COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 67/LM/Dec01
In the large merger between:
Iscor Limited
and
Saldanha Steel (Pty) Ltd
_______________________________________________________________
Reasons for decision
_______________________________________________________________
Decision
1. The Industrial Development Corporation of South Africa Limited (‘IDC’)
and Iscor Limited (‘Iscor’) currently own Saldanha Steel (Pty) Ltd (‘
Saldanha’) in equal shares. In terms of this transaction, Iscor seeks to
purchase the IDC’s half share so that Saldanha becomes a wholly owned
subsidiary of Iscor.
2. The merging parties have asked for the merger to be approved
unconditionally. In its recommendation to us the Commission also asked
for unconditional approval, but at the hearing it asked for the merger to be
approved with a condition relating to supply to a downstream customer of
Saldanha’s, Duferco.
3. The Commission and the parties have advanced different reasons for why
the merger should be approved.
4. The merging parties argue that as the merger amounts to a change from
joint control to sole control, there is no lessening of competition. Hence the
merger should be regarded as neutral in substance with no effect on the
competitive fabric of the market.
5. The Commission does not examine this argument in any depth in its
recommendation to us, but finds that the two firms were never competitors
in South Africa as Saldanha only supplied offshore customers. Since the
1
Commission defines the market as a national one, the two firms were not
competitors.
6. We find neither theory entirely satisfactory for the reasons we outline
below. Nevertheless we have decided to approve the merger with
conditions. Briefly our basis for approving the merger are
1. Saldanha is a failing firm within the meaning of section 12A (2) (g)
of the Act
2. Prohibiting the merger would in all probability lead to the closure of
the Saldanha plant an outcome that cannot be justified on
substantial public interest grounds because of the adverse effect on
the Saldanha region.
3. The horizontal anticompetitive effects of the merger are hard to
quantify. Firstly, because Saldanha never competed in the local
market and secondly because of its disadvantageous location. The
vertical anticompetitive effects can be cured by the imposition of
conditions.
Background
7. Saldanha Bay according to one popular theory was named in error 1. The
explorer in whose honour it was named had never been to the bay. If that
is so, it was not the last miscalculation to plague the area.
8. The first record of a European explorer arriving at Saldanha was that of an
English explorer in 1612. Yet although the bay’s potential was known of
since that time, little development took place until the 20 th century. The
area was proclaimed a municipality in 1954, but by the mid – 1960’s its
population did not exceed 2500.
9. The town relied on fishing and the presence of a naval dockyard for its
1 Legend has it that the Portuguese explorer Antonio de Saldanha was the first European to
discover the bay in 1503. This was however the mistaken of a subsequent Dutch explorer, who
gave that honour to de Saldanha, based on an erroneous reading of the latter’s notes. De
Saldanha had not seen his eponymous bay, but was describing Table Bay. The name stuck
however. See the Saldanha Bay Story Jose Burman and Stephen Levin quoted in the “Report of
the Board of Investigation into the Saldanha Steel Project” dated 4 October 1995, Chapter 2
paragraph 2.1 This report was prepared by a Board of Investigation under the chairmanship of JH
Steyn and was submitted to the Minister of Environment Affairs and Tourism.
2
livelihood. During the Second World War Iscor officials had visited
Saldanha to consider its possibilities. They were attracted by its
favourable location in relation to international shipping lanes and the
physical attributes 2 of the harbour. They believed that with the proper
development it could be an industrially competitive export zone.
10. Their visit had no immediate consequences and it was not until Iscor
required an outlet for its iron ore mine situated at Sishen, which is near
Kimberley that their proposals were reconsidered.
11. Although Sishen was initially intended to supply Iscor’s steel factories
domestic needs, it was soon realised that the mine’s iron ore production
potential exceeded the needs of the local steel industry. Hence Iscor
wanted to enter the export market. Given Sishen’s inauspicious location
there was no obvious harbour outlet or a favourable transport link. The
solution planners thought lay in Saldanha.
12. A railway line was constructed in the 1970’s to link Sishen to Saldanha a
distance of 861 kilometers. The project also entailed expansions to the
mine and the development of the harbour so it could serve as an iron ore
loading port.
13. This project proved a great success. Today 76% of Sishen’s production is
exported through Saldanha Bay. 3
14. In the 1970’s planners came up with the idea that if iron ore could be
beneficiated before it was exported this would yield even greater returns.
They proposed that a steel factory be constructed at Saldanha Bay, that
would receive the Sishen ore, beneficiate it and then export the resultant
product through the port.
15. It is not hard to see why the scheme was so seductive for government. A
large factory would boost the other ailing industrial efforts then at
large factory would boost the other ailing industrial efforts then at
Saldanha, create new jobs and make South African exports competitive in
a strategic industry. It was also foreseeable that a successful plant could
lead to other downstream activity in the region.
2 In Saldanha Steel’s literature the port is described in the most glowing terms:
“Saldanha Bay is one of the great natural harbours of the world. Apart from the entrance
it is completely landlocked yet the water is deep enough for large ships. But for a
shortage of drinking water, Saldanha Bay would certainly have been the Cape’s main
port, and not Cape Town.”
3 See Kumba Circular to shareholders dated 29 October 2001 page 12. South Africa supplies 5%
of the global iron ore production of which Sishen contributes 81%.
3
16. For various reasons, which are not relevant to our enquiry, the idea
conceived of in the seventies was not implemented until the midnineties. 4
17. In 1994 the change in South Africa’s political dispensation was to have
profound effects on Iscor. The company had previously enjoyed the
protection of high tariff barriers and confined itself to a domestic market.
Now the new government was committed to both lowering tariff barriers
and to ensuring that its companies competed in export markets. In 1995
the tariff on steel was reduced from 30% to an effective 5%. At the same
time the General Export Incentive scheme was phased out.
18. Iscor responded to these changes in 1994 by embarking on a fiveyear
transformation program to transform its business to become internationally
competitive.
19. The following year, in 1995, Iscor and the Industrial Development
Corporation entered into a joint venture agreement to establish Saldanha
Steel with each party owning 50% of the company. With the opening up of
economic opportunities previously denied to apartheid South Africa, the
object of the company was the:
“development of a robust competitive business which will compete
principally in world markets..” 5
20. The factory was only built in 1997 and production only started towards the
middle of 1998, 18 months later than anticipated.
21. The delay cost Saldanha dearly. In the first place it led to massive cost
overruns, and secondly, and perhaps crucially, it meant that Saldanha
entered the market at the most inopportune moment for a nascent steel
producer. In 1998 world steel prices had plunged due to the crisis in Asian
economies.
22. Once the Asian crisis was behind them world steel producers believed
there would be an international recovery in demand because the US and
European economies remained buoyant. In eager anticipation plants that
European economies remained buoyant. In eager anticipation plants that
had been mothballed during the Asian crisis were brought back into
production. The result of this optimism was that world steel production had
grown by 5,1% in 1999 and by 8,2% in 2000 far exceeding economic
4 This had led one unnamed cynic to remark that Saldanha was conceived of in the seventies,
designed in the eighties and built in the nineties. See Financial Mail dated November 17 2000.
5 Saldanha Steel Shareholders agreement clause 2.1
4
growth.6
23. Saldanha came onto the market just as steel prices has plummeted
internationally. This volatility remains to the present day. As a result
revenue projections in its initial budgets have proved woefully unrealistic.
24. To compound the problems expenses were also underestimated. Bernard
Smith, a former Managing Director, told the Steyn Commission in 1995
that the project would cost R4,7 billion 7. Today the merging parties tell us
the final costs were R8,7 billion.
25. This meant the two shareholders had to inject loans to keep the company
financed so it was soon consuming more debt than iron ore. This led the
auditors to remark in August 2001 that:
“ The ability of the company to continue as a going concern for the
foreseeable future depends on the continued financial support by
the shareholders. The shareholders have reconfirmed their
intention to fund the company’s cash flow requirements for the next
twelve months by way of interest free loans, as referred to in the
Directors report..” 8
26. At the end of June 2001 the firm had shown an after tax loss of R 3287
million dwarfing even the loss of the previous year of R 945 million.
27. In 2001 Saldanha was losing $ 91 per ton in production without even
contributing to financial interest or depreciation.
28. Not surprisingly the shareholders insisted on action on all fronts. A report
was commissioned by consulting firm McKinsey to assess whether the
plant was viable in the long term. The consultants concluded it was,
provided a number of recommendations were implemented .The
recommendations heralded an improvement initiative that was sanguinely
labelled Operation Rainbow.
29. Consultants together with Saldanha staff analysed the production process
from start to finish in a bid to lower production costs and improve
from start to finish in a bid to lower production costs and improve
efficiencies. It is too early to determine whether these efforts have been
successful because some significant repairs have still to be implemented
6 Saldanha’s 2001 Annual Report. The report of the Managing Director pg 5.
7 See Steyn Report paragraph 2.2.2.
8 See Report of the Independent Auditors dated 13 August 2001, contained in the Annual Report
of 2001.
5
but Saldanha claims some modest success to date.
30. But it was financial as opposed to production engineering that saved
Saldanha from imminent failure at the end of 2001.
31. Since 2000 there had been an idea that Iscor assets were considerably
undervalued because they combined both mining and steel assets in one
listed company. The market it was thought would rerate the firms if they
were separated into a mining and steel company. The problem was what
to do with the Saldanha debt in order to achieve this. If all this debt was to
be inherited by the standalone steel company it would be very
unattractive to investors. Eventually after months of tough negotiations, in
which the IDC played a crucial role, an acceptable structure was arrived
at, the crucial elements of which were that –
a) The Saldanha debt was apportioned between Kumba, the newly
named company that inherited the mining assets and Iscor 9;
b) Iscor was guaranteed supply of iron ore from Sishen on favourable
terms; and
c) Iscor would acquire IDC’s 50% stake in Saldanha.
32. In effect debt was taken off the Saldanha book and bolstered by the
injection of equity into Iscor and Kumba financed partly by the IDC and
partly borne by the respective shareholders of those companies who given
their rerating by the market could not complain.
33. The listing of the two companies proved spectacular. After the unbundling
Iscor ‘s shares started at R6 in November last year. At one stage they had
reached R17 although they have appeared to have stabilised at around R
13,50 at the time of this decision. 10
34. Then fortune at long last smiled on Saldanha. The spectacular crash of
the rand at last made its export prices competitive. So it happened that for
the month of December 2001 the company reported its first profit.
35. Despite these propitious events we still consider Saldanha to be a failing
35. Despite these propitious events we still consider Saldanha to be a failing
9 For the period reckoned from 1 July 2001, to the date of the unbundling, Kumba will be
indebted to Iscor to the extent of R 250 million. The loan account will be settled after the
unbundling by the issue of 10 million shares by Kumba to IDC on behalf of Iscor as part
consideration for the acquisition by Iscor of IDC’s shareholding in Saldanha steel.
10 See Business Day, 21 February 2002.
6
firm within the meaning of the Act, and we explain why below, but before
that we need to determine whether the merger raises any competition
concerns.
Competition Issues
a) Joint to sole control
36. In their competitiveness report, the parties main argument for the
approval of the transaction was that the merger did not ‘de facto’ amount
to a change of control, as Iscor had been effectively managing Saldanha
Steel since January 2001. Although at the hearing the parties also
invoked the failing firm doctrine, this initial argument was not abandoned
and we must therefore consider it. 11
37. This argument was not fully developed beyond the parties’ observation
that whilst there was a structural change as a result of the acquisition
there would be no change in the competitive environment.
38. It is not selfevident that because a company goes from joint control to
sole control, its competitive inclination remains unchanged. For this
reason the onus is on the parties to the merger to establish that this is the
case.
39. In Europe in the ICI /Tioxide case, the Commission had to decide the
reverse situation, namely whether a move from sole control to joint control
amounted to a concentration. In coming to their decision they had to
evaluate the distinction between joint and sole control:
“…because decisive influence exercised solely is substantially
different to decisive influence exercised jointly, since the latter has
to take into account the potentially different interests of the other
party or parties concerned.. By changing the quality of decisive
influence exercised by ICI on Tioxide, the transaction will bring
about a durable change of the structure of the concerned
parties.”12
40. In this case the merging parties have done no more than make a bald
parties.”12
40. In this case the merging parties have done no more than make a bald
11 In their Competitiveness Report the parties argued quixotically that Saldanha was not a failing
firm within the meaning of the Competition Act, but then go on to illustrate the fact that Saldanha
has “been financially troubled since its inception.” ( See page 20 of the Competitiveness Report.)
12 ICI /Tioxide 1991(4) CMLR 854
7
assertion that Iscor enjoys ‘management control’ over Saldanha. 13We
have not been provided with any agreement to that effect or any evidence
to indicate that the IDC has been constrained from exercising any rights it
enjoyed as a result of the 1995 shareholders agreement.
41. On the other hand there is evidence to suggest that the change of control
would make a significant difference to the way Iscor relates to Saldanha
Steel.
42. In the first place its incentives have changed. It has gone from a situation
where it enjoyed only half of the benefits of an enterprise, which
constituted a competitor, to being its sole owner and controller.
43. In the Saldanha shareholders agreement, entered into in 1995, Iscor
insisted on a clause that would effectively preclude Saldanha from
entering the local market as a competitor. 14 A sole shareholder would not
require such a clause as it could achieve the same end without a contract.
Iscor required the clause because it did not have sole control and in this
respect it knew that its interests and the IDC ‘s would not coincide.
44. Another fact that illustrates this, is the supply arrangement it has now
secured for itself with Kumba in relation to Sishen. Prior to the
restructuring, Iscor then owner of Sishen, supplied Saldanha on an arms
length basis. Yet its mine at Thabazimbi supplied its Vanderbijlpark
factory at cost plus a 3% management fee i.e. on more favourable terms.
When Iscor was restructured it ensured its supply agreement with Sishen
at cost plus a 3 % management fee i.e. on the same terms as Thabazimbi
was supplying it. 15The fact that Iscor supplied Saldanha less favourably
prior to the restructuring is again indicative of the fact that its incentives as
a joint shareholder were different to that of a sole shareholder.
45. Furthermore in communicating with its shareholders Iscor has made much
45. Furthermore in communicating with its shareholders Iscor has made much
of the fact that having sole control of Saldanha would allow it to introduce
changes beneficial to Iscor.
“Full control of Saldanha will allow the realisation of significant
13 Iscor assumed management control in January 2001. According to the circular to shareholders
until this date Saldanha Steel had been ‘independently managed.’ See Iscor circular to
shareholders dated 29 October 2001, page 11
14 Clause 16 . We examine this more fully below when we deal with the horizontal effects of the
merger.
15 Iscor owns an undivided share in Sishen equal to its current needs and the right to acquire
more if its needs increase.
8
synergistic benefits for Iscor in the areas of product rationalisation,
marketing, and future capital expenditure.” 16
46. Presumably these changes would have been implemented some time ago
if Iscor was able to behave as if it were a sole controller. The reality is that
the IDC acted as a constraint. Despite the fact that at our hearings the IDC
protested modestly that it was not in the business of making steel and was
therefore content to let Iscor manage the business, the IDC was no mere
passive investor or spectator at board level. It had risked an enormous
amount in the undertaking and it is improbable that given its exposure it
would not have kept the closest scrutiny over Saldanha’s affairs.
47. Finally the IDC is a significant player in the steel industry apart from its
stake in Saldanha. Its joint ownership of Duferco Steel Processing (DSP)
a customer and a potential competitor of Iscor are illustrative of the
difference in interests. Iscor as a sole shareholder in Saldanha has every
incentive to squeeze DSP, but the IDC, because of its interest in DSP,
does not.
48. In our view the argument that the change from joint control to sole control
leaves the competitive environment unchanged, is without substance.
49. For this reason we need to go on to analyse the competitive effect of the
merger.
b) Horizontal effects
50. Both firms are involved in the manufacture of steel products. Since steel
products have a variety of different applications they are not all
substitutes. In this case both the Commission and the parties are in
agreement on the product market but some prefatory remarks are
necessary before we consider this.
51. Steel is manufactured in an integrated process. Raw materials such as
iron ore, coal and dolomite are charged to blast furnaces where they are
converted to liquid iron. The liquid iron is refined in basic oxygen furnaces
converted to liquid iron. The liquid iron is refined in basic oxygen furnaces
and electric arc furnaces to produce liquid steel. The liquid steel is cast
into slabs, which are hot rolled into heavy plate in a plate mill or coils in a
strip mill. The coil is either sold directly as hot rolled strip or processed
further into cold rolled and coated products.
16 See Iscor Revised Listing procedures dated 29 October 2001, page 13.
9
52. Both Iscor and Saldanha produce Hot Rolled Coil (HRC), which is also the
only area of product overlap between the parties. However, Saldanha has
been specifically equipped to roll to a thinner gauge of between 1mm to
1.6 mm in thickness, called Ultra Thin Hot Rolled Coil (UTHRC), which is
thinner than the HRC that is produced by Iscor and other competitors such
as Highveld Steel. Saldanha currently only exports this product.
53. HRC is a basic material used in the manufacture of general engineering
products such as containers, pipe, wheel rims, agricultural implements
and gas cylinders. Gauges as thin as UTHRC are traditionally produced
as Cold Rolled Coils (CRC), which are used in automotive components,
tubular products mainly in furniture applications and in high precision
tubing for conveyance of gases and fluids. Since CRC tends to be
smoother and more pliable than UTHRC, UTHRC can only be used as a
substitute for CRC in those applications where surface conditions and
annealing strength (i.e. brittleness) are suitable for hot rolled material.
Currently no customers in South Africa utilize UTHRC. In order to convert
from CRC to UTHRC technical changes to welding and forming equipment
needs to be made by potential customers.
54. However UTHRC presently only constitutes 35% of Saldanha ‘s
production and thus 65% of its current production comprises product,
which could be sold in the domestic market.
55. Iscor in response to this have argued that Saldanha’s location in relation
to downstream industry make it an unlikely entrant into the local market.
The bulk of the downstream manufacturing capacity is located in the
Gauteng region with only one major customer in the Western Cape 17 the
nearest market to Saldanha.
56. The evidence of the parties is that the South African market consumes
56. The evidence of the parties is that the South African market consumes
approximately 2,4 million tons of flat steel products annually. Of this
approximately 900 000 tonnes is in the form of HRC.
57. The evidence of the parties as to transport costs is that for a firm located
in the industrial heartland transport costs per ton from Saldanha would be
in the vicinity of R240 to R 270 per ton. Iscor’s transport costs from
Vanderbijlpark to the central market would be R 54 per ton. The parties
argue that if the same firm were to import product from Europe, which
would be landed at Durban, transport costs would be approximately R140
per ton. The parties argue convincingly, that based on these figures
17 Pro Roof.
10
Saldanha’s transport cost disadvantage make it an unlikely entrant to the
inland market. 18
58. Iscor argues that had it been intended that Saldanha would compete in the
local market it would not have been situated where it is.
59. However this bold assertion by Iscor is belied by its own conduct. As we
mentioned earlier, Iscor in 1995 insisted on a clause in the shareholders
agreement that provided that it would be responsible for the sale of
Saldanha’s products in the domestic market.
60. Despite the euphemistic language, the effect of this clause is to exclude
Saldanha from the domestic market except with Iscor ‘s consent. Without
taking too conclusive view of it, the clause amounts to a market division
between competitors and thus might well be pro no scripta on the grounds
that it amounts to an unlawful horizontal restraint. In fact Saldanha had no
domestic customers except for DSP.
61. The fact that Iscor insisted on this clause is a clear indication that it feared
that Saldanha might enter the domestic market as a rival, despite its
claims to the contrary that such rivalry is infeasible.
62. Post merger of course the clause becomes academic, but it cannot be
used to justify the fact that Saldanha was never a competitor of Iscor’s.
We do not know if but for the restraint imposed on it, Saldanha might not
have entered the local market.
63. That is not to say that the market for HRC in South Africa is characterised
by intense rivalry. Indeed, as the table below suggests, this is largely a
two firm market with Iscor having achieved an overwhelmingly dominant
share, more than 80 %, and its only local rival Highveld holding to a
relatively constant 15 % share. Competition from imports is slight, less
than 3 % at present and the trend shows this dropping in the past three
years.
Table 1: HOT ROLLED PRODUCTS
S.A. MARKET SHARE
years.
Table 1: HOT ROLLED PRODUCTS
S.A. MARKET SHARE
18 When dealing with the fact that it was struggling to make its exports competitive, Iscor made
the point that its transport costs to export were significant in relation to its ex factory cost because
of its inland location. The same can be said of Saldanha’s transport costs inland in relation to its
ex factory price.(See Iscor Revised Listing particulars, page 12)
11
INDEX
MA 100%
90% Iscor
80% 80.4% 82.1%
70% 79.3% 79.2% 72.7% 71.9%
12
60%
50% Highveld
40%
30%
20% 13.9% 15.2% 16.1% 15.0% 14.3% 15.1% Imports
10%
0% 6.8% 5.6% 11.2% 13.1% 5.3% 2.7%
95/96
96/97
97/98
98/99
99/00
Jul00Mar01
64. The parties nevertheless contend that the market is an international one.
The Commission argue for a national one. There is no doubt that
international steel prices play a function in determining the price on the
domestic market as Iscor has a policy of import parity pricing 19.
According to Iscor’s Revised Listing Particulars:
“Iscor’s steel pricing policy in the domestic market is based on import
parity principles as its main competition in most of its product ranges is
represented by imports. The exceptions to this principle are:
in the case of products where local competition exists and where
over capacity results in prices that are lower than import parity, as it
is the case with certain lower quality long products; and
where Iscor offers lower price incentives (negotiated on a case by
case basis ) with local manufacturers to encourage secondary
exports.
65. Many suggest that if a firm can set prices at import parity that fact alone
is indicative of the fact that it has market power. We do not need to decide
however whether the market is an international one or a domestic one as
that assessment would not alter the outcome of our decision. We have
assumed however that the market is a national one. 20
19 See the Revised Listing particulars dated 29 October 2001, page 18 as well as the pricing
documents received from Iscor, which provide for an import parity rebate.
20 As shown in Table 1, the low level of import penetration, particularly in recent years suggests
13
66. Nevertheless we conclude that although Saldanha poses potential
competition to Iscor, its geographic disadvantage from the largest
customer base in the interior, the absence of a customer base of
significance in the Western Cape, coupled with an absence of a market for
the product it is most competitive in (UTHRC), all suggest that its potential
to compete successfully with Iscor is remote.
c) Vertical issues
67. Saldanha has only one local customer and that is Duferco Steel
Processing (Pty Ltd) (‘DSP’) a company that is jointly owned in equal
shares by the IDC and Duferco a Swiss company. 21
68. DSP was established as part of the broader Saldanha industrial
development strategy to process HRC. Saldanha Steel and DSP entered
into an agreement in 1997 to set out the terms on which Saldanha would
supply HRC to DSP for a 10year period.
69. In terms of the agreement DSP was –
a) obliged to purchase exclusively from Saldanha a specified amount of
HRC per annum; 22 and
b) was further prohibited from reselling the HRC that it had purchased
from Saldanha and processed in markets in Southern Africa, without
the consent of Saldanha. 23
70. The first clause was presumably inserted to guarantee DSP as a customer
and from DSP ‘ point of view to ensure that it had a secure source of
supply. The prohibition on resale was inserted again as with clause 16 of
the Saldanha shareholders agreement for the benefit of Iscor which also
processes HRC in the manner that DSP does. Again both clauses served
Iscor by ensuring that potential rivals were confined to the export market.
71. The agreement was premised on the assumption that Saldanha would
produce 1,2 million tons of HRC per year and that DSP would be able to
that the market is more likely to be a national one.
that the market is more likely to be a national one.
21 While the IDC ‘s shareholding is an indication of the extent of the incestuous relationships that
exist in the steel industry, the role played by the IDC in developing industry in South Africa is
recognised.
22 Article 2 of the agreement.
23 Article 3 of the agreement.
14
absorb 450 000 tons of this output per annum. As we have outlined above,
Saldanha’s production ambitions were not realised and it was not able to
supply DSP on the original contract terms. An arrangement was entered
into in 2000, in terms of which Iscor undertook to supply 50% of DSP’s
needs.
72. The new arrangement has not been formalised into an agreement yet. The
status of the 1997 agreement is unclear. Iscor alleges that the “agreement
has effectively been abrogated by disuse.” Confusingly, they also in the
same breath state that “if the merger is approved, Iscor proposes to take
the business out of Saldanha Steel, and therefore there will be a need to
be a cession from Saldanha Steel to Iscor” 24 This suggests they regard
the agreement as still binding if it was not there would be no need for a
cession. Yet later on they state that part of their future strategy for
Saldanha is to develop a steel grade for thin HRC for supply to DSP for
cold reduction to dimensions suitable for West Africa. 25
73. In a submission to the Competition Commission, DSP expressed anxiety
about its conditions of supply given its present lack of contractual
security.26
74. DSP points out that with the merger it would only have one supplier for it
most critical raw material, which accounts for 70% of its production costs.
This single supplier relationship exposes it to a potential squeeze from
Iscor both in relation to price, quality and quantity. Since DSP is a
potential competitor of Iscor, if it were to supply the local market, its
vulnerability to a supply squeeze is well founded. DSP states that it does
not have any alternative supplier to Iscor and when in the past it found
alternative sources it was faced with the prospect of antidumping duties
being imposed.
75. At the hearing we raised these concerns with the merging parties. In
response to the proposal by the Commission that the vertical concerns
could be obviated by the Tribunal imposing appropriate conditions, the
merging parties raised no serious objections.
76. We have accordingly framed conditions, which are designed to ensure
that whatever contractual arrangements the parties may enter into, DSP
has no constraints on its source of supply and that it is free to compete in
the domestic market.
24 Paragraphs 5.2 – 5.3 of the Parties response to the Tribunal questions.
25 Paragraph 11.2 .2–of the Parties response to the Tribunal questions.
26 Letter from Horacio Malfatto dated 14 February 2002.
15
d) Failing firm
i) Theoretical
77. The jurisprudence of competition law recognises what has become known
as the ‘failing firm defence’ to sanitise a merger that might otherwise raise
competition concerns.
78. The defence first emerged in US law when in a 1930 decision,
International Shoe v FTC 27the Supreme Court recognised that the
acquisition of a failing firm did not violate section 7 of the Clayton Act.
79. What is surprising is that notwithstanding amendments to the Clayton Act
subsequent to this case, and discussion of the failing firm defence in
Congressional debates preceding the amendments, the language never
found its way into the statute. 28 Nevertheless the defence is well
recognised in the case law and has been invoked on numerous
occasions.29
80. The defence is also recognised in the U.S. Horizontal Merger Guidelines
which provide for the following ;
“A merger is not likely to create or enhance market power or facilitate its
exercise if the following circumstances are met:
1) the allegedly failing firm would be
unable to meet its financial obligations
in the near future;
2) it would not be able to reorganize
successfully under Chapter II of the
Bankruptcy Act;
3) it has made unsuccessful goodfaith
efforts to elicit reasonable alternative
offers of acquisition of the assets of the
failing firm that would both keep its
27 280 US 291 (1930)
28 See Areeda and Hovenkamp, ”Antitrust Law” 2 nd Edition, paragraph 951a.
29 See American Bar Association, Antitrust Law Developments (Third) Volume 1 pg. 313 fn. 219
and the cases decided therein.
16
tangible and intangible assets in the
relevant market and pose a less severe
danger to competition than does the
proposed merger; and
4) absent the acquisition, the assets of the
failing firm would exit the relevant
market.”30
81. Influenced by the US approach the defence has also found its way into
European law albeit in an altered form. As in US, the European Merger
Regulation contains no express recognition of the doctrine, but it has been
recognised now in case law and the practice of the Commission. In the
judgement of the European Court of Justice (the ‘ECJ’) in the case of
France v Commission 31 the ECJ accepted the failing firm test applied by
the Commission, in approving the merger between the only two German
producers of potash. 32
82. The Commission ‘s test requires that the following conditions be satisfied:
a) the acquired firm would have
withdrawn from the market if not taken
over by the other firm;
b) the acquirer would gain the market
share of the acquired firm if the latter
were to exit the market; and
c) no alternatives were available that
were less anticompetitive.
83. It has been pointed out that the second condition is a European innovation
and is more stringent than the U.S. test, which has no such
requirement.33
84. In Australia, the Merger Guidelines indicate that the Australian Consumer
and Competition Commission ( the ‘ACCC’) will recognise the failing firm
notion provided certain conditions are satisfied. Their approach is
instructive and worth quoting at length: 34
30 Paragraph 5.1 of the Revised Guidelines April 8, 1997 issued by the U.S. Department of
Justice and the Federal Trade Commission.
31 1998 (4) CMLR 829
32 KaliSalz/Mdk/Treuhand Case IV/M308 OJ L 186.
33 See Bellamy and Child, “European Law of Competition” , Sweet and Maxwell, (2001) pg. 418.
34 See paragraph 5.1345 of the Guidelines.
34 See paragraph 5.1345 of the Guidelines.
17
“Briefly, the Commission [the ACCC] will need to be convinced that
the firm cannot be successfully reorganised and there is no other
viable buyer for the business, and no likelihood of such a buyer
emerging, such that the firm’s resources are likely to exit the
market absent the merger and so cease to represent an actual or
potential constraint on the market.
If the target firm is considered to be failing, the Commission will
consider the likely effect of the acquisition on competition
compared to the effect of the target’s assets exiting the market.
Under the latter circumstances, the distribution of the target’s
customer base among the remaining market participants would be
determined by market forces, whereas an acquisition would tend to
deliver those customers to the acquiring firm. If the competitive
strength of the remaining participants is evenly matched, the level
of competition in the market may be better served by allowing the
firm to fail. However, the loss of capacity will tend to reduce
competitive pressures in the market. Depending on the effect of the
acquisition on the relative strength of remaining participants,
retaining the failed firm’s capacity in the market may still be pro
competitive.”
85. In Canada the failing firm doctrine is given statutory recognition as one of
the factors to be taken into account in determining whether a merger
prevents or lessens competition. In this respect our Act is identical to the
Canadian Competition Act. 35
86. There is thus no doubt that the failing firm doctrine is widely recognised in
competition law jurisprudence, and regardless of whether the doctrine has
become part of the case law or enjoys an express statutory recognition,
has been applied with a degree of uniformity. 36 What is more difficult to
has been applied with a degree of uniformity. 36 What is more difficult to
discern, and which is relevant to an assessment of how much of their
jurisprudence to adopt, is the exact rationale for the defence.
87. Writing in the context of European merger regulation, Bishop and Walker
argue that if other firms will buy the assets after a firm has failed, then the
failing firm defence is not valid 37. The defence is only reasonable if
35 See Section 93 (b).
36 All require satisfaction to varying degrees of the fact that the firm is a failing one, that re
organisation is not an option and that there is no other less anticompetitive outcome. Failure on
its own absent these other criteria is not sufficient.
37 Presumably the only other time that other potential buyers will not be interested in acquiring a
18
productive assets would otherwise exit the market. 38
88. A similar theme is echoed in the US Horizontal Merger Guidelines, where
it is argued that if imminent failure would mean that the assets of the firm
would exit the market, then post merger performance if the merger is
approved, may be no worse than if the merger had been blocked and the
assets left the market. 39
89. The rationale expressed here seems to be that if the status quo remains
unchanged if the failing firm’s assets exit or are acquired one would favour
their acquisition. That still begs the question of the underlying rationale of
invoking the defence when the post merger state of the market is less
competitive than before because the acquiring firm would enjoy a greater
market share on acquisition of the failing firm than it would have if it just
exited.40 Here case law is not that consistent.
90. Areeda alludes to this difficulty in his comment on the International Shoe
case:
“International Shoe suggests two differing and perhaps inconsistent
grounds for a failing firm defence (1) Acquisition of a failing
company may have no significant adverse effects on competition;
and (2) the interests of stockholders, creditors, employees, and
others affected by the fate of the failing company deserve
recognition. These propositions are hardly sufficient grounds for
making the defence absolute in all circumstances; nor do they point
to any unified or simple way of identifying the defence’s proper
domain.”41
91. Areeda goes on to say that:
“as a general proposition the cases have not attempted to determine
failing firm will be when they are unaware of a value enhancing factor, which might be known only
to the acquiring firm such as e.g. a secret efficiency gain or because the acquisition will enable
the acquirer to strengthen its market share to such an extent that it is able to exercise market
power, a position the other potential buyers would not be able to secure if they purchase the
failing firm.
38 See Bishop and Walker, ‘ Economics of EC Competition Law: Concepts, Application and
Measurement’, Sweet and Maxwell, (1998), pg 162
39 See US Guidelines op cit para. 5.0.
40 For instance on exit the failing firm’s share may be taken over in some proportion by the
remaining firms, whilst in an acquisition the acquirer may take all the failing firms share or a
disproportionate amount to that it would have got if there was only exit.
41 See Areeda op cit para 952a pg 225.
19
whether an acquisition benefits competition more than failure would do
harm.”
92. Areeda is critical of the one leg of the International Shoe test namely the
adverse impact on shareholders, employees or creditors. He points out
that antitrust is traditionally unsympathetic to these concerns when they
are asserted as a justification for an anticompetitive outcome. Thus a loss
to shareholders is no panacea to firms involved in a price fixing cartel.
Furthermore the private interests are not always reconciled if a merger
goes ahead. A firm may be willing to purchase only the assets of a failing
firm and thus satisfy shareholders to some extent but not employees.
93. Areeda does however acknowledge that there are circumstances where
private interests may be worth recognising. Although he gives several
examples 42one is particularly relevant to the circumstances of this case.
He argues that new entry and investment are encouraged the more the
costs of failure are reduced. Expressed differently, if firms taking
investment decisions know that competition law might increase the costs
of failure by harshly applying merger control in the event of their exit, they
would be less likely to assume the risk.
94. Areeda then looks at the other rationale for the failing firm defence which
is to ensure that productive assets are reassigned to more efficient users.
He points out correctly that a number of these defences are more
appropriately classified as efficiency defences and need not be used to
broaden the failing firm defence beyond what it need be.
95. This is particularly apposite in interpreting our statute where we have an
express efficiency defence, which is absent in the Clayton Act. 43
96. Areeda however goes on to identify efficiency defences which arise in a
failing firm context and which do not qualify for acceptance in the typical
failing firm context and which do not qualify for acceptance in the typical
economies defence and he argues for their recognition as part of the
failing firm defence. Into this category he would include the following :
a) an acquisition would preclude the administrative costs of
bankruptcy
b) it would keep in the market resources that might otherwise be taken
42 See Areeda op cit Para 9252c2 pages 229 –230 Areeda also refers to the fact that bankruptcy
has high social costs even if reorganisation is successful, secondly an acquirer may pay more for
a firm’s assets because it can put them to more efficient use.
43 See our decision in Trident Steel 89/ LM/ Oct 00, for a discussion of the United States
approach.
20
out of production, even though they are not yet depleted
c) it would assign productive assets to managers capable of using
them more efficiently. 44
97. If we follow the Areeda approach and look at the failing firm defence in
the context of our Act, then there may be other aspects of a failing firm
defence that can more appropriately be assumed under other sections
provided expressly for by the Act. Thus as is the case with the Kali und
Salz merger, although the transaction led to unacceptably high
concentration, the failing firm defence was successfully raised in part
because the merger obviated a large loss of jobs in Eastern Germany. 45
98. In our statute there would be no need to invoke the failing firm doctrine to
such a situation when the adjudicator can have regard to the employment
effect in terms of the public interest criteria. 46
99. Similarly, where the failing firm defence is in reality an efficiency defence,
the merging parties should rely on the efficiency defence in section 12 (A)
(1)( a)( i). This is not to say that alternatives cannot be alleged, but it is
important that we avoid conceptual confusion. The danger of following
some overseas jurisdictions uncritically, is that they may recognise under
a failing firm defence, factors that we, with our more extensive merger
regime, might recognise under another classification, employment loss
being a good example.
100.This perhaps leads us to an important contextual difference between the
way we should apply the failing firm doctrine and the way it is applied in
other jurisdictions.
101.In our Act, the failing firm doctrine is not used as a ‘defence’ to a merger
that has been found on an initial market analysis to be anticompetitive.
Rather it is recognised as one of list of ‘factors’ that one takes into account
before one can determine whether a merger is anticompetitive.
before one can determine whether a merger is anticompetitive.
102.Thus in some jurisdictions, such as the United States, the adjudicator
would first determine whether a merger was anticompetitive and then only
if it was, consider the failing firm doctrine as a defence.
103.Our Act does not divide the inquiry into two discrete stages. The way
section 12A(2) is drafted, the consideration of whether a merger is anti
44 See Areeda op cit para 952d pages 230 231.
45 See opinion of the Advocate General
46 Section 12 A (3) (b)
21
competitive involves as part of that inquiry a consideration of a non
exhaustive list of factors, one of which is whether a party to the merger is
a failing firm. In contrast to this, our ‘efficiency defence’ 47 is a real defence
to an anticompetitive merger and for this reason is located in a self
standing subparagraph of section 12A, as a reading of section 12A(1)(a)
(i) makes clear. To invoke the efficiency defence one first has to conclude
that the merger is anticompetitive. This one does by first conducting the
inquiry into the factors contained in section 12A(2). Then, and only if that
inquiry leads to the conclusion that the merger is anticompetitive, does
one go on to enquire whether the efficiencies gained outweigh the anti
competitive effects.
104.The distinction might appear to be a mere lawyers quibble with no
practical significance, but this is not so. If the failing firm doctrine was a
“true defence”, then if all the elements of the defence could be
established, an anticompetitive merger would have to be approved.
However if it is just one of a list of factors to be taken into account, in the
list set out in section 12A(2), then even if it was established, that the firm
was failing, by say the application of the US or EU tests, one might
nevertheless still find a merger to be anticompetitive because of the way
one balances this failing firm factor in relation to all the others. It is thus
possible in terms of the Act, that a credible failing firm theory may
nevertheless not save a merger, which raises serious competition
concerns.
105.Conversely, where the competitive loss is low, then one may be less
exacting in requiring a showing of all the elements of the traditional failing
firm defence. If the failing firm concept was a defence, in the sense that
firm defence. If the failing firm concept was a defence, in the sense that
the efficiency defence is, then this type of flexibility would be
impermissible and one would have to satisfy all the elements of a test that
the legislature had provided before it could be invoked.
106.Whilst this approach may risk making the concept more nebulous, it does
allow the adjudicator the flexibility to achieve real interest balancing, as
opposed to the application of rigid formulas.
107.A flexible approach, allows one for instance to have regard to some of
the rationale for the failing firm defence even though they do not constitute
elements of a traditional defence. Thus if one rationale, as Areeda puts it,
47The phrase ‘efficiency defence’ is just a convenient shorthand for the defence that the merger
can be justified on account of any ‘technological, efficiency or other procompetitive gain’ that
would offset any anticompetitive effect of the merger and that would not likely be obtained absent
the merger. (See section 12 A (1)(a)(i) ).
22
is to avoid inhibiting investment decisions because we regard investment
in general terms as procompetitive, then evidence that not allowing the
acquirer to rescue a failing firm might inhibit entrepreneurial or investor
risk, would be relevant and pertinent despite the fact that they are not
elements of a traditional test. This distinction is important to bear in mind
before one imports en bloc the jurisprudence on this doctrine from other
jurisdictions.
108.This is not to say that we would abandon all reference to these tests.
Rather we are saying that some of the elements of the defences would be
more sacrosanct than others. If the merging parties had not established
the requirement that there were no other viable less anticompetitive
outcomes, the failing firm doctrine would not avail them. This is the
approach which we took in the Sasol/Schumann48 merger, where
although we applied the test set out in the US Guidelines the failing firm
doctrine was not found to have been established on this ground.
109.Other controversies in foreign case law about the failing firm doctrine are
partially answered for us by the language of the Act. For instance it is not
necessary to show that a firm has failed only that it is likely to fail. Nor
does failure need to equate to insolvency, otherwise the legislature would
presumably have used that language. As Areeda has expressed it “
insolvency is not a necessary ingredient of failure:
“Low revenues may dictate that a firm withdraw from a market
rather than reinvest capital, even though it is continuously able to
pay its maturing debts. Although proof of such a case poses more
serious problems, the opportunity to make it cannot reasonably be
foreclosed.”
110.In summary we are saying the following:
1. A failing firm defence should
not be invoked if it amounts
in substance to another
not be invoked if it amounts
in substance to another
factor or defence which the
Act already provides. In
particular we draw attention
to the efficiency defence and
the public interest criteria.
2. The merger criteria for a
failing firm set out in the
48 See Tribunal Case No: 23/LM/May01
23
tests of other jurisdictions
will carry serious weight in
our assessment. Organising
ones evidence on the basis
of these criteria would thus
be useful and instructive to
the Tribunal.
3. A merger would not be
regarded as lessening
competition if the conditions
laid out in the more stringent
EU test can be satisfied.
4. A party falling short of the
“market share would have
gone to us” requirement, but
that could satisfy the other
elements of the test or the
standard in the US test,
would have a reasonable
possibility of success
depending on the degree of
the anticompetitive sting.
Thus where the anti
competitive effects of the
merger are otherwise slight,
then the Tribunal might be
less stringent in the
application of some of the
criteria. Here the party
should have regard to
evidence that establishes
some rationale for the
existence of the failing firm
doctrine. We have referred
to some of these in our
discussion although we do
not suggest that this is an
exhaustive list.
5. Evidence of the extent of
failure or its imminence,
would be weighed up
against the evidence of the
anticompetitive effect. The
24
greater the anticompetitive
threat the greater the
showing that failure is
imminent
6. No leniency would be
afforded to the requirement
that there be evidence that
there is no less
anticompetitive alternative.
7. The onus is on the merging
firms to establish the
evidence necessary to
invoke the doctrine of the
failing firm. 49
ii) Applying the failing firm doctrine to the facts of this case
111.At the time that the Saldanha project was first conceptualised in the
1970’s, Iscor was still a parastatal. In 1989 Iscor was privatised and then
listed. At that stage the company was involved in both mining and steel
manufacture although they were operated as separate businesses. When
Iscor listed, the markets initial euphoria was soon tempered by the fact
that analysts did not like the idea it was running two businesses and there
were perceptions it lacked focus and would land up doing neither well.
After listing the Iscor share price was to drop from R2 to 60 cents per
share.
112.In 1994 Iscor brought in new management to run the separate
businesses. According to an article in the Financial Mail, Iscor had not
adapted quickly enough to the post ‘94 economic environment.
“Though it took advantage of export opportunities, especially in
Asia, it did not restructure quickly enough to remain internationally
competitive in steel.” 50
113.The idea was then to transform both businesses to make them
internationally competitive. This theme of the international competitiveness
of Iscor was to drive both the company’s and government policy thereafter
49 This is the case in the European Union. See Whish, Competition Law , 4 th edition Butterworths
page 780. Whish relies on Rewe/ Meinl OJ (1999) L 274/1. for this proposition. It is also the case
in US law. See Areeda op cit para 951 C
in US law. See Areeda op cit para 951 C
50 Financial Mail November 17 2001 pg 51. Article entitled “The IDC and Iscor – In for the Chop” .
25
and provided the context for the decision we have to arrive at in relation to
this transaction.
114.In 1995, as we noted earlier, Iscor and the IDC entered into a
shareholders agreement to establish Saldanha. The construction of the
factory commenced in May 1996 , but the first coils were only produced in
the fourth quarter of 1998.
115.The plant was bedevilled by numerous problems from the outset.
• Concerns about the
environmental impact
of the plant including its
site led to delays in the
commencement of
construction.51
• The construction itself
took longer than
anticipated.
• When production
commenced it was at
levels substantially
below those budgeted.
The plant had been
designed to produce
100 000 tons per
month, but for most of
1998 and 1999 the
production levels were
considerably below
this. The Corex smelter
and gassifier was
producing at only 70%
of its capacity due to
design flaws. It was
only in October 2001
that production
reached a peak of 90%
and it is by no means
clear that this is
sustainable as the
Corex will require
51 Environmental concerns had led to the Steyn Commission of Inquiry in 1995.
26
repair later this year.
The Conarc furnace is
one of the few in
existence in the world
and thus there was
limited experience in
dealing with it when
problems arose, as
they did.
• By the time Saldanha
was ready to place its
product on the market,
as we noted above,
steel prices had
plunged and were
continuing downwards.
The project could not
have come to market at
a less opportune
moment.
• Expertise in running a
plant with technology
that was new to the
South African steel
industry was not what it
should be and
production delays
occasioned by
technical problems
were frequent.
• The delays in
commencement and
the suboptimum
returns on initial
production had meant
that the shareholders
had to dig deep into
their pockets to provide
loans to continue the
joint venture.
• In 2001 at then prices
and production costs
the firm was losing $
27
91 per ton.
116.Despite the fact that the two shareholders are very large concerns with a
considerable ability to raise capital their balance sheets started to take
strain under the weight of the obligations that they started to incur. This
was to lead to a strained relationship between the shareholders, and
according to the Financial Mail, the IDC had at one stage contemplated
taking over control of Iscor. 52
117.Iscor’s own performance was compromised by Saldanha’s difficulties.
Iscor’s share of Saldanha Steel’s after tax loss excluding impairment
charge for the year 2001 amounted to R 526 million compared to R 473
million for 2000.
118.Faced with these growing problems the shareholders engaged the
services of consultants in 2001, who as part of their wider brief,
considered the option of liquidating Saldanha steel or mothballing it for a
period until international prices for HRC had improved.
119.The consultants concluded that neither of these options was attractive
and might indeed result in a greater cost in the short term to the
shareholders than continuing the operations.
120.The shareholders accepted the recommendation and the fortunes of
Saldanha and its shareholders have now improved both as a result of the
restructuring we describe earlier, the improvements to Saldanha’s
production and the favourable rand dollar exchange rate.
121.This change in fortunes begs the question of whether Saldanha should
still continue to be regarded as a failing firm. Indeed Saldanha reported in
December 2001 that it was in the black for the first time for its figures of
that month.
122.The parties have urged us not to place too much emphasis on these
factors to come to a conclusion that the firm is no longer failing.
factors to come to a conclusion that the firm is no longer failing.
123.Saldanha’s recent results are not yet evidence that it has turned the
corner and its revival in fortunes is largely the result of the decline of the
rand which on a rand / dollar exchange gave a windfall to exporters at the
end of last year.
124.The fact that Saldanha’s debt has been restructured does not mean it
52 See Financial Mail dated November 17 2000.
28
has been eliminated. If Saldanha was still carrying its prerestructuring
debt, the December results would have shown a considerable loss. It is
the deep pockets of its shareholders that have kept Saldanha from exiting
the market. The fact that they have concluded that the costs of its
retention outweigh the costs of its closure does not make it any less than a
failing firm. As we pointed our earlier in our theoretical discussion, our Act
does not require that a firm must have failed only that it is likely to fail.
Without the financial restructuring of Iscor and the IDC that we have
referred to Saldanha would have failed no independent firm would have
provided the finance necessary to bail it out of its debt obligations given its
past performance and its less than certain future.
125.Whilst there is no doubt that Iscor and the IDC remain confident that
Saldanha has a future, this will only become clear in the long term. In the
medium term the risks to the shareholders remain considerable.
126.The extent of the financial disaster is not in doubt and the numbers speak
for themselves. 53 In a letter to the Tribunal, dated 15/02/02, by the Chief
Executive Officer of ISCOR, Mr Louis van Niekerk, indicates that by 2001
Saldanha Steel had a debt burden of R5,8 billion consisting of the
following:
Foreign Loans R 3.3 billion
South African Banks R 1.5 billion
IDC (through project loan) R 1.0 billion
TOTAL R 5.8 billion
127.He also said that both Iscor and the IDC would absorb R3.0 billion each
of Saldanha’s debt i.e. recapitalisation of Saldanha’s debt by
shareholders.54
128.The IDC, according to Mr Ngqula, 55 (the CEO of the IDC) stands to lose
R 6.5 billion, Iscor R 2.7 billion and the local banks R 1.5 billion if the
merger was not approved. This amounts to a total of R10.7 billion. 56 He
merger was not approved. This amounts to a total of R10.7 billion. 56 He
53 Whilst the figures we have been provided with at the hearing and those that appear in other
documentation emanating from the parties are not always consistent their portent as a symbol of
the financial gloom is. The inconsistencies are attributable to the fact that the information is not
provided for the same reporting periods
54 According to the Iscor 2001 Annual report Iscor ‘s share of the Saldanha loss excluding the 3
billion rand impairment charge amounted to R526 million compared to R 473 million the previous
year. The Iscor board said it would not declare a dividend in view of the uncertainty in steel price
recovery and the funding requirements of Saldanha.
55 Oral evidence during the hearing on 18 February 2002.
56 Contrast this amount with the original projections of the cost of the project prior to construction
29
also mentioned that there were foreign loans to the amount of R3 billion.
Both Iscor and the IDC would absorb R3 billion of Saldanha’s debt, as
shareholders.
129.According to the McKinsey Report, Saldanha Steel’s ultimate net present
cost to shareholders would be R11.5 billion, should Saldanha continue
business as pre the merger. Ceasing operations at Saldanha Steel will
have a total cash impact of R5.8 billion for mothballing, R7.3 billion for
liquidation and a further equity write off of R4.7 billion is to be expected in
both scenarios. For both liquidation and mothballing shareholders are
likely to be exposed to the full Saldanha Steel debt position of R 5.5 billion
in addition to the R1.0 billion injected up to June 2001. Moreover, large
contract cancellation costs of approximately R 7.0 billion must be faced.
130.Iscor has launched a rights issue for R1.67 billion to bring down its
Saldanhadriven debt, while the IDC recorded the impairment loss of R2.6
billion in its interim results. Iscor’s share of Saldanha’s operating loss in
the 6 months to December 2001 was R266m. 57
131.In the short term Saldanha will have to decrease its production levels as
its main refinery Corex will be shut down for 45 days to undergo repairs in
May 2002.
132.The evidence that the patient is in remission is too inconclusive.
Saldanha must at the present moment still be regarded as a failing firm.
133.The next issue we must examine is whether even if the firm is failing
there is not an alternative buyer whose purchase would not raise
competition concerns.
134.The evidence of the merging parties is that they have approached
various international concerns over the past few years. All it seems were
approached on the basis that they would be offered a stake in Iscor. All
apparently placed various conditions on the deal which included an
apparently placed various conditions on the deal which included an
insistence that Saldanha be integrated first into Iscor. None it appears
would have been interested in purchasing Saldanha as a going concern
and that is hardly surprising as given its debt levels the shareholders could
never have got their price. 58 On the other hand if Saldanha is liquidated
of R 4,7 billion . See the Steyn Report par 2.2.2 , quoting Bernard Smith a previous Managing
Director of Saldanha. According to the parties the final capitalised cost was R8.7 billion.
57 Business Day – Company News – 8 February 2002
58 LNM Holdings, a foreign steel company have now purchased the largest stake in Iscor. They
30
equipment is more likely to be sold off piecemeal to another firm based
offshore and hence will not remedy any domestic competition concerns.
135.The fact that the shareholders had commissioned the consultants report,
which had looked at all these issues in detail lends credibility to the fact
that the present option is the only realistic scenario.
136.Purchasing only Saldanha is highly unlikely to prove attractive to a third
party purchaser. Firstly they would have to source supply from Sishen and
it is highly unlikely that they would be able to procure supply on the same
favourable terms as Iscor has, which it could only have obtained as a
result of the window of opportunity afforded by the unbundling.
137.Without a competitive source of supply and given Saldanha’s as yet
untested production process, it is hardly a jewel to be added to any steel
makers crown. Nor would any firm want to enter into the domestic market
to take on the dominant Iscor more favourably located next to the
domestic customer base. The firm would then only enter to supply the
international market and hence have no effect on our domestic market.
138.We conclude that it is unlikely that an alternative buyer for the firm would
be found.
139.What distinguishes this case from the typical failing firm case, is that the
buyer is not an arms length independent firm, but a 50% shareholder
seeking to reduce the loss it has incurred to date. To prevent Iscor from
protecting the investment it had made to date would be to discourage
investment in new plant and innovation, which is what Iscor has done to
date in Saldanha.
140.Iscor is not taking advantage of a competitors demise to secure a
monopoly, the standard problem presented by a failing firm defence.
Together with its partner the IDC it had embarked on a project to invest
Together with its partner the IDC it had embarked on a project to invest
considerable capital in new and innovative productive capacity. The dream
has run into trouble. It would not serve the cause of competition policy,
which seeks to encourage firms to invest in plant and innovation, to apply
the failing firm doctrine so rigidly that we inhibit such schemes, otherwise
firms may become afraid to risk their capital.
141.Finally the transaction costs occasioned by Saldanha’s failure or exit
either by liquidation or by temporarily mothballing would be excessive and
have indicated in a letter to Iscor, given to us, that they would not have done so if this merger is
not implemented. The LNM Group is according to Iscor the world’s second largest steel company.
31
exceed mere loss to the shareholders. Both Iscor and the IDC have
absorbed debt by way of institutional loans to finance their respective
stakes in Saldanha from both domestic and foreign firms. If the venture
were allowed to fail this would according to McKinsey‘s report lead a re
rating of their credit status, increasing their costs of capital. Given that
both firms continually raise capital in the market to finance development,
the costs of such a failure would be felt throughout the economy.
142.Our conclusion is that the failing firm concerns outweigh the loss to
potential competition that might otherwise be occasioned by the
transaction and that accordingly the merger does not substantially lessen
or prevent competition in the relevant market.
Public interest
143.If the merger is approved we have no evidence that this would be in
conflict with any of the public interest grounds set out in section 12 A (3) .
We have been informed that employment levels will remain unaffected by
the transaction .
144.However if the merger is not approved this will have adverse public
interest considerations. One of the factors that we have to look at in
examining the public interest is the effect on the particular industrial sector
or region.
145.There is evidence that the Saldanha Steel plant is a vital part of the
town’s economic life. If the plant was to be shutdown or be mothballed for
a period this would not only have a substantial impact on the employees of
the plant who would be retrenched, but also on all the firms and
individuals in the West coast region whose livelihoods are so dependent
on the plants functioning. 59 The effect of Saldanha on the local economy
is best expressed in a report by Wesgro 60on the contribution that the
is best expressed in a report by Wesgro 60on the contribution that the
project made to the gross regional product of the region during its
construction phase – a figure of R 1,15 billion.
146.Were Saldanha a larger economic region the effect might be muted but
given its dependency on a small number of industries the effect would be
devastating. Saldanha Steel has to its credit been a good corporate citizen
in the area and is involved in a number of important social programs that
59 More than 340 million was paid out in salaries and wages to local residents during the
construction phase alone.
60 The Western Cape Trade and Investment Promotion Agency
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contribute to the upliftment of the area. Without the plant these projects
would become less viable, if they survived at all.
147.The public interest thus strongly favours the approval of the merger.
Views of the Department of Trade and Industry
148.Government industrial policy has played and will continue to play a key
part in the structure of our local steel industry. The Department of Trade
and Industry has been involved with and has been a champion of the
Saldana project for many years and for this reason we invited the DTI to
make submission to us on the merger 61. Regrettably these submissions
were only received at the hearing itself in the form of oral testimony by
Department representatives.
149.Nevertheless, the thrust of the DTI submission was that they were in
favour of the merger, as it would enhance the competitiveness of Iscor
internationally.
150.Iscor needs to compete in a global market against firms much larger than
it. Unless it can expand its productive capacity it will falter in its attempts to
secure international markets.
151.The DTI is also of the view that if Iscor can become a lower cost producer
this will benefit the downstream steel industry in South Africa and thus
Iscor’s customers will also become more competitive. The DTI also
endorsed the public interest submissions made by the parties which we
referred to earlier.
152.What is missing from the DTI’s approach and which we could not get a
satisfactory answer for, was why Iscor should pass on these cost savings
to its customers in the domestic market where it faces no serious local
competition.
153.The fall in the rand means that Iscor can maintain its price at an import
parity price and since it faces no domestic pressure retain the margin for
itself. Whilst it’s true that our tariffs on steel imports are comparatively low
at 5 % the authorities have not been reticent about imposing steep anti
at 5 % the authorities have not been reticent about imposing steep anti
61 In 1995 in a submission to the Steyn Commission the Minister of Trade and Industry stated
that “ the Saldanha Steel Mill epitomises the type of world class industry that South Africa can
and must develop.” Paragraph 3.2.3 of the Report op cit.
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dumping duties at the behest of Iscor. In 1999 the Board on Tariffs and
Trade (the BTT) imposed antidumping duties of 81,7 % and 94,8%,
respectively, on steel imported from Russia and the Ukraine. 62
154. The low figures of import penetration indicate that foreign competition does
not impose a serious price constraint on Iscor. Within a few days of our order
being handed down in this matter Iscor announced that it was to increase
prices on its flatsteel products by 9,8% from May because, according to its
Corporate Affairs Executive, Phaldie Kalam, the company’s flatsteel business
has been “under severe pressure” because of dollar prices for steel being at a
30year low. “In particular, margins at our Vanderbijlpark and Saldanha steel
mills have been constrained,” he said. 63
155. Were Iscor faced by a strong domestic competitor it might be more
constrained in the local market. We are concerned that downmarket firms
may not see Iscor’s growth through the same rose tinted spectacles as the
DTI, but that is not a subject that we need dwell on for the purpose of this
decision for all the reasons given above.
Conclusion
156. We are of the view that the merger will have an anticompetitive effect both
because of the removal of Saldanha as a potential competitor to Iscor and the
vertical effects on DSP. The vertical problems can be cured by the conditions
we have imposed. In respect of the horizontal effects, when we balance the
loss of potential competition with the prospect of Saldanha failing we
conclude that the merger will not substantially lessen or prevent competition.
In addition, from a public interest perspective, we arrive at the same
conclusion as the failure of the transaction would in all probability lead to a
closure temporarily or permanent of the firm, and with that a devastating
impact on the region.
impact on the region.
157.The merger is approved subject to the conditions set out in the order
attached hereto.
62 The problems of the international steel market are to a large degree created by distortions
because of protectionist measures imposed by governments in varied forms. These distortions
impact upon other markets, as steel companies denied access to one market have to find other
outlets for their production. Thus a company denied access to the markets of country A, because
of a tariff or quota, will land up exporting to Country B only to be accused of dumping. As John
Kay, an economist writing in a column for the Financial Times, recently observed,” So long as
politicians love steel, steel will always be a problem.” (Financial Times, 26 March 2002).
63 See Business Day: Company News, In Brief dated 26 February2002 on page 15.
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4 April 2002
N Manoim Date
Concurring: P.E. Maponya and M. Holden
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