COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 06/LM/Jan02
In the large merger between:
Mondi Limited
And
Kohler Cores and Tubes a division of Kohler Packaging Limited
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Reasons for Tribunal Decision (NonConfidential version)
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Prohibition
1. The proposed merger between Mondi Limited and Kohler Cores and Tubes was
prohibited by the Tribunal in an order issued on 23 May 2002. The reasons for this
decision follow.
The transaction
2. This is a vertical merger where Mondi Ltd, a supplier of paper products, including
those used in the manufacture of cores and tubes, is acquiring the cores and tubes
division of Kohler Ltd, one of Mondi’s downstream customers. Moreover, the
upstream paper supplier is also a customer of the downstream cores and tubes
manufacturer that is certain of Mondi’s other paper products (for example,
newsprint) are wound on to cores and tubes produced in the target market.
3. On the 13 th March 2002 the Competition Commission recommended that this merger
be prohibited.
The Parties
4. Mondi Ltd, the acquiring company, is a wholly owned subsidiary of Anglo America
plc. Both Anglo and Mondi control numerous companies. Mondi is an international
pulp, paper, board and timber manufacturer. Mondi’s divisions are Mondi Paper,
Mondi Recycling, Mondi Cartonboard, Mondipak, Mondi Kraft, Mondi Timber and
Mondi Forests.
5. The primary target firm is Kohler Cores and Tubes (“KC&T”), a division of Kohler
Packaging Ltd (“Kohler”), which is a subsidiary of Malbak Ltd. Remgro Limited,
Malbak’s largest shareholder, holds 50,4% of the issued share capital of Malbak
6. Mondi intends to locate KC&T within Mondipak, which produces corrugated
packaging for both agricultural and industrial markets.
Rationale for the transaction
7. Kohler, in a letter from its attorneys, informed the Commission that Kohler wanted to
sell KC&T because the manufacturing of cores and tubes is not its core business.
Kohler had approached two companies to purchase its cores and tubes business,
Sonoco International 1 and Mondi. In the papers submitted to us Mondi averred that
Sonoco decided against purchasing Kohler’s cores and tubes business because of
concerns surrounding the depreciation of the Rand, labour unrest and crime.
However, in the hearing the witness from KC&T testified that Sonoco rejected the
approach because it preferred to enter into a joint venture with Kohler rather than an
outright purchase of KC&T – we return to this discrepancy below.
8. Mondi, for its part, averred that it had considered the possibility of starting its own
cores and tubes manufacturing business in order to ensure the quality of the cores and
tubes it used in certain of its manufacturing processes. However when Kohler
approached it with an offer it decided to purchase KC&T rather than ‘destabilizing’
an already small industry by introducing a new player. Note, however, that at the
an already small industry by introducing a new player. Note, however, that at the
hearing the witness from Mondi (and the witness from KC&T) denied any knowledge
of quality problems experienced with KC&T’s product and informed the panel that
Mondi had purchased KC&T because it represented a solid business opportunity it
regarded the merger as value enhancing 2 and it believed that it could run KC&T more
cost effectively 3. Neither of these claims was substantiated. Again, we return to this
discrepancy below.
Background information
1 Sonoco is a global supplier of industrial consumer packaging and packaging solutions, based in the USA
and which is listed on the New York Stock Exchange. It’s sales in 2001 were approximately $2.6 billion.
2 See page 211, line 10 of the transcript.
3 See page 217, line 16 of the transcript.
2
9. As already noted, this is a vertical transaction with Mondi, the acquiring firm,
producing paper products, an input into the activities of Kohler, the target firm, which
produces cores and tubes. Mondi’s activities are thus in the upstream market and
Kohler’s in the downstream market.
The upstream marke t
10. Mondi Cartonboard operates in two broad categories, namely packaging and
industrial. It produces coated, uncoated and laminated folding boxboard, which is
used for packaging of, inter alia, food, pharmaceuticals and detergents. The division
also manufactures specialty boards used in the stationery, match, paper and textile
industries. The carton board division’s mill is situated at Springs and it produces
approximately 130 000 tons of board each year.
11. Mondi Cartonboard supplies the following products to KC&T and its competitors for
use in the manufacturing of cores and tubes:
1) Ndicore4 core board
This is a core board, manufactured from recycled paper 5, with a maximum
strength of 300330 scott ply 6. It is not a strong paper for “scott ply bond”
purposes, as it does not have individual ply adhesion strengths and tears
easily. It does however create bulk to build up the wall thickness, and, hence,
the ‘crush strength’, of cores. Mondi specifically developed Ndicore
approximately 6 years ago specifically for use in the cores and tubes industry.
The price per ton is approximately R3 723. The witness from Mondi averred
that at approximately 12 000 tons per annum 7, the production of Ndicore
represents a relatively small part of Mondi Cartonboard’s total output, and that
it is a relatively low return part of the carton board business.
2) Kraft Paper
Kraft paper is manufactured for use in the corrugated box industry, although,
to a limited extent it is also used in the manufacture of cores and tubes. Kraft
to a limited extent it is also used in the manufacture of cores and tubes. Kraft
paper (“kraft”) is manufactured from virgin paper and is stronger and gives a
smoother finish than Ndicore. Kraft prices are currently lower than the price
of Ndicore. Mondi Kraft is manufactured at the company’s Richard’s Bay
mill.
4 Ndicore is the brand name of the specialty core board supplied by Mondi Cartonboard.
5 The distinction between a paper product produced from recycled paper (for example, Ndicore) and one
produced from offcuts of virgin paper (for example, Spiralwind, Sappi’s specialist coreboard) is
elucidated in the testimony of Mr. Van Breda, the witness from Mondi at page 238, line 10 of the
transcript.
6 Scottply refers to the strength of the paper used.
7 This represents approximately 9.2% of the total output of board from the Springs Mill per year.
3
12. Sappi – the other South African producer of paper products – also produces kraft
paper at its Ngodwana and Tugela mills. However, the Sappi product specifically
directed at the manufacture of cores and tubes is Spiralwind. This is the trade name
given to the kraft liner board which Sappi supplies to the cores and tubes industry.
Spiralwind then is a kraft paper manufactured from offcuts 8 with an approximate
maximum strength of 200 scott ply. It is manufactured from virgin paper. As with the
kraft paper produced by Mondi, it is stronger and gives a smoother finish than Mondi
Ndicore. Price per ton for both Mondi and Sappi kraft paper is between R3 247 – R3
555.9 Note that although Ndicore currently costs approximately 15% more than
Spiralwind, it does give a 7% better yield leaving an effective price differential of
approximately 8%.
13. Core board can also be imported from Indonesia, Finland, France, Spain and the
UK.10 Imported core board is generally of a higher quality than that available locally
and is used where exceptional crush strength or very large internal diameters of the
core are required. Some of these papers are also made from recycled waste. The
import duty on imported paper used in the manufacturing of cores and tubes is 8%
and will be lowered over the next 2 years to 2%.
14. Mondi supplies Ndicore to KC&T, Qualicores and Triumph in Kwazulu Natal and to
Framen11 (the second largest producer of cores and tubes in South Africa) and Tube
Products in Gauteng. It also supplies Ndicore to KC&T in the Western Cape.
The downstream market
15. KC&T manufactures cores and tubes, angle board, dufaylite (honeycell) and textile
cones. Kohler operates from 3 factories located in Johannesburg, Pinetown in Natal
(known as Texac) and Cape Town.
16. Cores and tubes are spirally wound paper tubes. They are utilized as an inner core in
16. Cores and tubes are spirally wound paper tubes. They are utilized as an inner core in
8 See footnote 4, above. These are the offcuts or the reel ends of the Kraft linerboard manufacturing
process, the paper manufactured by Sappi for the corrugated industry. Those offcuts that are not used by
the core manufacturers are repulped.
9 The Spiralwind price is a factor of the kraft price. Mr De Sousa (page 294 – 295 of the transcript)
testified that because Spiralwind is a considerably narrower width than the linerboard of which Spiralwind
is an offcut and which Sappi sells to the carton board manufacturers, the price of Spiralwind is between
R500 and R1000 per ton lower than the price of linerboard.
10 We will refer to board that is used in the manufacture of cores and tubes by South African core and tube
manufacturers as ‘core board’ even though certain of the board used for this purpose – for example, kraft –
is not specialist core board. In fact, as already noted, the only truly specialist coreboard produced in South
Africa is Mondi’s ‘Ndicore’. Sappi’s ‘Spiralwind’ is exclusively used in the manufacture of cores and tubes
board but it is produced from kraft liner board, which is produced as an input in the manufacture of cartons
and which generates certain offcuts used to produce Spiralwind. When relevant we will specify the
particular core board or paper product to which we are referring.
11 According to Framen , Ndicore represents 75% of the paper used by it in the manufacturing of its cores
and tubes.
4
various applications – for example, products such as paper, board, textiles, steel and
plastic are wound on to an inner core or tube. Note that when these products – for
example, newsprint, are used by their downstream purchasers, the core is inserted
into the printing press and the product is wound off. This means – and the
significance of this point will become apparent – that if the core collapses or crushes
it is not possible to use the surrounding material because it cannot then be easily and
smoothly wound off the core. Hence, although the value of the core is a fraction of
the value of material surrounding it, a malfunctioning core may nevertheless render
useless the material that it supports.
17. KC&T’s largest customers for its cores and tubes are Sappi Paper, Hulett’s
Aluminium, Columbus Steel and S.A. Nylon Spinners. These highend industrial
customers represent 65% of KC&T’s core and tube turnover per annum. Mondi
Cartonboard, Mondi Paper, and Mondi Kraft currently purchase 25%, 57% and 50%
respectively of their cores and tubes requirements from KC&T.
18. Framen, KC&T’s largest rival, supplies most of Mondi’s core and tubes
requirements.12 According to the parties Framen supplies 100% of Mondi’s
requirements in the Gauteng province while KC& T supplies 100% of Sappi’s
requirements in the same region.
19. The cores and tubes market accounts for 65% of KC&T’s turnover and is the focus of
this decision. Note however that KC&T is also active – indeed is the dominant force –
in the production of angle board, dufaylite and textile cones. KC&T’s market share
for Angle Board, 13 which is used as a stabilizing strut for pallet loads for transport
of fruit is 65%. Its market share for Dufaylite14, which is used as a lightweight filler
of fruit is 65%. Its market share for Dufaylite14, which is used as a lightweight filler
for door panels is 33%. Its market share for Textile Cones ,15 on to which yarn is
wound is 75%. It was common cause between the Commission and the parties that
the merger raised no competition concerns in respect of these three markets. We
concurred with this assessment and accordingly we confine ourselves to the cores and
tubes market.
The hearing
20. A prehearing conference was held on 4 April 2002 at which the Tribunal instructed
the merging parties and the Commission to furnish additional information. The
parties indicated that they intended calling only Mr. Peter Davies, Divisional
12 According to the Representative of Framen, 52% of its total annual turnover is derived from sales to
Mondi.
13 Angle board is paper, which is laminated and shaped to a right angle. The largest users are in the fruit
industry, particularly those who export.
14 Dufaylite is paper which is spot laminated to form strips of paper which resemble a beehive cell
structure when expanded. According to the Commission no substitute products are available at competitive
prices.
15 According to the Commission plastic cones, for technical reasons, cannot be substitutes for paper cones.
5
Manager of Kohler Cores and Tubes, for the plants in Natal, Gauteng and the Cape as
a witness. The Commission informed the prehearing conference that it would be
calling only Mr. Bino Silva, Managing Director and sole shareholder of Diversified
Paper Cores & Tubes (Pty) Ltd. Mr. Silva’s opposition to the transaction was on
record.
21. The Tribunal member presiding at the prehearing conference instructed the
Commission to secure the presence at the hearing of representatives of Framen Paper
Products, the target company’s largest competitor, from International Tube
Technology, another producer of cores and tubes, and from Sappi 16, another major
supplier of board to the cores and tubes manufacturers and a significant purchaser of
cores and tubes. 17 We also requested that representatives of Mondi and KC&T be
available for questioning at the hearing.
22. The following witnesses then gave evidence at the hearing:
• Mr. Bino Silva, Managing Director and sole shareholder of Diversified Paper
Cores & Tubes (Pty) Ltd.
• Mr. Peter Davies, Divisional Manager of Kohler Cores and Tubes, for the
plants in Natal, Gauteng and the Cape.
• Mr. Peter Jooste, Manufacturing Director of International Tube Technology.
• Mr Theo van Breda, General Manager of Mondi Carton Board.
• Mr. Shalom Bouzaglou, Managing Director of Transpaco Cores (Trading as
Framen Paper Products)
• Mr. Koos Janse van Vuuren, Purchasing Manager of Sappi Enstra Mill.
• Mr. Antonio de Sousa, Business Manager for Container Board, Sappi.
16 The witnesses of Sappi were subpoenaed to attend the hearing.
17 Note that counsel for the merging parties expressed some concern (transcript p2026) regarding the
witnesses called by the Tribunal. The precise nature of the concern is not at all clear. It does not seem that
the right of the Tribunal to call witnesses was contested. Nor is this surprising because Section 45 of the
Competition Act provides in clear terms that ‘The member of the Competition Tribunal presiding at a
hearing may (a) direct or summons any person to appear at any specified time and place; (b) question any
person under oath or affirmation’. The Tribunal was however cautioned by counsel of the dangers of
‘entering the ring’ he appeared concerned that he may be presented with evidence that he had not had
sufficient opportunity to consider. The panel made it clear that should he wish to take further instructions
on any matter raised by these witnesses then we would be willing to consider a postponement to allow him
to do so. It should also be pointed out that the witnesses called by the Tribunal all represented firms who
had made written submissions in the course of the Commission’s investigation and whose submissions
were on record – the questions put to them by the Tribunal were based on their written submissions. It
should also be borne in mind that we are enjoined to determine whether or not the transaction is likely to
substantially prevent or lessen competition. Where the merging parties and the Commission elect to call so
few witnesses – note that the witness list did not even include a representative of the acquiring party – then
we are obliged to take the steps necessary to discharge our functions under the Act. This routinely includes
instructing the parties and the commission to file additional documents and to make additional witnesses
available.
6
Competition Evaluation
Introduction
23. In his closing statement counsel for the merging parties cautioned us against being
‘… seduced by speculative arguments, which are easy to conjure up but altogether
more difficult to prove…’. As a statement of general principle this caution is, of
course, unimpeachable, even trite. But in the context of merger adjudication it invites
comment. Judge Richard Posner, the highly regarded antitrust scholar and US
Appeals Court Judge expresses it thus:
‘Section 7 (of the Clayton Act) does not require proof that a merger or other
acquisition has caused higher prices in the affected market. All that is necessary
is that the merger create an appreciable danger of such consequences in the future.
A predictive judgment, necessarily probabilistic and judgmental rather than
demonstrable, is called for. Considering the concentration of the market, the
absence of competitive alternatives, the regulatory barriers to entry (the certificate
of need law ), the low elasticity of demand, the exceptionally severe cost pressures
under which American hospitals labour today, the history of collusion in the
industry, and the sharp reduction in the number of substantial competitors in this
market brought about by the acquisition of four hospitals in a city with only
eleven (one already owned by Hospital Corporation), we cannot say that the
Commission’s prediction is not supported by substantial evidence.’ 18
24. Of course a prediction must be supported by evidence, but no amount of reliable
evidence will remove the predictive or ‘probabilistic’ element in merger adjudication.
This is explicitly recognized in the Act, which enjoins us to determine the ‘ likely’
consequences of a transaction before us. The Act provides explicitly for a regime
where the effect of a merger is assessed prior to its implementation. The necessary
implication of this regime is that adjudication is a priori , not post hoc . Since the
merger has not taken place at the time of adjudication and indeed may not take place
at all, an element of prediction regarding what may happen after implementation is
inherent in the statutory design. 19 Fortunately significant advances in economic
theory, particularly in game theory, have eased the task of prediction – based on
observations of past behaviour and on the rational responses of profit maximizing
firms to a given set of incentives we are able to make predictions from a strong
scientific basis, one far from the act of ‘conjuring’ which counsel for the merging
parties so rightly disparages. It is instructive that game theory has its earliest origins
in observations of the behaviour of participants in oligopolistic markets.
18 Hospital Corporation of America v. Federal Trade Commission 807 F.2D 1381 (1986).
19 There is, of course, a predictive aspect at all stages of a merger evaluation, not merely in the competition
evaluation. Hence a competition authority attempting to evaluate the competition implications of a merger
is no more ‘predictive’ than a merging party claiming efficiencies or predicting a positive impact on public
interest.
7
25. We are dealing here with a vertical transaction. We have elsewhere observed that
vertical transactions seldom attract adverse attention from the competition
authorities.20 This is not surprising given that these transactions, unlike their
horizontal counterparts, do not imply greater concentration in either of the markets
implicated in the transaction. Indeed contemporary antitrust scholarship and
jurisprudence is careful to acknowledge the procompetitive, efficiency promoting
features that frequently attach to vertical arrangements generally.
26. However, there was a time when the US Courts treated vertical mergers as almost per
se illegal and several landmark Supreme Court decisions perceived a danger of
foreclosure arising from what would now be considered very low upstream and
downstream market shares indeed. The Brown Shoe judgment in which a
manufacturer with a 4% share of the upstream market was prevented from acquiring a
retailer with a market share of less than 2% is the best known of these Supreme Court
judgments.21 The Chicago School attacked this view – which it disparaged as
protecting competitors rather than competition with a significant degree of success
although judicial and scholarly opinion clearly never embraced Robert Bork’s
argument in support of treating vertical transactions as per se legal. Now the
pendulum has swung back some considerable distance since the halcyon days of the
Chicago School and, while contemporary antitrust would distance itself from the
approach taken in Brown Shoe, the prevailing wisdom strongly accepts that vertical
transactions require close antitrust scrutiny, and, in certain circumstances, outright
prohibition. 22 Certain features of the transaction currently under examination would
prohibition. 22 Certain features of the transaction currently under examination would
unquestionably attract contemporary antitrust attention.
27. Firstly, that the target firm, KC&T, is overwhelmingly the most powerful firm in its
market is bound to attract the attention of any competition authority – Mr. Davies, the
KC&T official who testified at the hearing, describes it ‘a very dominant player in the
industry’.23 Secondly, the acquiring firm, Mondi, does not only enjoy a powerful
presence in the upstream core board market, but is also one element of a long
standing duopoly spanning a significant number of markets within the broadly
defined paper products market. The other member of this duopoly, Sappi, is also an
important supplier of input to the cores and tubes manufacturers (including to the
target firm) and is also a significant customer of the target firm – indeed Sappi is a
more significant customer of KC&T, the target firm, than is the acquiring firm,
Mondi. And then there are several highly unusual features of this transaction. For
example, it is unusual, to say the least, that the acquiring firm, Mondi (as well as its
20 Sasol/Schumann Tribunal Case No: 23/LM/May02
21 Brown Shoe Co. v United States (370 U.S. 294 (1962))
22 For brief historical overviews of the US treatment of vertical mergers see Michael H.Riordan and Steven
C. Salop – Evaluating Vertical Mergers: A PostChicago Approach (Antitrust Law Journal Vol. 63, 1995);
M. Howard Morse – Vertical Mergers: Recent Learning ( The Business Lawyer, Vol. 53, August 1998);
Areeda, Hovenkamp and Solow – Antitrust Law (Vol. IVA)
23 Page 136 of the transcript of the hearing .
8
fellow duopolist Sappi) is both a key input supplier to the target firm and a key
purchaser of its output. Moreover, the fact that KC&T’s competitor, [acquiring firm –
confidential], is simultaneously in the process of concluding a deal with the acquiring
firm, Mondi, to purchase, postmerger, the Cape Town plant of KC&T also demands
consideration by the competition authorities.
28. There are three broad theories or sets of concerns that inform antitrust evaluation of
vertical mergers. The first is best characterised as ‘raising rivals costs’ pursued by
means of ‘foreclosure’ – either by foreclosing access on the part of downstream
customers to key inputs (‘input foreclosure’) or else through foreclosing access on the
part of upstream competitors to key customers (‘customer foreclosure’). The second
set of concerns centers on the vertical transaction’s ability to promote coordinated
conduct between competitors (horizontal coordination) through facilitating an
exchange of competition sensitive information. The third – not relevant to this
transaction – is concerned with the ability of a vertically integrated firm to evade
price regulation.24 The parties have also identified these as the major concerns
arising from vertical mergers. 25
Foreclosure
29. The Commission’s recommendation that the transaction be prohibited rests primarily
upon the ability of the merged, vertically integrated firm to foreclose the downstream
market by denying to its nonintegrated competitors the supply of the board essential
in the manufacture of cores and tubes (input foreclosure). The parties, however, take
issue with the factual basis of this concern: they contend that, should the integrated
firm attempt to ‘selfdeal’ only, that is, should it decide to deny Ndicore to its
downstream competitors, then the foreclosed cores and tubes manufacturers will
simply turn to alternative inputs readily available in the market. 26 It appears then
that the identification of the relevant market will determine whether or not foreclosure
will result from this transaction.
30. However, as will be elaborated below, while our analysis of the relevant market does,
on balance, persuade us of the likely existence of substitutes for Ndicore, those
substitutes are only available from Sappi, the other member of the paper products
duopoly. We will demonstrate that by withholding Ndicore from nonintegrated
rivals downstream, Mondi will enable Sappi to increase the price of its core board
thus raising the costs of Mondi’s rivals in the downstream cores and tubes market. In
24 For useful surveys of the competition theory governing vertical mergers see Riordan and Salop (op.cit)
and Areeda, Hovenkamp and Solow (op cit)
25 On page 537 of the record the parties explicitly state that ‘Vertical mergers can potentially give rise to
three types of competition concerns namely: (1) anticompetitive exclusion;(2) collusion facilitated by
information exchange; (3) evasion of regulation.’
26 By ‘selfdeal’ we mean confine the supply of the upstream product to its downstream division only and/
or confine its purchases of upstream inputs to its upstream division alone. Note that Mondi denies that it
intends to selfdeal postmerger. This is discussed in detail below.
9
other words, foreclosure will not be affected by Mondi unilaterally withdrawing
supplies of Ndicore from nonintegrated cores and tubes producers. Rather,
foreclosure will be affected through coordination between Mondi and Sappi. This
coordination need not be explicit. It may be tacit, driven by the respective interests of
the members of the paper products duopoly which point them in the direction of
cooperation. We have also determined that the foreclosure will not only be directed at
Mondi’s rivals in the downstream market. We will also show that it will be directed
against prospective imports of paper products or new entrants into the upstream
market where, trite to say, Mondi and Sappi’s interests are closely aligned.
Facilitating Coordinated Conduct
31. In addition, we are persuaded that the transaction will facilitate coordinated conduct
between Mondi and Sappi in the input market as well as in other related markets in
which the duopolists are present. The transaction will facilitate this conduct by
easing the exchange of information in both the upstream and downstream markets.
The prospect that a vertical agreement may be an instrument for strengthening a
horizontal arrangement is widely accepted in antitrust scholarship and jurisprudence.
In the words of Areeda, Hovenkamp and Solow:
‘..under fairly conventionally accepted theories vertical mergers might
facilitate horizontal collusion, principally by changing the nature of output
pricing and thus making cartel ‘cheating’ easier to detect and
discipline.’27
32. We are enjoined by Section 12A of the Act to determine whether the transaction ‘is
likely to substantially prevent or lessen competition’. In summary, we find that the
transaction will likely
Raise the cost of doing business by rivals of Mondi and Sappi in the upstream
market,
Raise the cost of doing business by rivals of Mondi and Sappi in the upstream
market,
Raise the cost of doing business by rivals of KC&T in the downstream
market;
Facilitate the exchange of pricing and other sensitive information and, hence,
facilitate coordinated conduct between Sappi and Mondi in the upstream
market and in a number of other markets in which both are engaged,
and, thus, ‘substantially prevent or lessen competition’.
33. The reasons for these findings follow.
27 Op. cit., page 143. See also the NonHorizontal Merger Guidelines, 1984, par 4.22 of the U.S.
Department of Justice and the Federal Trade Commission.
10
The Relevant Markets
34. This being a vertical transaction there are, per definition, two relevant markets to be
determined. The upstream market is that market in which board is supplied to
manufacturers of cores and tubes. The downstream market is the market in which
cores and tubes are supplied to a variety of endusers. As already noted the
characteristically neat distinction between these markets is somewhat muddied by the
dual role of the input suppliers who are simultaneously amongst the most important
purchasers of cores and tubes.
The Downstream Product Market
35. It is, for ease of exposition, preferable to begin with identifying the relevant
downstream market. The Commission argues that there is not a single market for
cores and tubes. It insists that there are two markets, a topend and bottomend
market. The parties make much of the Commission’s failure to delineate clearly the
two markets for which they contend. This shortcoming notwithstanding it is clear
that all the participants in the market share the Commission’s view to the extent that
they recognize a distinction between, on the one hand, the market segment for heavy
industrial cores in which the quality of the core and particularly its ‘crush strength’,
that is its ability to withstand considerable pressure, is paramount, and, on the other
hand, the market segment for light industrial and consumer product cores. The
various witnesses all distinguished their firms’ activities by reference to the segment
of the market in which they competed – certainly while KC&T, Framen and
Diversified Cores and Tubes were somewhat active in the production of lighter cores
and tubes, all clearly identified the production of heavy cores and tubes as their
principal market. ITT, on the other hand, clearly operated at the lighter end of the
market and while it was not confined to the production of mere cores for toilet rolls –
the core consistently caricatured as typifying the lower end of the market nor, it
appears, was it active in the production of heavy industrial cores and tubes.
36. These two markets are distinguished by a variety of factors. As already noted, the
quality of the core, and, in particular, its crush strength is paramount. 28 Predictably, it
appears that those manufacturers focused on the production of lighter cores are not
easily able to compete in the production of heavier cores without investment in
particular equipment and skills. Mr. Bouzaglou, the witness from Framen, even held
that a producer would not want to use the same machine in producing for the top and
lower ends of the market, nor, he averred, would it be commercially sensible to
28 Counsel for the merging parties insisted that because certain purchasers of industrial cores and tubes
specified only the diameter and length of the core they required and not the crush strength that this latter
capacity was therefore of no consequence in the construction of cores for those customers. This is
persuasively answered by Mr. Silva who argued that, in those cases, it was for the core and tube
manufacturer to ensure that it produced a core of the requisite crush strength. If the manufacturer
attempted to cut corners by underspecifying the crush strength the core would collapse, presumably
together with the core manufacturer’s business.
11
switch from one paper input to another on the same machine. 29 Mr. Silva also
testified – and this part of his testimony was not contested that returns in the upper
segment of the market are notably larger than those at the lower, easiertoenter end
of the market. 30
37. This having been said, it is indeed not easy to specify a precise point of delineation
between these market segments. Counsel for the parties insists that because a specific
delineation proves elusive, we are then left with a single market for cores and tubes
with the various categories simply falling along a single, seamless spectrum. It is
somewhat akin to defining an elephant – while this may be a difficult task, it is
nevertheless easy to recognize an elephant when one happens upon one. A failure to
accurately define an elephant does not simply place it along a continuum of four
legged beasts, the one substantively indistinguishable from the other. So with cores
and tubes – every witness who testified before the Tribunal (including those
representing the merging parties) constantly referred to two distinct market segments.
We accept this delineation and simply identify the downstream market relevant to this
transaction as the market for heavy industrial cores and tubes. Its principal customers
are in the metal, paper and textile industries although certain textile cores and tubes
do belong at the heavier end of a second market segment, namely, the market segment
for light industrial and consumer product cores and tubes which is not relevant to this
transaction.
38. KC&T’s national market share of all cores and tubes is 45%. Its main competitors are
Framen Paper Products (11%), International Tube Technologies (ITT) (6%), Tube
Products (1%) and Raybro (1%). If the other products produced by KC&T are
included – that is, the textile cones, dufaylite and angle board – KC&T’s share rises
included – that is, the textile cones, dufaylite and angle board – KC&T’s share rises
to 59% and Framen’s to 15%. The Commission calculated the concentration level
(HHI) in the downstream market at approximately 2502 points – the 1984 US
Vertical Guidelines, par. 4.131, states “ that the Department is unlikely to challenge a
potential competition merger unless overall concentration of the acquired firm’s
market is above 1800 HHI .”
The Upstream Product Market
39. As already noted, the upstream market may be generally characterized as that in
which core board is supplied to manufacturers of cores and tubes. Indeed the
merging parties are content to leave the definition there. On this version the market is
characterized by a range of competing products, a variety of types of board, each of
which may be used interchangeably in the production of both heavy and light cores.
This includes the specialty core boards – namely Mondi’s Ndicore and Sappi’s
Spiralwind – as well as kraft paper produced by Mondi. In support of this contention,
the parties have submitted evidence purporting to show that cores and tubes are
29 See page 270 of the transcript.
30 Page 19, line 7 of the transcript.
12
indeed manufactured using both of the locally produced specialty core board
varieties, Mondiproduced kraft and specialty imported core board.
40. However, the Commission holds otherwise. It holds that the relevant market is that
for the supply of Ndicore, the specialty core board produced exclusively by Mondi,
the acquiring firm. The Commission provides evidence purporting to show that there
is no efficient, commercially viable substitute for Ndicore in the manufacture of ‘top
end’ or, what we have described as ‘heavy industrial’ cores and tubes. This naturally
implies that the acquiring firm is a monopolist in the relevant market. By foreclosing
the supply of Ndicore to all but its vertically integrated producer of cores and tubes –
itself a dominant producer in its market – it would effectively leverage its upstream
monopoly to the downstream stage of the production process.
41. This view of the relevant market is emphatically rejected by the parties who present
evidence purporting to show that there are several substitute products for Ndicore. In
the lower market segment – caricatured as the production of toilet roll cores but in
truth comprising a range of light industrial and consumer good applications – it
appears generally accepted that Ndicore would be overspecified because cores and
tubes in this segment of the market do not require the crush strength which the
Commission alleges is a feature of Ndicore alone. On the other hand, at the top end of
the upper segment of the market – that is, that part of the heavy industrial segment of
the market in which the most technically demanding cores and tubes are produced,
cores that require a particularly high crush strength it is common cause that there is
no substitute for imported paper. This latter – the heaviest industrial cores implicates
only a small part of the relevant market.
only a small part of the relevant market.
42. However, between these extremes, in particular in the market for the production of
heavy industrial cores and tubes, there are a large range of cores and tubes produced
out of Ndicore alone, or a combination of Ndicore and imported paper, or a
combination of ndicore and one of the kraft papers (Spiralwind or Mondi kraft), or
one of the kraft papers alone.
43. This evidence appears to fly directly in the face of the Commission’s contention and
of the evidence of the only witness that it called, Mr. Silva of Diversified Cores and
Tubes. Mr. Silva initially insisted that it was impossible to build a core for a large
part of the market without using a large proportion of Ndicore as the coreboard
input. While later he appeared to concede that it was technically possible to build
most heavy cores without using Ndicore, he nevertheless continued to insist that it did
not make commercial sense to do so. Mr. Silva’s personal conduct as a producer of
cores and tubes is at least confirmatory of his assertions – he is, without doubt, a
person of considerable experience in this industry (which he has only recently re
entered after ‘serving out’ a five year restraint of trade) and he clearly uses only
Ndicore in production of industrial cores and tubes. 31
31 Indeed counsel for the merging parties attempted to establish, through a perusal of the records of his
13
44. We are persuaded that Ndicore is indeed a superior product. In fact a careful reading
of the record will show that only one witness – Mr. Jooste of International Tube
Technologies – insisted that Ndicore was absolutely interchangeable with kraft paper.
Indeed Mr. Jooste’s insistence that an industrial core could be made out of any paper
whatsoever including, in his estimation, toilet paper, undermines, in our view, the
reliability of his evidence. It is possibly predicated on the narrow range of ITT’s
experience which appears to be in the manufacture of cores and tubes for consumer
applications and at the lighter end of industrial applications.
45. For the rest the evidence was located somewhere between the polarities occupied by
Mr. Silva and Mr. Jooste. In other words it was acknowledged by witnesses from
both KC&T and Framen that, all things being equal, Ndicore was the preferred input
in producing a core that was required to withstand considerable pressure or ‘crush’,
that is, all cores in the relevant market, the heavy industrial segment of the cores and
tubes market. It has been pointed out time and again that the value of the material
surrounding the core – for example, the newsprint or the aluminium – dwarfs the
value of the core itself and, yet, if the core malfunctions, essentially if it is crushed by
the pressure of the surrounding material, the latter is rendered useless. This suggests
that the purchasers of heavy industrial cores would be prepared to pay a premium for
reliable quality – expressed otherwise one would reasonably expect a low price
elasticity for Ndicore, the clear quality leader amongst the variety of board and paper
input used for the production of heavy industrial cores and tubes.
46. Moreover, the merging parties’ arguments for denying the distinction between
Ndicore and kraft papers are not, on their own, persuasive. They argued, for
example, that because, prior to the development of Ndicore, cores and tubes had been
manufactured from alternative inputs that this established that it could be done again
– in other words, that core manufacturers could simply revert to utilizing the board
used in preNdicore days. However, horse drawn carriages were used before the
development of the automobile and could still technically be used as a means of road
transport from one point to another, but they would not render a very efficient service
compared to the alternative product now available. Indeed one is left with the distinct
impression that Ndicore may well be the coreboard of the future but that a
combination of factors nevertheless ensures that inferior board is still widely used in
the manufacture of cores and tubes. These factors include the vested interest and
market power of a company like Sappi whose preference for using its own paper in
the manufacture of its cores and tubes combined with its purchasing power in the
cores and tubes markets ensures that Sappi product is used in the manufacture of
cores and tubes – it is interesting that after lengthy trials using Sappi product to
manufacture cores, trials which Mr. Silva insisted had failed, Sappi has now decreed
purchases of inputs, that Mr. Silva used kraft paper in the production of his industrial cores and tubes.
However after examining the records submitted by Mr. Silva, this assertion was not made again suggesting
that Mr. Silva had indeed established that he, at least, used Ndicore alone in the production of heavy
industrial cores and tubes.
14
that all its cores and tubes must be manufactured using Spiralwind. In other instances
a plant such as Mondi Tugela that has long been producing its cores and tubes in
house continues to do so on old machinery designed to work with a particular type of
paper, that being the kraft paper produced at the Tugela mill. 32 In any innovative
process there is a transitional period in which vested interests and installed capacity
ensure that the new and old products continue to coexist – vide vinyl records,
cassette tapes and CDs even though the superiority of the new product is clear. We
are left with a strong sense that this may explain the apparent interchangability of a
technically superior product like Ndicore with other inferior board and kraft papers.
47. This is considerably more than mere hunch. The very manner of Ndicore’s
development tends to confirm the product’s superiority over alternative inputs.
Ndicore was clearly designed for use as a specialized coreboard. It was developed
by Mondi with the assistance of the major cores and tubes manufacturers, notably
KC&T itself and Framen. 33 Sappi, as noted above, has striven to produce a core
board to match Ndicore’s capacity but, it appears, without success. Despite Sappi’s
recent requirement that cores and tubes purchased by it use Sappi inputs, we are not
persuaded that it has successfully developed a core board with Ndicore’s capabilities.
The papers submitted for this merger indicate that Sappi expected to take another
three years before developing a product that would match Ndicore. 34 However,
without explanation it appears that the company has suddenly decided to compel core
manufacturers to use its product in the manufacture of cores for Sappi’s use. There
are solid prima facie grounds for believing that this decision was inspired precisely by
this transaction rather than by any sudden technological breakthrough.
this transaction rather than by any sudden technological breakthrough.
48. On balance however we cannot ignore the clear evidence that demonstrates that,
despite Ndicore’s technical superiority, users of heavy industrial cores and tubes who
are clearly concerned with the quality of the product are using cores made up of
32 Mr. Bouzaglou’s testimony confirms that Mondi and Sappi’s specifications to the cores and tubes
manufacturers are frequently driven by their insistence that their own products be used as the input in the
manufacture of those cores and tubes that they purchase. (transcript page 261)
33 Conflicting explanations for the development of ndicore were provided. Mr. Jooste of ITT and Mr.
Davies of Mondi claimed that the coreboard then used – kraft – could not be efficiently used in
combination with the bonding agent (silicate) that had then been used in the manufacture of cores.
However, they contended that once silicate was no longer used as the bonding material core manufacturers
were then able to revert to kraft, that is, that the source of Ndicore’s technical superiority was lost. Mr.
Bouzaglou and Mr. Silva, both of whom (in contrast with Jooste and Davies) had personal knowledge of
the development of Ndicore offered a less particular and more plausible explanation. It appears that prior
to the development Ndicore Mondi had been supplying a particular box liner for use in the manufacture of
cores and tubes. Mondi wished to discontinue production of this paper and approached Kohler and Framen
to assist in the development of a specialist core board. Kohler identified the paper available in the
international market that it believed to be most effective core board. Together these three companies
developed Ndicore (see page 256 of the transcript). This, incidentally, appears, on the face of it, to be a
clear example of how the proclaimed efficiencies arising from cooperation between different segments of a
production or value chain can be easily and procompetitively achieved through mechanisms that fall
significantly short of a full merger.
34 See Competition Commission’s recommendation, page 6, par 6.
15
Sappi’s Spiralwind as well as locally produced kraft paper. As already noted, all
other things being equal, Ndicore is the preferred product for producing industrial
cores and tubes, that is cores and tubes in which crush strength is an important
requirement. However it is clear that substitution is technically and commercially
feasible albeit limited by Ndicore’s clearly superior qualities.
49. We accordingly conclude that the relevant upstream product market is that for the
provision of board utilized in the production of industrial cores and tubes. This
includes Mondi’s Ndicore, Sappi’s Spiralwind and Mondi’s kraft paper. Imported
paper can also obviously be used in the production of cores and tubes. However, as
we outline below, except where the most technically demanding cores and tubes are
concerned, imported paper is not in the geographical market.
50. The parties aver that Mondi Cartonboard and Sappi each have a 38% share of the
market for core board, the paper product supplied to the cores and tubes, angle board,
dufaylite and textile cones markets. 35 The remaining 24% of core board is imported
from Europe and the East. 36 It appears that the imported core board is principally
used for the production of technically demanding cores for selected customers – for
example, all of the cores supplied to Huletts Aluminium are manufactured from
imported core board. The Commission calculates the HHI at approximately 2021
points.
51. The parties aver that Mondi Kraft has a 33% market share of the overall kraft market.
Sappi is Mondi’s largest competitor with a market share of 51%.
The Relevant Geographical Markets
52. What of the geographical markets? The Commission contends for a national market
in respect of both the upstream and downstream. The parties have made so much of
the role of core board imports in constraining any exercise of market power by the
the role of core board imports in constraining any exercise of market power by the
merged entity, that one might have expected them to define the relevant upstream
geographical market as global. They have however chosen not to broaden the
relevant geographic market beyond the national and they are, in this respect, well
advised.
53. Although tariffs are scheduled to fall, the level and volatility of the exchange rate
means that imports are unlikely to act as a substantial constraint on domestic
producers of core board post merger, much less be included in the relevant
geographical market. We are also persuaded by those submissions that point out the
35 See page 15, par. 6.7.2.4.1 of the record.
36 The Commission, on page 16 of its recommendation, remarks that it has reservations regarding this high
import figure since all the competitors contacted by it confirmed that imports are possible but not
economically viable due to the exchange rate.
16
difficulties faced by small cores and tubes manufacturers in profitably importing their
key input. Their purchases are too small to take advantage of volume discounts; they
would have to hold larger stocks and absorb the associated storage and financing
charges.
54. This is not to say that the larger core and tube manufacturers – for example the pre
merger KC&T are not capable of importing their core board inputs, of assuming, in
other words, the mantle of the ‘disruptive buyer’, or that the transaction is not, in part,
precisely designed to foreclose imports that may threaten Sappi and Mondi’s
collective dominance of the upstream market or the merged entity’s dominance of the
downstream market. We return to this below.
55. Note that it is generally accepted that there are no imports into the downstream
market, the market for cores and tubes. Indeed, our reading of the evidence is that the
downstream markets may well be regional or subnational. KC&T appears to have
located its three plants in order to service its customers in the areas surrounding the
plants. Framen’s plant is located in Gauteng from which it services customer in the
north of the country as does Diversified Cores and Tubes, also located in Gauteng.
International. International Tube Technology services a predominantly Western Cape
clientele from its Cape Town plant. In its submission to the Commission, Sappi
states:
‘Logistically it does not make sense to supply coastal mills from Gauteng and
vice versa. The reason being that freight costs would increase the price of the
product by approximately 25% to 30%. To import cores would also not be
feasible as the freight costs and the exchange rate would affect the prices even
more. It would also add additional cost to Sappi because larger amounts of stock
will have to be carried as imported products can take up to 8 week to be shipped
will have to be carried as imported products can take up to 8 week to be shipped
to South Africa.’ 37
Is the merged entity likely to substantially prevent or lessen competition in the
relevant markets?
56. As noted above there are two mechanisms through which this vertical transaction may
threaten competition. First, there is the possibility that the transaction may, through
foreclosing access to important inputs (input foreclosure) or a sufficient customer
base (customer foreclosure), increase rivals cost of doing business in either or both of
the upstream and downstream markets.
57. Second, there is the prospect that the merger may, through easing the flow of
information between competing firms, be an instrument for facilitating coordinated
conduct between the postmerger participants in either or both of the relevant markets
or, indeed, of ancillary markets.
37 Record, page 404
17
Input Foreclosure
58. A superficial reading of this particular transaction and of foreclosure theory generally
may suggest that the prospect of foreclosure is effectively denied by our acceptance
of the existence of substitutes for Ndicore. In fact the parties have insisted that once
there are alternative products available for use in the manufacture of cores and tubes
any attempt by the merged entity to deny Ndicore to its nonintegrated downstream
rivals will simply result in a loss in Ndicore’s market share to Sappi’s Spiralwind.
Moreover, Sappi, by suddenly requiring that the cores and tubes that it purchases be
manufactured from Sappi product alone, has surely effectively eliminated the
prospect of input foreclosure. However this conclusion manifests both a very crude
reading of foreclosure theory and a selfserving blindness to the facts of this
particular transaction.
59. In any event Mondi insists that, post merger, it will not selfdeal, that it will be
‘business as usual’, that, in other words, it will continue to sell Ndicore to its non
integrated downstream rivals. 38 Before examining the likely modalities of
foreclosure it is necessary to take a view on the plausibility of Mondi’s claim
regarding its postmerger conduct in the markets implicated in this transaction.
60. We are persuaded that Mondi will indeed continue to engage in a limited amount of
trading in core board outside of its newly integrated core board and cores and tubes
producer – that is, its downstream division will purchase a certain quantity of core
board from Sappi and its upstream division will continue to sell a limited quantity of
coreboard to nonintegrated manufacturers. As will be elaborated below a certain
amount of trading outside of its integrated facilities will be an extremely effective
amount of trading outside of its integrated facilities will be an extremely effective
platform for exchanging critical pricing information with Sappi. However, we do not
find the ‘business as usual’ scenario at all plausible.
61. Why, if Mondi, had wished to conduct its commercial relationship with the core and
board manufacturers ‘as usual’ would it have purchased KC&T in the first place? We
have been offered a number of conflicting and implausible accounts of the rationale
for the transaction:
In the papers filed with the Commission, Mondi claimed that it ‘had been
considering the possibility of starting its own cores and tubes manufacturing
business in order to ensure the quality of the cores and tubes it used in certain of
its own manufacturing processes’. 39 However, not only did the parties fail to
identify any efficiency or procompetitive gains that it expected to accrue from
the transaction, the witnesses from Mondi and KC&T denied any knowledge of
38 See statement by Mr Van Breda, page 213, line 6 of the transcript.
39 Letter from the merging parties’ attorneys to the Competition Commission. (Record, page 364) .
18
any quality problems associated with the KC&T’s product. 40 Indeed the
overwhelming impression of cores and tubes production conveyed by most of the
witnesses, notably those from the parties, was of a technologically mature product
that could be produced to a specified standard by any participant in the market.
No evidence that has been presented suggesting that there are any product or
process innovations expected in the manufacture of cores and tubes. The only
innovation referred to concerned Sappi’s continuing efforts to develop a core
board capable of emulating or improving upon Ndicore.
Mondi ultimately decided to purchase KC&T rather than set up its own cores and
tubes business. It avers that it took this decision, firstly, because it enabled it to
purchase KC&T as a going concern with the requisite technical skills. Secondly,
by going the acquisition route the cores and tubes market would not be
‘destabilised’ by the creation of additional capacity. It did not, however, respond
to the Tribunal’s invitation to give more precise meaning to this latter rationale.
However, at the hearing the Mondi witness insisted that the transaction simply
presented a good business opportunity, one that, in opaque corporatespeak,
would be ‘value enhancing…going forward’. 41 The precise source of the
enhanced value was not identified despite several invitations to the Mondi witness
to do so. KC&T, for its part, painted a less rosy picture of the cores and tubes
business – flat demand, excess capacity, mature technologies, low returns are
some of the descriptors that spring to mind. As we will elaborate below, we
accept that the vertically integrated firm is indeed a good business opportunity
because it is, in essence, a mechanism for securing market domination.
because it is, in essence, a mechanism for securing market domination.
62. In short we have been offered a number of conflicting and unsubstantiated accounts
of the rationale underpinning the transaction. Several witnesses questioned Mondi’s
averment that it would not engage in selfdealing. We too find implausible the notion
that the merged entity would conduct business as usual. There would seem to be little
point in a vertical transaction between parties that did not have selfdealing as a
central objective and postmerger feature. Certainly any efficiency gains to be derived
from a vertical transaction would rely on selfdealing, on the internalization of
transaction costs and other prospective efficiency rationales that potentially arise from
vertical transactions. The US Courts simply presume that an ‘…integrated firm will
deal with itself when all things are roughly equal as they usually will be. Indeed, this
would seem to the primary motive for vertical mergers.’ 42
63. However, just as selfdealing may be at the heart of efficiency gains, so may it be the
centerpiece of anticompetitive foreclosure. The important question to be resolved by
a competition evaluation of a vertical merger is usually whether the internalization of
40 See page 218, line 20, of the transcript.
41 See page 211, line 10 of the transcript.
42 Areeda, Hovenkamp and Solow op.cit. page 159
19
trade that is implied by a vertical agreement is procompetitive or competition neutral
or whether it is anticompetitive. In this transaction we have been offered nothing
other than bland assertions regarding potential procompetitive consequences – not a
shred of evidence has been presented to substantiate the sparse assertions of
efficiency gains. On the other hand, the postmerger market structure and the
incentives of the key players persuade us that input foreclosure will be an outcome of
the transaction with a consequent increase in the costs faced by both the downstream
and the upstream rivals of the merged entity.
64. In summary, then we proceed on the basis – in our estimation an eminently
reasonable assumption – that the postmerger integrated entity will largely selfdeal,
that is, it will largely confine its sales of Ndicore to its integrated downstream cores
and tubes manufacturer and that the latter will largely confine its purchases of core
board to its upstream producer of core board. Mondi’s integrated core board and cores
and tubes producer will certainly engage in a limited amount of trade in the market.
As already intimated (and elaborated more fully below) a limited amount of
participation in the market will facilitate the flow of information, and, hence facilitate
cooperation between Mondi and Sappi. In addition it is probably unreasonable to
expect a mathematically precise alignment between the output of Ndicore by the
upstream division and the demand for Ndicore by the downstream division. Mondi’s
upstream division would enter the market to sell occasional supplies of Ndicore in
excess of its needs and its downstream division would enter the market to make good
occasional shortfalls in the supply of Ndicore. 43
65. Given then that the merged entity will largely selfdeal, that is, it will, by and large,
65. Given then that the merged entity will largely selfdeal, that is, it will, by and large,
restrict sales of Ndicore to its downstream division alone, all other cores and tubes
manufacturers will be left in the hands of an effective Sappi monopoly. There would,
under these circumstances, be little to prevent Sappi from exercising its new found
market power by charging a monopoly price for its core board, Spiralwind. To the
extent that Mondi’s newly merged entity continues to participate in the market (that
is, to the extent that it does not exclusively selfdeal but rather continues to supply
some Ndicore to nonintegrated cores and tubes manufacturers) it will have no
interest in increasing output and decreasing prices in order to wrest market share from
its rival, Sappi. On the contrary Mondi’s best interests would simply lie in following
Sappi’s price increase thus permitting both producers of coreboard to extract
monopoly rents from nonintegrated cores and tubes manufacturers in the
downstream market. Hence by reducing the supply of Ndicore to the market (that is
by engaging largely in selfdealing) Mondi will permit Sappi to increase the price of
43 Ndicore is produced by a single machine at Mondi’s Springs plant. This machine is, however, not
dedicated to the production of Ndicore – it is thus a relatively simple matter to increase the machine time
devoted to Ndicore as per the requirements of the downstream cores and tubes division. However relative
to the alternative product which is produced by this machine, Ndicore is low margin. Accordingly both
commercial imperatives and, as will be elaborated below, Mondi’s monopolization strategy ensure that the
output of Ndicore will be limited to the requirements of the downstream cores and tubes manufacturer. See
pages 224 – 225 and 230 of the transcript.
20
coreboard to nonintegrated producers of cores and tubes. 44 Sappi will be the
principal beneficiary of this strategy in the upstream market – it will supply the lion’s
share of this market and it will do so at a monopoly price.
66. Mondi’s interest in allowing Sappi to charge a monopoly price to its customers
resides in the impact of Sappi’s monopoly price in the downstream core and tube
market – it raises the cost of Mondi’s rivals in the downstream cores and tubes market
thus either enabling Mondi’s newly acquired cores and tubes division to capture a
larger share of this market, or, more rationally, enabling it to raise its prices to its
customers in the downstream market, a market in which it will, through its acquisition
of KC&T, already command a dominant share. In this way vertical integration does
indeed ensure that this will be good business opportunities for both Mondi and Sappi.
67. For Mondi’s part foreclosure will transform Kohler’s low return cores and tubes
business into a lucrative dominant firm. This strategy was not open to a non
integrated KC&T and, hence, where it was faced with low returns ‘going forward’,
the newly integrated producer is, on the other hand, faced with enhanced value ‘going
forward’. This explains why Mondi is prepared to pay approximately R40 million for
a production facility that, by its own reckoning, it could have replicated with state of
the art equipment at less than twothirds of that price. 45 Had it constructed its own
downstream cores and tubes facility it would have been faced with a nonintegrated
KC&T. As we shall elaborate below, because a nonintegrated firm of KC&T’s size
and market share may have attracted an international partner, input foreclosure may
not have succeeded in monopolizing the cores and tubes market. In short, had Mondi
not have succeeded in monopolizing the cores and tubes market. In short, had Mondi
entered the market in competition with KC&T, the only buyer capable of ‘disruptive’
(destabilizing?) behaviour, viz, KC&T, would have remained a threat. Areeda,
Hovenkamp and Solow cite the possibility that ‘a vertical merger might eliminate a
large buyer whose aggressive bargaining has disrupted oligopolistic collaboration
among suppliers’ as one of a number of possible scenarios for anticompetitive effects
44 We do note however that, any anticompetitive imperatives aside, Mondi’s capacity to produce Ndicore
is restricted to a single machine located at its Springs plant. This machine is not dedicated to Ndicore and
Mondi’s witness commented that it could be used for the production of more commercially lucrative
alternatives. So, even from a narrow commercial perspective there is no incentive to increase the supply of
Ndicore.
45 The purchase price of KC&T is R 37.5 million whereas Mondi estimated that it would have cost
between R25 million – R30 million to establish a state of the art new plant. We instructed Mondi to furnish
us with the record of the due diligence undertaken prior to the acquisition. It appears, from the document
furnished, that a very cursory study was done, one that appears to have been confined to an assessment of
human resourcerelated liabilities. This contrasts markedly with the elaborate study undertaken by Mondi
when it was considering setting up a new cores and tubes facility. A copy of the study had also been
requested at the prehearing although it was only furnished at the hearing itself. A possible inference from
the sparse due diligence is that, despite the claim that the transaction was undertaken because it represented
a good commercial opportunity, Mondi was principally driven by a desire to eliminate the dominant
independent cores and tubes producer. Certainly Mondi’s claim that it would be able to operate Kohler
more efficiently and cut costs could not have been gleaned from the results of the due diligence submitted
to the Tribunal.
21
from a vertical merger. 46
68. It is important to add that a foreclosure strategy in the upstream market that
effectively passes a monopoly price extracted by input suppliers on to the customers
of the downstream manufacturers is ably abetted by the low price elasticities that
appear to characterize the demand for cores and tubes. Several witnesses commented
on this feature of the cores and tubes markets. As already noted, it was repeatedly
pointed out that the value of the product wound on to the core vastly exceeded that of
the core itself. In the scale of things even a significant increase in the price of a core
is unlikely to be resisted by an aluminium or textile or paper manufacturer for whom
the price of the core represents a relatively small part of the total value of the product
of which the core forms one, albeit vital, part.
69. But are Mondi and Sappi, and particularly the nonintegrated Sappi, not faced with
conflicting incentives in raising the cost of and hence the price charged by
downstream core and tube manufacturers? They are, after all, important consumers
of cores and tubes. Indeed Sappi explicitly noted its concern at the prospect of an
increase in the price of cores and tubes. 47
70. Mondi, of course, need have no fear of raising the cost of cores and tubes to its
divisions who purchase these products. As a fully integrated producer its purchases
of cores and tubes are not affected by the pass through of the monopoly rent to the
consumers of cores and tubes. Sappi, may, at worst, end up paying more for its own
cores and tubes but may recoup this from the monopoly rent gleaned from its sales of
its coreboard to nonintegrated downstream producers. Mondi, of course, extracts its
monopoly rent from the customers of its cores and tubes division. In short, the
incentives of the duopolists, Sappi and Mondi, are well aligned. There should indeed
incentives of the duopolists, Sappi and Mondi, are well aligned. There should indeed
be no need for explicit coordination of this monopolistic outcome between Sappi and
Mondi – once Mondi acquires KC&T all the incentives point in the direction of tacit
cooperation. We do however note that, in response to a question posed by one of the
panel members to the witness from KC&T it was confirmed that Sappi had been
consulted about the transaction. 48
71. In any event, a related transaction was brought to our attention that undoubtedly helps
to cement Sappi’s support in pursuing this foreclosure strategy. We refer to the
intended postmerger sale by Mondi of KC&T’s Cape Town plant to [acquiring firm
– confidential] competitor of KC&T. We should note that while the parties put on
record their intention to dispose of the Cape Town plant, the identify of the purchaser
and the extent to which the transaction had evolved – [acquiring firm confidential]
46 Areeda, Hovenkamp and Solow ‘ Antitrust Law’ Vol IVA page 143. Bear in mind that KC&T’s share of
the relevant market is conservatively estimated at 45% whereas its largest competitor – Framen – has an
11% share. KC&T is also part of a much larger packaging group. It’s size and resources qualify it as a
potentially disruptive buyer, indeed probably the only one in the South African cores and tubes market.
47 See page 404 of the record.
48 Transcript page 186
22
and Mondi were already entering into heads of agreement at the time of the hearing –
was only revealed at the hearing in response to questions put by the Tribunal panel. 49
Sappi is a particularly significant customer of KC&T’s Cape Town plant, whereas it
appears that Mondi does no business with this plant. 50
72. By selling the Cape Town KC&T plant to [acquiring firm – confidential], Mondi
thereby effectively assures Sappi that its upstream market for Spiralwind and its
downstream supply of cores and tubes are secure – the ceding of some of KC&T’s
current capacity to [acquiring firm – confidential] ensures that there is sufficient non
integrated downstream capacity to secure a market for Sappi’s upstream output and to
supply its cores and tubes requirements. Nor is there any reason for Sappi to fear a
more powerful [acquiring firm – confidential]. For one thing it is not beholden to
[acquiring firm – confidential] – there are other cores and tubes manufacturers. On
the contrary, postmerger [acquiring firm – confidential] is thoroughly beholden to
Sappi both for its supplies of coreboard and as a market for [acquiring firm –
confidential] output. Bear in mind that premerger [acquiring firm – confidential]
customer was Mondi – [acquiring firm confidential] of its output was purchased by
Mondi. Accordingly postmerger Sappi’s custom will loom exceedingly large in
[acquiring firm – confidential] calculation.
73. Turning to the supply of coreboard, we learned in the hearing that Sappi will
henceforth require downstream manufacturers who produce for it to utilize Sappi
coreboard in their manufacturing processes. In our estimation this is simply a
cautious safeguard on Sappi’s part. As already elaborated, the logic of the transaction
dictates that Mondi will accord priority to its inhouse needs certainly when supplying
dictates that Mondi will accord priority to its inhouse needs certainly when supplying
Ndicore. Even without a Sappi requirement that nonintegrated producers use its
product as an input in the core manufacturing process, these producers, including
[acquiring firm – confidential], will have no alternative but to turn to Sappi for
supplies of coreboard. The requirement that Sappi input be used as a precondition
for supplying Sappi with cores and tubes is either a display of excessive caution or it
is a strong inducement for nonintegrated downstream producers not to seek
alternative input suppliers offshore. It is little wonder that the parties refrained from
presenting the sale of the Cape Town plant as a procompetitive gesture. They have
not done so because what appears, at first blush, to be a complementary transaction
that will weaken the postmerger market position of Mondi’s downstream producer of
49 We should also note that the postmerger relationship between Sappi and [acquiring firm – confidential]
will help ensure that Sappi’s purchase of cores and tubes is not prejudiced by the pursuit of a monopolistic
strategy in the upstream market for core board given that Sappi will both supply [acquiring firm –
confidential] with unusually high volumes of core board and that it will purchase unusual volumes of cores
and tubes from [acquiring firm – confidential], volume based discounts could be justified in both markets
thus ‘legitimising’ Sappi charging a monopoly price for its core board to all but [acquiring firm –
confidential] and ‘legitimising’ [acquiring firm – confidential] passing on this monopoly input price to all
but Sappi.
50 Note our earlier remarks regarding the subnational character of the relevant geographical market for
cores and tube, that is, the downstream market.
23
cores and tubes, is revealed, on closer examination, to be the instrument by which
[acquiring firm – confidential] is bound over to the Sappi leg of the duopoly.
74. Mr. Bouzoglou of Framen is clearly alert to the unenviable predicament in which he
finds himself. 51 He intimated that he was considering offshore sources of paper.
However, he, who struck us as a particularly candid, thoughtful and wellinformed
witness, has clearly not made any significant progress in securing these supplies. Nor
do we believe that he will. Framen’s scale makes it the only independent potentially
‘disruptive buyer’ in the cores and tubes business. But its independence is illusory –
its input is supplied by Sappi and its market is provided by Sappi and, under these
circumstances, it would be extremely foolish to risk the consequences of disruptive or
destabilizing action.
75. The merging parties are correct then when they argue that, on account of Ndicore’s
substitutability, the merged entity does not, on its own, have the capacity to
successfully foreclose inputs and to raise the costs of its rival cores and tubes
producers. Successful foreclosure requires the support of Sappi. However Sappi’s
interests and incentives are well aligned with those of the merged entity. As already
noted, it is an alignment that does not require explicit coordination. In summary, the
integration of Mondi’s coreboard manufacturing division with the country’s largest
cores and tubes manufacturers places Sappi in an effective monopolistic position with
respect to other downstream manufacturers. Mondi will have no reason to take
advantage of monopolistic pricing by Sappi by attempting to gain a larger market
share of the core board market. And to the limited extent that it will supply core
board – either Ndicore or kraft – to nonintegrated cores and tubes manufacturers it
board – either Ndicore or kraft – to nonintegrated cores and tubes manufacturers it
not only has no reason to oppose monopolistic pricing on Sappi’s part, but every
reason to follow suit. By allowing Sappi to take advantage of its monopoly position
vis a vis the nonintegrated producers of cores and tubes, it effectively ensures that its
rivals costs in the downstream market are increased thereby allowing Mondi’s
downstream division to capture its own monopoly rent in the downstream market
which, through its acquisition of KC&T, it will immediately dominate postmerger.
Customer Foreclosure
76. The parties have also insisted that imports, or the threat of imports, will undermine
any attempt at input foreclosure. However, as already intimated, we are thoroughly
unpersuaded. High quality European coreboard will continue to be used in small
volume for the manufacture of particularly demanding cores. It will however not be a
viable general alternative to local supplies of coreboard – it is extremely costly both
because of its quality and because of the depreciation of our exchange rate vis a vis
developed country currencies.
51 See page 273 of the transcript where he is specifically asked for his reaction to Sappi’s postmerger
dominance over his core board input.
24
77. However, other developing country coreboard producers may present a more viable
alternative, with Indonesia frequently mentioned as the most likely country of origin
for imports. The board produced by these countries appears to be of a lower quality
and hence less costly than the European product. Our exchange rate has remained
relatively stable vis a vis the Indonesian currency which has also suffered the
significant depreciation that has characterized the Rand. If evidence is required that
this is viewed as a serious threat by the members of the local coreboard duopoly then
one need look no further than Mondi’s reaction to KC&T’s earlier attempt to import
coreboard from Indonesia. On the single occasion that this was attempted Mondi
responded by drastically reducing its purchases of cores and tubes from KC&T which
then immediately recognized that its interests lay rather in ceasing to import core
board. An extract from Kohler Cores and Tubes divisional budget for 2001/2 is
revealing:
‘We had been importing raw materials at prices well below the local mills’ prices.
However, the local mills represent 25% of our turnover and Mondi has taken
business away from us as a result of the imports. As a result of this we have
stopped importing raw materials and are working with Mondi to gain more
business.’52
78. We should add that with Mondi acquiring the country’s dominant producer of cores
and tubes and Sappi requiring that its product be used in the manufacture of cores and
tubes which it purchases, the size of the domestic market for imported coreboard is
reduced (that is, foreclosed) significantly. It certainly eliminates KC&T as a possible
purchaser of imported coreboard and drastically reduces the prospect of Framen –
destined to become a primary supplier of cores and tubes to Sappi – importing core
destined to become a primary supplier of cores and tubes to Sappi – importing core
board. As already noted, Framen, the country’s second largest cores and tubes
manufacturer may have the scale and the resources necessary to import its paper
input. However, Sappi will constitute a significant part of Framen’s market which
obliges it to purchase Sappiproduced input. Moreover, beyond these contractual
obligations, it is clear that Framen is effectively bound over to Sappi which will, at
once, be both Framen’s largest supplier and largest customer. This will not
predispose Framen to displays of independence inimical to the paper duopoly’s best
interests.
79. This leaves the smaller cores and tubes manufacturers as potential importers of core
board. In relying on imports they will face reduced certainty in the source of supply
of their critical input; in order to take advantage of volume discounts and reductions
in transport costs they will have to purchase input in greater volume and face
concomitantly larger storage and financing charges; they will have to cope (without
commanding the resources necessary to hedge large foreign exchange exposures)
with the volatility that characterizes emerging market exchange rates; they will, given
Sappi’s injunction, cut themselves off from Sappi’s custom; and they run the risk, as
52 Record page 339
25
the much larger KC&T earlier discovered, of incurring Mondi’s wrath;.
80. In short, importing carries considerable risk for local downstream producers. And the
South African market for coreboard, with the lion’s share foreclosed by the actions
of the powerful domestic duopoly, will not be an attractive market for exporters –
they are unlikely to go the extra mile to penetrate this market given their structurally
limited prospects.
81. One possible threat to Sappi and Mondi’s domestic duopoly comes from foreign
investment. Were a significant foreign core and tube manufacturer to set up in this
country, particularly one linked backward into coreboard manufacture, this may
represent a significant challenge to Sappi and Mondi’s collective dominance of the
upstream market. A potential challenge from this quarter would, of course, extend
beyond coreboard to other segments of the domestic market collectively dominated
by Sappi and Mondi.
82. Indeed it is instructive to recall that KC&T’s shareholder held discussions regarding
the sale of its cores and tubes division with both Mondi and Sonoco, the giant US
paper manufacturer and converter. Again, we have been offered several explanations
for why Sonoco ultimately decided not to invest in this country. In the papers filed
we are offered the familiar mix of crime and labour unrest. In the hearings however,
the witness from KC&T suggested that Sonoco preferred to enter into a joint venture
with Kohler and that this was ultimately not attractive to the latter’s shareholders. 53
We suggest, however, that a joint venture between a large domestic paper converter
like Kohler and a major multinational paper manufacturer and converter like Sonoco
would have been anathema to Mondi and Sappi. Suffice to say that with the sale of
KC&T to Mondi, in combination with Sappi’s requirement to use its input in
producing its cores and tubes, entry into the South African market either through the
manufacture of core board or cores and tubes is effectively foreclosed. This, in our
view, is the real meaning of Mondi’s concern to prevent ‘destabilisation’ of the core
and board market, one of several rationales offered by Mondi for the transaction and
one which was not satisfactorily elaborated despite our invitation to do so.
83. In summary, potential entrants at the core and tube manufacturing stage of the
production process will find their source of coreboard inputs effectively foreclosed
by the collective dominance of Mondi and Sappi and their cost structure hostage to
the interests of the duopoly. Entrants (either exporters or foreign investors) at the
upstream coreboard manufacturing stage, will find potential sources of custom
foreclosed by Mondi’s integration with the country’s largest core and board
manufacturer and Sappi’s requirement to use its product exclusively in the
manufacture of its cores and tubes.
53 Note that Mr. Davies from KC&T informed the Tribunal ‘if the Mondi deal didn’t materialize then
maybe one could progress the Sinoko (sic) deal.’ Transcript page 189
26
84. On these grounds alone we conclude that this transaction is likely to substantially
prevent or lessen competition in both the relevant markets identified and, accordingly,
it falls to be prohibited.
Facilitation of Coordination
85. However, the likelihood of input and customer foreclosure is not the only ground for
concern with this transaction. We are specifically enjoined by Section 12A(2)(c) of
the Act to consider ‘the level and trends of concentration, and history of collusion, in
the market’ when evaluating a proposed merger. 54
86. We are concerned that the transaction is the centrepiece of a strategy designed to
facilitate the flow of price and other competition sensitive information between
Mondi and Sappi thus cementing the domestic duopoly, indeed cartelising a number
of segments of the broad domestic paper manufacturing market.
87. The formation and operation of a cartel is the most egregious offence under
competition law, it is indeed the very antithesis of competition. While a cartel is
difficult to form, most cartels fail, not because the prospective members were unable
to forge an agreement amongst themselves but because of the powerful incentive for
cartel members to cheat on one another – while the collective has an interest in
maintaining the price and output and market division covenants that underpin the
cartel, each individual member has an incentive to cheat, to increase output and
undercut its coconspirators. This is why a successful cartel requires not merely an
agreement, but also a mechanism for enforcing the agreement. This is clearly risky
under conditions of illegality. In order for a cartel to monitor effectively the conduct
of its members, the firstbest solution is to minimize secrecy, to ensure transparency
in respect of those factors that make up the substance of the illegal agreement.
in respect of those factors that make up the substance of the illegal agreement.
88. We are not in the process of trying a cartel. We are adjudicating a merger.
Moreover, although mergers are agreements between firms – the first requirement for
the existence of a cartel we must bear in mind that we are adjudicating a vertical
agreement whereas a cartel is an agreement between firms in a horizontal relationship
to one another. However, we are not seeking to prove the existence of a cartel. We
are merely establishing whether the transaction will facilitate the flow of information,
the degree of transparency, necessary to overcome the problem of monitoring the
members of an illegal conspiracy, arguably the most significant impediment
confronting successful cartelisation. In order to do this we must first establish
whether the structure of the market in question and the character of the products lend
themselves to cartel formation. We should also examine whether the past and current
conduct of the participants in the market provide prima facie grounds for concern
54 The Commission, too, has raised the prospect of postmerger collusion between Mondi and Sappi – see
page 17 of the Commission’s recommendation.
27
regarding prospective cartelisation.
89. We should note that the parties themselves acknowledge that the structure of the
upstream market lends itself it to collusion:
‘absent the merger, the upstream market is oligopolistic in nature.
Structural conditions in the upstream market thus are such that Mondi
would be able to pursue a collusive strategy with Sappi in any event
should it wish. The merger certainly does not enhance the possibilities for
collusion between Sappi and Mondi. In addition, the dangers of relying
solely on structural conditions to conclude on potential conduct post
transaction are well known’ 55
90. When, as per Section 12A(2)(c) of the Act, ‘the level and trend of concentration’ in a
market lends itself – even on the merging parties own admission to collusive
conduct, we are obliged to take this into account. In contrast with the approach of the
parties, our responsibilities under the Act do not permit us to simply shrug off an anti
competitive structure with the observation that a member of the oligopolistic market
‘would be able to pursue a collusive strategy….should it wish’. Indeed the Act
requires that, under these structural conditions, we exercise particular vigilance and,
in this case, a vigilant examination reveals that the present merger does indeed
‘enhance the possibilities for collusion between Sappi and Mondi’.
91. George Stigler first attempted to identify those features of markets and products that
lent themselves to collusion or cartelisation. 56 Stigler’s groundbreaking work
actually took issue with an antitrust establishment that the Nobel Prize winning
Chicago University economist considered unduly concerned with the problem of
cartels. His critique was based precisely upon the difficulty of the cartel monitoring
and disciplining its members. In developing his critique he identified those features
of the product and the market that lent themselves to successful monitoring of the
conduct of cartel members and the enforcement of its rules. Stigler’s typology
provides a near perfect fit for the South African pulp and paper products markets – a
small number of large participants, stable and equal market shares, homogenous
products, mature technologies, high entry barriers and transparency. If this
transaction provides additional transparency then we would have to conclude that
these are markets that would make even the skeptical and venerable father of the
Chicago School of antitrust sit up and take notice.
92. A mere glance at the following table will confirm that Sappi and Mondi collectively
dominate a range of important market segments in the paper products sector and that
their market shares are equivalent in most of these markets:
55 Additional Submission (by the merging parties) in the Competition Tribunal of South Africa (para
11.11.1, p35) – record page 551
56 George Stigler – The Organisation of Industry (1968)
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Product Estimated market
share of Mondi
Estimated market
share of Sappi
Uncoated woodfree
Cut sheet
Converting grades
Newsprint
Cartonboard
54%
38%
62%
38%
46%
62%
38%
38%
Source: the merging parties, record page 131 and 132
93. It is common cause – and was stressed by several witnesses in the present enquiry –
that the products are homogenous and there is a low rate of product innovation. Paper
manufacturing (although not necessarily paper converting) is one of the most capital
intensive sectors in the South African economy thus ensuring that new entry is only
feasible for those with extremely deep pockets and well established access to capital
markets.
94. The present enquiry has, moreover, been provided with strong evidence of
transparency in pricing information and of coordination of pricing decisions. It was
certainly commonly accepted – with remarkably little embarrassment even from the
witnesses from Sappi and Mondi – that the list prices for Mondi and Sappi Kraft were
set for the same period and changed at the same time and by effectively the same
amount. The timing of Ndicore’s price adjustment is known well in advance. Hence
the relationship between kraft prices (including Spiralwind prices) and Ndicore prices
is well known – it appears that the adjustment in the Sappi and Mondi kraft prices
takes place some six months earlier than the adjustment in the Ndicore price. The
following exchange at the hearing between a member of the panel and Mr. Davies
from KC&T bear this out:
Mr. Manoim: Perhaps we should just be specific about whose Kraft we are talking
about since they both make it.
Mr. Davies: No Kraft is Kraft, whether it is Sappi or whether it is Mondi the price….
Mr. Manoim: Yes, but I think that we are talking about the prices. You are saying both
firms’ prices have moved up?
Mr. Davies: No what I am saying is the Kraft price, which is the price of paper supplied
Mr. Davies: No what I am saying is the Kraft price, which is the price of paper supplied
into the corrugated industry increased on first (1 st) of April from both Sappi and Mondi,
29
the core board price which we buy from Mondi in Springs (this is Ndicore – our addition)
did not increase in April and will be increasing in October. 57
95. This is confirmed in an exchange between Mr. Coetzee (for the Commission) and Mr.
Bouzaglou:
Mr. Coetzee: Right. On the Kraft papers increases does Mondi’s and Sappi’s
Kraft prices get increased at the same time?
Mr. Bouzaglou: Ja
Mr. Coetzee: And the price increases are the normally close to each other or almost
exactly the same?
Mr. Bouzaglou: No it’s not all the same. It’s different.
Mr. Coetzee: But very close?
Mr. Bouzaglou: It is close. I mean we pay three oh six oh (3 060 – that is, Rand per ton –
our addition), the other one is three oh five oh (3 050) 58
96. Our concern then that this transaction provides the basis for an exchange of
information that would facilitate horizontal coordination does not emanate from a
clear sky. The structure of the pulp and paper market, the characteristics of the
product and the existing level of transparency all meet the requirements for successful
coordination. And there is prima facie evidence that coordination is already the order
of the day.
97. We have already intimated how we envisage these information flows occurring post
merger. We proceed on the assumption – which we believe, as already elaborated, is
perfectly reasonable – that the newly integrated Mondi will, by and large, selftrade.
However, in line with what Mondi itself has told us, it will not selftrade exclusively,
that is, it will place a certain quantum of its sales and purchases on the market.
Mondi’s downstream cores and tubes operation may thus purchase a small quantity of
Spiralwind or Sappi kraft. It will also likely sell a certain amount of Ndicore to its
downstream competitors who are clearly destined to purchase the bulk of their core
downstream competitors who are clearly destined to purchase the bulk of their core
board requirements from Sappi. This will likely include Framen who will rely upon
Sappi as the supplier of its coreboard inputs. By the same token, the divisions of
Mondi that require cores and tubes – and this would covers most, probably all, of its
key paper producing activities – will mostly secure its requirements from its
downstream cores and tubes manufacturer. However, some of its divisions may well
purchase certain of its requirements from the competitors of its newly acquired cores
and tubes division, including from those competitors, like Framen, who will supply
Sappi with its cores and tubes.
98. The quantum and quality of information exchange afforded by this small transaction
is, on the face of it, sufficient to enable Mondi and Sappi to monitor a cartel that
57 Transcript page 154
58 Transcript pages 2867
30
extends well beyond the coreboard market. At the very least it covers coreboard
(Ndicore and Spiralwind) and cores and tubes but it also clearly takes in kraft. It may
also facilitate an exchange of important information between other users of cores and
tubes within the Sappi and Mondi stable – their respective producers of newsprint for
example.
99. We accordingly find that this transaction will facilitate tacit or express coordinated
conduct (and thus is likely to substantially lessen competition) by facilitating the
exchange of pricing and other competitively sensitive information in both the input or
output market. On this ground too it falls to be prohibited.
Order
100.We find then that this merger is likely to substantially prevent or lessen competition
in both the upstream and downstream markets and thus order that it be prohibited.
20 June 2002
D. Lewis Date
Concurring: N. Manoim and S. Zilwa
31