COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 75/LM/Oct02
In the large merger between:
Coleus Packaging (Pty) Ltd
and
Rheem Crown Plant, a division of Highveld Steel and Vanadium
Corporation Limited
________________________________________________________________
Reasons for Decision: non confidential
________________________________________________________________
On the 27 January the Competition Tribunal approved, subject to certain
conditions, the acquisition by Coleus Packaging (Pty) Ltd, a wholly owned
subsidiary of South African Breweries Limited (‘ SAB’) of the Rheem Crown
business, a division of Highveld Steel and Vanadium Ltd, which is engaged in the
manufacture and supply of bottle crowns.
Procedural Background
This merger was notified to the Commission on the 19 August 2002. On the 31
October 2002 the Commission recommended that the merger be prohibited.
A prehearing conference was held on the 9 December 2002. At that stage the
Tribunal was advised that there were various firms who objected to the merger
and that one of the objectors, MCG (Pty) Ltd (‘MCG’), a competitor of the target
firm, intended bringing an application to intervene in the proceedings. The
Commission indicated that the other objectors, Guinness UDV South Africa (Pty)
Ltd (‘Guiness UDV’) and Distell Limited ( ‘Distell’), competitors of the acquiring
firm SAB, had given statements to the Commission and were to be called as
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witnesses at the hearing.
The parties and the Commission then prepared for the hearing and exchanged
witness statements.
No application for intervention was received from MCG. However, at the
commencement of our hearing on 21 January 2003, the parties advised us that
SAB had entered into a procurement agreement with MCG, and that this had
alleviated MCG’s concerns about the merger. (A copy of this agreement, which
we analyse more fully later, is annexure ‘A’ to our order.)
The hearing commenced and we heard testimony from Maarten Van Hoven, the
Commission’s investigator, Mr John Reilly the Group Purchasing Manager of
Distell, and Mr Grant Wall, his counterpart at Guinness UDV.
During the course of Mr Wall’s crossexamination by Mr Unterhalter, counsel for
the merging parties, it became apparent to us that Guiness UDV was not
opposed to the merger, provided certain conditions were imposed, and that SAB
for its part was willing to give certain ‘ comfort’ undertakings to the customers of
Rheem. We suggested that the merging parties consider proposing certain
additional conditions to the approval of the merger to meet the concerns of
customers of the target firm.
This the merging parties did, and after a series of negotiations with their
customers and then the Commission, we were presented with a draft order for
our consideration. The order was acceptable to Mr Wall representing Guinness
UDV. It was also largely acceptable to the Commission who had also consulted
with other customers of Rheem on its contents. The Commission and the parties
had a fundamental difference with one term of the proposed conditions. The
Commission wanted to impose a condition that SAB be required to sell control of
Rheem within 3 years of the merger. SAB, whilst willing to undertake to sell a
minimum of 40 % of the firm’s equity to an empowerment shareholder within 2
years, was unwilling to commit to a time period to dispose of its controlling
years, was unwilling to commit to a time period to dispose of its controlling
interest, although it insists that this remains its long term intention.
The Commission and the parties agreed that they would each motivate their
respective formulations for our consideration, but were otherwise in agreement
on the remaining content of the order. 1 The Commission indicated that on the
basis of the terms of the draft order, with the rider proposed by them requiring a
sale of control within 3 years, it would no longer oppose the merger. The upshot
was that on the second day of the hearing both sides had moved from their initial
1 This now appears in clause 2 of the order where we have adopted the parties’ formulation for
reasons that we explain below.
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‘absolutist’ approach to the merger and agreed to recommend to us that it be
approved conditionally on the terms proposed in the draft order.
After hearing evidence from three further witnesses, Luigi Matteucci of Highveld,
Mike Short and Andrew Wolf of SAB, we adjourned the proceedings to consider
our order. 2
Our proceedings had been slightly truncated as a result and we did not hear the
oral testimony of the expert witnesses of either side nor what we suspect might
have been a lengthier examination of witnesses who had testified after the
proposed order had been put to us. 3
OUR APPROACH
In this case, as we have mentioned above, the parties and the Commission had
with the exception of one clause, reached agreement on the conditions that
should be attached to the approval of the merger. If this was a restrictive practice
case, not a merger, all the Act would then require of us would be to approve the
terms of the order. 4 We would not be required to come to our own conclusion on
the evidence. No such mechanism exists in merger cases, as the Tribunal is
obliged in terms of section 16 to:
“..consider the merger in terms of section 12A, and the recommendation
and the request, as the case may be, and within the prescribed time…”
Nevertheless, for the same reason that consent orders are seen as desirable in
restrictive practice cases – inter alia, that they curtail proceedings and encourage
settlement of disputes – we should try and encourage this practice in mergers
without abdicating our adjudicative function.
For this reason we have taken the approach in this case that although the
hearing of oral evidence was not concluded as originally contemplated, we
nevertheless had sufficient evidence of the anticompetitive effects, that had been
alleged. Further hearing would have only served to test whether these allegations
were sustainable, as the parties challenged some of these conclusions in their
were sustainable, as the parties challenged some of these conclusions in their
filings. Nevertheless we take the parties willingness to agree to propose
2 The evidence of these three witnesses was handled on a less formal basis than the previous
witnesses, as they were largely there to respond to certain issues the Tribunal sought clarity on.
3 By lengthier we mean if we were still being asked to choose between the options of an absolute
prohibition (the Commission) or unconditional approval (the parties).
4 See section 49D.This is not to suggest that the Tribunal acts as the proverbial rubber stamp in
section 49 D proceedings, but rather that it is not obliged to come to an independent conclusion
on the merits.
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conditions as a concession not to challenge the correctness of the allegations. 5
Given this development our approach in this decision is to assume that the
allegations of anticompetitive effects have been established and then to assess
whether the proposed remedy adequately addresses the harm alleged. In this
way we give effect to the efficiency of the proposed order without abandoning our
discretion to one of simply approving a consent order.
It was for this reason that the Tribunal advised the parties and the Commission
on adjourning, that if we did not feel satisfied with either of the proposals
concerning the consent order, we would advise them and continue the hearing.
We are satisfied that the consent order as proposed by the parties is adequate to
ameliorate any anticompetitive effects brought about by the merger. We explain
below why we have come to this conclusion, and in particular why we have
preferred the parties’ formulation of clause 2 to that of the Commission.
Background
Rheem’s business is very simple. It takes sheets of tin plate and transforms them
into crowns. 6 The crowns serve as closures on glass bottles, which contain either
soft drinks or alcohol. The crowns are either of a twistoff or pryoff variety. The
physical dimensions and decorations on crowns vary, depending on the
specifications of a particular customer.
The crowns are then packed and delivered in large volumes to the customer,
typically a beverage manufacturer. The customer is responsible for inserting the
crowns on the bottles, a process known as crimping.
The cost of a crown is negligible in relation to the total cost of the beverage. 7 The
manufacturing process whilst requiring expensive machinery is not unusually
complex. So why are beverage manufacturers so exercised by this merger?
The answer is that the mundane aspect of the crown belies its importance to the
product it covers.
A poorly made crown may inhibit the high speed crimping process and thus delay
A poorly made crown may inhibit the high speed crimping process and thus delay
5 In fairness to the parties it has to be pointed out that the concession to accept conditional
approval is tactical i.e. in order to speed up the resolution this matter and did not entail an
acceptance by them of the correctness of the Commission’s contentions.
6 Crowns are what the layperson colloquially refers to as bottle tops.
7 Crowns cost 2 to 3 cents. For SAB the cost represents approximately 0,5% of the resale price
of a quart of beer.
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a production line at great cost. 8 It can also detract from the quality of the finished
product if it releases pressure from the bottle leading to premature decay of the
product. Furthermore, as crowns are also often part of the getup of the product,
their physical appearance must conform to the specifications given by the
customer.
The crown manufacturer needs to be capable not only of conforming to the
technical and decorative requirements of the customer, but also of delivering in
time, particularly for product promotions, where deadlines are short.
Given that their strategic value exceeds their cost, beverage manufacturers pre
occupation with the source of supply is then not surprising.
Beverage manufacturers are as vigilant about their other sources of supply .In
1998 our predecessor, the Competition Board, considered a merger between
Nampak Ltd and Crown Cork SA (Pty)(Ltd) a manufacturer of cans and crowns.
The merger was opposed by Coca Cola SA, but not by SAB.
Although the overlap in that merger involved metal cans, and not crowns, the
following observation of the Board is at least indicative of the buying power of the
beverage manufacturers, that as we discuss later may be a feature of the market
for crowns as well.
“ The applicants [i.e. Nampak and Crown Cork SA] aver that the beverage
can industry has two dominant customers, namely Coca Cola and SAB,
who between them control the purchase of eighty five percent of cans
provided and both require competitive pricing. Nampak’s prices to both
have been below CPI and well below the customer’s own price increases
for filled products.” 9
The Board report notes that at that time (1998) there were only two crown
producers in the country, Crown Cork SA having 65 % of the market and Rheem
SA having 35 %. The report further notes that the dominant customer is SAB.
Just how dominant we later see.
Nampak, we are advised, found the crown business unsustainable, apparently
Nampak, we are advised, found the crown business unsustainable, apparently
because they were unable to agree on the terms of an acceptable supply
agreement with SAB. This led SAB to enter into a five year supply agreement
8 See for example the letter from Lesotho Brewing Company to Rheem, dated 18 February
1999,where they complain of huge losses due to uncrowned filled bottles. (Record page 687).
9 Paragraph 25 of Competition Board Report number 71 entitled Investigation into the proposed
transaction between Nampak Ltd and Crown Cork SA Ltd.
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with Rheem SA in 1999. The power of SAB becomes clear when we note that
according to Rheem, for the year ending 2000 its share of the market was now
74 %, whilst Crown Cork’s had declined to 24%. Not surprisingly Crown Cork
exited the market in April 2000 and for a short period Rheem was the only local
manufacturer.
Rheem also has an ad hoc supply arrangement with Coca Cola South Africa.
Coca Cola South Africa (‘CCSA’) is a subsidiary of the Coca Cola Company
based in Atlanta Georgia. However, it negotiates supply arrangements centrally
on behalf of other firms in South Africa who are its bottlers. There are several
Coca Cola bottlers in South Africa, but by far the largest is ABI a wholly owned
subsidiary of SAB.
We described the arrangement as ad hoc, as although CCSA and Rheem have
been attempting to negotiate a supply agreement, negotiations were inconclusive
and they entered into an arrangement based on an exchange of letters in 2002,
in terms of which CCSA has awarded Rheem the supply of 400 to 500 million
crowns to Coca Cola bottlers at an agreed price. The arrangement is for the
period April 2002 to March 2003. Although this arrangement was subject to the
firms entering into a mutually acceptable service level agreement by June 2002,
no such agreement was entered into and the ad hoc arrangement effectively
continues.
Exactly how influential ABI is in these negotiations is unclear. The Commission
and MCG believe that they are, whilst the parties, avoiding the substance of
ABI’s relationship with CCSA, rely on the fact that formally CCSA, not ABI,
negotiates with suppliers on behalf of all its bottlers.
In February 2001, a new player, MCG Industries (Pty)(Ltd) (‘MCG’), entered the
market. MCG has been in business in South Africa since 1957 as a packaging
company but was not involved in the production of crowns. It had however
supplied printed tin plate sheet to Crown Cork.
MCG had undergone some changes at this time. In December 2001, its
MCG had undergone some changes at this time. In December 2001, its
controlling shareholder Zumtobel AG, had sold the business to a consortium that
included empowerment firm Wiphold. Previously disadvantaged persons now
hold 44,5% of the equity in the company.
According to SAB, MCG entered into the crown market at the behest of Distell,
who, concerned that it would be left with one supplier after the exit of Crown Cork
SA, guaranteed it’ s business to MCG. 10
10 Mr Reilly, who testified for Distell, was reticent about confirming this, but it seems probable
that SAB’s theory is correct. It is unlikely that once the market knew that SAB had given a five
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Distell entered into a threeyear contract with MCG. Since entering the market
MCG has acquired a few other customers mostly soft drink manufacturers. It
does a small amount of production for CCSA although it says that more business
may become available from this source when CCSA’s contract with Rheem ends
in March this year. At our hearing Mr Wall from Guinness UDV indicated that they
have started using MCG to a small extent to try them out.
Nevertheless MCG’s production figures show that Distell is overwhelmingly its
major client.
Relative to Rheem, MCG is however a minor player. If we disregard SAB’s
purchases, MCG has 41% of the market and Rheem 59 %. However once SAB
is included, the picture changes dramatically – Rheem has 90% to MCG’s 10%.
MCG is currently utilising only [confidential %] of its production capacity. KPMG,
in a report prepared for MCG in October last year, forecasts that it will produce
[confidential figure] units by the end of its next budget year, April 2003.Yet we are
advised that its break even point is [confidential figure] units. 11 This volume is
only obtainable according to the Commission, assuming SAB and ABI remain
with Rheem, if MCG secures all the remaining domestic production. The
Commission argues that this breakeven figure does not ensure the minimum
level of profitability that a firm would require in order for it to be worth its while to
stay in the industry. If the Commission is correct, then given the size of the
domestic market this will only be achieved if they win some volume from Coke
and or SAB, the two largest customers for crowns in the market. 12
With this background we turn now to the concerns that have been raised about
the mergers effect on competition.
Analysis of Competition Concerns
There is no dispute among any of the participants about the relevant market in
which Rheem operates. This is defined as the market for the supply of crowns for
which Rheem operates. This is defined as the market for the supply of crowns for
glass bottles. The market is defined as national. Although technically other
products can be used as substitutes for bottle closures instead of crowns, plastic
year sole supply agreement to Rheem that any other firm would enter without the security of a
major contract.
11 MCG claimed a confidential interest in these figures. However, we note that the forecasted
production figure is well below the break evenpoint.
12 The merging parties submitted an expert report by Lexecon in which they question some of
the assumptions contained in the KPMG report and suggest that MCG’s breakeven should occur
at lower volumes, because not all its overheads are attributable to the production of crowns and
appear to be utilised as well for its noncrown production.
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being an obvious example, these are not considered to be substitutes for the
purpose of competition analysis due to pricing and other technical reasons.
The merger is a vertical merger – a customer, SAB is buying one of its suppliers.
We have previously held in the case of Mondi Limited and Kohler Cores and
Tubes, a division of Kohler Packaging Limited 13, following the seminal work of
Riordan and Salop – that vertical mergers can raise three possible concerns:
i. raising rivals costs by means of either input or customer foreclosure,
ii. ability to promote coordinated conduct between competitors, and
iii. ability of a vertically integrated firm to evade price regulation
In this particular merger the evasion of price regulation is not relevant so we
need take that no further. The possibility of coordination is something that we
will examine, although neither the Commission nor the objectors raise this as a
concern, correctly in our view. The real concern then is the incentive the merged
firm would have to foreclose.
Customer Foreclosure
Both Rheem and MCG, its only domestic rival, produce crowns. Given that SAB
is overwhelmingly the dominant purchaser of crowns and further the fact that its
ownership of ABI, the key Coca Cola bottler, gives it enormous leverage as to
where CCSA awards it supply contract, the acquiring firm exercises considerable
market power as a buyer in the market for the production of crowns. 14 The
recent history of the industry, which we set out above, is consistent with this
observation.
SAB’s acquisition of Rheem makes MCG’s concerns that the merger may lead to
it being foreclosed as a supplier because its competitor is controlled by the same
firm that accounts for 78.2% of the current purchases in the market, entirely
reasonable. If MCG has no prospect of being awarded a contract from SAB and/
reasonable. If MCG has no prospect of being awarded a contract from SAB and/
or CCSA then it is unlikely to be viable on its present volumes according to the
KPMG report. Nor is it likely to embark on investment that might lead it to lower
13 Tribunal case no. 06/LM/Jan02 quoting Michael H. Riordan and Steven C. Salop – Evaluating
Vertical Mergers: A post Chicago Approach ( Antitrust Law Journal Vol 63, 1995) page 551.
14 The relationship between SAB and Coke extends beyond ABI. According to SAB’s 2002
annual report, “The Company’s recent decision to partner The CocaCola Company in expanding
into new beverage categories has had a positive effect with products gaining market share from
competitors.”(Annual Report of SAB plc 2002, Record page 57) Some parties, Guinness UDV
being one of them, also refer to the fact that SAB has a 30% interest in Distell. Mr Reilly from
Distell denied that Distell was controlled by SAB.
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costs of production and hence make it a more formidable rival to the merged
firm.15
MCG states that a nominal investment in production would enable it to expand its
production capacity to meet all of CCSA’s demand. MCG is unlikely to be able to
enter the export market, where there are a number of firms considerably larger
than it, unless it obtained sufficient domestic custom to enable it to invest in the
necessary plant to lower its costs. Another disadvantage for any SA firm wanting
to enter the export market is that they are unable to produce the considerably
cheaper tin free crowns. This is because ISCOR, the only local supplier does not
produce tin free steel.
The merger could lead to the foreclosure of MCG and hence its exit from the
market leaving customers some of whom are SAB and /or ABI ‘s rivals with only
one source of supply, Rheem.
Apprehension about customer foreclosure is justified.
Input foreclosure
Guinness UDV and Distell are two major players in the alcoholic beverage
market who source their crowns locally for the most part. Both firms sell products
that require crowns which compete with similar offerings from SAB, by way of
example fruit flavoured alcoholic beverages or as they are commonly referred to
in the industry, FAB’s. Distell currently does not make use of Rheem as a
supplier but has in the past. Guinness UDV currently uses Rheem but has
recently placed some business on a trial basis with MCG.
Both firms expressed a similar set of concerns.
If they relied on Rheem as a source of supply they feared –
• Price discrimination, with SAB being treated more favourably;
• Supply might be refused or restricted. For instance if the Rheem plant
experiences production constraints it is probable that it will favour the
customer who owns it at the expense of its other customers;
customer who owns it at the expense of its other customers;
• Confidential business information about their production requirements
might be made known to SAB who would then be able to respond
15 One of the more important scale benefits would be to get a volume rebate from Iscor, which it
seems even Rheem was not able to get. (See page 560 letter from Rheem to SAB dated 5 March
1999.)
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accordingly. The production information would relate to inter alia size of
product runs and seasonal fluctuations. In particular they felt that this put
them at a disadvantage in respect of new product launches as the crown
manufacturer would have to have access to information where reaction
time to ones rivals efforts is crucial. A firm innovating wants its rivals to
have the shortest possible time to react, as it maximizes it gains during the
period before its rivals have reacted. If SAB has access to this type of
information prematurely, it means that they can respond more quickly than
they might otherwise have.
• The FAB market in which they compete with SAB is a crucial growth area
where new marketing initiatives are typical and response times to market
changes crucial.
• Concerns that SAB may not have the same interest as they do in
introducing innovation to Rheem’s technology particularly as this is not
part of SAB's core business.
If they relied on MCG as their only source of supply they would be faced with a
single supplier who could raise prices above the competitive level knowing that
the firms’ had no domestic alternative. Furthermore MCG has only recently
commenced the production of twist off crowns and, at least in the opinion of Mr
Wall from UDV, have no track record yet. He also does not consider pry–off
crowns as a substitute for twistoff crowns. Hence vulnerability to MCG as the
only source for domestic supply is not merely a price issue.
Both firms explained that whilst they had had some experience of importing
crowns this was not an attractive alternative. Firstly, unlike SAB, their volumes
were too low to secure them attractive contractual terms from an offshore
manufacturer. Secondly, on their volumes, imports were more expensive, and
thirdly, due to the need to ship these goods, they are vulnerable to the
vicissitudes of transport logistics. All this impacts on their ability to launch new
vicissitudes of transport logistics. All this impacts on their ability to launch new
product, where lead times need to be reduced if a product needs to come to
market before rivals can respond.
ABI, not surprisingly did not oppose the transaction. Yet its reason for doing so
justifies the concern expressed by the other firms. In a letter to the Commission
ABI states:
“ As major customer, ABI has no concerns that it would hamper its own
ability to compete. Neither Coleus packaging nor SAB compete with
CocaCola or its bottlers in the market place, nor can we foresee a
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situation where we might be denied access to limited supply. (Our
emphasis)
Again, we are satisfied that apprehension by SAB’s rivals about the possibility of
input foreclosure is justified.
Collusion
As mentioned earlier this is sometimes one of the concerns in relation to vertical
mergers although neither the Commission nor any of the other competitors
thought it relevant here. We would agree with this. Given the vast difference in
size between the firms, the fact that the business is noncore to SAB’s activities,
we see no reason why Rheem would have any incentive to collude with MCG
and much to risk to both it and its parent, if it did.
Market analysis
When a merger is likely to substantially lessen competition we have two possible
remedies. We may prevent a merger or where appropriate approve it subject to
conditions that serve to ameliorate the anticompetitive effects.
Initially, as we noted the Commission had recommended that we prohibit the
merger. The parties response to this was that if the merger was prohibited
Highveld would exit the market and sell the plant to an overseas buyer. Since
SAB was not prepared to be dependant on one local supplier, which in any event
could not meet its needs at present, it would in all likelihood have sourced plant
from overseas and set up an inhouse crown division to meet its needs. It is not
difficult to see why this would be the most perverse of outcomes.
Although the Commission challenged whether Highveld had tried sufficiently hard
to find a local buyer we have no reason to believe it did not. 16
It is not hard to see why. The structure of the market is such that any firm that
hopes to remain viable needs to source work from SAB. With SAB currently
requiring a sole supplier it is powerful enough to impose a suboptimal contract
on its supplier. 17 This was precisely the case with the Highveld contract where
on its supplier. 17 This was precisely the case with the Highveld contract where
Rheem’ s margins were under continual pressure so that it had no incentive to
invest. Accordingly it was never able to lower its production costs and as the
16 Highveld produced several letters from firms who had been approached and who said ‘thanks
but no thanks’, accounting variously for their coyness from Robert Mugabe to a lack of funds
17 This also explains why even a significant force in the packaging industry such as Nampak was
reluctant to purchase Rheem when it was on offer.
11
contract progressed, it experienced everdeclining returns. 18 Highveld also never
saw Rheem as part of its core business so its enthusiasm for the division
diminished with its returns. Staff morale suffered and key personnel were lost.
The decision to exit became inevitable.
We are satisfied that prohibition is not a viable option given the current market
structure as it is likely to lead to the exit of Rheem.
Conversely approving the merger will allow SAB the opportunity to introduce the
efficiencies into the Rheem business, which it could not achieve in terms of its
contract. As owner it will have incentives to allow Rheem to invest, which it never
had as a customer, and it is probably, at the moment, the only owner to have this
incentive.19
The proposed conditions
The proposed conditions have been designed to deal with all the foreclosure
concerns raised by MCG, Guinness and Distell. All parties were consulted and
were part of the negotiations.
The details of the conditions are contained in our order and need not be repeated
here.
The supply contract that SAB has entered into with MCG will ensure that that firm
has the minimum scale that it requires to invest in its’ plant and become
competitive, provided that it retains its other business. The agreement lasts for
three years and although MCG is vulnerable to losing this business to Rheem
thereafter, it would be inappropriate to make this condition for any longer period.
The conditions inserted for the benefit of Rheem’s customers all address the
concerns raised by Guinness UDV and Distell and in our view are sufficient. They
provide for a mechanism to protect confidentiality, inhibit price discrimination and
ensure supply. They even go further to deal with plant innovation.
The other benefit of these conditions is that they make Rheem a real alternative
for SAB’s beverage rivals, so they are not faced by MCG as a sole supplier. If
for SAB’s beverage rivals, so they are not faced by MCG as a sole supplier. If
MCG is aware that its customers have a viable alternative it will ensure that it will
18 The agreement was subject to an escalation clause that provided that certain costs could only
escalate at 87% of CPI. Without being able to reduce its production costs, Rheem’s returns were
decreasing annually.
19 As the parties economic report makes clear, any party other than SAB that invested to reduce
Rheem’s marginal cost of production was unlikely to receive the full benefit, because SAB is in a
position to appropriate any increase in profits.( See section 5 of the Lexecon report, Record page
774).
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be more competitive in tendering for their business.
The one area of dispute between the Commission and the merging parties was
whether, as part of the conditions, SAB should be required to sell its control of
Rheem rather than a minimum stake that falls short of control.
The Commission argued that if SAB’s rationale for the merger was to turn the
company around for the purpose of selling it on to an empowerment group then
they had ample time to do so, within the three year period the Commission was
proposing. SAB protested vehemently that they could not be certain how long
they would need, and should not be stampeded into a fire sale to meet an
arbitrarily imposed deadline.
To some extent the Commission has succeeded in calling SAB’s bluff. Clever
public relations by SAB had suggested that the rationale for the deal was just that
– to quote a letter addressed to Mr Wall from Mr Short of SAB
“In short therefore, we feel that the purchase of Rheem by SAB will
allow:..Significant progress in terms of further black advancement in South
Africa through selling the company on to black ownership after turn
around.” 20
In his line of questions to witnesses counsel for the merging parties put forward
the same proposition:
“ADV UNTERHALTER: There’s one other feature of this merger, which you may
know of, but perhaps you don’t, which is that SAB is acquiring control of Rheem
in order to undertake investments and bring it up to spec as far as its own
requirements for crowns are concerned. But it wishes to do so in order then to
onsell it to a black economic empowerment company. So it means only to hold
the company for a period of time. Were you aware of that? “
The Commission could be forgiven for holding SAB to what appeared to be its
stated position.
Be that as it may, we must decide whether the condition suggested by the
Commission is necessary or viable to cure the anticompetitive effects.
Commission is necessary or viable to cure the anticompetitive effects.
In our view forcing SAB to sell prematurely would not cure the problem. It would
mean that the new owner would be forced to accept an unfavourable contract
20 See letter from Mike Short to Mr Wall , entitled “SAB purchase of Rheem Crown”, undated.
13
from SAB, likely to be as onerous as the one Rheem had under Highveld’s
stewardship, and we would soon be back where we are today with another
controlling shareholder wanting to sell.
It would be better to have the company under SAB’s control, but still subject to
the conditions imposed by this order, than for it to de facto control the company
by contract without having to be subject to these conditions.
It must be remembered that except for the contract with MCG, which is of a 3
year duration, the remaining conditions remain in force for so long as SAB has
control.
These conditions, together with the obligation to sell at least 40 % to an
empowerment partner in 2 years, are sufficient incentive for SAB to dispose of its
control sooner rather than later, but at least when it does so, it will be in terms of
market driven, as opposed to regulatory driven, forces and for this reason the
outcome is more likely to favour the formation of a genuinely independent firm
rather than one that has to be constructed to meet an imposed deadline.
For this reason we have opted for the parties version of this clause in our order.
With the exception of this clause the conditions imposed are behavioural
remedies. There is some scepticism amongst competition law commentators
about whether this type of remedy works. Often it is suggested they are too
difficult or too costly to monitor or that they involve the diversion of resources by
the regulator from other areas where they could be more productively spent. In
this case there is no ongoing burden placed on the Commission. The
competitors of Rheem and SAB, who benefit from the conditions, are all large
and sophisticated concerns, and will for this reason be well placed to police
compliance. The Commission is not obliged to perform any ongoing monitoring of
market behaviour. Its only function post merger is to receive reports from SAB
detailing the progress of the intended rehabilitation of Rheem, a condition that it
had requested.
had requested.
A powerful incentive for the merged firm to comply with the merger conditions, is
that amongst the remedies for noncompliance, is revocation of the merger or
divestiture. For this reason we also required that that a breach by SAB of its
contract with MCG, in respect of certain material clauses, would also constitute a
breach of the merger conditions, and not just be enforceable at civil law.
We are satisfied that although the merger will lead to a substantial lessening of
competition in the market for the manufacture of crown closures, the conditions
imposed in the order will adequately ameliorate the anticompetitive effects.
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Order
The merger is approved subject to conditions contained in the annexed order. A
nonconfidential version of our order is annexed to the public version. 21
__________ 11 February 2003
N. Manoim Date
Concurring: D.H. Lewis, Prof. M. Holden
For merging parties: Adv Unterhalter on behalf of Bowman Gilfillan Inc ;
For the Competition Commission: Mr H Shozi Legal Services Division
21 The confidential version contains production information relating to Rheem and MCG, which
both firms have a legitimate interest in remaining confidential.
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________________________________________________________________
Order: non confidential
________________________________________________________________
Further to the recommendation of the Competition Commission in terms of
section 14A(1)(b), in the large merger between Coleus Packaging (Pty) Ltd
(“Coleus”) and Rheem Crown Plant, a division of Highveld Steel and Vanadium
Corporation Limited (“Rheem”) and having heard the representatives of the
parties and Commission:
IT IS ORDERED THAT:
1. Whilst noting the intention of South African Breweries Limited (“SAB”) to
dispose of its control over Coleus, SAB shall dispose of not less than 40%
of the issued share capital in Coleus to a black empowerment partner(s)
suitable to SAB within two years of the date of this order, provided that the
crown plant acquired by Coleus has been rehabilitated to the reasonable
satisfaction of SAB. In the event that SAB considers that the plant has not
been rehabilitated to its reasonable satisfaction, it shall make application
to the Tribunal, on notice to the Commission, for an extension, and
appropriate variation, of any of the conditions set out in this order. SAB
and Coleus shall furnish the Commission with a written report on a six
monthly basis commencing on 1 October 2003 regarding the steps taken
to rehabilitate the crown plant;
2. The supply agreement concluded between SAB and MCG Packaging
(Pty) Ltd (“MCG”), entered into on 21 January 2003, shall come into force
by 31 March 2003, or such later date as may be agreed by the parties to
such agreement. A material breach by SAB of the provisions of clauses 4,
5.6, 5.7 and 5.8 of that agreement shall constitute a breach of this merger
condition. A copy of this agreement is annexed to the confidential version
of this order marked ‘A’;
3. All employees and directors of Coleus shall be obliged to sign
3. All employees and directors of Coleus shall be obliged to sign
confidentiality agreements in relation to volume forecasts, new product
launches and promotional activities of Coleus’ customers, on the basis
that a breach of such agreement would be treated in the most serious light
which could lead to the dismissal of the employee concerned. Coleus
shall take all reasonable measures to ensure that confidential information,
proprietary to its customers, and coming into the possession of Coleus or
its employees, remains confidential within Coleus;
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4. In the event that there are production stoppages or shortages, such that
Coleus is unable to meet the full contractual requirements of all its
customers, it shall reschedule its production on a nondiscriminatory pro
rata basis which will, inter alia, take into account issues such as the then
requirements of existing customers, their volumes of purchases over the
last twelve calendar months, and the then forecast requirements of
customers for the next twelve weeks;
5. Coleus shall consider in good faith proposals from any customers or
suppliers, which would have the effect of increasing the efficiency of the
crown plant. Coleus will further undertake that appropriate steps are taken
to ensure that its technology and performance is benchmarked against
industry standards and that any technology interchange relationships
which are reasonably necessary, are entered into;
6. Coleus undertakes that its ex works prices to customers in the South
African market whose annualized volume of crown purchases from Coleus
exceeds (confidential figure) crowns (based on the last audited financial
year of Rheem or Coleus) shall not exceed the ex works prices charged to
SAB by more than (confidential percentage), for crowns of a similar design
and specification. In the event that the Commission, or a customer for
whose benefit this condition has been imposed, wishes to verify
compliance with this condition, Coleus shall procure such verification from
its auditors in the form of an audit certificate. In addition, Coleus
undertakes to ensure that all crown purchasers, to whom the above
applies, are informed of the confidential contents of this clause.
7. The conditions set out above shall only apply until such time as SAB has
7. The conditions set out above shall only apply until such time as SAB has
disposed of its controlling interest, as defined in Section 12(2) of the
Competition Act 89 of 1998, in Coleus.
__________ 27 January 2003
D.H. Lewis Date
Concurring: N. Manoim, Prof. M. Holden
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