Brief Summary

Competition Law — Merger Control — Conditional approval of merger between Boart Longyear and Huddy (Pty) Ltd — Horizontal merger involving acquisition of businesses producing diamond-based drilling equipment — Commission recommended approval subject to divestiture of Kempe business — Tribunal found that the merger would enhance economies of scale and improve capacity utilization for Boart, while providing an alternative to costly recapitalization for Huddy — Conditional approval granted, with divestiture requirement aimed at maintaining competition in the relevant market.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned the determination of a large merger by the Competition Tribunal of South Africa under the Competition Act 89 of 1998, in which the Tribunal was required to decide whether to approve, conditionally approve, or prohibit a proposed acquisition.

The acquiring firm was Boart Longyear, a division of Anglo Operations Limited (ultimately controlled by Anglo American PLC). The target firms were Huddy (Pty) Ltd and Huddy Rock Tools (Pty) Ltd (collectively referred to as “Huddy”), both wholly owned subsidiaries of Industrial Diamond Products (Pty) Limited. The merger was described as horizontal, because both firms manufactured diamond-based drilling consumables and capital equipment used in the mining, construction, and quarrying industries.

In procedural terms, the Competition Commission recommended on 24 October 2003 that the merger be approved subject to a divestiture condition requiring Boart to divest the Kempe business (the part of Huddy’s business producing the Kempe pneumatic drill). A pre-hearing was held on 3 November 2003, followed by the hearing on 26 and 27 November 2003. The Tribunal conditionally approved the merger on 8 December 2003, and subsequently furnished written reasons for decision dated 20 January 2004.

The general subject matter of the dispute was whether the merger was likely to substantially prevent or lessen competition, with the competition concern concentrated in the national market for pneumatic drill machines used in South African underground mining, and what remedy (if any) would appropriately address the identified harm while taking account of public interest considerations, particularly employment effects.

2. Material Facts

Boart and Huddy both manufactured diamond-based drilling consumables and capital equipment. The transaction contemplated that Boart would acquire Huddy’s businesses as going concerns. The parties’ rationale for the transaction was tied to the need for economies of scale, the rationalisation of production facilities, and the upgrading of facilities. Huddy required recapitalisation for upgrades, which its shareholders regarded as infeasible given intentions to retire, while Boart indicated it had excess capacity at its Springs plant and sought increased capacity utilisation.

The Tribunal accepted an industry background in which there had been significant global consolidation and cross-border acquisitions, together with trends towards centralising manufacturing at a limited number of sites and using distribution networks (often independent agents) in national markets. The record further supported that many of the consumable products were internationally standardised, facilitating cross-border supply. At the same time, the Tribunal noted that certain equipment could be country-specific, and the pneumatic drill was highlighted as uniquely utilised in South Africa’s mining sector.

A critical and effectively determinative factual feature concerned pneumatic drill machines. Internationally, pneumatic drills had largely been replaced by hydraulic drills, but South African mining houses continued to use pneumatic drills. The Tribunal accepted evidence that, following global trends away from pneumatic drills, all manufacturers except the South African producers (Boart and Huddy) stopped production of pneumatic drills. As a result, pneumatic drills were available locally from only two sources: Boart’s Metereater and Huddy’s Kempe machine. The Tribunal accepted that JKS Boyles had stopped producing pneumatic drills years earlier, and it accepted evidence that Atlas Copco was unlikely to manufacture a pneumatic drill for sale in South Africa.

There was material common ground between the merging parties and the Commission that most affected markets did not raise substantial competition concerns because they were characterised as international markets with significant cross-border trade. The principal disputed emphasis, rather than the existence of harm, concerned the appropriate remedy. It was accepted that, in the pneumatic drills sub-market, the merger would result in the merged entity enjoying a monopoly, and the parties conceded that this would amount to a substantial lessening of competition in that market.

On public interest facts, the parties indicated that the merger would lead to estimated job losses, initially stated as 145. At the pre-hearing, they further contended that if the merger were not approved, there would be 120 job losses, alongside a risk that Boart’s coring division might be moved out of South Africa and that Huddy would cease manufacturing and become a distribution entity, with further implications for employment.

3. Legal Issues

The central legal questions the Tribunal was required to determine were whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market, as required by section 16(1) of the Competition Act 89 of 1998, and, if so, whether the adverse effect could be appropriately addressed by conditions rather than prohibition.

A major antecedent issue was the proper definition of the relevant markets, both product and geographic. The dispute required the Tribunal to decide whether to adopt multiple narrow product markets (as contended for by the parties and accepted by the Commission) or to adopt broader product markets with narrower segments or sub-markets within them.

The issues were therefore primarily concerned with the application of law to fact and evaluative determinations intrinsic to competition analysis, including market delineation, assessment of market power and entry conditions, and the design of an appropriate remedy. The Tribunal also had to make an evaluative judgment concerning public interest effects, particularly employment, in the context of the industry’s global dynamics.

4. Court’s Reasoning

The Tribunal approached the matter by first determining the relevant markets, emphasising that the existence of many products that are not functionally interchangeable does not, on its own, settle the relevant market definition for competition purposes. Although it accepted that products within the three broad categories were not functionally interchangeable, it reasoned that market definition must also take account of how the market is supplied and demanded in practice. By analogy to retail markets (such as furniture), the Tribunal explained that markets may be meaningfully analysed at a broader level where suppliers and distributors commonly provide a wide range of products and customers typically require a full range within a category.

On that basis, the Tribunal rejected the parties’ and Commission’s preferred approach of identifying numerous narrow relevant markets (the parties had identified a large number of overlaps). It instead found three relevant product markets, namely the markets for industrial diamond products, diamond core drilling products, and percussion drilling products, while recognising that each contained distinguishable segments or sub-markets. The Tribunal noted that functional interchangeability remained important for identifying segments and for crafting remedies, but it treated it as one factor among others rather than the sole determinant of market boundaries.

Turning to the geographic dimension, the Tribunal accepted evidence that imported products were widely used in South Africa and that both Boart and Huddy competed with international manufacturers such as Atlas Copco, JKS Boyles, and Fordia. It found that the geographic markets for industrial diamond products and percussion drilling products were international, and that most segments within diamond core drilling products were also international. However, it identified a critical exception: the market for pneumatic drill machines was found to be national, because pneumatic drills were exclusively manufactured and sold in South Africa by Boart and Huddy. This finding aligned with evidence led from industry witnesses and the acknowledged reality that international manufacturers had largely exited pneumatic drill production.

Applying section 16(1), the Tribunal accepted that there was no substantial lessening of competition in the majority of the markets, largely because they were international markets supported by cross-border trade and established distribution networks (often through agents), global procurement policies of mining houses, and the absence of significant trade obstacles. It also accepted evidence that agents distributed products for multiple manufacturers and could procure goods from Boart or Huddy if customers required. The Tribunal considered these features to be strongly supportive of ongoing competitive constraints in the international markets.

In contrast, the Tribunal treated the pneumatic drill sub-market as presenting a clear competition problem. It accepted that the merger would produce a monopoly in this national market. Although the parties argued that the market was declining and that barriers to entry were low because there were no patents, the Tribunal did not regard market decline as a basis to overlook anti-competitive consequences. It emphasised that stagnation made entry less likely, and it noted evidence that the profitable end of the market lay in parts, with extensive penetration by suppliers of pirated parts. It also relied on evidence that a major potential entrant (Atlas Copco) was not interested in entering pneumatic drill manufacturing for South Africa. These considerations supported the conclusion that the merged entity could not be assumed to be constrained by likely entry.

Having found a substantial lessening of competition in the pneumatic drill sub-market, the Tribunal then evaluated remedial options. It recorded that the Commission’s proposed remedy was a divestiture of the Kempe business, but it noted two difficulties: the Commission had not identified a likely purchaser, and it appeared that the Kempe business would not be viable as a stand-alone undertaking, because it would need to be maintained by an established player able to offer the machine alongside other products. The Tribunal referred to its prior scepticism about divestiture remedies where no buyer is identified and where viability concerns exist, and it located its remedial approach within the general objective that remedies should create conditions for actual competition to subsist and potential competition to emerge.

The Tribunal considered the parties’ alternative proposals, including a behavioural remedy capping price increases for the Kempe product to CPI for three years, and an exclusion of the Kempe business from the transaction with Huddy retaining it. It rejected the latter in substance, reasoning that leaving the product with owners seeking to exit the market would likely condemn it to failure. Seeking instead to ensure that both the Boart and Huddy pneumatic drills remained present in the market, the Tribunal crafted a remedy combining behavioural and structural elements, specifically targeting the role of independent distribution agents. The remedy required the acquiring party to identify two independent agents responsible for marketing and distributing the Kempe product, while the post-merger entity remained responsible for manufacture, alongside a behavioural constraint drawn from the parties’ proposal.

On public interest and employment, the Tribunal acknowledged the parties’ employment estimates and expressed concern about the global dynamics of the industry. It was mindful that prohibiting the merger might unintentionally worsen employment outcomes if it led to relocation of Boart’s operations outside South Africa and the cessation of Huddy’s manufacturing. The Tribunal thus treated the employment dimension as a relevant public interest consideration in evaluating the overall outcome, without treating it as a reason to ignore the identified competition harm in pneumatic drills.

5. Outcome and Relief

The Tribunal conditionally approved the merger on 8 December 2003. The condition was designed to remedy the identified competition harm in the national market for pneumatic drill machines, while allowing the transaction to proceed in circumstances where the remainder of the affected markets did not raise substantial competition concerns.

The Tribunal did not impose the Commission’s proposed divestiture of the Kempe business. Instead, it adopted a combined behavioural and structural remedy aimed at ensuring the continued presence of both pneumatic drill products in the market. The details of the condition were recorded as being set out in the Tribunal’s order attached as annexure A, including the requirement that the acquiring party identify two independent agents to market and distribute the Kempe product, with manufacture remaining the responsibility of the post-merger entity, alongside a behavioural price-related condition as formulated in the order.

No specific costs order was recorded in the provided text of the reasons.

Cases Cited

Newscorp/Telepiu (European Commission decision, 2 April 2003, Case No. COMP/M.2876).

Distillers Corporation Limited/Stellenbosch Farmers Winery Group Ltd (Competition Tribunal, decision of 30 July 2003, Case No. 08/LM/Feb02).

JD Group/Ellerines Limited merger (Competition Tribunal, Case No. 78/LM/Jul00).

Legislation Cited

Competition Act 89 of 1998, section 16(1).

Rules of Court Cited

No rules of court were cited in the provided text.

Held

The Tribunal held that, for competition analysis purposes, the relevant product markets were properly characterised as three broad markets—industrial diamond products, diamond core drilling products, and percussion drilling products—each containing narrower segments, rather than a multiplicity of narrow product markets based solely on functional non-interchangeability.

It further held that the relevant geographic markets were generally international for industrial diamond products and percussion drilling products, and largely international for diamond core drilling products, but that the sub-market for pneumatic drill machines was national because production and supply of pneumatic drills persisted locally only through Boart and Huddy.

On the merits under section 16(1), it held that the merger did not substantially lessen competition in the majority of the relevant markets, but that it would substantially lessen competition in the national pneumatic drill market by creating a monopoly. It held that this harm required a remedy and that divestiture of the Kempe business was not appropriate on the record due to the absence of an identified purchaser and concerns about the viability of a stand-alone divested business.

The Tribunal accordingly held that the merger should be approved subject to conditions combining behavioural and structural elements intended to maintain the availability of the Kempe pneumatic drill through independent distribution arrangements while manufacture remained with the merged entity, as set out in the order.

LEGAL PRINCIPLES

The Tribunal applied the principle that the assessment under section 16(1) of the Competition Act 89 of 1998 requires determining whether a merger is likely to substantially prevent or lessen competition in a properly defined relevant market, and that market definition is a foundational step in the inquiry.

In defining markets, the Tribunal applied the principle that functional interchangeability, while important, is not the sole determinant of relevant market boundaries. Market definition must also consider broader market structure, including how suppliers and distributors operate across ranges of products and how customers demand product bundles or full ranges within categories. The Tribunal’s approach recognised that broader markets can encompass narrower segments, and that segmentation may become especially important when designing remedies.

In remedy design, the Tribunal applied the principle that the objective of a remedy is to create conditions for actual competition to subsist and for potential competition to emerge. It treated remedies as instruments that should be tailored to cure the identified competitive harm, preferring a targeted remedy for a narrow problem over broader intervention not supported by the record.

The Tribunal also applied the principle of caution regarding divestiture remedies where there is no identified purchaser and where there are substantial reasons to doubt the post-divestiture viability of the business. In such circumstances, the Tribunal treated alternative conditions—combining structural and behavioural features—as potentially more effective in achieving a competitive outcome consistent with the evidence.

Finally, the Tribunal took into account public interest considerations relating to employment in the context of industry dynamics, recognising that prohibiting a merger may have unintended adverse employment consequences where parties may relocate or cease domestic manufacturing operations absent the transaction.

Boart Longyear (a division of Anglo Operations Limited) and Huddy (Pty) Ltd / Huddy Rock Tools (Pty) Ltd (41/LM/Aug03) [2004] ZACT 2; [2004] 1 CPLR 81 (CT) (20 January 2004)