COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No.: 02/LM/Jan04
In the large merger between:
Murray & Roberts Limited
and
The Cementation Company (Africa) Limited
Reasons for Decision
Approval
1. On 18 May 2004 the Tribunal unconditionally approved the transaction between
the abovementioned merging parties. The reasons for the Tribunal’s decision follow.
Background
2. This is a transaction in which Murray and Roberts Limited will acquire control of
the Cementation Company (Africa) Limited from Skanska AB, a multinational
company based in Sweden. It is intended that Murray and Roberts will acquire
Skanska AB’s 79,13% controlling interest in Cementation Africa. 1
3. The transaction was notified to the Tribunal on 16 March 2004. A prehearing in
this matter was held on 24 March 2004. The matter was heard on the 12 th and 13 th
of May 2004.
4. Various witnesses testified at the hearing. The Tribunal subpoenaed three
witnesses:
Mr Les Jagger (General Manager of the Mining Projects Division at Impala
Platinum Limited),
Mr Herman Fourie (Financial Director of Shaft Sinkers) and
Mr Andre Deventer (Financial Director of Master Drilling).
5. The merging parties called the following witnesses:
Mr Henry Laas (Managing Director of Murray & Roberts RUC),
Mr Brian Bruce (Group Chief Executive of Murray & Roberts), and
Mr Timothy Wakefield (Director of the Cementation Skanska South Africa
operations).
1 Refer to page 3 (para. 2) of the Commission’s mergers and acquisitions report.
The Parties
6. The primary acquiring firm is Murray & Roberts Limited (“M&R”), a wholly owned
subsidiary of Murray & Roberts Investments Limited, which is in turn controlled by
Murray & Roberts Holdings Limited (“M&R Group”). M&R Group is a public company
listed on the JSE Securities Exchange South Africa. The shares are widely held with
the major institutions including Old Mutual and Liberty as well as the Public
Investment Commissioners all holding significant stakes.
7. The primary target firm is the Cementation Company (Africa) Limited
(“Cementation”), a firm listed on the JSE Securities Exchange South Africa. 79.13%
of Cementation’s issued share capital is held by Skanska Cementation International
Holdings Limited (a company incorporated in the United Kingdom), which is in turn
controlled by Skanska AB (a Swedish construction, project development and facilities
management firm). 2 Cementation controls three subsidiaries in South Africa as well
as other interests elsewhere on the continent. 3
8. M&R is a wellknown South African construction company, which focuses on a
wide range of construction and industrial manufacturing activities. M&R RUC is the
division within M&R that provides mining contracting services and infrastructure
development and is the business that is relevant in the context of the proposed
transaction. RUC, originally a joint venture between M&R and Gencor, then a
prominent South African mining house, has been wholly owned by M&R since 1997.
It competes with the target firm, Cementation, in various product markets. RUC
operates its business through two divisions, namely raise drilling and mining.
9. The services provided by RUC in the raise drilling division include raise drilling,
shaft boring and exploration drilling. In the mining division RUC provides services
shaft boring and exploration drilling. In the mining division RUC provides services
such as mechanised and conventional horizontal and incline development,
mechanised stoping and contract mining, mine and engineering design, shaft sinking
and associated infrastructure, cementation and ground stabilisation, drop raising and
long hole stoping, feasibility studies and associated construction and specialised
support work. 4
10. Cementation is regarded as the leading underground mining subcontractor in
South Africa. It operates two divisions, namely, drilling and mining. Its drilling division
provides services such as surface drilling, underground drilling, raise boring and drop
raising whilst the mining division focuses on underground construction and mine
development, tunnelling and stoping, shaft sinking, and cementation and
underground drilling. 5
Rationale for the Transaction
11. Skanska avers that the businesses in South Africa, Canada and Australia do not
form part of its strategic areas of business. For M&R, on the other hand, the
2 See page 286 of the record.
3 Its South African subsidiaries are Cementation Mining Skanska (Pty) Ltd, Cementation Emgodini
Skanska Ltd, and William Bain & Company (S.A.) (Pty) Ltd.
4 Refer to page 44 of the record.
5 Ibid page 45 as well as page 5 of the Commission’s mergers and acquisitions report.
2
transaction is a significant step towards realising its ambition of becoming a pre
eminent player in a number of markets related to mining construction and
development, markets which, it is argued, are increasingly global in character. M&R
claims that this deal will enhance its ability to tender for major projects in Africa,
outside South Africa, as well as in North America (mainly Canada), South and
Central America, Australia and Southeast Asia. 6
Relevant product markets
12. There are two main methods of mining, namely pit mining and underground
mining. The merging parties as well as a number of other large players in the broad
mining contracting industry are active in underground mining. Open pit mining
involves the mining of massive ore bodies characteristic of copper and iron ore.
Neither M&R nor Cementation is involved in open pit mining. The skills and capital
equipment required in undertaking underground and openpit contracting activities
are quite distinct and it is only the underground mining category that is relevant for
purposes of this transaction. 7
13. In his testimony to the Tribunal, Mr. Laas, the managing director of M&R RUC,
identified three broad areas of activity in underground mining, namely, ore body
evaluation, infrastructural development and mining of the ore . Before commencing a
mining operation, the ore body must be evaluated in order to determine whether the
reserve is of a quality and size necessary to sustain a mining operation. Once a
viable ore body has been established the necessary infrastructure must be put in
place. This infrastructure essentially secures access from the surface to the ore body
and enables the ore to be removed from the mine. Once access to the ore body is
and enables the ore to be removed from the mine. Once access to the ore body is
secured actual mining commences. One or other – or both of the merging parties is
engaged at each stage of the mining process.
14. As already noted, M&R RUC and Cementation group their activities in two broad
divisions, namely drilling and mining. In the drilling division one or both of the
merging parties are engaged in raise drilling and exploration drilling. In the
mining division one or both of the merging parties are engaged in toll mining
(“contract mining”), shaft sinking and mine construction , drop raising ,
cementation and underground drilling , construction and erection , and in mine
design, feasibility study and project management .
15. A more detailed exposition of these activities follows:
15.1 Raise drilling
15.1.1 Raise drilling is a specialised technique for drilling vertical shafts. The purpose
of raise drilling is to establish a vertical or an inclined excavation used for ventilation
or ore passes. It is done by means of drilling a small hole of approximately 40cm in
diameter from the surface to a horizontal shaft within the mine. Once the horizontal
shaft is reached a reaming device is attached to the drill string and the reamer is
pulled upwards whilst rotating. The rock, which is broken down as a result of the
drilling, collects in the horizontal shaft and is then removed via the mine’s existing
6 See page 286 to 287 of the record.
7 See Mr Henry Laas’ testimony, pages 12 & 13 of the transcript.
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infrastructure. The drilling continues until the reamer reaches the surface. Upon
completion a vertical shaft has been drilled. Raise drilling does not make use of
explosives.
15.1.2 The parties argue that the holes being drilled can be classified into three
categories or sizes, these being small, medium to large and very large holes. It
appears further that different types of drilling machines are required to drill the
different types of holes. The Commission’s investigation revealed that machines used
to drill small holes could not be used to drill large to medium holes or very large
holes. Again, machines used to drill large to medium holes are not strong enough to
drill very large holes and inefficient to drill small holes. Nor, it appears, are the
customers easily able to substitute different sizes of holes as each hole has different
functional requirements, for example, for ventilation purposes or for removing ore.
15.1.3 In light of the above information, the Commission concluded that each of
these types of holes drilled by means of raise drilling machines constitute relevant
product markets. 8 Only three players are active in the raise drilling market, namely
M&R, Cementation and Master Drilling. It appears that Cementation does not own
machines capable of drilling very large holes. M&R and Master Drilling both have the
capacity to drill very large holes.
15.2 Exploration drilling
15.2.1 The purpose of exploration drilling is to extract reef drill core for mineralisation
assessment by geologists. This is sometimes done from the surface while, in other
circumstances, the exploration drilling process commences from existing
underground excavations. Cementation and M&R are both active in surface
exploration drilling as are other prominent players such as Boart Longyear and
Rosond. It appears that a number of smaller companies are also active in this area. 9
Rosond. It appears that a number of smaller companies are also active in this area. 9
15.2.2 Underground exploration drilling is used for purposes of assessing the quality
of the ore body. It is principally used for short to medium term planning for mining
purposes. Cementation, although not M&R, is active in underground exploration
drilling. There are also other companies active in underground exploration drilling
including Rosond, Boart Longyear, ProDrilling and other smaller black economic
empowerment (“BEE”) companies. 10
15.3 Toll mining (also known as “contract mining”)
15.3.1 This involves the actual mining, stoping and removal of ore from the mine.
This is generally viewed as the core business of the mining companies themselves,
although recently outsourcing has even made inroads into this area. The merging
parties indicated at the hearing that contracting companies are currently being invited
to undertake this work on a project basis. 11
15.3.2 It appears that M&R is not active in this market. The existing players in this
8 See the Commission’s report (page 6) and Mr Laas’ testimony (pages 34 to 36 of the transcript).
9 Refer to page 48 of the record as well as the Commission’s report, page 11, para 5.1.4.
10 See Mr Laas’ testimony, page 18 of the transcript dated 12 May 2004.
11 See Mr Laas’ testimony (page 45 of the transcript).
4
market are Cementation, JIC and BTX (prior to liquidation). 12 We were informed at
the hearing that Grinaker LTA is also currently undertaking this kind of work and that
Shaft Sinkers has also started a project of this kind. 13
15.4 Shaft sinking and mine construction
15.4.1 Shaft sinking and mine construction primarily involves the construction of
vertical shafts which are utilised for transporting workers and ore to and from the
surface. Hence, whenever a new underground mine or a new section of an existing
mine is started a vertical shaft must be constructed. 14 The shaft is the main access
from surface to levels underground to access the ore body. The shaft could either be
vertical or declined. The engineers decide whether a vertical or declined shaft is
required to access the ore body.
15.4.2 The minimum diameter for vertical shafts is 4.5 metres and in South Africa
these shafts are of the order of 1 500 metres deep. A declined shaft has an average
dimension of 4.5 metres to 3.5 metres at a gradient of 8 to 10 degrees. According to
the parties, the deep level vertical shaft is primarily for gold and platinum mining and
the shallower shafts would be for platinum in the eastern part of South Africa, chrome
and coal.
15.4.3 M&R and Cementation are both active in shaft sinking. The other major player
– in the South African market, at least – is a company called Shaft Sinkers. There
are a number of other South African firms interested – it cannot be put much higher
than that at this stage – in this submarket. There are also international firms actively
engaged in shaft sinking, some of which enjoy a presence in the South African
market, usually in partnership with a South African firm. Among the better known
nonSouth African firms active in the shaft sinking market are Deilmann Haniel (a
German company), the Canadianbased, Redpath, and an Australian company,
German company), the Canadianbased, Redpath, and an Australian company,
Brandrill.15 M&R is also active in this product market outside of South Africa. 16
15.4.4 The parties indicated that mine construction and development work, which
refers essentially to the infrastructure required between the shaft and the reef, forms
part of the shaft sinking and mine construction product market. It appears that the
mining companies undertake much of this work themselves. However, all the major
construction companies such as M&R, Cementation, Grinaker LTA, Deilmann Haniel,
Concor and other small BEE companies such as UbuntuUbuntu can do this kind of
work, and many are already active in this area. 17
15.5 Drop raising
15.5.1 Drop raising is a method used to construct vertical excavations on a much
12 Note that Brandrill, an Australian shaft sinking firm, acquired a local firm, Torrex, to form BTX
which, is now in provisional liquidation after what appears to be a period of very aggressive pricing
and imprudent cash flow management.
13 Refer to page 46 & 47 of the transcript.
14 Refer to the Commission’s report, page 7 and also page 19 of the transcript.
15 See footnote 12 above.
16 Refer to page 21 of the transcript.
17 Ibid page 33.
5
smaller scale than is possible through raise drilling. This is used for ore passes and
vertical dams for excavations of small diameter with a maximum length of about 50
metres and an average diameter of about 1.5 to 2 metres inside the mine. During this
process, holes are drilled over the full length of the required excavation whereafter
the holes are charged with explosives from the bottom. The hole is plugged and the
explosives are detonated. The blasted rock falls down into the existing mine shaft
and is transported out. 18
15.5.2 Firms currently engaged in drop raising include Cementation, JIC, Boart
Longyear, Master Drilling and various other smaller players. It appears that M&R is
no longer involved in the drop raising market. 19
15.6 Cementation and underground drilling
15.6.1 The parties submitted that the cementation process was the traditional product
offering of the target company, Cementation. It involves the pumping of cement into
mining cavities and fissures and the lining of underground shafts and tunnels with
cement. It is done to limit the ingress of highpressure water into the mining works.
This process also stabilises underground operations and facilitates the development
of underground shafts. Indeed, the parties claim that it is this process that made
underground mining possible in many of those areas in which South Africa’s gold
reserves are to be found. 20 According to the Commission, the cementation process
includes underground drilling and thereafter the pumping of cement.
15.6.2 M&R RUC is not involved in this activity. Firms which provide this service are
Cementation, JIC, Rosond, Boart Longyear and other small players. It therefore
appears that no overlap exists between M&R and Cementation in this submarket.
15.7 Construction and erection
15.7.1 It is indicated that this service involves minor construction work, which is not
15.7.1 It is indicated that this service involves minor construction work, which is not
associated with major mining projects. It appears that small civil engineering firms
can perform these types of projects.
15.7.2 Both the merging parties as well as Shaft Sinkers, Grinaker LTA, Deilmann
Haniel and various other small players are active in this market.
15.8 Mine design, feasibility study and project management
15.8.1 This is a service in which highly skilled personnel are engaged in assessing
the feasibility and developing the design of mining projects. Participants in this
market include companies such as M&R RUC, Shaft Sinkers, RSV, Hatch and
TWP.21 Cementation does not offer this service.
Conclusion in respect of relevant product market
18 For a detailed explanation of these processes, see Mr Laas’ testimony (pages 43 to 44 of the
transcript) and the Commission’s report (page 7).
19 Supra footnote 16.
20 See page 294 of the record.
21 See page 49 of the record as well as page 13 of the Commission’s mergers and acquisitions report.
6
16. We are, in principle, reluctant to adopt the approach apparently favoured by
both the parties and the Commission – that would effectively place each service
provided by the merging parties in a separate relevant market. While we are
prepared to concede that many of these activities are legitimately designated as
distinct submarkets, we are equally persuaded that each of the more significant
players – and this naturally includes both of the merging parties – could, if they so
desired, enter each of the submarkets. Certainly, while, in order to enter a particular
submarket, they may be required to acquire additional machinery or skills, these are
easily within their grasp, and the absence of one or other of the major players from a
particular submarket may reflect an implicit market sharing arrangement or simply
historical circumstance rather than a meaningful market segmentation. That, for
example, M&R is no longer involved in drop raising or that Cementation does not
currently possess the range of machinery enabling it to offer every possible raise
drilling service, should not necessarily lead to the conclusion that these are separate
relevant markets. At very least, each of the merging parties has the potential to
enter, with little difficulty or delay, each of these submarkets. Within this broad
market, we will undoubtedly find active participants in certain of the less
technologically or financially demanding submarkets who are unable to engage in
the more demanding submarkets, for example shaft sinking. By the same token we
may find that certain of the more sophisticated participants have elected not to
participate in some of the lower value markets.
17. Although, then, from the perspective of a competition evaluation, we will focus on
17. Although, then, from the perspective of a competition evaluation, we will focus on
the former set of submarkets – those in which overlaps are significant – this does
not alter our conclusion that the relevant product market is that for the provision
of a broad range of mining infrastructure . Within that broad market, our
competition evaluation will focus on the shaft sinking and raise drilling submarkets.
These are submarkets in which both merging parties are active and from which
many of the smaller players engaged in other submarkets are effectively excluded.
There are clearly other submarkets – for example, mine design or toll mining – from
which all but the best resourced and most sophisticated companies are excluded.
However these do not appear to be welldeveloped markets, that is to say, these are
markets in which the mining companies remain the dominant players, and so do not
loom large in our evaluation of the competitive effects of the transaction.
The relevant geographic market
18. The Commission, the various witnesses who appeared before us, and, indeed,
the merging parties themselves all appear to accept that, should the shaft sinking
and raise drilling providers active in the South African market attempt to exercise
market power, it is not effectively open to their customers, the mines, to procure
these services from other players active in other national markets, for example those
currently active in Australia or Canada. The parties acknowledged that “generally in
the past, foreign mining contracting companies, specialising in raise drilling, shaft
sinking and mine development have not been successful in their own right in
tendering or establishing a mining contract company in South Africa.” 22
22 See page 76 of the transcript and page 26 of the Commission’s mergers and acquisitions report. We
emphasise the phrase ‘in their own right’ and will elaborate the significance of this below.
7
19. Moreover, all those testifying to the inability of international firms to substitute for
local players offered the same set of persuasive reasons. They all averred that
South African geological conditions and mining practices – notably, although not
exclusively, the unusual depths at which mining is undertaken in South Africa fatally
inhibited the ability of firms schooled in other mining environments to offer a
substitute service. 23 They argued that South African ‘cultural’ particularities also
constrained the ability of foreign players to enter this market, these ‘cultural’ factors
ranging from language barriers through to, even more pertinently, the importance of
established ‘connections’ between the service providers and those in the employ of
the mines responsible for awarding contracts. More tangible inhibitors such as the
certification that South African mining regulations demand of those employed on
shaft sinking projects and the, partially related, fact that international firms would be
obliged to remunerate their key personnel in hard currency whilst earning their
contract fees in the volatile local currency were also mentioned. And, at least as
important as any of these constraints, all acknowledged that South African mining
companies would, partly for many of the reasons outlined here, be extremely
reluctant to entrust a massive shaft sinking or raise drilling project to a firm with no
established track record in South Africa.
20. For all these reasons we have no hesitation in finding that the geographic
markets at issue in this transaction are national. However, we hasten to add that this
does not mean that international firms are unable to participate in the national South
African markets for the provision of these services. This does not however effect the
African markets for the provision of these services. This does not however effect the
delimitation of the geographic market although it does have important implications for
our assessment of barriers to entry and, hence, of the competition implications of the
transaction, and is elaborated below.
The impact of the transaction on competition
21. As already indicated, our competition evaluation will focus on two submarkets
within the broad market for the provision of mining infrasructure, these being shaft
sinking and raise drilling. From a competition perspective this transaction appears, at
first glance, to raise serious grounds for concern. Consider the bald facts that
characterise the two submarkets:
22. In the shaft sinking submarket one of the two largest participants, Cementation,
is merging with the third largest firm, Murray and Roberts RUC, leaving Shaft Sinkers
the only other wellestablished domestic firm in this submarket. Although there are
other firms – both local and international – that are active in the (national) geographic
market, they are, though frequently substantial companies in their own right, still
relatively minor players in the relevant markets.
23. In raise drilling, the second of the submarkets under consideration, the second
largest firm, Murray and Roberts RUC, is merging with the third largest firm,
Cementation. Master Drillers is the only other active participant left in what becomes
a two firm submarket.
24. It cannot be denied that the transaction will eliminate a significant competitor in
23 See, amongst others, the Commission’s report (page 9) as well as Mr Fourie’s testimony (page 201
of the transcript).
8
each of the submarkets. Although the merging parties point out that Murray and
Roberts does not enjoy a significant share of the shaft sinking submarket and that
Cementation is, similarly, a small presence in the raise drilling submarket, it is clear
that both are, at least, significant potential competitors in each of these areas –
certainly both actively bid for tenders in these submarkets where they are clearly
viewed by the competitors and customers as serious contenders and thus
undoubtedly serve to constrain the behaviour of the other two, more successful,
players.24
25. Note also that both principal competitors left in each of these submarkets, Shaft
Sinkers and Master Drillers, fear the prospect of the merged entity, backed by the
financial strength of the Murray and Roberts group, engaging in predatory pricing,
that is, tendering below cost, the better to force their less well endowed competitors
out of the market and, thereafter, to exercise market power. 25 Evidence from Shaft
Sinkers suggested that Cementation’s position in the shaft sinking market has been
won through exceptionally aggressive pricing which had already depressed margins
in the shaft sinking market. 26 Shaft Sinkers – and Master Drilling in respect of the
raise drilling market – aver that the financial backing of Murray and Roberts would
allow this to be taken a step further, beyond the realm of highly competitive pricing
into that of anticompetitive predatory pricing. They also fear that the merged entity’s
capacity to offer, in contrast with their more specialised competitors, a ‘onestop
shop’ – ranging through mine development, shaft sinking, raise drilling, toll mining –
will enhance their position in the market to the ultimate detriment of a competitive
market structure.
26. Moreover, we have already determined that the geographic boundaries of both
26. Moreover, we have already determined that the geographic boundaries of both
market are national – in other words, local customers, if confronted by an exercise of
market power, have a limited ability to turn to providers located elsewhere. Nor, on
the face of it, are these national product submarkets particularly susceptible to new
entry. Certainly capital requirements – both financial and human are significant,
and experience or ‘track record’, including the valued contacts that it brings, is widely
acknowledged to weigh heavily in the considerations of those who award tenders.
27. On the face of it then, this transaction fails many of the important tests commonly
used to evaluate the competitive impact of mergers – by any measure the transaction
increases concentration in two already concentrated markets; it results in the
elimination of successful competitors in both markets, including one in which the
competitor eliminated has adopted a competitionenhancing aggressive pricing
strategy; in reducing the number of competitors from three to two it may enhance the
likelihood of cooperation; and barriers to new entry appear to be high. And yet a
detailed evaluation of the dynamics of this market reveals factors sufficient to
mitigate these concerns.
28. We will turn now to a consideration of those factors that, in our view, mitigate the
prima facie concerns outlined above. These may be grouped under two broad
headings. The first are what may be termed the general features of a market in
24 In any event, as we point out below, it is, in these markets, difficult to draw the usual inferences
from market share data.
25 See pages 467 & 479 of the record as well as pages 202 & 274 of the transcript.
26 See Mr Fourie’s testimony (pages 203, 204 & 241 of the transcript).
9
which the products or services provided comprise a relatively few, but extremely
large, ‘lumps’ of infrastructure. For want of a better term, we will refer to these as
‘large project markets’. As will be elaborated below, particular characteristics of these
markets make it difficult to draw the usual inferences from market share data. In
addition the nature of the customer and the particular role of bidding or tendering in
promoting competition in these markets have persuaded us to approve this
transaction.
29. Secondly, we will show that the barriers to entry are markedly lower than first
impressions suggest.
Large project markets
Market Shares
30. In each of the submarkets postmerger market shares are, on the face of it,
extremely disturbing although there are significant differences between the merging
parties and the Commission regarding precise market shares. 27 In shaft sinking the
Commission calculates that market shares move from a premerger 24.2% to a post
merger 59.9%. 28 On the other hand, the merging parties’ revised figures indicate
the market share move from a premerger 12.47% to a postmerger 30.85%. In raise
drilling (small holes category) the pre and postmerger market shares, as
determined by the Commission, are 39.6% and 79.3% respectively, while the
merging parties estimate the pre and postmerger market shares in raise drilling at
29% and 58.1% respectively.
31. Although market share data are rarely dispositive and must always be
complemented by an analysis of entry barriers and other dynamic features of the
market in question, they are legitimately and widely used as reliable prima facie
indicators of the competitive temperature in a given market.
32. However, in the submarkets under consideration market share data are to be
approached with particular circumspection. This is simply because the markets –
approached with particular circumspection. This is simply because the markets –
substantial though they are – are composed of a small number of extremely large
contracts and that an individual firm’s victory (or defeat) in a single tender may
impact significantly on aggregate market share data. In the shaft sinking submarket,
Shaft Sinkers is currently undertaking some 9 out of 12 active projects, with
Cementation responsible for the remainder. 29 M&R is, currently, not engaged in a
single shaft sinking project. However, were a new entrant to gain a foothold in a
market such as this – and the prospect of that happening is examined below – its
gain in market share would not accumulate in the incremental fashion associated
with most other markets. Were it to win one of the larger tenders it would be
immediately propelled into the first league of participants in the market – on present
performance it would give it a larger, actual market share than M&R itself. And
conversely of course, failure to be awarded a significant contract may result in an
immediate and precipitous decline in market share. For example, Shaft Sinkers,
which was until relatively recently a division within the Anglo American stable, has a
27 At the hearing, the Commission accepted some of the merging parties’ arguments and conceded that
the market share figures as portrayed in its recommendation should be appropriately reduced.
28 Refer to page 12 (paragraph 5.16) of the Commission’s mergers and acquisitions report.
29 Refer to pages 65, 238 and 239 of the transcript.
10
particularly significant share of Anglogold and Lonmin’s shaft sinking work indeed
the witness from Shaft Sinkers all but presented this as a captive market, work for
which his company did not even have to tender. Were this privileged position to be
compromised in any way, a major realignment in market shares may result.
33. For these reasons we cannot readily infer low levels of competition from the high
levels of concentration apparent in these submarkets – they are always likely to be
high but the identity of the players occupying these heights may nevertheless be
unusually susceptible to rapid change.
Countervailing Power
34. Merging parties frequently argue – as they do in the present matter that the
market power that might accrue to them as a result of the merger is blunted by the
countervailing strength of their customers. It is not an argument that has always
found favour with this Tribunal. We have elsewhere questioned the glib notion that
large, wellresourced customers are necessarily better able to resist a monopolistic
supplier of an important good or service than are less privileged consumers. Indeed,
the customer best able to resist – or, better termed, to accommodate – the exercise
of market power on the part of a supplier, is precisely one that enjoys market power
vis a vis its customers and, hence, is able to pass on an increase in the price of an
important input to its own customers. This, as we have pointed out elsewhere, may
serve to allay the concerns of the direct customers of the merging parties, but it is
cold comfort to the end consumers. 30
35. However, the customers of the merging parties in this transaction, for all their
undoubted purchasing power and sophistication, are, for the most part, price takers
in their own product markets. This is certainly true of the gold producers, and while
the platinum producers may be better placed to influence the price of their output,
the platinum producers may be better placed to influence the price of their output,
this influence, if it exists, is indirect at most. In other words, the mining companies
have little or no ability to pass on cost increases to their customers and so the
incentive to resist upward pressure on the cost of their key inputs is considerable.
36. Bear in mind, also, that shaft sinking and raise drilling are important parts of the
initial capital investment and are carefully costed by groups of experts in the
permanent employ of the mining companies or by consultants retained for this
purpose. At the end of a lengthy process, the mining company’s board of directors is
presented with a project, the viability of which is critically dependent upon the scale
of the initial capital outlay. Only after approval has been obtained from the Board do
the mining company managers go out to the market in order to procure the capital
goods and services that are the necessary precursor to undertaking the business of
mining. And they do so within parameters established by their own experts and
approved by their Board of Directors – to overshoot on the initial capital outlay is not
only to flout a specific board decision but it is also to tamper with the very
assumptions that underpinned the decision to undertake the project in the first place.
This, we are persuaded, is to be distinguished from the daily purchase of working
inputs where it is possible to accept cost overruns occasioned by exercises of market
power without thereby threatening the underlying viability of the project.
30 See Competition Tribunal case Daun / Kolosus : Case No.: 10/LM/Mar03.
11
37. We are satisfied, then, that the inability to pass on cost increases coupled with
the character of a large capital investment project will powerfully incentivise the
mines to resist attempts by the merging parties to exercise market power. We are
also persuaded that the mining companies have the ability to act on this incentive.
38. Indeed, the presence, inside most of the established mining houses, of staff
effectively responsible for representing the customer in its purchases of technically
complex goods and services is, arguably, the most important source of countervailing
power – it addresses the massive informational asymmetries that characterise the
interplay between, on the one hand, a purveyor of a technically complex product,
and, on the other as is frequently the case, an infinitely less knowledgeable
customer. Nor is it surprising that the mines should possess this countervailing
power, this internal capacity. It manifests the importance attached by the mines to
their purchases of capital equipment and services. Whether from a managerial,
financial or safety perspective, it is inconceivable that purchasers of capital
equipment and services on this scale and of this type would subordinate their
decision making capacity to their suppliers. This is, of course, why, until relatively
recently, most shaft sinking and raise drilling work was undertaken inhouse and why
there remains, to this day, an unusually close connection between, on the one hand,
the division of the mine responsible for undertaking feasibility studies for new capital
investment, and, on the other, the senior personnel of the shaft sinking and drill
raising providers.
39. In short, we are persuaded that the mines possess countervailing power not
simply by virtue of their size and importance – indeed unlimited financial resources
may render them particularly susceptible to powerful suppliers. It is rather their
may render them particularly susceptible to powerful suppliers. It is rather their
vulnerability to cost overruns on their critical capital investment projects coupled with
their inability to pass these on to their own customers that provide a particularly
powerful incentive to resist an exercise of market power in the relevant markets
under consideration. And this, in turn, compels the mines to retain an internal
capacity capable of matching the technical sophistication of their input suppliers.
40. While the right incentives and technically competent staff go a long way towards
understanding the countervailing power possessed by the customers of the merging
parties, they are not sufficient. The ability on the part of the suppliers to exercise
market power is further weakened by the manner in which large capital investment
tenders are solicited and awarded. We turn now to a consideration of these factors
broadly grouped under the heading ‘bidding markets’.
Bidding Markets
41. The manner in which project specifications are developed and in which tenders
are adjudicated limit the ability to exercise market power. We will group these
features under the heading ‘bidding markets’ although not all are, strictly speaking,
features that belong to bidding markets alone. Nor, we hasten to add, are all bidding
markets equally capable of limiting the ability of their participants to exercise market
power. There appears to be no particular reason why the existence of bidding
markets should prevent an exercise in market power in the market for providing, for
example, protective clothing or explosives or some other input that is required by the
mines on a regular basis. There may be other reasons why confidential bidding is
12
preferable in markets in which working equipment is supplied on a relatively small
scale and on a regular basis – it may limit corruption, it may provide the appearance
of fairness and contestability and, as such, may, from a governance perspective, be
preferable particularly where a public entity is the purchaser – but it does not
necessarily provide a greater degree of protection from market power. However, we
are persuaded that bidding markets do provide a considerable counter to the
exercise of market power where the product or service that is the subject of the
bidding is a large, lumpy capital investment project.
42. As already intimated, the prospective purchaser of a large capital investment
project does not go to market with an approximate idea of the prices and quantities at
which he wants to purchase, say, protective clothing, ideas that are usually based on
what he paid in the last, usually quite recent, round of purchases of the identical
products. Rather the purchaser of a large capital investment project approaches
prospective suppliers after an extremely detailed round of technical investigations
conducted by its, that is, the purchaser’s, own expert employees and consultants and
after several rounds before experienced board committees and the board of directors
itself. In this process, the detailed requirements of the project – inevitably quite
distinct from other shaft sinking or raise drilling projects – are specified. The
technical features of the project and the attendant risks are evaluated. Detailed
forecasts are undertaken of likely market conditions for the product that is to be
mined and, again, the attendant risks are evaluated. Financial models are built and
mined and, again, the attendant risks are evaluated. Financial models are built and
evaluated. The technical, financial and other relevant parameters of the project are
specified. Detailed knowledge of the costs entailed in performing the specified
project – including labour and material costs – is brought to bear on the decision
making process, combined, naturally, with a sophisticated understanding of the
impact on costs of a range of imperfectly known factors from interest rate or
exchange rate shifts to variable geological conditions. In short the purchaser
understands what is required from a technical standpoint, how much he is willing to
pay and, within quantifiable limits, what could go wrong. Not all of this knowledge will
be revealed to the prospective suppliers but it will be in the possession of the
purchaser and the seller will clearly appreciate the extent of the purchaser’s
knowledge.
43. In short, the client sets, at a high level of detail, the terms of the bid. These
parameters are then communicated to a preselected group of prospective suppliers.
These prequalifying bidders are then given access to a data room and to the site of
the project. A series of exchanges then takes place between the client and the
bidders. The fruits of these various exchanges are communicated to each of the
bidders. However, the individual bidders are not given sight of the proposals of their
competitors.31 The client ultimately conducts a confidential review and selection
process. Because the client stipulates the design and the key specifications of the
project, specifications which have to be met by all of the bidders, the critical, if not the
sole, criterion governing the ultimate selection is price.
sole, criterion governing the ultimate selection is price.
31 The witness from Shaft Sinkers cast doubt on the actual confidentiality of the bidding process.
Certainly he claimed – quite plausibly – that the unsuccessful candidates were, through the grapevine
of a small and tightly knit community, made aware of the size of the successful bid. Through this
knowledge, he inferred – again quite plausibly – that price was not the only criterion governing a
successful bid. He did however acknowledge the overriding importance of price particularly where the
price of the mined commodity itself was under price pressure.
13
44. Although, theoretically, there is nothing to prevent the client from dividing up
discreet pieces of the project between various providers, it appears that the norm is
to make a single award although it is common for the lead bidder to assemble a
consortium of bidders. At times a particular company is invited to join a consortium
because it possesses skill in a particular area of the project that is not within the core
competence of the lead bidder. Or a consortium partner may lend financial security
to the project. Or, and this is elaborated below, a consortium partner may bring the
necessary local knowledge and experience that its partners are unable to
demonstrate.
45. However, once the award is made, the winner, be it in the form of a single bidder
or a single consortium of bidders, takes all. And, unlike an award for the supply of
some or other element of working capital, in this case the award will usually account
for a not insubstantial share of the successful bidder’s total activity going forward.
Nor is there any particular reason to expect a second bite at the cherry in the form of
another tender offered by the same client – that is, the award may well account for a
substantial share of the total market.
46. It is this combination of factors that persuades us that the markets in question are
competitive and that, despite the elimination of an important competitor and
apparently high levels of concentration, they will continue to exhibit high levels of
competition. In summary, because the project is specified to a high level of detail by
an unusually sophisticated client, there is little basis for competition other than price.
While the competing bidders share knowledge of the technical specifications of the
contract, the individual bids and the ultimate award are confidential. And the winner
takes all of a project that is likely to loom large in the total amount of work available to
takes all of a project that is likely to loom large in the total amount of work available to
each bidding company. A useful analysis (not least, because it was not specifically
commissioned for this merger) of bidding markets by Lexecon, a group of
consultants, expressed it thus:
“In bidding markets, each bidder will want to submit the highest cash bid that
it believes will secure the contract, taking into account other factors such as
quality and the likely bids of other bidders. If a bidder bids too high and loses
the contract then it has gained nothing.
In these circumstances competition for a given contract does not necessarily
increase as the number of firms increases – as long as there are at least two
firms capable of making credible bids, competition can be as vigorous with
two firms as with three or more. Even if there is only one rival bidder, bidding
any price but the lowest results in no sales whatsoever.” 32
47. It is appropriate to add here that these factors have also served to ameliorate
concerns around possible postmerger collusion between the merged entity and
Shaft Sinkers as well as possible postmerger predation on the part of the merged
entity.
48. In any ‘3 to 2’ merger, the prospect of postmerger collusion must loom large. 33
32 See ‘When Two is Enough’ – Lexecon Report – June 1995 www.lexecon. co.uk
33 While we refer here to the extreme of a ‘3 to 2’ merger, in fact our conclusions regarding potential
entry or, more accurately, the role and presence of credible bidders (even if not always active
participants) implies that this is not a ‘3 to 2’ in the sense in which this is usually understood.
14
However, even if we discount the prospect of new entry, we believe that collusion
between Shaft Sinkers and the merged entity is an unlikely outcome of this
transaction.
49. In a bidding market collusion would take the form of bid rigging. The features of a
‘large project’ market will constrain this. Firstly, the customers’ detailed knowledge of
the activities in question will make it extremely difficult to construct a collusive bid that
does not invite detection by the customers. Secondly, the opacity of the tendering
process atomises the sellers and makes it extremely difficult for colluding sellers to
detect cheating on the part of their coconspirators. And, thirdly, this is a market
where the incentive to cheat is enormous – insofar, of course, as the cheat stands to
gain a multimillion rand contract that may represent a substantial share of total work
available – but where, because of the onceoff nature of the product or service sold,
the means to punish cheating are all but nonexistent.
50. Similar considerations cast doubt on the argument that the transaction will
incentivise and better enable the merged entity to engage in predatory pricing. In the
wake of this transaction, argue the proponents of the view, there will be two active
participants in each of the shaft sinking and the raise drilling market, these being,
respectively the merged entity and Shaft Sinkers and Master Drilling. In each sub
market then the merged entity is but one competitor away from achieving a
monopoly. This provides a powerful incentive to the merged entity to adopt
strategies aimed at excluding its remaining competitor in each of the markets. The
financial strength of the Murray and Roberts group will provide the wherewithal to
employ predation as the exclusionary strategy. It was, indeed, intimated, although
strongly denied, that Cementation’s aggressive pricing strategy may already be
tantamount to predation.
tantamount to predation.
51. In fact, we consider predation in a large project market to be a particularly risky
strategy. The predator must be reasonably confident of its ability to eliminate its
competitor through predation. And, then, of course, the predator must be similarly
confident that it will, through the exercise of postpredation market power, be in a
position to recoup the losses suffered as a result of the predatory scheme. Neither
proposition appears credible in the markets under consideration. Simply put, initiating
a predatory scheme in a large project market implies a willingness – and the
considerable means – to sustain a loss on a contract that may constitute a very
significant part of the predator’s total share of the market, in fact it may constitute a
sizable portion of the total market. And, of course, it may not be sufficient to predate
on one contract – it may imply a willingness to sustain a loss on a number of
simultaneous and equally large contracts. Moreover, if the scheme is successful and
does result in the removal of the competitor from the market, the timing of the
payback, of the recoupment, is, at best, uncertain. It may present itself immediately.
Or it may take several years to acquire a contract that will enable the predator to
recoup the losses sustained during the period of predation. The predator has,
accordingly, not only to have confidence in his ability to remove his competitor
through predation, he has to be confident that the monopolistic structure created by
the predation will still prevail when the opportunity for recoupment presents itself.
The predator has, in other words, to take a view on market conditions stretching
some considerable time into the future.
some considerable time into the future.
52. In our view, then, there is no serious threat of predation in this market. This is, of
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course, not to say, that competitive conditions may not result in bidding on very
narrow margins, and that this may result in the successful bidder sustaining
significant losses on a contract. However, in this eventuality, it is the bidder itself that
will (as appears to be the case with BTX) sustain the harm arising from a
commercially imprudent strategy, which is not to be confused with the logic of
predation.
Barriers to entry
53. We have already noted the existence of apparently high barriers to entry. To
recap, it is clear that the financial strength required to enter the submarkets under
consideration and to credibly bid for the massive contracts characteristically at stake,
is considerable. So, also, are the skills required. We have also been told that the
mines, in awarding tenders, place considerable store in the ‘track record’ or level of
experience of the bidders, in particular, of the teams that will actually undertake the
complex tasks that characterise these activities. ‘Cultural’ barriers and geological
specifities constrain the entry of foreign competitors, as do more prosaic, but no less
significant, factors like exchange rate volatility.
54. As already elaborated, we are persuaded that the features of a bidding market,
particularly one in which the product or service takes the form of a large, lumpy
project, ameliorate the anticompetitive significance of high levels of concentration.
We would, nevertheless, be hard pressed to approve a three to two merger in
circumstances in which we deemed new entry to be an unlikely prospect.
55. The record indicates that the parties themselves do not have a high opinion of
their South Africanbased competitors – except, of course, of Shaft Sinkers in the
shaft sinking submarket and of Master Drilling in the raise drilling submarket both of
whom are rated very highly and who are, arguably, the leading firms in their
whom are rated very highly and who are, arguably, the leading firms in their
respective submarkets. As for the prospect of new international entrants, it appears
to be common cause that international companies are unlikely new entrants.
What, then, are we left with?
56. Firstly, we are persuaded that the customers themselves – that is, the mining
companies – are, in the face of an exercise of market power on the part of their
providers, capable of entering the market themselves. Or, certainly, they are capable
of facilitating new entry on the part of alternative suppliers and consortia should this
prove necessary.
57. Secondly, while new entry by South African firms or by international firms acting
on their own or, as the merging parties put it, ‘ in their own right’, may be
discounted, we are persuaded that consortia of international and local firms may
prove, and already have proved, to be credible new entrants in these submarkets.
58. As will be elaborated, our assessment of potential new entry is underpinned by
the combined effect of the mining companies’ countervailing power, by the features
of what we have termed a large project market, and by the characteristics of a
bidding market.
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59. Let us first examine the prospect of the mines themselves entering – or, rather,
reentering – the various submarkets in which the range of infrastructural products
and services are provided. In particular we will examine this prospect in the sub
markets of shaft sinking and raise drilling.
60. It is instructive to recall that each of the three major shaft sinking providers were,
until relatively recently, aligned to one or other major mining house. Hence, until a
mere two years ago, Shaft Sinkers was part of the Anglo American stable; M&R RUC
was, until 1997, part of what is now the BHP Billiton group; and Cementation was,
until six years ago, part of the Goldfields group.
61. We are, in fact, persuaded that these relationships, the fact that, in the relatively
recent past the South Africanbased shaft sinking companies were owned or part
owned by one or other of the major purchasers of shaft sinking services, is one
important reason for the limited penetration of international firms into the South
African shaft sinking market. The witness from Shaft Sinkers boasted of his firm’s
privileged relationship to Anglogold, suggesting that much of Anglogold work in this
area was not even put out for tender, but simply awarded to Shaft Sinkers, their
previous associate. It is our view that as these historic relationships work themselves
out, as the association between each of the shaft sinking firms and their erstwhile
mining house partners becomes more attenuated – and this merger is part of that
process – international firms will perceive the South African market as more
susceptible to new entry.
62. It appears, moreover, that certain of the mining companies continue to undertake
significant shaft sinking work inhouse. Hence, while conceding that shaft sinking is
highly specialised work which the mines prefer to contract out to specialist providers,
the witness from Impala Platinum indicated that his company has constructed 10
(ten) of its 15 (fifteen) shafts itself. 34 In general, it appears that the mining
companies continue to undertake a significant proportion of the shaft construction
and development work inhouse with outside contracts only accounting for 28% of
the capital expenditure involved. 35
63. With respect to raise drilling it appears that the Anglo American group has
retained significant capacity to undertake this work inhouse. Hence we were told
that Anglo American possesses 23 drill raising units. Master Drilling, the leading
provider in this submarket, owns only 25 of these units, only one of which is capable
of drilling very large holes. 36
64. We have, in our discussion of countervailing power, already commented, at some
length, on the inhouse technical capacity that each of the mining houses retain in
order to prepare the tenders and to evaluate the bids received. We must bear in mind
that the companies retain on their books a core permanent staff that, it appears,
undertakes work similar to that undertaken by the core capacity retained by the
mining companies themselves. That is, they identify the tenders and they engage
with their prospective clients, the mining companies, in preparing their responses to
the tenders. Once the tenders are awarded, the successful bidder then sets about
assembling the team necessary to undertake the actual work. Indeed a witness from
34 See Mr Jagger’s testimony on page 85 of the transcript.
35 Refer to page 301 of the record.
36 See Andre van Deventer’s testimony, page 284 of the transcript.
17
one of the mining companies indicated that, along with price and the financial
strength of the bidding party, the composition of the team that would undertake the
actual work was a critical factor in the evaluation of a bid. 37
65. It appears that, in order to assemble an effective team, each company retains a
valuable database of prospective employees – including, of course, those who may
be in the permanent employ of, or temporarily contracted to, opposition companies.
Each witness emphasised that the members of this labour force are well known
across the industry and that it is a labour market characterised by its mobility and
flexibility. At the highest level of skill, the members of this work force regularly move
between companies and regions of the country (and, indeed, the world) as they
respond to the demand for their highly valued services. There appears to be no
reason why the mines – given the project leadership capacity that they retain in
house – should not avail themselves of this peripatetic labour force should they elect
to undertake the projects themselves.
66. This, in our estimation, is the key challenge to the barriers to new entry because
even if the mines are reluctant to undertake the actual shaft sinking or raise drilling
work themselves, they clearly have the inhouse knowledge to specify their
requirements, and then, critically, to identify, assemble and supervise the consortia
necessary to undertake them.
67. But are alternative consortia available? In other words, should the mines elect
not to undertake the projects themselves are there alternative external providers to
whom they could turn and who are likely to enter credible bids to undertake work of
this nature? We are persuaded that there are and that consortia composed of
international and domestic firms are the most likely new entrants.
68. There are clearly credible international companies active in the shaft sinking
arena. The Canadian firm, Redpath, has been frequently mentioned, as has
Dilemann Haniel, the German firm, and there is the Australian provider, Brandrill.
Each of these already enjoy a presence in the South African market and they have
invariably achieved this through forming consortia with local firms. There are, on the
other hand, local South African firms who are financially sound and who have
considerable experience of leading large infrastructural projects – Concor, LTA and
Grindrod were mentioned – who could, in cooperation with international shaft sinking
firms, enter credible bids. Many of these are companies that have undertaken
significant work on the mines although not necessarily in shaft sinking or raise
drilling. We should also add that South African firms experienced in the management
of large infrastructural projects in combination with international shaft sinking firms
would have access to the same mobile labour force on which the mines, the merging
parties and Shaft Sinkers currently rely.
69. The mining companies are, through the tendering process, capable of facilitating
the formation of consortia. It appears that tenders and the contracts subsequently
awarded are often split up on an Engineering, Procurement and Construction
Management (“EPCM”) basis where design is done internally or by one firm,
materials being procured from other suppliers whilst the contractor effectively
provides only a specific construction service.
37 See page 87 of the transcript.
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70. We take comfort from evidence of actual entry by these consortia. For example,
Mr. Fourie, the witness from Shaft Sinkers, testified that his company had
successfully submitted a joint tender with Dielmann Haniel on the important
Buffelsfontein Chrome project – this consortium was awarded a R500 million for
undertaking the first phase of the project. This would, as argued by the merging
parties, presumably have well positioned Shaft Sinkers together with its partner to
tender for the second phase. 38 It appear that Dielmann has participated in a number
of joint projects for the purposes of tendering on certain business, including with
M&R.39 The parties also referred us to the entry into the shaft sinking submarket of
Brandrill (an Australian company) which acquired Torrex, a local company 40, and as
a result won significant market shares in this submarket. In his testimony, Mr Les
Jagger indicated that Impala Platinum has invited bids from five potential providers
including Shaft Sinkers, Cementation, Murray & Roberts, Grinaker LTA and Dielmann
Haniel for a major shaft sinking project planned by the platinum giant. He added that
about 8 years ago there was a shaft that was sunk at Beatrix Mine in the Free State
by a Brazilian company. 41
71. It also appears that there are projects in which part of the work is undertaken by a
contracting company and part by the mining company itself. For example, the shaft
sinking project at Boschfontein in Rustenburg was partly undertaken by Anglo
Platinum itself.
72. We should add that, in the context of a bidding market of this nature, we must,
when assessing credible new entry, be persuaded that there are credible alternative
bidders, that is, alternative potential providers who, by virtue of entering a bid of their
bidders, that is, alternative potential providers who, by virtue of entering a bid of their
own, are thereby able to restrain an exercise of market power on the part of the
merged entity. They do not actually have to win the bid in order to establish their
presence in the market. As already noted M&R is not actively undertaking any
existing shaft sinking contracts and yet it is clearly and legitimately perceived as a
significant actual participant because, regardless of its current lack of success in
acquiring contracts, it is perceived to be capable of actually undertaking shaft sinking
work. Hence, M&R is a credible bidder. Therefore extant providers of shaft sinking
contracts like Shaft Sinkers and Cementation will, in preparing their bids, be
restrained by the prospect of M&R submitting a successful competing bid. Similarly,
although Cementation enjoy a small share of existing raise drilling contracts, those
currently active on a significant scale in this submarket – namely, Master Drilling and
M&R will, in preparing future bids, look over their proverbial shoulders at
Cementation because they are viewed as credible bidders for these contracts. A
critical fact in our decision to approve this transaction is our assessment that there
are in existence credible bidders for both shaft sinking and raise drilling contracts
even though certain of these may not have ever participated in a shaft sinking or
raise drilling contracts in this country or, indeed, at all. We are, as indicated in our
discussion of relevant markets in the province of the provision of mining
infrastructure. We are persuaded that there are South African firms experienced in
the provision of mining infrastructure and in managing other large engineering or
38 See page 313 of the transcript.
38 See page 313 of the transcript.
39 See the merging parties’ close submissions, page 316 of the transcript.
40 See footnote 12
41 See page 8788 of the transcript.
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construction projects who could team up with an international shaft sinking or raise
drilling firm and make a credible bid for a contract in one of those markets. By the
same token, there are well resourced, highly regarded international shaft sinking
firms who could team up with South African firms possessing local knowledge,
connections and experience and, in this combination, could lead a credible bid for a
shaft sinking contract.
Conclusion
73. We accordingly find that there is no substantial lessening or prevention of
competition in the relevant markets. No public interest issues militate against the
approval of this merger. Hence the transaction is approved unconditionally.
______________ 28 June 2004
David Lewis Date
Concurring: Phatudi Maponya and Merle Holden
For the merging parties: Adv. David Untenhalter SC instructed by Robert Legh &
Nikki Bush (Bowman Gilfillan Inc.)
For the Commission: Lungile Oliphant (Legal Services) assisted by Martin van
Hooven (Mergers & Acquisitions)
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