Brief Summary

Competition Law — Merger Control — Conditional approval of merger between Inzuzo Furniture Manufacturers (Pty) Ltd and PG Bison Holdings (Pty) Ltd — The Tribunal conditionally approved the merger following a recommendation from the Commission for unconditional approval — Concerns raised by industry participants addressed through negotiated undertakings — The merger facilitates PG Bison's participation in a forestry development project requiring significant capital investment — The Tribunal found that the merger would not substantially lessen competition in the relevant markets.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings concerned the determination by the Competition Tribunal (Republic of South Africa) of a notified large merger in terms of the merger control regime under the Competition Act 89 of 1998. The Tribunal was required to decide whether the proposed transaction should be approved and, if so, whether approval should be subject to conditions addressing any competition concerns arising from the merger.

The merger parties were Inzuzo Furniture Manufacturers (Pty) Ltd (the primary acquiring firm), a special purpose vehicle wholly owned by Steinhoff Africa Holdings (ultimately Steinhoff International Holdings), and PG Bison Holdings (Pty) Ltd (the primary target firm), a holding company operating through subsidiaries and active as a dominant supplier of board products used as inputs in furniture manufacturing. The transaction was structured so that Steinhoff, which already held 34.9% of PG Bison, would acquire the remaining shares and thereby obtain sole control of PG Bison.

The Competition Commission filed its recommendation with the Tribunal on 14 May 2004, recommending unconditional approval. Following a pre-hearing meeting on 21 May 2004, the Tribunal requested additional information from both the merging parties and the Commission. A second urgent pre-hearing meeting was convened on 9 June 2004 at the merging parties’ request, motivated by a commercial deadline linked to a contemplated forestry cluster development project in the Eastern Cape that was said to require a decision before 30 June 2004. Because the Commission was still awaiting further information from industry participants who had raised concerns, the Tribunal expedited the process by subpoenaing selected industry representatives to give oral evidence. The merger hearing took place on 17 and 18 June 2004.

During the hearing, the Tribunal concluded that the concerns raised by certain competitors could be addressed through an undertaking by the merging parties, ultimately incorporated as a condition to approval. On 22 June 2004 the Tribunal conditionally approved the merger; the written reasons (non-confidential version) were issued on 31 August 2004.

The general subject-matter of the dispute was the competitive effect of a vertical merger combining a major downstream furniture manufacturer (Steinhoff) with a dominant upstream supplier of critical board inputs (PG Bison), with specific attention to the risk of foreclosure (particularly input foreclosure) affecting independent furniture manufacturers.

Material Facts

Steinhoff was described as the largest furniture manufacturer in South Africa, with vertically integrated interests spanning forestry, sawmilling, wood processing, textiles, furniture manufacturing, and logistics. PG Bison was described as the dominant supplier of key furniture-manufacturing inputs, particularly particle board (including upgraded particle board) and medium density fibreboard (MDF, including upgraded MDF). The transaction would convert Steinhoff’s significant minority stake in PG Bison (34.9%) into sole control through the acquisition of the remaining shares via Inzuzo.

The relevant product and geographic market definitions were not in dispute among the Commission, the merging parties, or the subpoenaed witnesses. Two upstream markets were identified, namely the market for particle board (including upgraded particle board) and the market for MDF (including upgraded MDF), treated as separate markets due to distinct characteristics, applications, and cost differences. On the evidence accepted by the Tribunal, PG Bison held substantial shares in both upstream markets, and the Tribunal recorded that entry appeared prohibitive due to the cost of building factories and securing access to raw materials. The Tribunal also recorded the presence of many downstream distributors (“board merchants”/resellers) who warehouse and supply board to users.

Downstream, Steinhoff operated in case goods (non-solid case goods) and upholstered (lounge) furniture markets. The Tribunal recorded the parties’ submission that Steinhoff’s market shares were 13.0% in non-solid case goods and 27.4% in lounge furniture, with no competitor in those markets exceeding 10% share, and it noted evidence suggesting that supply arrangements between Steinhoff and major retail chains might imply a narrower sub-market in which Steinhoff’s position could be stronger. The record also reflected that independent manufacturers’ ability to expand was linked to supplying larger volumes to retail chains to obtain scale economies, and that constraints on access to inputs could hamper such expansion.

The principal disputed factual concern (in the sense that it was raised by third parties and evaluated by the Tribunal) related to whether the merged entity would have the ability and incentive to restrict or manipulate supply of particle board and MDF to independent furniture manufacturers (Steinhoff’s competitors), especially during peak production periods and in times of shortage. Three case goods manufacturers—Furniture Perfection CC, Pilot Furniture Manufacturers (Pty) Ltd, and Harfred Products—had raised concerns during the Commission’s investigation and provided evidence after being subpoenaed. These firms depended heavily on PG Bison for supply: Furniture Perfection and Harfred sourced 100% of their particle board and MDF requirements from PG Bison, while Pilot sourced 75%–80% from PG Bison and had partially diversified supply following Steinhoff’s acquisition of its initial shareholding.

The Tribunal accepted that the furniture manufacturing industry was seasonal/cyclical, with peak demand from September to December, and that timely delivery of board inputs was crucial to viability. The Tribunal also accepted that there had been board shortages in 2002, confirmed by PG Bison and Sonae, although the precise causes were not definitively resolved on the evidence (maintenance downtime, underestimation of demand, and exports were canvassed as possible explanations). The Tribunal recorded evidence that switching suppliers could be difficult due to the need for consistency in thickness, surface, and quality, and that CIT’s board was not regarded as a ready substitute by the industry in terms of quality.

On the other hand, the Tribunal found no evidential basis for a concern that PG Bison’s upstream rivals would suffer customer foreclosure through loss of Steinhoff as a purchaser. CIT did not supply Steinhoff, and evidence from Sonae’s CEO indicated that Steinhoff’s purchases from Sonae had increased even after Steinhoff acquired its existing 34.9% stake in PG Bison, and that Steinhoff’s factories appeared to procure inputs independently based on commercial considerations of price, quality, and service. The Tribunal also recorded the merging parties’ submission that Steinhoff’s requirements comprised only 8.1% of PG Bison’s particle board production and 9.5% of its MDF production, and that Steinhoff had historically benefited from purchasing from Sonae rather than self-dealing with PG Bison in circumstances where Sonae offered better pricing.

A central material fact for outcome was that, during the hearing, the merging parties negotiated an undertaking with the concerned furniture manufacturers, later refined with the Commission and incorporated into the Tribunal’s approval order as a merger condition. The condition required PG Bison to supply particle board and MDF to all independent furniture manufacturers who were existing customers at the approval date at levels no less than their respective purchases in the 2003–2004 financial year (the “base year”), for a period of three years from 1 July 2004. In the event of force majeure, PG Bison could proportionately reduce supply to both independent manufacturers and Steinhoff on a pro rata basis relative to the base year. The condition further provided that an aggrieved party could approach the Commission for a remedy in accordance with its Rules.

Legal Issues

The core legal issue was whether the merger was likely to substantially prevent or lessen competition, requiring an assessment under section 12A(1) of the Competition Act (and, by implication, the factors in section 12A(2) referred to in the quoted statutory excerpt). The dispute primarily concerned the application of competition law principles to the factual context of a vertical integration between a dominant upstream input supplier and a significant downstream manufacturer, including an evaluative assessment of likely post-merger incentives and effects.

Within that overarching inquiry, the Tribunal was required to determine whether the vertical merger created a material risk of raising rivals’ costs through foreclosure, with the Tribunal identifying and focusing on two main foreclosure theories relevant on the evidence: customer foreclosure (whether upstream rivals would lose Steinhoff as a customer) and input foreclosure (whether downstream rivals would face restricted access to PG Bison’s board products or discriminatory supply strategies). The Tribunal also considered whether the merger could facilitate co-ordinated behaviour in the upstream board markets, although it found the evidence on this aspect not conclusive.

A further legal question arose concerning the treatment of claimed efficiency and technological benefits under section 12A(1)(a)(i). The Tribunal had to evaluate whether asserted efficiencies were (i) likely to result from the merger and (ii) sufficiently merger-specific in the sense that they would not likely be obtained if the merger were prevented. The Tribunal similarly considered claimed public interest benefits (particularly employment creation) said to flow from a proposed Eastern Cape cluster development, and whether the merger offended the public interest on the record.

Court’s Reasoning

The Tribunal characterised the transaction as a vertical merger between Steinhoff (a major downstream furniture manufacturer) and PG Bison (a dominant supplier of particle board and MDF inputs). In evaluating the merger’s competitive effects, the Tribunal stated that it followed the analytical approach used in prior vertical merger matters, in particular Mondi Limited and Kohler Cores and Tubes and Coleus Packaging (Pty) Limited and Rheem Crown Plant, and it located the foundation for this approach in the work of Riordan and Salop on post-Chicago vertical merger analysis. The Tribunal identified three broad vertical merger concerns from that framework—raising rivals’ costs through foreclosure, promoting co-ordination, and evading price regulation—while recording that evasion of regulation was not relevant on the facts.

On customer foreclosure, the Tribunal examined whether PG Bison’s upstream rivals (notably Sonae and CIT) would be harmed by losing Steinhoff as a customer. It found that CIT did not supply Steinhoff at all and generally sold to resellers rather than major furniture manufacturers, which removed any factual basis for customer foreclosure concerns regarding CIT. In relation to Sonae, the Tribunal accepted evidence that Steinhoff’s factories constituted Sonae’s largest furniture manufacturing customers but only approximately 4% of its combined particle board and MDF sales, and that Steinhoff’s purchases from Sonae had increased even after Steinhoff acquired its existing shareholding in PG Bison. The Tribunal accepted Sonae’s explanation that Steinhoff’s plants purchased inputs independently based on commercial considerations and that self-dealing would not be a necessary or likely outcome. It also accepted submissions that PG Bison was operating at capacity and would have to forgo other customers to supply all of Steinhoff’s requirements, a strategy said to risk alienating the furniture industry. In addition, the Tribunal recorded the merging parties’ submission that self-dealing would not be economically rational given the historical price differential favouring Sonae. On this basis, the Tribunal concluded that there was no evidence suggesting the merged entity would engage in customer foreclosure.

The Tribunal’s analysis focused more centrally on input foreclosure, because the concerns raised by independent case goods manufacturers related to the merged entity’s ability to constrain supply of critical inputs. The Tribunal accepted that these manufacturers were highly dependent on PG Bison for particle board and MDF, that import supply—while potentially price-competitive—was not convenient due to delivery times, and that timely supply was vital given the cyclical nature of the industry and the importance of peak-season production. It further accepted evidence that shortages had occurred in the board market (notably in 2002), and that switching to alternative suppliers could be difficult because consistency and quality were crucial and CIT was not viewed as an effective substitute. The Tribunal therefore considered the independents’ concern—that supply could be constrained in favour of Steinhoff factories during peak periods and shortages—to have at least prima facie support on the record. It did not, however, consider it necessary to reach a definitive conclusion on the likelihood of foreclosure, because it found that the proffered undertaking (made a condition of approval) would address these risks.

On alleged price discrimination (including the concern that PG Bison might supply Steinhoff at cost), the Tribunal recorded that even one concerned witness conceded such conduct would not make sense, and the Tribunal noted practical detection difficulties raised by witnesses. The Tribunal did not design the condition as a direct anti-discrimination measure in pricing terms, and it recorded evidence that annual price negotiations and volume-based discounts were integral to competitive outcomes; it reasoned that a condition aiming to curtail price discrimination might have the unintended effect of undermining legitimate discounting arrangements. Instead, the condition adopted was framed around security of supply volumes, particularly to address the risk of exclusion or constriction of access.

On co-ordinated behaviour, the Tribunal noted some evidence (though not conclusive) suggesting parallel pricing and the possibility of co-ordination between PG Bison and Sonae, including references to simultaneous price movements historically and the 2002 shortage episode. However, it found no conclusive evidence demonstrating that the merger would promote co-ordinated conduct between the two upstream producers, and therefore did not base its outcome on this concern.

The Tribunal treated the undertaking as central to resolving the remaining competition risk. It recorded that the undertaking was tested with witnesses who had not yet testified, and that those witnesses indicated it would alleviate their supply concerns. The Tribunal then explained the key features and intended effect of the condition: it ensured that existing independent furniture manufacturing customers would, at minimum, retain access to volumes equivalent to their base-year purchases for a three-year period, and that any reductions in supply in force majeure circumstances would be applied proportionately to Steinhoff as well. The Tribunal also clarified that it had not burdened the condition with express exclusions it considered implicit, using non-payment as an example of a commercial issue rather than a competition concern, and it indicated that conduct that complied with annual volume totals but “squeezed” supply during peak periods would be treated as contrary to the spirit of the condition.

As to claimed efficiencies and technological benefits under section 12A(1)(a)(i), the Tribunal recorded the parties’ reliance on anticipated efficiencies linked to an Eastern Cape forestry cluster development project, including a proposed particle board plant and integrated utilisation of timber inputs, with an asserted investment of about R700 million. The Tribunal examined contemporaneous project documentation and found that significant negotiations and governmental support remained unresolved, rendering the project speculative. Applying the statutory requirement that efficiencies be likely, the Tribunal held that the project was, at best, a possible rather than likely outcome. It also applied the further statutory requirement that efficiencies “would not likely be obtained if the merger is prevented”, and, relying on its prior holding in Trident Steel (Pty) Limited / Dorbyl Limited, it treated this as requiring that efficiencies be merger-specific. On the evidence, it concluded the anticipated efficiencies were tied to the cluster development rather than the merger itself and therefore could not be taken into account as cognisable efficiencies for merger assessment. The Tribunal nonetheless stated that, because the undertaking remedied the potential anti-competitive effects, it was unnecessary to decide whether efficiencies outweighed any harm.

On public interest, the Tribunal addressed claimed employment benefits linked to the same cluster development, but for similar reasons found it was not convinced that the merger itself would result in those employment opportunities. It also recorded that nothing in the record suggested the merger offended the public interest.

Outcome and Relief

The Tribunal approved the merger subject to a condition. The condition required PG Bison to supply particle board and MDF to all independent furniture manufacturers who were existing customers at the date of approval at levels no less than their respective purchases in the 2003–2004 financial year (base year) for a period of three years from 1 July 2004, with any force majeure reductions applied pro rata across independent manufacturers and Steinhoff relative to the base year. The condition further allowed an aggrieved party to approach the Competition Commission for a remedy in accordance with its Rules.

No costs order was recorded in the provided text.

Cases Cited

Mondi Limited and Kohler Cores and Tubes, a division of Kohler Packaging Limited, Competition Tribunal Case No: 06/LM/Jan02.

Coleus Packaging (Pty) Limited and Rheem Crown Plant, a division of Highveld Steel and Vanadium Corporation Limited, Competition Tribunal Case No: 75/LM/Oct02.

Trident Steel (Pty) Limited / Dorbyl Limited, Competition Tribunal Case No: 89/LM/Oct00.

Legislation Cited

Competition Act 89 of 1998, section 12A(1)(a)(i).

Rules of Court Cited

Rules of the Competition Commission (referenced in relation to approaching the Commission for a remedy for an alleged breach of the merger condition).

Held

The Tribunal held that, while customer foreclosure concerns were not supported on the evidence and co-ordinated behaviour was not shown to be promoted by the merger on a conclusive evidential basis, there was at least prima facie evidential support for concerns about input foreclosure affecting independent furniture manufacturers dependent on PG Bison for particle board and MDF.

The Tribunal held further that the efficiency and employment benefits asserted by the merging parties—linked to an Eastern Cape cluster development—were speculative and not shown to be likely outcomes of the merger, and in any event were not shown to be merger-specific as required by section 12A(1)(a)(i) as interpreted in prior Tribunal authority.

The merger was therefore approved conditionally, on the basis that the negotiated supply undertaking, imposed as a condition, adequately remedied the potential anti-competitive effects arising from the risk of input foreclosure.

LEGAL PRINCIPLES

Vertical mergers are assessed for potential competition harm principally through theories of raising rivals’ costs, including input foreclosure and customer foreclosure, as well as possible facilitation of co-ordinated behaviour, with the relevance of each theory determined by the factual and market context.

In evaluating foreclosure concerns, the assessment focuses on whether the merged entity would have the ability and incentive to foreclose rivals and whether market conditions (including capacity, substitutability of inputs, entry barriers, and the practicalities of switching supply) make foreclosure plausible and competitively significant.

Under section 12A(1)(a)(i) of the Competition Act 89 of 1998, efficiencies advanced to offset a likely substantial prevention or lessening of competition must be shown to be likely and must be merger-specific, in the sense that they would not likely be obtained if the merger were prevented. Speculative future projects and benefits not sufficiently linked to the merger itself are not treated as cognisable efficiencies for the statutory balancing exercise.

Where competition concerns in a vertical merger can be addressed through targeted behavioural commitments, the Tribunal may approve a merger subject to conditions designed to prevent the identified harm, including conditions securing continued access to essential inputs for affected downstream rivals, and providing for enforcement recourse through the competition authorities’ procedures.

Inzuzo Furniture Manufacturers (Pty) Ltd and PG Bison Holdings (Pty) Ltd (12/LM/FEB04) [2004] ZACT 57; [2004] 2 CPLR 288 (CT) (31 August 2004)