COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 10/LM/Mar03
In the large merger between:
Daun et Cie AG
and
Kolosus Holdings Limited
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Reasons for decision
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CONDITIONAL APPROVAL
1. The proposed transaction between Daun et Cie AG and Kolosus Holdings
Limited was conditionally approved by the Tribunal on the 29 July 2003. The
reasons for this decision follow.
The Transaction
2. In terms of a sale of shares agreement concluded between Senwes Limited
(“Senwes”) and Daun et Cie AG (“Daun”), Senwes sold its 62.5% share in
Kolosus Holdings Limited (“Kolosus”) to Daun for a consideration of R1.31.
One of the conditions of the agreement is that Daun concludes an agreement
with ABSA to acquire its shares in Kolosus. Daun thus acquired control of
Kolosus.
3. Further to this Daun entered into an agreement with a USA producer of
automotive leather, Seton, in terms of which Seton will acquire a 25%
shareholding in Kolosus. Seton is a major creditor of Kolosus, a debt which
arises from lengthy litigation between the two companies. Although this
transaction is not a separate merger for purposes of the Act, it is a significant
aspect of the analysis of the transaction before us and we return to a detailed
discussion of this issue later in the decision.
4. On the 30 April 2003 the Commission recommended that this merger be
unconditionally approved.
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THE PARTIES
The primary acquiring firm
5. The primary acquiring firm is Daun et Cie AG, a German company controlled
by Mr Claas Daun and the Daun family trust. Daun and its subsidiary, Kap
Beteiligungs AG (“Kap”), hold controlling interests in approximately 70
subsidiaries worldwide of which at least 30 are in South Africa. The Daun
group is particularly active in the textiles, footwear, furniture and automotive
supply industries.
6. The group’s subsidiaries relevant to this transaction are Springbok Trading,
Riverside Tannery and the joint venture Butterworth Tannery.
7. Mr. Daun’s entrepreneurial talents are highly regarded. He is a risk taker who has
developed a reputation as a successful ‘turnaround’ specialist, that is, an
entrepreneur adept at identifying opportunities for rescuing – often at the behest of
anxious creditor banks – ailing businesses .Mr. Daun’s record of successful
turnaround operations includes Morkels, a national chain of furniture retail stores,
East Rand Proprietary Mines, a gold mining company, Da Gama Textiles and
Glodina Towels, to name but a few. It appears that Mr. Daun’s interventions have
frequently impacted dramatically on the structure of entire sectors. The furniture
manufacturing industry in which Mr. Daun is said to have initiated the consolidation of
the sector and, ultimately, the formation of Steinhof, the dominant player in furniture
manufacturing in South Africa, is an example.
8. A successful turnaround generally presupposes the identification and
elimination of excess costs and, as such, is frequently accompanied by
significant labour retrenchments. Mr. Daun has not escaped some of the
controversy and recrimination that inevitably accompanies the process of
controversy and recrimination that inevitably accompanies the process of
workforce reduction. However, in addition to laying off labour, Mr. Daun is
also associated with some innovative rescues that have presupposed high
levels of cooperation with organised labour, the rescue of Mooi River Textiles
being one wellknown case in point.
The primary target firm
9. The primary target firm is Kolosus, a public company controlled by Senwes.
Kolosus controls various subsidiaries, principally active in the meat and
leather industries.
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10.The subsidiaries relevant to this transaction are the two feedlots,
Taaiboschbult and Hurland, African Hide Trading, and the tanneries, Kolosus
Automotive Leathers and Mossop Western Leathers.
11.We have already referred to the litigation with Seton that has dogged Kolosus’
recent history. This matter has impacted significantly on both the finances of
the target company as well as on its ability to compete effectively in a market
clouded by the negative sentiment surrounding the litigation. It appears that,
absent this transaction, the prospect of liquidation exists.
RATIONALE FOR THE TRANSACTION
12.Daun’s assumption of control of Kolosus portends both financial and
reputational relief for the ailing company. So powerful is Mr. Daun’s
reputation, that Seton has, in part settlement of its successful claim, accepted
a passive, minority equity stake in the ailing Kolosus simply because, it avers,
it expects Mr. Daun’s presence and his entrepreneurial flare to be manifest in
an upside on the share price over the relatively short term. Furthermore Mr.
Daun is a longstanding supplier to the automobile industry and it is hoped
that his reputation and connections with the automobile OEMs, particularly the
key German owned OEMs, will restore market access for Kolosus’ automotive
leather operation.
13.It is more difficult to determine with confidence the acquirer’s rationale for this
transaction. Mr. Daun insists that he is simply attracted by the sheer
challenge of turning around the ailing Kolosus and by the profit that he will
show in consequence of this. Be that as it may, there are, on the face of it,
structural consequences of the transaction that are potentially troubling from a
competition perspective.
14. Firstly, as will be elaborated below, the merger of the country’s two largest hide
traders is, prima facie , cause for concern.
traders is, prima facie , cause for concern.
15.Secondly, we are mindful of a discernible pattern of vertical integration in Mr.
Daun’s manufacturing strategy. This is apparent in respect of his interests in
the furniture and textiles sector. We must ask ourselves whether this
transaction represents a strategic step towards vertical integration of the
leather products value chain in which – through his interests in furniture and
footwear – he is already a significant player. This, too, may impact on the
character and intensity of competition in the affected markets.
16. Mr. Daun denies that considerations related to vertical integration play any part in his
decision to acquire Kolosus. Of course it is wholly conceivable that sheer
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opportunism has driven as consummate an entrepreneur as Mr. Daun. However, his
clear affinity for vertical integration speaks for itself. 1 At least, we must be alert to the
possibility that the opportunity for turnaround that Mr. Daun discerns is rooted in
vertical relations along the value chain and we must examine the competition
implications, if any, of that approach.
THE HEARING
17.A prehearing was held on 2003 and the hearing was held on the following
days:
8 July 2003
9 July 2003
10 July 2003
14 July 2003
24 July 2003
25 July 2003
18.The Commission called the following witnesses:
1. Mr D Venter, an independent consultant to companies in the meat and
leather industries
2. Mr P Booysen from the Executive Council of the International Meat
Secretariat (IMS) and the Meat Exporters of South Africa (MESA)
19.The merging parties called the following witnesses:
1. Mr P Schouten from Daun et Cie AG
2. Mr A Bischoff from Kolosus
3. Mr P Staples from Springbok Trading
4. Mr H Roets from African Hide Trading
5. Mr B Keyser from Kolosus Automotive Leathers
6. Mr C Daun Chairman of Daun et Cie AG
7. Mr PTrechack VicePresident of Seton USA
20.The Tribunal called the following witnesses:
1. Mr C O’Neill from Eagle Ottawa SA
1 This affinity for vertical integration was remarked upon by Mr.Patel in his submissions on behalf
of SACTWU (page 3 of transcript of 8 June 2003): “The first is I guess less of an opinion than an
observation that the main shareholder in the acquiring firm tends to concentrate investment in
pipelines or connected investments holding equity in value chains such as the textile clothing
value chain, textile auto industry, textile furniture, textile meaning the fabric making side to home
textiles which is the making up of textiles, hides and skin to tanning and tanning to footwear.”
4
2. Mr N G von Durckheim from Bader SA
3. Ms J C G Terreblanche from EAC
4. Mr R Nortje and Ms A. Viljoen from BMW SA
5. Mr B Lappiner from Cape Produce Company Pty Ltd
6. Mr H Cilliers from Daimler Chrysler
7. Mr C Austin from Hidskin Pty Ltd.
21. It is important to note that during the Commission’s investigation of the
transaction, various industry players raised their concerns regarding the
impact of the transaction. The Tribunal thus subpoenaed the
abovementioned witnesses as a sample representative of the various
players at different levels of activity within the industry.
The Trade unions
22. Mr E Patel and Mr M Bennett represented the South African Clothing and
Textile Worker’s Union (“SACTWU”) during the proceedings.
23. Mr P Motaung from Maserumele Inc represented the South African Food
and Allied Trade Union (“SAFATU”).
BACKGROUND
24. The transaction is a complex one. At its core is a horizontal merger, that
is a merger involving firms in the same market, but it also involves firms
that are suppliers and customers of these competing firms. Although, as
will be elaborated below, the horizontally related firms are involved in
trading and processing both sheep skins and cattle hides, for our
purposes it is only cattle hides that are pertinent and then, particularly
those hides that are suitable for ultimate use in the manufacture of
automobiles. To provide a general background to the merger, we firstly
describe the automotive value chain in which the firms are active. We then
discuss the relevance of the Motor Industry Development Programme.
Thirdly, we provide relevant information on the Seton legal claim against
Kolosus, as well as a brief overview of the establishment of Springbok
Trading.
The automotive leather value chain
25. The automotive leather industry, the most important component of the
25. The automotive leather industry, the most important component of the
South African leather industry, is best analysed as a value chain
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comprising four levels. 2
26. These are:
i. the feedlots;
ii. the primary tanners;
iii. the automotive tanners, and
iv. the original equipment manufacturers (OEMs).
The Feedlots (raw hide supply )
27. Since feedlot cattle are kept in enclosures, their hides have fewer defects
and blemishes. Hence, while the feedlots are not the only source of raw
hides, they do provide the main source of hide for the automotive industry,
which requires high quality hides. There are approximately 60 commercial
feedlots in South Africa. The South African Meat Industry Council
estimates South Africa’s annual total hide production to be between 2.2
and 2.4 million, of which 60% (1.32 million) is suitable for the automotive
industry. The industry requires approximately 3 million hides annually and
imports are therefore necessary to satisfy the shortfall.
28. Many of the feedlots have structural links with hide traders and primary
tanneries. Kolosus owns two feedlots, namely Taaiboschbult and Hurland
Feedlots, both of which exclusively supply raw hides to African Hide
Trading. Although the acquiring firm is not structurally linked to any
feedlot, it enjoys a supply relationship with an independent feedlot, Sparta.
The Primary Tanners
29. The primary tanners procure hides from feedlots and commercial cattle
farmers. The raw hides undergo a chemical process, which transforms
them into “wetblues”. A wetblue is a hide that has been washed in
chemicals and limestone to remove excess fat and hair. Although this is a
tanning process, further beneficiation is required to transform these wet
blues into leather. The better quality wetblues are sold to automotive
tanners and the lower quality ones are sold to tanneries that manufacture
other leather products such as shoes and handbags.
30. The primary tanners thus undertake three related activities. Firstly, they
30. The primary tanners thus undertake three related activities. Firstly, they
2 Auto upholstery makes up 58% of total leather exports. See Morris and Velia , Final Report on
Factors Impacting on the Competitiveness of Key Export Value Chains in the Leather Industry,
June 2002 .
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procure raw hides from the feedlots and commercial farmers. Secondly,
they process these raw hides into wetblues. Thirdly, they then onsell the
wet blues to the secondary tanners who produce finished leather for a
variety of industrial applications. The primary tanners, though performing
a basic processing function, are principally engaged in the process of
intermediating, of trading hides, between, on the one hand, owners of the
raw hide, and, on the other hand, those secondary tanners who convert
these raw hides into leather used in the process of manufacturing a wide
range of products from automobile seats to handbags. Accordingly, the
primary tanners are widely referred to as “hide traders” since their
principal role is the purchase of raw hides and their onsale in the form of
wetblues to the secondary tanners.
31. The Daun group operates at the primary tanning level through its
subsidiary, Springbok Trading, the largest South African hide trader.
Springbok Trading owns the Riverside tannery and, together with an
independent feedlot, Sparta, the Butterworth tannery. Although these
tanneries provide Springbok with a limited primary tanning capacity, it
appears that most of the raw hides that it procures are tanned under
contract by hide traders who have primary tanning capacity in excess of
that required by their level of hide procurement.
32. Kolosus is also active at this level of the industry through African Hide
Trading. In contrast with Springbok Trading, African Hide’s primary
tanning capacity significantly exceeds the volume of hides that it procures.
Accordingly, it undertakes primary tanning under contract from other hide
traders including Springbok.
33. There are three other significant participants at this level of the value
chain, namely Cape Produce Company (Pty) Ltd, EAC and Hidskin (Pty)
Ltd. Both EAC and Hidskin own feedlots.
34. Primary tanning is characterized by significant excess capacity. As
already intimated, African Hide, in particular, is said to possess significant
excess primary tanning capacity.
Automotive Tanners
35. The automotive tanners further process the wetblues to create finished
leather seat kits, or “cutkits”, which are then sewn and sold to the motor
manufacturers in the form of complete car seats.
36. While the Daun group is not active at this level of the industry, Kolosus
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Automotive Leathers (KAL), previously known as Ladysmith Leather,
operates an automotive tannery.
37. There are five automotive tanners active in South Africa. With the
exception of KAL, all are subsidiaries of international companies. These
are Bader SA, a Germanowned company, the Italianowned Mario Levi,
and the two USowned producers, Eagle Ottawa and Seton.
The original equipment manufacturers (OEMs)
38. The OEM’s – the multinational automobile manufacturers are the ultimate
consumers of automotive leather products. The OEMs contract automotive
tanners to produce finished leather car seats. BMW’s local subsidiary is the
largest player in this sector of the local value chain. Daimler Chrysler, Audi and
Volkswagen are the other major customers. Note that the locallybased OEMs
do not only procure car seat kits from the locallybased automotive tannery for
installation into locally produced models. Although procurement of locally
produced leather car seats is undertaken by the locallybased OEMs, many of
these are onsold to production facilities elsewhere in the world. In other words
South Africa’s automotive tanners are part of the global procurement networks of
the multinational OEMs. The Motor Industry Development Programme (MIDP),
the programme that effectively underpins South African participation in these
supplier networks, is described below. 3
39. This fourpart value chain is illustrated graphically in Diagram 1 on the
next page.
3 Note that an OEM does not have to undertake manufacturing in this country in order to take
advantage of the MIDP subsidies. Hence Renault has no production facility in this country but is
a large producer of catalytic converters which are then utilized in its international manufacturing
plants and the duty credits earned are then used to support the importation of Renault’s into this
country. It is not clear whether this is so with respect to leather car seats but there appears to be
no reason why it should not be so.
8
Diagram 1
PARTICIPANTS IN AUTOMOTIVE LEATHER VALUE CHAIN
LEVEL ONE
Daun Kolosus
FEEDLOTS Karan EAC Beefkor Sparta
contractual
arrangemen
t
with Daun
Taaiboschbult &
Hurland
LEVEL TWO Merging parties
Daun Kolosus
9
PRIMARY
TANNERIES
Cape
Produce
Company
(CPC)
EAC Hidskin Springbok
Trading
____________
_
*Butterworths
& Riverside
Tanneries
African Hide
LEVEL THREE
Kolosus
AUTO
TANNERS
Eagle Ottawa Mario Levi Bader SA Seton
25% equity
stake in
Kolosus
Kolosus
Automotive
Leathers
*The other tannery
is Mossop
LEVEL FOUR
O.E.M’s BMW Daimler
Chrysler
Volvo VW & Audi Delta
The Motor Industry Development Programme (MIDP)
40. Introduced by government in September 1995, the MIDP effectively constitutes a
package of incentives aimed at enhancing the international competitiveness of
the domestic auto assembly sector. The programme encapsulates a structural
shift in trade policy away from tariff and import control measures towards the
provision of a range of supply side support initiatives.
41. Of the five incentive packages that make up the MIDP, it is the import–export
complementarity scheme that is pertinent with respect to the automotive leather
industry. Essentially the scheme rewards OEMs and component manufacturers
duty credits calculated on the basis of the local content value of exported
vehicles and components. These credits are then used as rebates on the import
duties payable on vehicles or components. These rebate certificates are
10
tradable on the open market. 4 Practically, in the leather industry this translates to
the OEM’s earning rebate credits on the value of local content of leather car
seats. This includes the value of the hide itself (where it is a locally sourced
hide). It also includes the value of hide processing including the primary and
secondary tanning processes as well as the sewing of the hides. The greater the
value of the local content the greater the total percentage rebate earned. It is
anticipated that these duties and rebates will be gradually phased down until
2012. 5
42. The automotive leather industry in South Africa largely owes its existence
to the MIDP. Since its inception the MIDP has resulted in almost all major
OEM’s procuring leather upholstery from South African suppliers. This
has reduced the duty payable on the import of those models that are not
locally produced thus enabling the OEMs to specialise in the production
(for both local and international markets) of selected models.
43. However, critics charge that the MIDP has also inflated the price of local
hides. Hide traders are able to charge a premium over the international
price of raw hide because the rebates earned on local content make it
attractive for the OEM’s to procure hides locally, even at a premium on the
internationally traded price. However, as elaborated below the
procurement policies and practices of the OEMs appear to circumscribe
the size of the premium charged, that is, while the MIDP creates a degree
of differentiation between the prices of local and imported hides, the
international market in which the OEMs purchase their inputs nevertheless
exerts discipline on local price levels.
44. The phasing down of the rebates presents a challenge to the automotive
industry, in that it must remain globally competitive independently of the
MIDP in order to survive.
MIDP in order to survive.
The Seton Claim
45. Mr Daun initially owned a company known as Silveroak Industries (Pty)
Ltd (“Silveroak”), which operated in the automotive leather industry
through its subsidiary Ladysmith Lindgens Leathers (“LLL”). During 1994
Seton USA, a major global manufacturer of leather automobile seats,
purchased a 49% holding in Ladysmith Leathers and thus jointly held LLL
together with Silveroak. Silveroak and Seton entered into a noncompete
agreement that provided that neither company nor their subsidiaries and
4 Morris, M and Barnes, J, An Analysis of the endogenous and exogenous factors impacting on
the success of the motor industry development programme, CSDS Working Paper No. 27, March
2000, page 3.
5 The MIDP initially meant to end in 2007 was extended to 2012 .
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associated companies would compete with LLL .
46. In September 1995 Mr Daun sold his controlling share of Silveroak to
Kolosus. At the time Kolosus operated in the automotive tanning business
through its subsidiary, King Tanning, situated in King Williams Town.
Seton then alleged a breach of the noncompete clause arising from the
activities of Kolosus’ subsidiary, King Tanning, which competed with LLL,
the joint venture between Silveroak and Seton. The agreement provided
for dispute resolution under the auspices of the International Chamber of
Commerce. Seton was successful in arbitration proceedings held in Paris.
The arbitration award of over $13 million was subsequently made an
order of the South African High Court. During these proceedings, the
relationship between Seton and the Kolosus management continued to
deteriorate. Seton, dissatisfied with the manner in which Kolosus, as
controlling shareholder, managed Ladysmith Leathers, offered to
purchase Kolosus’ share in LLL. However, bv invoking the ‘texan clause’
in the joint venture agreement, Kolosus elected to purchase Seton’s share
at the same price.
47. Kolosus then embarked on a rationalisation plan aimed at integrating the
Silveroak businesses, properties and subsidiaries into Kolosus. The
upshot was that Silveroak was effectively stripped of its assets. As the
major creditor, Seton instituted liquidation proceedings against Silveroak.
In the meantime Kolosus undertook a capital reduction, disposing of the
loan account owing to Silveroak. In further legal proceedings, Seton,
alleged that the capital reduction was unlawful, and was therefore able to
establish Kolosus’ liability for the arbitration award against Silveroak.
48. At the hearing before us Mr Trechack, a Seton executive, revealed that
48. At the hearing before us Mr Trechack, a Seton executive, revealed that
this saga had cost his company some $8.4 million in outofpocket,
principally legal, expenses. Kolosus, for its part, suffered not only direct
financial costs, but also indirectly, and perhaps even more severely, from
the grave negative perceptions that permeated the industry. The OEM’s
insist on stability and long term supply relationships, and were therefore, it
seems, increasingly unwilling to rely upon a supplier whose financial
stability was put under severe pressure by the outcome of the Seton
litigation. Hence, we know, for example, that BMW ended its relationship
with Kolosus, while other OEM’s have shown reluctance to place large
orders with Kolosus. In consequence Kolosus Automotive Leather’s
(previously LLL) currently enjoys a relatively insubstantial market share of
approximately 5.5% of the automotive leather market.
49. Settlement of the Seton claim and the related litigation was thus effectively a
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precondition for establishing Kolosus on a sound footing. This was achieved
when, on the 1 stApril 2003, Seton, Kolosus and Daun concluded a settlement
agreement.
50. In terms of the settlement agreement Seton will receive an amount of US$
5 million and 24.5% of the issued share capital in Kolosus. In return Seton
will withdraw all legal action pending against Kolosus and its subsidiaries.
The agreement also provides for the withdrawal and abandonment of all
the liquidation claims against Kolosus and its subsidiaries.
51. Seton’s shareholding in Kolosus is a passive one, it will not be entitled to
board representation or participation in the management of Kolosus. In
fact, the agreement stipulates that Seton is obliged to follow the vote of
Daun in all shareholders’ votes. Seton is granted a put option, which may
be exercised at any time and in terms of which Daun is obliged to
repurchase Seton’s shares for an amount of US$ 1 million.
The establishment of Springbok Trading
52. In 1996, while the legal battle between Seton and Kolosus raged on, a
group of African Hide employees, having secured financial backing from
Mr Daun, severed ties with African Hide and formed Springbok Trading
which rapidly established itself as the largest purchaser of raw hide in
South Africa.
53. Kolosus was thus dealt a double blow. Firstly, it had lost heavily as a
result of the Seton litigation. This not only imposed substantial direct
financial costs on the group but it also seriously impaired the access of its
automotive tanner, Kolosus Automotive Leather (KAL), to the OEM
market. Secondly, while it was forced to grapple with the consequences of
the arbitration award against it, it also had to contend with the rise of
Springbok Trading and its attack on African Hide Trading, Kolosus’ hide
trading and primary tanning arm.
trading and primary tanning arm.
RELEVANT MARKETS
54. There are several distinct product markets implicated in this transaction.
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55. As already noted, the merging parties are both active in the skins market
(that is, sheep skin) as well as the hide market (that is, cattle hide).
The skins market
56. Both parties are active in the procurement of dorper and merino skins. The
Commission’s investigation into this market revealed that it is a highly
competitive export market. We are satisfied that the transaction does not
lead to a substantial lessening of competition in the skins market.
The hides market
57. Within the hide hide market there is, firstly, the market for the ‘production’ and
sale of raw hides, which we will refer to as the raw hide market . The target
company, Kolosus, participates in this market by virtue of its ownership of two
feedlots, although it appears that these feedlots trade only with African Hide,
Kolosus’ subsidiary in the hide trading and primary tanning market. The acquiring
company has, it appears, an exclusive trading arrangement with another feedlot,
Sparta.
58. Although there is some importation of raw hides, they are perishable products
and so, it appears, most of the raw hides tanned in the local primary tanneries
are locally sourced. All indications are then that the raw hide market is a
nationalmarket. Indeed several witnesses indicated that the premium, if any, on
the price of hides that is generated by the local content requirements of the MIDP
accrues principally to the sellers of raw hide. 6 That is, to say, at the raw hide
level there is limited discipline exerted by the international market, in contrast
with ‘wet blue’ hides, the product at the next level of the value chain. It appears
that prices of raw hides are negotiated and hides are procured on a weekby
week basis. 7
59. Secondly, there is the market in which the primary tanning activity is undertaken,
which we will refer to as the wet blue market . This comprises three discrete
which we will refer to as the wet blue market . This comprises three discrete
activities. Firstly, the purchase of raw hides. Secondly, the conversion, through
the primary tanning process, of the raw hide into a ‘wet blue. Thirdly, the sale of
the wet blue to the secondary tanners, who, in a further tanning process, convert
the wet blues into leather for particular industrial applications, most notably for
our purposes, for the auto industry.
60. It appears that all those with primary tanning facilities are also traders in hides,
that is, they purchase raw hides for onsale as wet blues. However, not all hide
6 See for example the testimony of Mr O’Neill on page 288 of the transcript of 9July 2003.
7 In his testimony Mr Staples, stated that the bulk of Springbok’s hides are negotiated for and purchased
weekly. Page 574 of the transcript of 14 July 2003.
14
traders necessarily own their own primary tanning facilities. African Hide has
significant primary tanning capacity at which all raw hides purchased by it are
processed into wet blues. As already indicated African Hide’s primary tanning
capacity exceeds its own requirements and so it undertakes contract tanning on
behalf of other hide traders. Springbok Trading, on the other hand, although the
largest trader (procurer of raw hides and seller of wet blues) has limited primary
tanning facilities and rather contracts out this function to those who own these
facilities including, it appears, African Hide. 8Springbok Trading does, however,
appear to be the exception. That is, the norm is for the larger traders to do most
of their own primary tanning.
61. Both the Commission and the merging parties aver that the wet blue
market is an international market. They point out that a significant portion
of wet blues purchased by the automotive tanners for conversion into car
seat kits is already imported and that the price of domestic wet blues is
thus effectively disciplined by the international price of the product. They
argue that, should the merged entity attempt to exercise market power in
the wet blue market, their customers – the auto (‘secondary’) tanners – or
even the OEMs themselves will procure their wet blue requirements on the
international market.
62. We agree with this view of the geographic market for wet blues. Local demand
for wet blues significantly exceeds the supply of wet blues converted from locally
sourced raw hides which, as we later indicate, is determined by conditions in the
red meat market. The Commission and the merging parties also point out that
the prices of local wet blues are set at import parity. In fact the available
evidence suggests that while prices do approximate import parity, if anything,
local wet blues trade at a slight price premium. This is to be expected given the
rebates earned by the OEMs and hence their preference for utilizing locally
sourced wet blues. The MIDP obviously accounts for a builtin preference on the
part of the South Africanbased OEM’s for locally produced wet blues since these
attract significantly enhanced MIDP benefits. On the other hand, all the evidence
confirms that imported wetblues are of a superior quality and yield than local
wetblues.9
63. In summary, it appears that the market for wetblues is an international
market.However, locally produced wetblues are afforded some protection by the
MIDP benefits they attract. It is therefore predictable that a slight premium over
the international price of wet blues is payable for locally sourced wetblues.
However, as we shall elaborate below, the size of the premium is kept firmly in
check by the international procurement practices of the OEMs because while the
8 According to Mr Staples, Butterworth tannery produces 800 wetblues a day and Riverside
tannery produces approximately 1000 a day. This is significantly less than the capacity necessary
to meet Springbok’s requirements. Page 578 of the transcript of 14 July 2003.
9 In the case of BMW for example, we are told that the demand is that no less than 75% local wetblues are
contained in any given order.
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local branches of the OEMs may have a strong interest in locally procured wet
blues, their international companies – who are ultimately responsible for
procurement – will have an overwhelming interest in an internationally
competitive price and quality rather than in the level of subsidy that accrues to
their South African operations.
64. Thirdly, there is the market in automotive – or, ‘secondary’ – tanning, the
automotive leather market . The participants in this market purchase wet blues
and convert them, through a tanning process and a sewing process, into car
seats. The target company, Kolosus, is active in this market though its
subsidiary, KAL.
65. As already indicated, the locallybased OEMs do not only procure car seat
kits from the locallybased automotive tannery for installation into locally
produced models. The rebates offered through the MIDP have enabled
the locally based producers of automotive leather to participate in the
OEMs’ global procurement networks because they encourage the locally
based OEMs to export as high a level of local componentry as possible.
However, as already intimated, it seems clear that the procurement
decisions for components, including seats, are made centrally by the
various OEM parent companies who make their purchasing decisions
purely on the basis of the price and quality of the product on offer. They
will not make their decisions with a view to the rebate on local content
potentially earned by their South African operation. 10 In summary then,
while the local OEM subsidiaries have a clear incentive in ensuring
procurement of South Africa produced components for the global
operations of their companies, it seems that this can only be achieved by
operations of their companies, it seems that this can only be achieved by
ensuring that local component producers are internationally competitive. It
is therefore clear that if local producers of automotive leather do not price
competitively, the international purchasing departments of the OEMs
would simply purchase their automotive leather requirements elsewhere.
66. It appears then that the geographic market for automotive leather is
international.
67. In conclusion then, there are three relevant markets implicated in this
transaction. Firstly, there is a national market for raw hides. Secondly, we
have an international market for wet blues. Thirdly, there is an
international market for automotive leather.
THE IMPACT OF THE TRANSACTION ON COMPETITION IN THE
10 Ms Viljoen testified on behalf of BMW that in order to get the business from the parent
company of the OEM, the finished leather must be priced competitively. See testimony on pages
176 ;180 and 190 of 9 July 2003.
16
RELEVANT MARKETS
68. Viewed from a competition perspective, this merger embodies both
vertical and horizontal dimensions.
69. Firstly, the merging parties compete in the wet blue market, hence the
horizontal dimension. Indeed, they are – through the Daun subsidiary,
Springbok Trading, and the Kolosus subsidiary, African Hide the two
largest South African participants in the wet blue market. That is to say
both parties are active at the second level of the value chain as described
in the diagram reproduced above. They procure raw hides from the
feedlots at the first level of the value chain and secure their conversion,
though the primary tanning process, into wet blues, that is, into hides
suitable for further processing into automotive leather. African Hide
processes into wet blues the raw hides that it procures at primary tanning
facilities owned by it. In the case of Springbok Trading much of the
primary tanning of those raw hides that it procures is contracted out to
companies with the appropriate facilities, including African Hide.
70. Secondly, apart from its activities at the second level,the target company,
Kolosus, is also active at the first and third levels of the value chain, hence
the vertical dimension. At the first level Kolosus owns two feedlots. At the
third level, that is, at the level of the automotive tanners who procure wet
blues from the primary tanners for further processing, Kolosus is
represented by KAL.
71. Additional competition dimensions may arise from the purchase by Seton,
another participant at the automotive tanning level, of a significant minority stake
in the Kolosus group. Recall that Seton acquired its equity stake in Kolosus from
Daun in part settlement of its (Seton’s) claim against the target company.
Seton’s stake in Kolosus potentially embodies a horizontal dimension arising
from Seton and KAL’s presence in automotive tanning and a vertical dimension
arising from Kolosus’ presence in the first – the raw hide market and second –
the wet blue market levels of the value chain. 11
72. The questions that must be answered are, firstly, whether market power is
likely to accrue to the merged entity in the wet blue market. It may
11 Note that Kolosus owns two feedlots and Springbok has a contractual relationship with Sparta, another
feedlot, that apparently gives Springbok privileged access to Sparta’s raw hide supply. Sparta and
Springbok also jointly own a tannery. This may suggest a horizontal dimension in the raw hides market as
well arising from Kolosus’ ownership of Taaiboschbult and Hurland and Springbok’s relationship with
Sparta. Although this represents such a small share of raw hide output that it does not portend a
competition concerns, we will, for the sake of completeness, note this in our competition evaluation set out
below.
17
manifest market power in this market by monopsonistic conduct, that is, by
forcing the price of its key input, raw hides, to subcompetitive levels.
Alternatively, given the presence of the merged entity in the upstream raw
hide market, we must ask whether it is likely to leverage power from the
wet blue market to the raw hide market by imposing discriminatory
purchasing and pricing practices that will favour its group interests in the
raw hide market. That is, it may engage in input foreclosure.12
73. Secondly, we must ask whether the merged entity is likely to behave
monopolistically in relation to its customers in the automotive leather
market. That is, will it be able to impose an increase in price or reduction
in the output of wet blues. Moreover, given the presence of the merged
entity in the automotive leather market (conceivably exacerbated by its
recent link up with Seton, a competitor in that market), we must ask
whether the merged entity is likely to engage in customer foreclosure.
That is, whether it is likely to leverage its power in the wet blue market in
favour of its interest – KAL and, conceivably, Seton – in the downstream
market, the market for automotive leather.
74. Note the centrality of the wet blue market in the core questions posed
above. This is simply because, on the face of it, it is only in the wet blue
market that the postmerger market shares portend a unilateral exercise of
market power. As elaborated above, we must examine whether it will use
its postmerger market share monopsonistically (in relation to its suppliers)
or monopolistically (in relation to its customers). In addition it may use its
postmerger position in the wet blue market to support its interests in the
upstream raw hide market or in the downstream automotive leather
upstream raw hide market or in the downstream automotive leather
market at the expense of its competitors in those markets. Although, as
already intimated, there are minor horizontal impacts in the raw hide
market and Seton’s acquisition of a stake in Kolosus demands that we
examine a possible horizontal dimension in that market, there is no
prospect of the merged entity being able to exercise market power in
those markets as a result of the transaction. We must however examine
the prospect of a leverage of market power from the wet blue market to
the raw hide and automotive leather markets.
75. We proceed to examine the impact of this transaction on competition in
each of these markets.
12 For a detailed discussion of foreclosure effects see the seminal work of Michael H. Riordan
and Steven C. Salop – Evaluating Vertical Mergers: A PostChicago Approach (Antitrust Law
Journal Vol 63, Winter 1995).
18
Competition Impact: the market for raw hides
76. Raw hides are offered for sale by the feedlots, commercial farmers and
abattoirs. As already noted, the target firm owns two feedlots, namely
Taaiboschbult and Hurland, both of which exclusively supply raw hides to
African Hide Trading. The acquiring firm apparently enjoys an exclusive
supply relationship with an independent feedlot, Sparta.
77. Even the combination of the three feedlots mentioned above accounts for but a
small share of raw hides available on the market. In any event, it is clear from the
evidence before us that, because the hide accounts for a relatively small share of
the total value of the carcass, the supply of raw hides is a derivative of conditions
in the market for red meat. 13 alone would severely limit the likelihood of the
merged entity restricting output from its feedlots even if, by so doing, it was able
to price hides at supracompetitive levels.
78. By the same token there is no prospect of the merged entity utilising its
position in the raw hides market to foreclose sources of raw hide supply to
its competitors in the wetblue market. In any event it appears that, to all
intents and purposes, the supply of hides from the merging parties’
feedlots is already dedicated to the respective parties to the transaction.
The feedlots connected to the merging parties do not currently supply their
competitors in the wet blue market with raw hides. Accordingly, the access
of other hide traders to the output of these feedlots is already limited and
so the prospect of the merged entity foreclosing its competitors in the
primary tanning market does not arise.
79. This market will not be analysed further. We should however note the disturbing
allegations made regarding the conduct of participants in this market. In
particular, we note the evidence of Mr Venter and Mr Roets, which suggests that
particular, we note the evidence of Mr Venter and Mr Roets, which suggests that
the feedlot owners regularly collude in fixing price and output levels. 14 While the
merger does not increase the prospect of collusion in the raw hide market and so
is not relevant to this evaluation, it remains a particularly disturbing allegation
because, if true, it reflects on conduct in an important segment of the broader
food market. The Commission is accordingly urged to investigate these
allegations as a matter of urgency.
13 Mr Staples testified that the economic benefit of the carcass to the hide industry is approximately 12%.
See page 595 of the transcript, 14 July 2003. See also Mr Venter’s testimony on page 61 of the transcript, 8
July 2003.
14 See page 7of the report of Mr Venter provided to the Commission during the investigation,
which is page 433 of the record. Mr Roets also tesitified that his experiences with feedlots
indicated to him that feedlots “talk to each other and they try to hold the prices up.” See page 527
of the transcript of 10 July 2003.
19
Competition Impact: the market for wet blues
80. Wet blues are produced in the primary tanning process. The principal raw
material inputs in this process are raw hides. These are purchased by
hide traders and converted by them through the primary tanning process
into wet blues. These, in turn, are onsold to the automotive tanners. As
noted the norm is for the larger hide traders to undertake the primary
tanning process at their own facilities although the level of hide
procurement of Springbok Trading vastly exceeds its primary tanning
capacity and so it contracts out this function to other hide traders, notably
including African Hide, also party to this merger. However, Springbok
Trading retains ownership of the hide from the time that it purchases it
from the feedlots – the first link in the value chain (its upstream market)
until such time as it disposes of the wet blue hide to the automotive
tanners, the next link in the chain (its downstream market).
81. Springbok Trading and African Hide – respectively the hide traders within
the Daun and Kolosus groups – occupy a powerful position within the wet
blue market. There is some dispute regarding the precise market share of
each of these firms. Market shares are outlined in the table below.
82. The Commission avers that between African Hide and Springbok Trading they
procure slightly under 51% of all raw hide traded on the South African market.
This includes imported raw hides. As already noted, the vast majority of raw hide
processed in South African is locally sourced although there is some importation,
almost entirely from the southern African region. The parties themselves
undertake some importation of raw hides. 15
15 See Mr Roets testimony on page 512 of the transcript of 10 July 2003.
20
Table 2 Market Shares in the Procurement of Raw Hides
Market Participant Total hides
including
imports
(annually)
Total market share %
African Hide Trading 585 684 20.37
Springbok Trading 870 552 30.27
EAC 312 000 10.85
Hidskin 234 000 8.14
CPC 540 000 18.78
Richard Kane 33 600 1.17
Britz Huide and Velle 180 000 6.26
Hart 120 000 4.17
Total 2 875 836 100.00
83. According to the Commissions data, as tabulated above, the parties
combined market share would be 50.64%. During the hearing the merging
parties submitted their revised figures, reflecting market shares of the total
procurement of raw hides. On the basis of these figures, the combined
market share post merger would be 47.21%
Table 3 Parties revised Market Shares in the Procurement of Raw Hides
Market Participant Total hides
including
imports
(annually)
Total market share %
African Hide Trading 585 683 18.95
Springbok Trading 873 286 28.26
Total of hides (incl other
participants) 3 090 000
21
84. The combined market share of the merged entity qua purchaser of raw
hides – as well as the accretion to this market share as a result of the
merger is clearly significant. It is these market shares and this accretion
that underlies prima facie concerns regarding this market.
85. Arising from the merged entity’s powerful share of the wet blue market, we
must, firstly, determine the likelihood of it behaving monopsonistically vis a
vis its suppliers, that is, exercising market power by pushing down the
prices of raw hides to subcompetitive levels. Secondly, we must examine
whether or not the merged entity is likely to practice ‘input foreclosure’,
that is, is it likely to use its power in the wet blue market to exclude
suppliers of raw hides other than those with which the merged entity is
structurally or contractually bound (that is, the Taaiboschbult, Hurland and
Sparta feedlots)?
86. It has not been suggested that the merged entity would be able to
determine, through the exercise of monopsonistic power, the price of raw
hides. On the contrary, several of the witnesses before us argued that
power in the pricing of raw hides resided with the sellers of the product
rather than the buyers. The South African based OEMs, incentivised by
the rebates available through the MIDP, insist, as far as possible, on the
utilization of locally procured raw hides. Largely in consequence of the
MIDP incentives, the raw hide market is a sellers market, one in which
demand consistently exceeded supply and which was thus characterized
by upward pressure on price.
87. As to the prospect of foreclosure, there is no likelihood of the merged
entity leveraging power from the wet blue market in order to privilege the
raw hide suppliers with which it is linked. The hide procurement activities
of the premerger Springbok Trading and African Hide significantly exceed
of the premerger Springbok Trading and African Hide significantly exceed
the level of raw hide supply available from their ‘inhouse’ feedlots. In fact
the primary tanning capacity of African Hide exceeds the raw hide supply
from its own feedlots. Accordingly, the post merger entity will remain
dependent upon a supply of raw hides from feedlots other than its own
and there is accordingly no prospect of it utilizing its power as a customer
in order to foreclose the access of suppliers of raw hides to the wet blues
market.
88. Arguably of greater prima facie concern, is the likelihood of the merged
entity conducting itself monopolisitically in relation to its customers and
competitors in the downstream market, that is, in the automotive tanners
22
market. Expressed otherwise, is the merged entity likely to decrease the
output of, and raise the price at which, the automotive tanners procure
their supplies of wet blues? Secondly, is the merged entity like to engage
in ‘customer foreclosure’, that is, is it likely to restrict the supply of wet
blues to automotive tanners other than those that are part of its stable,
namely KAL and, conceivably, Seton.
89. Again, as is to be expected, the merged entity’s share of the wet blue
market, that is to say, its share of the quantum of South Africansourced
wet blues sold by the primary tanners to the auto tanners, as well as the
accretion as a result of the proposed transaction, is considerable. Note
that although the merged entity’s share of the procurement of raw hides is
a reliable indicator of its share of South African sourced wet blues onsold
to the automotive or secondary tanners, they are not identical. This is
because not all wet blues produced in the secondary tanning process are
suitable for use in the automotive leather tanneries. Hence, differences
between the various secondary tanners as to the ‘automotive yield’ will
account for differences between their respective shares of raw hide
procurement, on the one hand, and, on the other, their output of
automotive wet blues. The market shares revealed by the Commission’s
investigation are reproduced in the table below.
Table 4 Market Shares in the Sale of wetblues
Market
Participant
Total hides
including
imports
(annually)
% Destined
for
automotive
industry
Number of
wetblues Market share
African Hide 585 684 80% 468 547.2 22.07744771
Springbok
Trading 870 552 80% 696 441.6 32.81559041
EAC 312 000 65% 202 800 9.555721163
Hidskin 234 000 93% 217 620 10.25402386
CPC 540 000 60% 324 000 15.26653677
Richard Kane 33 600 80% 26 880 1.266557125
Britz Huide
and Velle 180 000 50% 90 000 4.240704658
Hart 120 000 80% 96 000 4.523418302
23
Total 2 875 836 2 122 288.8 100
90. According to the Commission’s information, the merged entity’s combined
market share would be 54.89%. However, during the hearing the parties
disputed the Commission’s assumption that the percentage yield of wet
blues destined for the automotive market was as high as 80%. Instead the
parties submitted that African Hide’s automotive yield percentage is 48%
and Springbok Trading’s is 50%. On the parties calculation the combined
market share for the sale of wet blues is 33.4%, less than their combined
47.21% market share of the raw hide market.
91. Although the merged entity will have a significant share of South African
sourced automotive wet blues, this is unlikely to enable an exercise of
market power vis a vis its customers, the automotive tanners, for the
simple reason that the geographic market for automotive wet blues is, as
elaborated above, international and not national. That is to say, should
the merged entity attempt to increase the price or restrict the output of its
product, their customers will source their requirements on the international
market.
92. We have consistently adopted a cautious and sceptical response to the
often glib claim that international supplies discipline domestic pricing. In
this instance, this claim is strengthened by the absence of tariff barriers,
but this does not necessarily make for a seamless relationship between
the international and domestic markets. First, the MIDP does provide
suppliers of locally sourced wet blues with a form of protection. Second,
transport and other logistic costs must also be considered and, thirdly, the
reliability of supply is inevitably compromised to a degree in those
circumstances where a key input is imported. This is particularly
significant in a context where the ultimate consumers of automotive
significant in a context where the ultimate consumers of automotive
leathers – the OEMs – are notoriously unwilling to hold inventories.
Indeed, as we shall elaborate below, it is precisely the procurement
policies and practices of the OEMs that is dispositive. That is, the OEMs
have, largely in consequence of their global procurement practices, the
means to prevent an exercise of market power from a nationally based
supplier even one located several places up the value chain. 16
93. Let us summarise the requirements imposed by the OEMs, on their
suppliers, the auto tanners, who are the customers of the wet blue
producers. Note at the outset that the OEMs source globally. That is to
say, when an order for leather car seat kits is placed with a South African
16 Both the representatives from BMW and DaimlerChrysler testified to the global procurement practices
of the OEMs. See page 176; 180 and 256 of the transcript, 9 July 2003 .
24
based auto tanner, the procurement decision is made at the global
procurement office of the OEM. An order is placed for the seating for a
model that may be manufactured at several of the OEMs production
facilities across the world. One of these sites may be in South Africa but
this is not necessarily the case. Or, it is possible that a certain portion of
the order is placed in vehicles assembled in South Africa, some of which
may be sold on the domestic market, others of which may be exported.
As already elaborated, the MIDP provides an incentive for the locally
based subsidiary of these global OEMs to persuade its parent to source
as much of its component supply domestically as possible because the
local content embodied in the component allows the locally based OEM to
rebate the customs duty on imported vehicles. We are not aware that the
rebate is necessarily passed on to the local consumers, and so it is wholly
conceivable that a significant portion of it accrues directly to the bottom
line of the local OEM. However, while the OEM parents may have an
incentive to support their South African subsidiaries by procuring, though
their international procurement offices, from South African sources, this
will not extend to sourcing, for international markets, a component, the
price and quality of which, is not internationally competitive.
94. These then are the requirements of the OEMs: a reliable source of
automotive leather at internationally competitive prices and quality. Their
local subsidiaries have, to be sure, a powerful incentive to export locally
produced components to their parent companies and their manufacturing
sites elsewhere in the world. But the incentive must, for the most part,
translate into the domestic OEMs ensuring that they receive prices and a
level of quality that compares favourably with competing products
level of quality that compares favourably with competing products
elsewhere in the world. Merely assisting their local subsidiaries to reduce
the tariff on imports into what is, for every OEM, a very small market,
cannot be sufficient incentive for an international OEM to accept, for its
international production, components at uncompetitive prices and of
uncompetitive quality.
95. The value of the wet blue hide is the most important part of the domestic
value added. This is naturally why most of the OEMs insist on a minimum
quantity of domestically sourced wet blues in the orders that they place
with local auto tanners. All the evidence suggests that South African wet
blues are smaller and of a somewhat lower quality than those available on
the international market. It is thus highly unlikely that the local OEMs
would tolerate a premium on the price of local leather – their MIDP
incentive may incline them in this direction, but the ability of their parent
companies to substitute from suppliers elsewhere in the world will place a
strict limit on the premium that they will accept.
25
96. This then will limit an exercise of market power in the wet blue market
regardless of the considerable share that the merged entity will enjoy of
local wet blue production. The only way that it could exercise market
power is if their customers, the auto tanners, were willing to absorb a price
premium because the latter could not pass such a premium on to their
customers, the OEMs.
97. If faced with an exercise of market power in the wet blue market, the local
OEMs, because of the powerful incentive on their part to maintain
internationally competitive prices of local wet blues, are likely to support
the merged entity’s competitors. There is already evidence of some of the
auto tanners directly procuring supplies of raw hide for conversion into wet
blues.17 Although engaging in raw hide procurement and wet blue
production is clearly not a preferred activity for the specialist auto tanners,
it is a wholly predictable response to an exercise of market power on the
part of the merged entity and one that will undoubtedly be encouraged and
facilitated by the local OEMs.
98. Similar considerations – and a similar response would apply in the case
of any attempt by the merged entity to foreclose supplies of wet blues, that
is to discriminate with respect to prices and supplies in favour of auto
tanners that are part of the Daun/Kolosus post merger group as in the
case of KAL, or linked to it as in the case of Seton. Moreover, although
KAL is operating at significantly below its full capacity, it appears that KAL
(or even KAL and Seton) would not, on their own, be able to absorb all of
the merged entity’s output of wet blues. Nor, insisted several witnesses,
would it be commercially viable for the merged entity to hoard supplies of
wet blues. 18 In short, the merged entity will continue to rely on the custom
wet blues. 18 In short, the merged entity will continue to rely on the custom
of those auto tanners in competition with KAL and Seton. The only way
that this could change is if the OEMs elected to favour KAL and Seton for
their supplies of automotive leather. And this, as we shall elaborate
below, is highly unlikely. We will, in our discussion below of the
automotive leather market, further elaborate our grounds for believing
foreclosure of wet blue supplies by the merged entity, particularly in favour
of Seton, highly unlikely.
99. For the sake of completeness we should mention a third anticompetitive
practice that potentially arises from this merger, a practice that potentially
occurs in the interface between the two processes that characterise the
17 See the testimony of Mr O’Neill, page 287 of the transcript, 9 July 2003.
18 See evidence of Mr Venter, page 104,8 July 2003. As well as the evidence of Mr Staples, page 581, 14
July 2003.
26
wet blues market, namely the trading of hides and the tanning of the raw
hides.
100.Primary tanning capacity is not consolidated to any significant extent in
consequence of this merger. As already noted while one of the merging
parties – African Hide – possesses significant primary tanning capacity,
Springbok Trading’s capacity is slight and thus it relies on contract tanning
through, inter alia, African Hide. There is clear evidence of considerable
excess tanning capacity at African Hide. The transaction clearly
incentivises the Kolosus group to utilise African Hide for all of its primary
tanning capacity. Accordingly, it is conceivable that other hide traders who,
like Springbok, utilise African Hide capacity will no longer have access to
this capacity or that they will only gain access at a price that discriminates
between them and those within the merged entity. However, while, on the
face of it, this prospect does arise there is no indication that it is, in fact,
likely to occur.
101.Indeed the evidence before us suggests that African Hide is beset by
excess capacity and, accordingly, that the prospect of this being utilised is a
significant benefit flowing from the merger. That having been said, we do
not know whether all of this capacity will be utilised even with the additional
throughput of hides procured by Springbok, that is, there may well still be
excess capacity after the merger and, to the extent that this represents a
significant capital cost, the incentive to undertake contract tanning on behalf
of other hide traders remains. Moreover, we are also not aware that other
hide traders are dependent on African Hide for its tanning requirements. On
the contrary – and as we have already indicated – the norm appears to be
for hide traders to utilise their own tanning facilities and most of the traders
for hide traders to utilise their own tanning facilities and most of the traders
of any significance appear to possess these facilities. There will clearly be
small traders and new entrants who will be unable to engage in trading if
they are unable to access tanning facilities but there is no indication that
there is a primary tanning capacity constraint. In any event it appears that
most of the very small traders – frequently referred to in the hearings as
‘bakkie traders’ – act as agents of the larger traders.
102.We conclude then that this transaction is unlikely to give rise to a
substantial lessening of competition in the market for wet blues.
Competition Impact: the market for automotive leather
Table 5 Automotive leather tanners (autotanners )
Market participant % Market Share
27
Seton 30.3
Bader 25.3
Eagle Ottawa 24.3
Mario Levi 14.4
K.A.L 5.5
TOTAL 100
103.As already elaborated, it is in this market that the wet blues purchased – either
locally or on the international market – from the primary tanners are converted,
through, inter alia, a secondary tanning process, into finished car kits. With the
exception of KAL, all of the participants in this market are wholly owned
subsidiaries of multinational companies. Note too that market share is spread fairly
evenly between the multinationals active in the South African market. Again KAL,
with its significantly smaller market share, is the exception to this rule. Recall that
KAL’s precarious financial position had caused it to lose the custom of key OEMs,
notably BMW, the largest procurer of South African produced leather car seats.
104.In relation to this market the transaction generates both horizontal and
vertical concerns.
105.From a horizontal perspective, the Daun group did not, prior to this
transaction, have a presence in this market, and so, on the face of it,
horizontal concerns did not arise. However, the terms of the Seton
agreement have resulted in the US multinational owning a significant stake
in Kolosus and, hence, in Seton’s competitor, KAL. However, Seton’s
acquisition of this stake is not treated as a separate merger for the purposes
of this notification and this because there is no question of Seton having
achieved any degree of control over Kolosus or any of its subsidiaries.
Seton’s stake in Kolosus is a fraction under 25% which means that it does
not possess the votes necessary to block special shareholder resolutions.
Nor will Seton be represented on the board of Kolosus. Control of Kolosus
is firmly in the hands of the Daun group.
is firmly in the hands of the Daun group.
106.Nevertheless, we are, predictably, left with a residual degree of discomfort
at this arrangement between competitors. The passive nature of Seton’s
investment in Kolosus notwithstanding, it is difficult to believe that this
relationship does not enhance the likelihood of, and opportunity for, co
operation between Seton and KAL. However, it is not clear that co
operation between Seton and KAL – albeit, potentially in contravention of
the Competition Act – would assist the competitors in achieving market
power. There are three other wellestablished competitors with significant
activity in South Africa. Moreover, as elaborated above, it appears that the
OEMs source globally and that their decisions are driven by price and
28
quality considerations. Accordingly, in the unlikely event that the South
African auto tanners attempted to exercise market power, the OEMs would
turn to the array of alternative sources of supply in the international market.
In general it appears that the buyer power of the OEMs – already
considerable and qualitatively enhanced by the globalised character of their
procurement arrangements – will counteract any attempt to exercise market
power, particularly a localized as opposed to globalised attempt at
exercising market power.
107.Indeed, the vertical dimensions of this transaction and of Seton’s
involvement are, if anything, somewhat more disturbing and so we have
considered the likelihood of the merged entity foreclosing supplies of wet
blues to the auto tanners at some length already in our discussion, above,
of the wet blue market. On balance we consider it to be an unlikely
consequence of the merger. The Daun group has given us the usual
assurances that the various component elements of the Kolosus group will
operate at arms length to one another, that, in effect, the performance of
each company within the Kolosus group will be assessed by reference to its
own profitability rather than by reference to its subsidization of profits
earned elsewhere in the group. We are not inclined to assign much weight
to these assurances. However, there are other factors that militate against
foreclosure.
108.There is no apparent incentive for Kolosus to support foreclosure in favour
of Seton – neither Kolosus nor its controlling shareholder, Daun, has an
interest in Seton. Foreclosure by the post merger hide traders in favour of
Seton and KAL only makes sense as part of a strategy to collectively
Seton and KAL only makes sense as part of a strategy to collectively
dominate the automotive leather market. As already elaborated we believe
that the OEMs would not accept dominance of this market and, more
important, that the structure of both the automotive leather and wet blues
market provides both the competing automotive leather producers and the
OEMs with the means to resist any attempt by Seton and KAL to achieve
dominance of their market through foreclosure.
109.Moreover, our residual discomfort notwithstanding, we are constrained to
acknowledge that, Seton’s stated rationale for accepting, indeed for insisting
upon, a bloc of Kolosus equity in part settlement of its claim against the
latter, does appear to make commercial sense. We have been assured by
a number of witnesses that KAL possesses worldclass plant and
equipment. This, in combination with Daun’s financial backing and the
added value of his wellestablished relationship with the OEM’s, should
provide the basis for KAL to compete vigorously in its market. Indeed given
the shortcomings attributed by some witnesses to both Kolosus’ erstwhile
29
shareholders as well as its management, there is a reasonable expectation
that the combination of Daun’s entrepreneurial flare, his managerial
experience and skill and his financial strength will reap the benefits
envisaged by Seton and, hence, vindicate its decision to take a passive
equity stake in Kolosus.
110.It is, of course, eminently conceivable that without settlement of the Seton
claim, Kolosus – and hence KAL – would not have been rescued at all. In
that eventuality KAL may well have exited the market. Although on the face
of it, an attractive prospect for Seton, on closer examination the US
producer is probably better off with the present arrangement. Certainly this
enables it to recoup a significant potion of the costs of its protracted
litigation with Kolosus. And if Seton’s confidence in Mr. Daun – and in the
ability of the stock market to mirror his ability – is vindicated, then,
particularly given the present depressed level of Kolosus’ share price,
considerable upside may be realized on the appreciation of the value of
Seton’s stake. It should also be borne in mind that KAL’s present market
share stands at only 5,5%. Given that, had it exited the market, this share
would, in all likelihood have been distributed between the remaining players,
the increment that would have accrued directly to Seton as a result of KAL’s
demise would have been very small indeed.
111.Put against this, of course, is the fact that by agreeing to settle its claim
with the new owners of Kolosus, Seton has breathed life into what appears
to be a terminally ill competitor. If the pattern of market share that currently
prevails between the four multinational auto leather producers extends to
cover a reinvigorated KAL, then we would expect the latter to grow up to
cover a reinvigorated KAL, then we would expect the latter to grow up to
something approximating onefifth of the total market. In the process it will
take market share away from all of the existing producers, particularly
Seton, Eagle Ottawa and Bader. Again, Seton will, in all probability, give up
a relatively small portion of its market share to KAL while through its stake in
KAL it will derive a 25% share from the additional business taken by KAL
from Seton and all its competitors – that is, while in respect of the business
that Seton loses to a postmerger KAL, it will effectively replace a 100%
share with a 25% share, in respect of the business gained by KAL from
Seton’s competitors, Seton will receive a 25% share where previously it had
none. The alternative scenario is that KAL is liquidated, falls into the hands
of a new entrant, which then gains market share. Clearly , for Seton this
would be a less favourable scenario.
112.We conclude, then, that this transaction is unlikely to give rise to a
substantial lessening of competition in the market for automotive leather.
30
Countervailing power
113.Many of the witnesses have argued that the countervailing power of the
OEMs will prevent an exercise of market power on the part of the merged
entity. While, as already indicated, we agree that the OEMs are able to
resist an exercise of market power on the part of a domestic supplier of
components – and thus may colloquially be said to possess ‘countervailing
power’ – we should clarify that this power resides not in the mere size of the
OEMs and the level of resources at their command, but, rather, in the
structure of the market for the sale and purchase of auto components.
114.The notion of countervailing power suggests that large, wellresourced
buyers are better placed to resist an exercise of market power on the part of
a monopolistic supplier than less wellresourced and more atomized
consumers. However, this proposition, although, on the face of it, self
evident, requires closer examination. In our view there are two mechanisms
uniquely open to larger purchasers that may be employed to resist efforts on
the part of their suppliers to exercise market power.
115.Firstly, a powerful buyer, because it often has power in its own market, will, if
faced with supracompetitive pricing by key suppliers, generally be able to pass on
any increase in the cost of its inputs to its customers. In other words a powerful
purchaser is, because of its power in its own market , able simply to share in the
monopoly rents derived from its supplier’s exercise of market power. Certainly, this
mechanism appears to have been revealed in some of our earlier merger
enquiries.19 Hence countervailing power, understood as a large well resourced
purchaser dealing with a monopoly supplier, may well provide comfort to the buyer
but it does not necessarily avail the final consumer any.
but it does not necessarily avail the final consumer any.
116.However, it seems reasonable to hypothesise, even in the absence of a
detailed market analysis, that although the OEMs are indeed large and
powerful corporations, they nevertheless do not individually possess power
in their own markets precisely because these are competitive markets.
Hence, despite their considerable size and evident power, they would
nevertheless be hard put to simply pass through cost increases to their
customers. Although it seems counterintuitive, even slightly offensive, to
cast the BMWs and Daimler Chryslers of this world in the mould of victims,
the reality is that, if faced with an exercise of market power by a key
supplier, they would, like any other consumer, have to stump up the
monopoly rent demanded by their supplier. Mere size does not inure a
19 For expample in Nestle (SA) (Pty) Ltd and Pets Products (Pty) Ltd and Others, Tribunal case no.
21/LM/Apr01 the Tribunal found that even though the retail buyers were powerful, there was no incentive
for them to exercise countervailing power, since any price increase by a manufacturer would simply be
passed on to the consumer.
31
purchaser from the effects of an exercise in market power.
117.Secondly, purchasers with access to the unusual level of resources
commanded by the average OEM may, in the face of an exercise of market
power on the part of a supplier, elect to produce their own supplies of the
monopolized input. But this would be an extraordinary and, most likely,
inefficient expedient. It rows against the tide of firmly established
developments in manufacturing generally and in the auto manufacturing
sector in particular. Long gone are the days of massive fully integrated
motor assembly plants producing everything from steel to the final
consumer product, the fully assembled automobile – the auto assembler is
precisely that, an assembler of a range of component inputs produced by
independent firms at hundreds of plants which are located, increasingly,
across the globe. In short, the OEMs are not car seat manufacturers and
they would be extremely hard put to set up their own auto tanning capacity.
118.A less dramatic alternative – but, arguably, a variant of the same inefficient
compromise with the prospect of market power is for the OEMs to spread their
purchases so as to ensure the continued existence of a range of suppliers of each
of their components. 20There is, indeed, already evidence of this in the peculiar
symmetry in the auto leather market, in the unusual equality of market share
between the various auto tanners. We can clearly infer from this that if the
merged wet blue producers attempted to favour the downstream auto tanners to
which they are connected, this would meet resistance from the OEMs who would
insist on maintaining the even spread of purchases that is already evident. In the
insist on maintaining the even spread of purchases that is already evident. In the
event that the OEMs were confronted by an attempt to exercise market power in
the auto leather market, the OEMs have ensured the existence of a number of
wellresourced, stable alternative sources of supply.
119.However, the true site of OEM power vis a vis the South African based
auto tanners does not lie in the fact that the former are large and powerful
corporations while the latter are relative minnows by contrast. The source
of their power is that the market for auto leather is an international market
and, whereas the OEMs organize their production globally and procure
globally, the local auto tanners are effectively national producers. In short
an auto tanner – even one that through merger or by other means achieved
a dominant position relative to its national counterparts – would at best
attain the status akin to that of a large fish relative to the small pond in
which it swam. The OEMs, on the other hand, are large fish in a very large
20 In CHC Helicopter Corporation and Helicopter Services Group ASA –case no. CM 4556 (2000)
the UK Competition Commission found that the buying power of the oil companies was such that
they would and could encourage new entry if they were dissatisfied with existing helicopter
operators. The credibility of this threat would influence the behaviour of the helicopter operators,
making them less inclined to take advantage of any reduction in competition.
32
ocean in which there are a number of equally formidable fish. These large
swimmers in international oceans may not be able to destroy their
counterparts, the other large fish. But they are certainly capable of taking
on those whose area of operation does not extend beyond their domestic
waters, if necessary by simply deserting a hostile domestic pool for the vast
expanse of friendlier oceans elsewhere. In short, the question then of where
power resides in this value chain, is answered through a familiar analysis of
markets and market power. In an international market, the international
players are well placed to counter any pretensions to market power on the
part of a domestic supplier.
EFFICIENCIES
120.Since we find that the merger does not lead to a substantial lessening of
competition, we do not need to examine the expected efficiencies.
PUBLIC INTEREST
121.The only public interest matter raised by this merger is in the area of
employment. In their submissions to the Commission, the parties estimated
that, on a worstcase scenario, the merger would give rise to 150
retrenchments. However, at the hearing, Mr. Bischoff revealed that Kolosus
had already embarked on a retrenchment programme affecting 107 African
Hide employees. He insisted that these retrenchments did not result from
the merger and that, accordingly, they were to be distinguished from the 150
merger specific retrenchments, which, he confirmed, remained the parties’
worstcase scenario.
122.Two unions – SACTWU and SAFATU – made submissions to the
Commission and participated extensively in the hearings. SAFATU initially
asked that the merger be approved subject to the condition that there be no
employment loss resulting directly or indirectly from the merger for a period
of 24 months but later submitted that a period of 12 months would be
appropriate. SACTWU appeared to have recognised that an outright
prohibition portended the possible failure of Kolosus and a consequent risk
of far greater employment loss. They too asked that we impose a condition
protecting employment, essentially requiring that the company maintain pre
merger levels of employment. Even then SACTWU appeared to concede
that, should the imposition of a condition unacceptable to the acquiring party
cause it to walk away from the transaction, the risk of failure on the part of
Kolosus portended a considerably greater scale of job loss than that
estimated by the acquiring party. SACTWU’s stated preference was for an
undertaking from the parties which would then be made part of the order of
33
the Tribunal. It seems clear however, that nothing short of an undertaking
to maintain its entire workforce would have satisfied SACTWU’s
requirement. In any event, no such undertaking was forthcoming from the
merging parties.
123.In addition, SACTWU asked for the imposition of conditions relating to the
maintenance, at current levels, of wages and employment conditions. They
also asked us to impose a condition that would oblige the merged entity to
continue its membership of the applicable industrywide centralised
collective bargaining system.
124.The unions have forcibly pointed out that we are obliged to consider the
public interest impact of a merger transaction in arriving at our ultimate
decision. They are, of course, correct. This is, however, consistent with the
view that we have previously taken – and that we confirm here that it is
incumbent on an unelected, administrative tribunal, principally charged with
defending and promoting competition, to approach its public interest
mandate with great circumspection. 21 We derive some comfort from the
knowledge that each of the elements of public interest that we are obliged to
consider are protected and promoted by legislation and institutions
specifically designed for that purpose – hence, the merged entity would not
be able to alter unilaterally employment conditions and agreed bargaining
arrangements. While this cannot provide the basis for us shying away from
tough decisions, it does place our own role in these matters in correct
perspective. At most, our role is ancillary to these other statutes and
institutions; it is supportive of their general thrust and should, by and large,
not be employed as a substitute for, and in order to secondguess, these
other interventions.
Wage, employment conditions and collective bargaining structures
other interventions.
Wage, employment conditions and collective bargaining structures
125.In our view this (that is, secondguessing industrial relations policy and
practice) is precisely what is asked of us when SACTWU urges the
imposition of conditions with respect to the level of wages and working
conditions and, particularly, the structure of collective bargaining. The
industrial relations framework in South Africa has moved decisively away
from the administrative and statutory prescription of collective bargaining
frameworks and outcomes to one that overwhelmingly favours industrial
selfgovernance within a statutory framework. The statutory framework
itself was, and continues to be, the product of extensive negotiation
involving government and organised labour and business. It cannot be that
21 See the following Tribunal merger decisions: Unilever/Robertson Case No: 55/LM/Sep01, Shell/Tepco
Case No: 66/LM/Oct01and Distell Group/Stellenbosch Farmers Winery Case No:08/LM/Feb02.
34
the legislature, having painstakingly constructed a comprehensive statutory
framework for industrial relations, intended that an administrative tribunal,
with no expertise or standing in the area of industrial relations, should
impose its own framework and substantive provisions on a firm that came
before it in order to have an intended merger adjudicated. This would
constitute an intolerable level of policy intervention on the part of the
Tribunal. We say this cognisant of the evidence presented regarding Mr.
Daun’s proclivity for disturbing, in the wake of an acquisition, longstanding
collective bargaining arrangements and reopening negotiated wage
agreements. What if we were to impose, say, an effective minimum wage
only for the parties to later mutually agree that economic circumstances and
the particular interests of their respective principals, justified a departure
from our order? In short, to enter, in the fashion advocated by SACTWU,
the realm of industrial relations would significantly extend our public interest
mandate and would, moreover, court conflict in a sensitive area for which
we have only a limited responsibility or technical competence.
Level of employment
126.It could reasonably be argued that similar considerations apply to our role
in determining, through the imposition of conditions, the level of postmerger
employment. Here too, employees could not be retrenched by the merged
entity without following the statutory procedures and other negotiated
provisions governing retrenchment. However, because of the powerful link
between direct employment loss and a restructuring initiative like a merger,
it is undoubtedly in this area that the legislature intended a role for the
competition authorities. In contrast then with the other conditions proposed
competition authorities. In contrast then with the other conditions proposed
by SACTWU we are confident that the Act empowers us to stipulate
conditions with respect to the scale of job loss occasioned by the merger.
127.But this, too, is a complex determination. Mr. Daun, in conformity with his
reputation as a turnaround specialist, is acquiring a highly distressed
company. Although the unions have argued that the intervention of Mr.
Daun does portend the revival of the company and, as such, a rosier
perspective on employment prospects going forward, there can be little
doubt that this eventual turnaround is predicated on a costcutting exercise.
The parties have pointed out that the ratio of output to employment (that is,
labour productivity) at the Kolosus subsidiary, African Hide, is considerably
lower than that at Springbok Trading. Hence in the shortterm, at least, it is
difficult to envisage increasing productivity without some measure of
employment reduction. For this reason, we do not believe that it would be
appropriate to for us to impose a condition freezing employment levels at
premerger levels.
35
128.With respect to costcutting then we must proceed with caution. To prohibit
retrenchment altogether, may turn out to be selfdefeating insofar as it will
likely inhibit the revival of Kolosus and so prove a threat to longer term
employment prospects. We insist that we are obliged to take a somewhat
longerterm view of the employment question than that contended for by the
unions – there cannot be a rosy prospect for maintaining employment levels
in an ailing company and, by protecting present employment levels, we may
well be storing up greater problems in the medium term. We concede that
there is an eminently respectable argument that holds that by placing a floor
under wages and employment levels, the merged entity will be encouraged
to turn to productivity enhancing measures other than retrenchment. But we
cannot judge the capacity for the introduction of these measures in this firm.
We note however that this is a determinedly lowtech area of economic
activity that does not appear to predispose to the introduction of new
technologies or work processes. We also note that the introduction of
alternative mechanisms of productivity enhancement, particularly the
introduction of new technologies, will, in the shortterm certainly, also be at
the expense of jobs.
Number of Retrenchments
129.When the transaction was first notified to the Commission on the 13
February 2003, the parties stated in Schedule 2 of the notification :
“Kolusus employs a total of 2010 employees. It is difficult to determine the
extent of any restructuring. In order to effect a turnaround in certain of the
loss making divisions some restructuring may be necessary. It is
anticipated that , in a worst case scenario, approximately 150 of the total
employees of the Kolosus group will be retrenched as a result of the
merger.”
merger.”
130.It also states that “if the merger succeeds and the appeal ( Seton) fails,
Daun is confident of being able to negotiate an economically viable
settlement with all the settlement benefits arising therefrom including
employment stability.”
131.Kolosus, in its notification did not state that it was considering or
undergoing a retrenchment process based on its financial situation and
therefore unrelated to the merger . In fact it was only at the prehearing
conference, on the 22 May 2003 that the parties disclosed, much to the
consternation of the trade unions, that Kolosus was initiating the
retrenchment of a 107 employees. Given the total labour complement of
36
Kolosus, 150 retrenchments is significant enough to warrant concern, the
more so if the 107 retrenchees now revealed worsen the ‘worst case’.
132.As noted in their submissions to the Commission, the parties themselves
volunteered that employment loss of 150 represented their worstcase
scenario. It is, with the level of information at our disposal, naturally very
difficult for us to secondguess this assessment and the unions have not
been able to assist us. Throughout the hearing t he parties pointed out that
this figure was submitted without the benefit of a full investigation and they
continued to vacillate as to the number of retrenchments. In his closing
submission, Mr Le Grange, legal representative of the merging parties,
stated that:
“ The exact nature of these integration activities are not a 100% clear
yet. The timing of when the integration may possibly occur is also
not 100% clear yet. It is very difficult for the parties to estimate
exactly what the effect on employment would be. In the merger
documents submitted by the parties, they indicated that they
expected that approximately 150 job losses would occur as result
of the merger.
It was apparent in both Mr Schouten and Mr Bischoff’s evidence
that, in fact, they were unsure of exactly what the total number of
retrenchments would be, taking into account the fact that
retrenchments had been necessitated due to operational
requirements. We believe that the position at the moment is that
the parties have not formally approached the trade unions yet as
far as talking about the state of employment or retrenchments after
the merger but that there has been a level of informal discussions.
” 22
133.With regard to whether the 107 retrenchments were included in the 150, Mr
Le Grange responded as follows”
Le Grange responded as follows”
“As far as the question is concerned of whether the 150 employees,
which we estimated initially would be retrenched as a result of the
merger, actually includes the 107 which have been identified during the
current retrenchment activities. I think that Mr Bischoff and Schouten
had difficulty in estimating the extent of those retrenchments and we
would request that the Tribunal take notice of the fact that the level of
22 See pages 823824 of the transcript of 25 July 2003.
37
retrenchments, which are required, would depend upon various factors.”
23
134.In fact, the parties adopted an inconsistent approach in respect of the likely
outcome of the merger: On the one hand they were consistently optimistic
that the disposal of the Seton claim would be good for the business, on the
other hand they remained pessimistic about the impact on labour.
Furthermore, we were not persuaded that Daun had insufficient knowledge
of the target business to enable an exact appraisal of the employment loss,
particularly since Daun had assumed the bank debt and, so, has certainly
had privileged access to the doings of the target company. It is also clear
that the acquiring party is very experienced in this area – not only are Mr.
Daun and his managers extremely experienced in identifying costcutting
opportunities, but the Springbok Trading managers are all former African
Hide managers and so possess intimate knowledge of practices at the
target firm. In this particular instance, the level of redundancy is ameliorated
by the acquiring party’s intention to maintain the separate existence of
African Hide and Springbok Trading.
135.For these reasons we are unwilling to concede that it is now necessary to
up this figure by a further 107 employees as contended for by Mr. Bischoff.
If the parties have misspecified their worstcase scenario to this extent,
then there is a clear inference that they intentionally downplayed their worst
case in order to smooth their passage through the Commission.
136.It must be emphasised that the the notification requirements exist precisely
to ensure transparent disclosure of all material aspects of the transaction at
an early stage. This is intended to allow the competition authorities and, with
regard to labour issues, the trade unions to react accordingly. It is improper
regard to labour issues, the trade unions to react accordingly. It is improper
for the notification forms to be “sugarcoated” merely to ensure a favourable
reaction, while later in the process, less favourable facts are disclosed,
particularly when the number of retrenchments is as significant as in this
case.
137.We also take cognizance that it is rather easy for companies to disguise
merger related retrenchments so that it would appear that these would
occur even absent the merger.
138.These practices are strongly discouraged and the importance of
transparent and bona fide disclosure is once again emphasised. It is these
concerns that motivated the imposition of the condition to the merger.
23 See pages 824825 of the transcript of 25 July 2003.
38
Conclusion
139.We have accordingly elected to hold the parties to their word and have
imposed a condition on our approval of the merger limiting retrenchment to
150 people for a one year period from the date of the order, that being the
29th July 2003.
17 September 2003
D. Lewis Date
Concurring: N. Manoim, T. Orleyn
For the merging parties: Mr A le Grange, Hofmeyr Herbstein & Gihwala Inc
For the Commission: Ms L Mtanga assisted by Mr M van Hooven,
Competition Commission.
For SAFATU: Mr P Motaung, Maserumele Inc.
For SACTWU: Mr M Bennett and Mr E Patel.
39