COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 57/LM/Aug04
In the large merger between:
Astral Operations Ltd
and
Earlybird Farm (Pty) Ltd
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Reasons
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Introduction
On 8 September 2004 the Tribunal approved the merger between Astral
Operations Limited and Earlybird Farm (Pty) Ltd without conditions. The reasons
are set out below.
The transaction
Astral Operations Limited (“Astral”) and Afgri Operations Limited (“Afgri”) jointly
controlled Earlybird Farm (Pty) Ltd (“Earlybird”) in which each held 50% of the
issued share capital. Astral Operations is now acquiring Afgri’s 50% shareholding
after which it will have sole control of Earlybird.
Astral is a vertically integrated company in the broiler industry; it is the sole
distributor and supplier of both Ross 788 and 308 breeding parent stock to the
broiler industry; it supplies dayold chicks to nonintegrated independent broilers
as well as parent stock to its own integrated businesses. In addition it also mills
and supplies various types of animal feed, supplies animal feed premixes that
contain vitamin and minerals and is involved in animal healthcare. The Astral
Foods Group controls, in addition to its Earlybird joint venture, Meadow Feeds
(Pty) Ltd, Nutec SA (Pty) Ltd, County Fair Foods (Pty) Ltd, Central Analytical
Labs, National Chicks Limited, Ross Poultry Breeders (Pty) Ltd, National
Veterinary Supplies (Pty) Ltd and Elite Breeding Farms.
Earlybird is a fully integrated broiler producer, which markets a full range of
frozen, fresh and valueadded chicken products.
Rationale for the transaction
In terms of their Shareholders agreement, Astral Foods and Afgri could not start
any new business that competed with the Earlybird joint venture. 1 This
agreement did not cover County Fair Foods. Tension between the shareholders
arose, as Afgri perceived that Astral had a conflict of interest as it could expand
its broiler production through Country Fair, which it owned 100% of, while Afgri
was bound to only expand its broiler business through Earlybird. The parties
eventually resolved their dispute by Astral making an offer to purchase Afgri’s
shareholding in Earlybird.
The acquisition enables Astral to transfer the expertise, which County Fair has
acquired in supplying fresh chicken products to the Western Cape region, to
Earlybird.
One of the conditions to the transaction being concluded successfully is a supply
agreement concluded between Earlybird and Afgri in terms of which Afgri will
continue to supply Earlybird with a specified quantity of feed for 9 years. Both
Astral and Afgri supplied feed to Earlybird in the past. The reason for this is that
Astral’s mill doesn’t currently have the capacity to supply all of Earlybird’s needs.
The period is seen as the time needed to adjust its milling capacity.
Afgri has indicated that, in future, it intends to enter the broiler market on its own
and would thereby create its own feed customer. 2
The relevant market
This is a horizontal merger. Astral’s subsidiaries, County Fair and Earlybird, are
both fully integrated broiler producers and operators, which produce day–old
chicks and broilers, as well as process, pack, distribute and sell chicken
products. Accordingly, both compete in the same product markets.
The parties claim that the relevant product market is the very broad market for
The parties claim that the relevant product market is the very broad market for
animal protein products, which includes beef, pork and mutton. However, if the
Tribunal requires a more narrow delineation of the relevant market they would be
prepared to accept an international market for poultry products, which could be
split into a international market for frozen poultry products and a regional market
1 See clause 6.19 of the Shareholders Agreement on page 551 of the record.
2 See transcript on page 8.
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for fresh poultry products.
The Competition Commission is of the view that the relevant product market
should be defined more narrowly as the market for the producing and processing
of poultry products consisting of frozen and fresh poultry products, value added
or processed poultry products and poultry offal. The geographic market is
national for all the various products except for fresh poultry products, which falls
within a regional geographic market due to its limited shelf life.
Whether we define the relevant market broadly or more narrowly, for purposes of
this evaluation, is not important. Since, as we show below the merged entity
would not gain market power as a result of the transaction.
Effect on competition
Rainbow, which owns the Rainbow, Bonny Bird and Farmer Brown brands, is the
only other vertically integrated poultry producer in South Africa. It sells the Cobb
breed and is the largest broiler producer in South Africa. Other competitors in the
market are Tydstroom Pluimveeplaas, which belongs to Pioneer Foods and owns
the Tydstroom brand, Country Bird, which owns the Supreme brand, Daybreak
farms, which owns the Superior brand and Chubby Chicks.
The following table represents the market shares of some of the largest
competitors in the broiler market before the merger:
Broiler producers Market share %
Rainbow Farms 28
Earlybird farms 17
County Fair Foods 8
Tydstroom Pluimveeplaas 8
Country Bird 6
Medium sized farmers 5
3
Daybreak farms 3
Chubby Chicks 2
Post the transaction Astral will have a market share of 25%, closely matching
that of its biggest rival Rainbow Farms, which has 28%.
Barriers to entry in this industry are high insofar as capital and sunk costs are
concerned, specifically if a new entrant wants to establish a grass roots
integrated meat production business such as Astral Foods or Rainbow.
Moreover, such an entrant would need substantial leadtime, close to 86 weeks,
in order to begin producing and selling broilers to its customers. There are also
regulatory requirements to ensure meat safety etc. 3
However, entry barriers into the nonintegrated broiler market, in which Earlybird
and County Bird compete, are lower, in that players in this market are regional
and concentrate on specific niche products such as fresh or live birds in order to
avoid incurring capital outlay in the form of processing plants and equipment. The
leadtime to enter in this segment is 24 weeks. 4
Although Earlybird management from internal documents appears to have
regarded County Fair as a competitor it seems that this competition was limited
to frozen poultry as given the geographic locations of the plants, Gauteng and
Western Cape respectively they were not competitors in respect of the fresh
poultry product. The frozen poultry market because of the ease of entry is more
contestable than the fresh one.
Major retailers have the ability to import poultry directly from Brazil and Canada
at prices that are competitive with those offered locally.
In light of the above we found that the transaction would not substantially lessen
or prevent competition. In fact the dismantling of the joint venture enables Afgri,
which has the knowledge and experience to compete in the broiler market, to
enter as an effective competitor to Early Bird and County Fair, something it could
not have done while it was party to the joint venture.
Public interest issues
not have done while it was party to the joint venture.
Public interest issues
3 Meat Safety Act No 40 of 2000.
4 As indicated earlier in the decision Afgri informed the Tribunal that it would be entering the broiler
market sometime in the future.
4
The transaction does not raise any public interest concerns.
____________ 20 September 2004
N Manoim Date
Concurring: L Reyburn, M Mokuena
For the parties: Lee Mendelsohn from Edward Nathan
For the Competition Commission: M van Hoven
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