTD Third Respondent
REASONS
APPROVAL
1. On 11 April 2001 we approved the intermediate merger between McCain Foods
(SA) (Pty) Limited (“McCain”) and Heinz Frozen Foods (Pty) Limited (“Heinz”)
subject to conditions as listed in our order at the end of this decision.
2. This merger was approved by the Competition Commission (“Commission”)
subject to conditions in terms of section 14(1)(b)(ii) of the Act. The Food and
Allied Workers Union (“FAWU”) has requested us to consider the Commission’s
approval of this merger in terms of section 16(1)(b) of the Act. Our approval of
the merger effectively confirms the decision of the Competition Commission.
The reasons for our decision follow.
BACKGROUND
The Merger Transaction
3. McCain is acquiring the entire issued share capital in Heinz. Heinz is controlled
by Heinz South Africa (Pty) Limited who holds 65% of the issued share capital in
Heinz; Sentraalwes Limited owns the balance of the shares. Heinz South Africa
(Pty) Limited is a subsidiary of HJ Heinz Company which is incorporated in the
US. Heinz is involved in the procurement, processing and sale of frozen potato
chips to the retail and catering industries in South Africa. As part of the
transaction all employees of Heinz will continue to be employed on the existing
terms and conditions of employment. This is the transaction presently under
consideration.
4. McCain is a wholly owned subsidiary of McCain Foods based in Canada. Its
business in South Africa is in the procurement, processing and sale of frozen
vegetables and potato products to the retail and catering industries. McCain
entered this market last year through an acquisition of the vegetable and potato
processing businesses of Irvin and Johnson (“I&J”). This latter transaction, an
intermediate merger, was unconditionally approved by the Commission. For
reasons that will become apparent below, it is important to record that in its
evaluation of the McCain/I&J transaction the Commission was not made aware of
potential consequential employment losses, a public interest aspect that, in terms
of Section 12A(3)(b), must be considered in the process of merger regulation. In
notifying a transaction it is incumbent upon the parties to disclose any potential
employment losses.
The Decision of the Competition Commission
5. The merger presently under consideration was filed with the Commission in
December 2000. This is an intermediate merger and, as such, in terms of Section
14(b), the Commission is empowered to prohibit the transaction or to approve it,
conditionally or unconditionally. FAWU, the Union representative of a great
many of the employees of both parties, participated in the proceedings before the
Commission. FAWU submitted that the merger should be prohibited on the
Commission. FAWU submitted that the merger should be prohibited on the
grounds that it will lead to a reduction in competition and will also have a
detrimental effect on public interest.
6. The Commission did not accept the arguments submitted by FAWU and
accordingly approved the transaction. It did however attach a condition to its
approval, viz., it required that the merged entity restrict the employment loss
consequential upon the transaction to no more than seven employees and that for
the next eighteen months it submit a monthly report to the Commission detailing
its employment totals.
7. FAWU has, in terms of Section 16(1)(b) of the Act, asked the Tribunal to
consider the Commission’s decision to approve the merger. In line with the
Union’s submissions to the initial merger review procedure it presents two
grounds for consideration. Firstly, it argues that the merger will lessen
competition. It argues that the Commission has erred by defining the relevant
market too broadly. Second, it presents public interest grounds for consideration.
In particular it argues that the employment loss consequent upon the transaction
justifies prohibition of the transaction.
THE REASONS FOR OUR DECISION
The Impact of the Transaction on Competition
8. FAWU argues that the Commission erred in its identification of the relevant
market. By specifying the market too broadly the market power that would
accrue to the merged entity had been significantly underestimated.
9. The parties have contended for a relevant market that includes frozen potato
products, freshcut potato products and table potatoes. The Commission has, in
its analysis, adopted the same definition of the relevant market. In its report the
Commission considered that the relevant market could arguably be defined as
comprising only frozen and freshcut potatoes. It appears however that it was not
persuaded to exclude fresh potatoes from the market by the evidence before it
because its analysis is based on the wider relevant market that includes fresh table
potatoes. Fresh table potatoes refers to washed or unwashed potatoes that are
unpeeled and uncut. The Union, by contrast, contended for a narrower definition
of the relevant market. It argued that the relevant market is the market for the sale
of processed frozen potato products to the retail and food services industries in
South Africa. By this definition, argued the Union, the merged entity would
enjoy considerable market power. Hence, averred the Union, the transaction
should have been impugned on competition grounds.
10. It is common cause that on the Union’s definition the market share of McCain
would increase from its current 50% to approximately 75%. Indeed, in the
McCain board papers at which the transaction was discussed a combined share of
McCain board papers at which the transaction was discussed a combined share of
85% of the frozen potato products market is mentioned. While market share on
its own is not determinative of the outcome of a merger evaluation it is indicative
of possible competition concerns and this would represent an extremely high
market share indeed.
11. Conversely, if the relevant market contended for by the Commission is accepted –
comprising both frozen potato products, freshcut potato products and table
potatoes – then the premerger market share of both parties and the postmerger
share of the merged entity decreases significantly to 11.11% relative to the share
that emerges on the Union’s definition.
12. As in relevant market definition generally, the outcome centers around evidence
regarding the degree of substitutability between the products in the respective
market segments. In support of its view the Union contends that frozen and fresh
cut potato products are not substitutable. The Commission and the merger parties
hold otherwise.
13. Where the sale of these products to the food services industry is concerned
compelling evidence of substitutability between frozen and freshcut potato
products, on the one hand, and table potatoes, on the other, has been presented.
The principal difference between frozen and freshcut potato products is the
longer shelf life of approximately six months enjoyed by the frozencut potatoes.
The main difference between freshcut and fresh table potatoes is that the fresh
cut potato products are always washed, peeled, sliced, have whitening agents
added to them, chilled and packed while table potatoes are uncut and unpeeled.
14. The Commission presented evidence that some fast food outlets use fresh table
potatoes exclusively in the manufacture of their chips, for example, the Steers
franchise, one of the largest sellers of chips in South Africa, which uses table
potatoes only. In interviews conducted by the Commission customers and
competitors of the merging parties in this industry expressed the view that were
prices of frozen and freshcut potato products to rise significantly the customers
could switch to table potatoes.
15. The merging parties presented evidence to the Commission that the use by
customers in this industry of frozen and freshcut potato products is varied. For
example, almost 80% of the chips sold by Ocean Basket, a fast food outlet, are
sourced from freshcut potatoes while the figure is approximately 40% for Spur
Steak Ranches. Furthermore, it appears that these proportions – that is, of frozen
to fresh – is not static. The price of potatoes naturally fluctuates seasonally and,
although we were not presented with rigorous data to this effect, the inference is
although we were not presented with rigorous data to this effect, the inference is
that when the price of potatoes increases, large customers move to frozen product.
16. There is evidence that customers can and have switched between frozen and
freshcut potato products. The Commission’s investigations revealed, for
example, that Nando’s, a large player in the food services market, used freshcut
potatoes for its chips until approximately three years ago when it switched to
frozen potato products. However, the investigations also revealed that substitution
from frozen to freshcut potatoes is easier than substitution from freshcut potato
to frozen potato products. Even though the cooking equipment remains the same
the customer making the switch from freshcut potato to frozen potato products
has to acquire freezers and increase its storage capacity. While fresh potatoes are
generally delivered everyday, frozen potato products are delivered about twice a
week. Customers wishing to switch from frozen potatoes to fresh potatoes face
none of these difficulties.
17. Generally speaking it would seem that while there is evidence that it is open to a
customer to switch between the two potato products, switching from freshcut
potato to frozen products is more onerous.
18. It should also be noted that post the merger there will still be three active
competitors in the market for frozen potato products. It appears that as a result of
the uncertainty surrounding this merger Heinz has been losing market share to
Oceana, a relatively smaller competitor in the frozen potato product market.
Oceana principally acts as a supplier to McDonalds in South Africa but has been
recently increasing its market share at the expense of Heinz. As a result Heinz
claims that its revenue has dropped by approximately 20% over the period
December 2000 to March 2001.
19. The parties also aver that there has been a move towards imports in the frozen
vegetables products Heinz SA imports frozen vegetables for Shoprite Checkers
and Wooltru. There is an import tariff of 20% on frozen potato products. The
parties claim that if prices were to rise significantly in SA then their customers
could not only switch to fresh potato products but also to imported potato
products. The parties note that their customers in the retail trade are mainly large
chain stores who could use their leverage to get competitive import prices despite
the tariff.
20. It appears that barriers to entry into the freshcut potato market are very low, the
Commission estimates that about R10 000 can secure a prospective entrant a
small freshcut chip operation. The raw material, potatoes, are readily available in
South Africa. In any event a prospective entrant into the market could
conceivably grow its own potatoes. The manufactured products may then be sold
to the small retailers and caterers who do not have the storage and stockholding
capacity required to use frozen potato products. While the cost of entry into
frozen potato is considerable the parties point out that there have been at least four
new entrants in the past several years, including the merging parties themselves.
Branding appears to play a very limited role in this market. In both frozen and
freshcut potato markets the evidence is that competitive pricing, quality and
efficient service is more important to customers than the brands. The food
services customers buy the potato products for conversion into chips in
accordance with their specification, which they onsell to consumers under their
own brand name.
21. In summary we accept the parties’ arguments that frozen and freshcut potato
products are substitutable for one another in the food services market where
customers seem to shift between the two products quite easily. Substitution is
somewhat less easy in the retail market. It appears that the retail industry, which
sells the products largely unchanged, would prefer the frozen potato products
because of their longer shelf life. However our concerns in this area are
ameliorated by the sheer size of most of the buyers, who are chain stores, and
their consequent countervailing buyer power. The size of these customers would
not only allow them to exert a disciplining influence on the pricing by the
producers but, as is the case with the current arrangement between Heinz SA on
the one hand, and Shoprite Checkers and Wooltru on the other, in the frozen
vegetables market, they would be able to source products from abroad.
22. We therefore conclude that this transaction is not likely to substantially lessen
competition in the relevant market.
The Impact of the Transaction on Employment
23. Section 12A(3) of the Act requires the relevant competition authority to determine
whether or not a merger can be justified on specified public interest grounds. The
public interest grounds specified include the transaction’s impact on employment.
The Union has asked that the merger be prohibited because of its deleterious
impact on employment.
24. The Union’s argument on this point is unusual. It is common cause that the
transaction in question will lead, directly at any rate, to a minimal loss of jobs –
seven jobs in all and then only at the higher, more mobile and reemployable end
of the workforce. Furthermore, the Commission has imposed a condition on its
acceptance of the merger that limits employment loss to these seven positions and
requires the company to report its employment figures to the Commission each
month for the next 18 months. However the Union argues that the full extent of
the job loss arising from the transaction incorporates the 362 retrenchments in
McCain’s frozen vegetable (‘nonpotato’) division.
25. As explained above, McCain acquired its frozen vegetable business from I&J
some 9 months ago. Essentially the Union argues that the transaction presently
under consideration manifests a decision by McCain to move out of the
production of frozen vegetable (nonpotato) products into frozen potato products.
production of frozen vegetable (nonpotato) products into frozen potato products.
It is this decision – concretely manifest in McCain’s decision to purchase the
Heinz potato products business – that accounts for the retrenchment of
approximately onethird of the workforce employed at McCain’s recently
acquired frozen vegetable division.
26.McCain denies the existence of any link between this transaction and
the retrenchments taking place in its frozen vegetable business.
McCain strongly disputes the notion that it intends exiting the frozen
vegetable products market. In support of its contention it points to the
considerable capital investment that it has already made or committed
to since its acquisition of the I&J division. In general it should be
noted that McCain has in the very recent past made a significant
investment in the frozen vegetable market in this country. This
purchase, it is common cause, gives it a very substantial share of the
South Africa frozen vegetable market, a market considerably larger
than the frozen potato products market. This investment complements
McCain’s significant involvement in the procuring, processing and
distribution of frozen vegetables in a great many national and regional
markets across the world. None of these incontrovertible facts accord
with the actions of a party intent upon exiting the market. Moreover
McCain also avers that it did not initiate the process that led to the
purchase of the Heinz assets. On the contrary, it arose as a
consequence of Heinz’s wish to exit an unprofitable business. This
sequence again does not reflect the actions of a party intent upon
exiting one line of business in favour of another. It is clear to us that
McCain’s actions rather evidence the company’s intention of
establishing strong positions in the South Africa markets for both
frozen vegetable products andfrozen potato products.
27.Against this, what evidence does the Union offer for the link it draws
between McCain’s purchase of Heinz’s frozen potato products
business, on the one hand, and the retrenchment of employees at
McCain’s frozen vegetable plants, on the other? It suggests that the
frozen potato products business is more profitable than the frozen
vegetable products business. While this is not specifically denied
(and it does appear to be a faster growing market) it does not follow
that, even if this were so, that it would constitute evidence in support
of the contention that McCain intends exiting the frozen vegetable
of the contention that McCain intends exiting the frozen vegetable
products market, particularly when this is set against persuasive
evidence to the contrary. It should also be noted that the Heinz frozen
potato products business is clearly un.
28. The Union also invites us to infer the link that it seeks to make from McCain’s
decision to retrench approximately onethird of the vegetable products workforce
barely 4 months after concluding the transaction with I&J. The Union contends
that the investigations preceding the purchase – the due diligence must have
revealed overstaffing of the magnitude suggested by the retrenchment. If this was
not so, that is if McCain was not acting on information available to it prior to
consummating the transaction with I&J, then, concludes the Union, its actions can
only reflect a subsequent decision to exit or downscale its involvement in the
vegetable products market in favour of a larger stake in the potato products
market. However, we cannot understand why we should draw this inference
particularly when set against evidence indicative of McCain’s commitment to the
vegetable products market.
29.The Unions are, we believe, entitled to draw a more direct inference.
That is, we understand why it may wish us to infer from the scale and
timing of the retrenchments that McCain had not discharged its
obligation to reveal the employment consequences of its transaction
with I&J. In this case the Commission, would have recourse in terms
of Section 15 of the Act which provides for revocation of a merger
decision made on the basis of false and misleading
information.1McCain strenuously denies that it has misled the
Commission and insists that the necessity for retrenchment was only
revealed after the merger. The true facts would presumably be
revealed on investigation. However, the merger under consideration
would then be that between McCain and I&J and the Commission
would not be obliged to link this merger with the retrenchments in the
frozen vegetable products business. We should add that we refuse to
draw an unfavourable inference from McCain’s assertion that the
Union’s action is motivated by its desire to improve its bargaining
position in the severance deal under discussion in respect of the
vegetable products retrenchment.
30. Finally, we should note that the employment consequences of prohibiting the
transaction are likely to be more severe than the consequences of approving the
transaction. Heinz avers that, were the merger not to go through, it is likely to
close its potato products plant with the loss of all the jobs and this in an area of
the country dependent upon the plant for industrial employment. A glance at the
the country dependent upon the plant for industrial employment. A glance at the
Heinz’s financial statements will verify that this must be considered a real danger.
McCain, for its part, insists that its decision to retrench in its vegetable products
branch will not change in consequence of a decision to prohibit the merger
currently under examination. We accept this because there is, in fact, no evidence
that the retrenchments in the vegetable products plant are linked to the merger in
the potato products business.
1 The Commission appears to believe that McCain has been less than candid. The unusual condition
imposed on the current transaction – viz. the requirement to restrict retrenchments to seven people –
appears to derive from a suspicion on the Commission’s part that it had been duped by McCain in the
previous merger. See transcript pages 423. If the Commission suspects this to be the case one wonders
why they have not revisited the merger to decide whether McCain’s conduct warrants any action on the part
of the Commission.
31. We accordingly conclude that none of the public interest objectives provided for
in the Act, including employment, will be furthered by prohibiting the transaction
between McCain and Heinz.
32. In our view the decision of the Commission is correct and we order that the
merger be approved subject to conditions similar to those imposed by the
Commission. We believe that the previous conduct of the parties in the I&J
merger warrants the conditions imposed by the Commission that the total number
of retrenchments as a result of this merger not exceed seven. Furthermore, as a
cautionary measure we think it is necessary that the parties, on a monthly basis,
supply the Commission with their employment statistics for a period of 18 months
after the date of approval of this merger. We are convinced that in the light of the
retrenchment currently being carried out by McCain, which were not revealed to
the Commission when it considered the I&J merger, the above conditions are
justified.
IT IS THEREFORE ORDERED THAT:
1. the merger between Foods (SA) (Pty) Ltd and Heinz Frozen Foods (Pty) Ltd is
approved subject to the following conditions:
a. that the number of employees retrenched as a result of this merger shall
not exceed seven (7); and
b. McCain Foods (SA) (Pty) Ltd and Heinz Frozen Foods (Pty) Ltd shall, on
a monthly basis, supply the Competition Commission with their post
merger employment statistics for a period of eighteen (18) months from
the date of this order.
2. each party must bear its own costs in this application.
_________________________ 26 April 2001
D.H. Lewis Date
Concurring: P. Maponya; C. Qunta