COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 08/LM/Feb04
In the large merger between:
LNM Holdings N V
and
Iscor Ltd
________________________________________________________________
Reasons
________________________________________________________________
Introduction
On 8 June 2004 the Competition Tribunal approved the merger between LNM
Holdings N.V. and Iscor Limited. The reasons for approving are set out below.
Iscor was founded in 1928 by the South African Government and was privatised
in 1989. Since the unbundling of Kumba (previously Iscor’s mining division) in
2001, Iscor has become Africa’s largest steel company. It produces iron and
steel at four plants in South Africa, at Vanderbijlpark, Saldanha, Newcastle and
Vereeniging.
Established in 1976, the LNM Group is the second largest steel maker in the
world. It operates steel making plants in 13 countries and is a major supplier to
the automotive industry and the appliance industry in the European Union and
North America. It has a history of acquiring government steel facilities that under
perform and thereafter improving their operating performance. Since 1989 it has
made 11 acquisitions in ten different countries: Algeria, Canada, France,
Germany, Kazakhstan, Mexico, Romania, Trinidad Czech Republic and the USA.
The transaction
In 2001 LNM bought 34.8% of the issued shares in Iscor on the JSE and entered
into a threeyear Business Assistance Agreement (“BAA”) with LNM. The BAA
was concluded at the time of the unbundling of Iscor, with a view to assisting
Iscor in improving efficiencies and costsavings. By receiving new technology
and skills from a global partner it was believed that Iscor could participate more
effectively in the global steel industry. LNM, in terms of the BAA, provided
business, technical, purchasing and marketing assistance to Iscor. As part of the
BAA, LNM undertook to invest in Iscor shares and in February 2003, LNM
increased its shareholding to 47%, following an offer to minority shareholders.
In terms of the BAA, Iscor remunerated LNM at the end of 2003 for its technical
assistance in ensuring that Iscor achieved the specific threshold cost saving
levels. 1 Pursuant to this remuneration LNM is, in terms of the BAA, acquiring a
further shareholding in Iscor, which will result in LNM holding 50% of Iscor’s
issued share capital. The parties claim that LNM will control Iscor subsequent to
this transaction.
The parties
The primary acquiring firm is LNM Holdings B.V. (“LNM”). LNM is a wholly owned
subsidiary of Richmond Investments Holdings Ltd (“Richmond”), registered and
incorporated in the British Virgin Islands.
The Mittal family owns the entire share capital of Richmond. The LNM group
consists of LNM Holdings N.V., Ispat International and Ispat Indo.
The target firm is Iscor Ltd (“Iscor”). Iscor is a public company listed on the JSE
securities exchange. The parties submit that no single shareholder currently
controls Iscor. Its two major shareholders are LNM, holding 47.23%, and the IDC
with 8.79%.
Rationale for the transaction
According to the parties the BAA is due to terminate at the end of 2004, and it is
LNM’s policy not to release its proprietary technological knowhow to entities that
LNM’s policy not to release its proprietary technological knowhow to entities that
1 LNM was initially remunerated in the form of Iscor shares but this was amended in December 2003 to
provide for payment in either shares or cash. See Iscor Limited Group report 2003 page 98.
2
it does not control. Once LNM controls Iscor, it is prepared to provide Iscor with
proprietary technology as well as give access to certain proprietary marketing
and procurement processes that will improve Iscor’s competitive position in the
international market. Iscor recognises that in order to participate in the global
steel industry, it needs LNM’s continued assistance as an international steel
partner.
Relevant market
Both Iscor and LNM compete globally on the steel market. Both companies
produce flat and long steel products, wire products and coke and both are
involved in shipping services 2.
The largest competitors in the global steel market are:
Competitors Market Share Total Steel
Production %
Arcelor 4.8
LNM 3.8
Nippon 3.3
Posco 3.1
Shangai 2.2
Iscor Less than 1%
Post the merger, the combined market share of Iscor and LNM would be less
than 5% of world steel production. Iscor will represent 14% of the LNM Group’s
turnover post the merger. 3 According to Iscor’s Limited Group Report 2003 of all
the operations in the LNM Group its steel shipments are the largest. 4
In 2003 LNM, through its European subsidiary Ispat Trefil Europe, made direct
steel sales into South Africa of 155 metric tonnes and in 2002 indirect sales of
1299 metric tonnes through steel merchants. These sales represent less than 1%
of total steel sales in South Africa and, according to Iscor, had no effect on its
2 Ispat Shipping acts as shipbroker for LNM and does not provide services to third parties. Iscor through its
associate company, Macsteel, does not provide any shipping services to LNM.
3 The LNM Group consists of LNM Holdings Group, PT Spat Indo and Ispat International.
4 This is not to suggest that we accept the merging parties view that the market is an international one. We
do not need to decide that question here and we have proceeded to examine the merger from the point of
view that the market may be a domestic one.
3
steel pricing policy. 5
Iscor’s products are priced at import parity and it provides various discount
programmes such as volume discounts, rebates for value added exports, and
strategic rebates to its customers.
Analysis
The merger raises three possible concerns that we evaluate separately. They are
whether
1) LNM as a potential competitor of Iscor might have had an effect of
constraining Iscor’s pricing policy.
2) Iscor with LNM, as an owner and a global steel player, will have different
incentives to an Iscor with no dominant shareholder
3) LNM, as the controlling shareholder, will embark on a policy of
retrenchments that the existing Iscor would not have.
Potential competition
LNM cannot be considered a participant in the local market – from what we have
seen above, its sales in South Africa over a threeyear period are too erratic and
too small. However LNM may still have had an effect on the domestic market if
Iscor perceived it as a credible potential entrant and constrained its prices
accordingly. There appears to be no evidence that this is the case. Whilst Iscor,
as we discuss below, does have a policy of strategic discounts, which seems
premised on discouraging imports, it does not appear to fear entry from any
particular manufacturer. Rather, it appears more concerned that steel merchants
will become a source for imported products on a sustained basis.
For its part LNM does not appear to favour grassroots entry. Rather, as its history
illustrates, its strategy has been to acquire incumbent firms with the potential for
turnaround. That suggests that other than through acquisition, it was an unlikely
entrant. Would LNM if it wished to enter the South African market have acquired
another firm that competes with Iscor? Given Iscor’s size in the local market, and
its own willingness to seek a strategic technology partner, it seemed the only
likely target for LNM, if it was to consider a local acquisition.
likely target for LNM, if it was to consider a local acquisition.
5 LNM also sold 329 metric tons in 2001 and 47 MT in 2002 in the South African market.
4
For this reason we conclude that LNM presence in the international market had
no constraining effect on Iscor in the domestic market and the merger raises no
potential competition issues.
Change in incentives due to the change in control
Another possible way in which competition might be affected by the merger,
would be if LNM had different incentives to the current Iscor management that
might alter the manner in which the company behaved.
In order to explore this issue we called, as a witness, Simon Nash who is the
executive chairman of Cadac, a manufacturing company who manufactures
industrial gas cylinders, barbeques, cookers and various other appliances. Mr
Nash has recently been an outspoken and articulate critic of Iscor’s pricing
policies and we felt that we would benefit from hearing his perspective on this
point.
Cadac is one of the quintessential South African brand names. The word braai
and Cadac have become inextricably coupled in the local culinary lexicon. Yet no
longer, according to Mr Nash, will there be this association, for the proverbial
cooking cylinder bearing that name has exited the market. Its demise, says Mr
Nash, is due to high steel prices. Steel constitutes 60% of the retail price of a
cylinder and his product is no longer competitive against rival imports. Cadac,
which once had 100% of the cylinder gas market, now has none.
Mr Nash makes a number of interesting claims. Firstly, his domestic customers
can purchase an imported, fully manufactured cylinder at a price lower than what
he pays the steel merchants for the steel that goes into a cylinder. Secondly, that
one competitor from Portugal is able to buy steel from Iscor, import it into
Portugal and then sell its finished cylinder in South Africa at prices much less
than he can achieve. These differences in price, he blamed on Iscor’s policy of
than he can achieve. These differences in price, he blamed on Iscor’s policy of
discriminating between its domestic and foreign customers.
Cadac's problems stem from a decision made by Iscor a few years ago to stop
manufacturing steel in 5ton coils and to sell only 20ton coils. Since Cadac
requires the steel it purchases to be in 5ton coils it was forced to purchase from
local steel merchants who purchase from Iscor and then cut the steel to the
required size. Unfortunately for Cadac the price of the steel subsequently
rocketed.
Mr Nash complained regularly and was led a merry dance by the merchants and
5
Iscor, each of whom blamed the other. Nor were merchants any more
forthcoming about importing steel. He says a request for another source was
ignored for a year by one of the merchants. 6
Even though his firm was eligible for an export rebate this was negligible and
could not make him competitive with foreign rivals importing into South Africa.
The question put to Mr Nash was whether the acquisition of LNM would make his
firm’s situation any different to what it was. His view was that it could. In
conversations he had had with senior executives from the steel merchants he
had been told that Iscor had become far more aggressive about the way in which
it priced since LNM had acquired its interest.
We have no reason to doubt that this is what Mr Nash has been told. However,
what we may be witnessing is an attempt by the merchants, and possibly
incumbent Iscor management, to find a scapegoat for a pricing policy that the
firm would adopt, regardless of the identity of the controlling shareholder. Iscor’s
pricing policy, warts and all, suits shareholders, whether they reside in London’s
most expensive home or a more modest local hovel. They are the actions of a
rational profit maximising firm enjoying Iscor's position in the domestic economy.
We are not here to decide whether Iscor is allegedly abusing a dominant position
we are only called upon to decide whether the acquisition of control by LNM will
lead to a substantial lessening of competition from what it is now. In a nutshell,
although they have of course not expressed it as such, Iscor and LNM’s case is
that it makes no difference since it cannot get worse. Iscor candidly states its
prices at import parity (‘IPP’) while LNM candidly states that it:
“made its decision to invest in Iscor on the basis that Iscor prices steel
consistent with the prevalent global steel markets. “ 7
consistent with the prevalent global steel markets. “ 7
But there are some nuances to the import price parity model that we must
consider. Firstly Iscor does not uniformly charge up to IPP and there are
occasions for departure. Mr Charles Dednam, a senior executive at Iscor
responsible for pricing and marketing policies, testified that Iscor offers a number
of strategic discounts and rebates to its customers i.e. at prices less than IPP. It
appears that the policy is premised partly on encouraging firms that beneficiate
steel to enter export markets and partly to protect its back from other products or
producers, hence the use of the word ‘strategic’ discount.
6 Mr Nash testified that when he asked an executive of Trident Steel, one of the large merchants, why they
wouldn’t import steel for him he was told: “ Simon we only deal with Iscor ”.
7 Record page 786
6
Will an independent controller still have the incentive to provide these discounts?
Mr Dednam assures us that due to their strategic nature they are the type of
discount policy any controller would adopt. In other words they are a function of
Iscor’s market position not some sentiment infused by patriotic jingoism that only
a local controller would exhibit.
It is worth noting, that not only does the discount system extend to only a small
fraction of the steel traded domestically, but also that when granted is of little
substantial relief to the customer. Thus even if it were to be discontinued by LNM
or drastically reduced, it would not have much effect on the market. As Mr Nash
put it in his testimony when we asked him whether the R200 per ton rebate would
have made him competitive with his Portuguese rival:
“No, we need R 2000 a ton, not R200.” 8
Nevertheless, interesting in this regard has been the initiative of the Department
of Trade and Industry (DTI). Concerned over complaints that it had received from
downstream domestic purchasers that high steel prices from Iscor were making
them uncompetitive, the DTI made overtures to LNM to enter into an agreement
over what the DTI terms a ‘developmental pricing model’. The DTI has explained
its motivation. While it recognises that the investment of LNM will lead to much
needed efficiencies in Iscor’s operations it is also concerned over the
competitiveness of the downstream industry. The DTI wants Iscor to pass
through some of these efficiency gains to its domestic customers. It met with
LNM in London in May this year to pursue discussions.
On 5 May 2004 a memorandum of understanding was entered into between the
department and LNM. Although the terms were initially confidential, when asked
to do so at the hearing, the parties agreed to make the contents public.
The DTI indicates that as a result of this agreement its initial concerns about the
The DTI indicates that as a result of this agreement its initial concerns about the
merger have been allayed. 9 The memorandum does not set out the
developmental pricing policy model, but rather provides that:
“LNM commit themselves to – as soon as possible after attaining a
majority shareholding:
8 Transcript page 29.
9 In a letter to the Competition Commission dated 19 February 2004, the then Minister, Alec Erwin, had
written “Accordingly, we wish to advise the Commission that we support the merger between Iscor Ltd and
LNM Holdings subject to agreement – between the companies applying for the merge,r and the Minister of
Trade and Industry on a suitable developmental pricing model for domestic purchasers of steel.” Record
page 712.
7
a. To conclude an agreement with the Department of Trade and
Industry on a sustainable, competitive pricing model to achieve the
objectives as set out in 6. above, provided such model is compliant
with World Trade Organisation rules and principles; and
b. To the implementation of this pricing model.
c. To ensure that Iscor service centres participate in achieving the
objectives as set out in 6. above.
Clause 6 states:
“Whereas LNM desires to develop its liquid steel capacity from
about the existing 6m MT per annum to approximately 9m MT per
annum, including the redevelopment of Saldanha to a level of
approximately 2m MT per annum.”
As this language makes clear the parties have not yet reached an agreement,
but have only agreed in principle to do so. If the existence of this agreement was
material to our decision we may have been concerned with the nonbinding
nature of the memorandum. However, we will consider the merger as if the
agreement had not been entered into – i.e. as if Iscor via LNM as its new
controller had not committed to a new pricing model of the kind envisaged by the
DTI. This is not to suggest that either of the parties is not committed to the further
process, and indeed there is nothing to indicate that they are not – but that for
our purpose we must proceed in a spirit of pessimism and to see that if our
darker vision prevails, there is any greater danger to competition in the absence
of an accord.
Given what we have said above in our view it will not. At worst the status quo will
prevail and that is not a situation created by the merger, but the present structure
of the market.
LNM has, in terms of the BAA, been entitled to appoint two directors to the board
of Iscor and was later given permission by the Iscor board to appoint a further
of Iscor and was later given permission by the Iscor board to appoint a further
nominee. Despite their presence on the Iscor board we are told that LNM’s
nominees recused themselves from discussions over pricing issues. Thus their
future plans cannot be discerned from their conduct on the present board.
It has been difficult of course to predict the behaviour of LNM as a controller not
least of which is due to the firm’s own reluctance to make its intentions known.
Whilst, after some prodding, we were given sight of the due diligence it
conducted when it first invested in Iscor, this exercise did not prove particularly
illuminating. The report was prepared by various consultants and manifested
8
their view of the present Iscor business it did not betray the mind of the putative
controller. Asked at the hearing if there were any documents in existence, which
might have been more revealing of their plans, we were informed by Mr
Maheshwari, the Chief Financial Officer of LNM, that there were not. 10
We are thus in the situation where we know more of Mr Mittal’s plans for his
daughter’s wedding than we do of his marriage with Iscor. Granted, LNM has
provided us with documents stating its group philosophy and brief histories of
how it has approached past investments, the suggestion being that its eventual
plans for Iscor will be consistent with this overall approach. Unfortunately these
policies are stated in the broadest terms and do not suggest how they may
impact on the strategic behaviour of Iscor.
We are thus left to consider the merger from the point of view as to whether the
change in identity of the controller to LNM will make Iscor more likely to behave
in a manner likely to harm competition than it does presently. The short answer is
no.
Effect on employment
We received submissions from two of Iscor’s unions Solidarity and the National
Union of Metalworkers of South Africa (Numsa). Both have understandably been
concerned at the massive reduction in employment that has occurred at Iscor in
recent years. According to figures from Numsa, Iscor’s employment levels went
from 44 000 in 1980 to 12 200 in 2004. Most of these jobs, on these figures, were
lost between 1980 and 1997, thus preceding 2002, the year in which LNM
acquired its first investment in Iscor. 11 Both unions allege that LNM has a
reputation as a job cutter; part of its miracle cure of turning around ailing steel
companies, they say, is to lower the wage bill.
For instance Solidarity states in its submission that it has undertaken:
For instance Solidarity states in its submission that it has undertaken:
“ extensive research on the history of LNM’s layoffs worldwide and related
10 When asked whether there was any written recommendation, which informed the Board on what kind of
an investment it was making Mr Maheshwari answered as follows: “ …at the level of LNM Holdings and
we, for example, which is principally a private company, the process is slightly different than it would be in
a publicly quoted company, for example. Although the essence of it is the same, the process engaged is as
elaborate as it would be in a public company, but when it comes up to the Board, the executive team of the
company, which also includes principally most of the Board members of the company, they have already
participated in the deliberation and the decision making process. So at the end of the day when it comes up
to the Board, there’s basically a formalisation of the decision that has been made in order that any
transaction document can be executed. So, when it comes up to the Board, it would not be as elaborate as
it would be towards the building blocks, reaching to that level. ” See page 98 of the transcript.
11 According to Numsa in 1997 employment was at 18 000.
9
matters within Iscor, and noted media reports on the interaction and relationship
between the Mittal clique and LNM.” 12
Numsa states that:
“LNM and Iscor collaboration has resulted in massive job losses to our
members.”13
LNM denies this and argues that it has had a good relationship with organised
labour when it has taken over. Indeed, LNM submitted much material to
demonstrate the good relationships it develops with the communities where it has
plants.14 But more importantly it argues that the unions have failed to show a
nexus between the loss of jobs and the intentions of LNM.
One of the issues that the unions were initially concerned about was the BAA
that LNM had entered into with Iscor that we referred to earlier in this decision.
Recall, this was the agreement where LNM was to be remunerated with shares in
Iscor in return for introducing cost savings. However, the agreement is clear that
the savings exclude labour savings. The unions have had sight of the agreement
since their initial representations and do not dispute this. LNM also maintains that
it has not been involved in decisions around employment issues. As far as future
employment is concerned it appears that there are no specific plans to depart
from existing Iscor policies.
Neither Numsa nor Solidarity offered any oral representations at our proceedings
relying instead on their written submissions. 15 For this reason LNM’s
submissions on the employment issues have not been refuted. The unions have
alleged, but not established, any link between Iscor's current employment
policies and the influence of LNM. Their absence from the debate at the hearing
has not made their case any stronger.
Conclusion
Therefore, in our view the merger will not have a merger specific effect on
employment policy at Iscor nor will it have an adverse effect on any other public
employment policy at Iscor nor will it have an adverse effect on any other public
interest the Act seeks to protect. Nor, for the reasons we gave earlier, will the
12 Record page 1259
13 Numsa’s submissions dated 3 June 2004, record unnumbered page.
14 By way of example, in Romania where it acquired a plant following a privatisation, it has built a church
near the plant for its workers earning it high praise from the local bishop who awarded Mr Lakshmi Mittal
the Diploma of Great Founder of Holy places.
15 It is worth noting that although the Unions both filed written representations neither chose to be
represented at the hearing, although they were entitled to do so.
10
merger lead to any substantial lessening or prevention of competition. For this
reason the merger is approved unconditionally.
____________ 05 July 2004
N Manoim Date
Concurring: M Holden, U Bhoola
For the merging parties: David Unterhalter with Jerome Wilson instructed by
Anthony Norton of Webber Wentzel Bowens and
Lesley Morphet of Deneys Reitz
For the Commission: Lungile Oliphant together with Johan Liebenberg and
assisted by Mr Geoff Parr
11