Engen Petroleum Limited and ExxonMobil South Africa (Pty) Limited (14/LM/Mar04) [2004] ZACT 32 (4 May 2004)

80 Reportability

Competition Law

Brief Summary

Competition Law — Merger Approval — Unconditional approval of merger between Engen Petroleum Limited and ExxonMobil South Africa (Pty) Limited — Engen to acquire control of certain assets from ExxonMobil and become exclusive distributor of ExxonMobil's lubricants in South Africa — Transaction aimed at enhancing competition in the lubricants market — No significant overlap in business activities leading to competition concerns — Merger deemed not to create anti-competitive effects and beneficial for South African consumers.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern a large merger adjudicated by the Competition Tribunal of South Africa under case number 14/LM/Mar04. The proceedings related to the Tribunal’s determination whether to approve a proposed transaction between Engen Petroleum Limited (Engen) and ExxonMobil South Africa (Pty) Limited (EMSA).

The Tribunal unconditionally approved the proposed transaction on 24 March 2004, and subsequently furnished written reasons dated 4 May 2004. The matter followed an investigation by the Competition Commission, whose assessment and findings on competitive effects and public interest were placed before the Tribunal for final determination.

The dispute concerned the competition-law assessment of a transaction in the lubricants sector, specifically the acquisition by Engen of certain assets from EMSA together with Engen’s appointment as the exclusive distributor and marketer of ExxonMobil-branded lubricants in South Africa. The central subject matter was whether the transaction would substantially prevent or lessen competition in any relevant market and whether any public interest concerns arose, including employment effects.

2. Material Facts

Engen, described as one of South Africa’s largest petroleum retailers, would, in terms of the proposed transaction, acquire and control certain assets from EMSA and be appointed the exclusive distributor and marketer of ExxonMobil’s lubricants business in South Africa. As a result, Engen would import, blend, and market ExxonMobil-branded lubricants locally. The transaction comprised several interrelated agreements, including an asset sale agreement, a lubricants blending distribution agreement, trade mark licence agreements, and a marine lubricants supply and services agreement.

Both merging parties were incorporated in South Africa. Engen was controlled through a chain culminating in Petroleum Nasional Berhad (Petronas). EMSA was an indirect wholly owned subsidiary of Exxon Mobil Corporation. The Tribunal recorded that EMSA controlled Cape Petroleum (Pty) Ltd and Safri-Lube (Pty) Ltd, and that control of these firms would not be transferred; accordingly, they did not form part of the merger.

The Tribunal accepted the parties’ commercial rationale that the transaction sought to combine complementary capabilities in lubricants, with Engen obtaining access to ExxonMobil’s technology and product range while ExxonMobil’s products would benefit from Engen’s distribution infrastructure. The rationale was framed against the competitive landscape in which other large suppliers (including BP/Castrol, Shell, and Total) were already supported by global technology and product portfolios.

As to the parties’ activities, Engen operated across refining, marketing, and distribution of petroleum products and also at manufacturing/blending, marketing, and distribution levels within lubricants. EMSA operated in the marketing of lubricants and chemicals, including automotive, industrial, and marine lubricants and specialty chemicals. The Tribunal identified that the only overlaps between Engen and EMSA were in the marketing of automotive lubricants and industrial lubricants, and in specialty chemicals; however, it recorded that the transaction related to lubricants only and not specialty chemicals, with the result that the parties would remain competitors in specialty chemicals.

On vertical aspects, the Commission’s investigation, as recorded by the Tribunal, found that the merger did not create vertical integration in itself, but would result in an increased use of base oil in the production of Engen and ExxonMobil-branded lubricants. The Commission examined whether customers who purchased base oil from Engen might be foreclosed. It found that such customers could import base oil (as other market participants do) or import manufactured product. Engen advised that it would continue supplying customers by operating at full capacity and expanding its base oil plant if required. The parties confirmed at the hearing that Engen engaged in toll blending for a number of firms, and that nothing in the agreements with ExxonMobil precluded Engen from selling base oil to competitors, including competitors of ExxonMobil products.

On horizontal effects, the Tribunal noted that pre-merger Engen had a toll blending arrangement with ExxonMobil under which Engen produced lubricants for ExxonMobil in South Africa using additives supplied by ExxonMobil, because ExxonMobil did not produce lubricants domestically. The Tribunal further recorded that ExxonMobil did not utilise Engen’s retail network to distribute its products and had no retail networking activities that would be affected by the merger, with lubricants ultimately being sold essentially through distributors. The Commission found that post-merger market shares would not exceed 20% in either automotive or industrial lubricants, and that on narrower customer-segment markets the merged entity’s shares would not exceed 26% in any identified segment. The Tribunal recorded the further assessment that automotive and industrial lubricants markets appeared highly competitive with numerous players.

On public interest, the Tribunal recorded the parties’ statement that employment contracts would transfer from EMSA to Engen and that no job losses were foreseen as a result of the transaction.

3. Legal Issues

The central legal questions concerned whether the proposed large merger would substantially prevent or lessen competition in any relevant market. This required an assessment of the transaction’s likely effects on competition within the identified overlapping areas (automotive and industrial lubricants marketing), as well as an examination of any potential adverse effects arising from the parties’ positions in adjacent levels of supply, particularly in relation to base oil.

The dispute involved primarily the application of competition-law standards to the established facts, rather than a dispute of fact requiring credibility findings. The Tribunal’s reasons reflect reliance on market structure indicators (including market shares and the presence of multiple competitors), the nature of the parties’ existing commercial arrangements (including toll blending), and the availability of alternatives to customers in the event of any attempted foreclosure.

A further legal question concerned whether any public interest considerations, particularly employment effects, warranted conditions or prohibition notwithstanding the competition assessment. This component entailed an evaluative judgment based on the parties’ representations regarding the transfer of employment and anticipated job losses.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the identification of the limited scope of overlap between the parties’ businesses. It recorded that the overlap was confined to the marketing of automotive and industrial lubricants (and that specialty chemicals were not part of the transaction, leaving the parties as competitors in that respect). Having concluded that no competition concerns arose from the transaction, the Tribunal stated that it was unnecessary to consider the nature and structure of the lubricants market in further detail.

In relation to potential vertical concerns, the Tribunal summarised the Commission’s investigation into whether the merger would facilitate foreclosure in base oil supply. The Tribunal accepted the Commission’s view that customers purchasing base oil from Engen would not be foreclosed because they retained practical alternatives, including importing base oil or importing the manufactured product. The Tribunal also relied on Engen’s indication that it would continue supplying customer needs by operating at full capacity and, if necessary, expanding production capacity. At the hearing, the parties confirmed that Engen currently toll blended for Mobil, Sasol, and other competitors, and that the agreements with ExxonMobil did not prevent Engen from supplying base oil to competitors. These considerations supported the conclusion that the merger would not create material vertical foreclosure risks.

In relation to horizontal effects, the Tribunal relied on the Commission’s market share findings, recording that post-merger shares would not exceed 20% in automotive or industrial lubricants markets and would not exceed 26% in any narrower customer-segment market. The Tribunal also placed weight on the observed competitive nature of the relevant markets, describing them as highly competitive with numerous competing players that would constrain any anti-competitive conduct by the merged entity. The Tribunal further recorded that ExxonMobil did not have a retail network to be affected and that customers would retain a choice of lubricant providers, with distribution occurring essentially through distributors.

On public interest, the Tribunal recorded the parties’ position that employment contracts would be transferred from EMSA to Engen and that no job losses were expected. On the basis of the competition assessment and the absence of adverse public interest effects, the Tribunal aligned itself with the Commission’s conclusion that the transaction would not substantially prevent or lessen competition in any relevant market.

5. Outcome and Relief

The Tribunal unconditionally approved the proposed merger between Engen and EMSA. No merger conditions were imposed.

No separate or express order as to costs was recorded in the reasons provided.

Cases Cited

No cases were cited in the Tribunal’s reasons.

Legislation Cited

No legislation was expressly cited in the Tribunal’s reasons.

Rules of Court Cited

No rules of court were cited in the Tribunal’s reasons.

Held

The Competition Tribunal held that the proposed transaction between Engen and EMSA would not substantially prevent or lessen competition in any relevant market. It further accepted that the transaction did not give rise to material vertical concerns, including foreclosure in relation to base oil, given the availability of alternatives to customers and the parties’ evidence regarding ongoing supply and the absence of contractual restrictions on sales to competitors.

The Tribunal also held that no adverse public interest consequences were established on the evidence presented, particularly in relation to employment, as the transaction was expected to involve a transfer of employment contracts without job losses. The merger was therefore approved without conditions.

LEGAL PRINCIPLES

The decision applied the principle that a merger should be approved where it is not shown, on the evidence assessed, to be likely to substantially prevent or lessen competition in any relevant market, having regard to the merger’s likely competitive effects in both horizontal overlaps and potential vertical relationships.

In evaluating possible vertical effects, the reasoning reflected that foreclosure concerns are weakened where customers have credible alternative sources of supply, including the ability to import upstream inputs or downstream finished products, and where the merged entity is not contractually constrained from supplying competitors.

In evaluating horizontal effects, the reasoning reflected reliance on indicators such as post-merger market shares and the presence of numerous competitors as constraints on the merged entity’s ability to exercise market power or act anti-competitively.

The decision further reflected that public interest considerations, including employment effects, form part of the merger assessment, and that an absence of anticipated job losses supported unconditional approval on the facts recorded.