COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 92/LM/Nov04
In The Large Merger Between:
Clover Fonterra Ingredients (Pty) Ltd Acquiring
Firm
And
Clover SA (Pty) Ltd and
New Zealand Milk Products SA (Pty) Ltd Target Firms
Reasons for Decision [NON CONFIDENTIAL]
APPROVAL
1. On 13 May 2005 the Competition Tribunal issued a Merger Clearance Certificate
conditionally approving the merger between Clover Fonterra Ingredients (Pty) Ltd,
Clover SA (Pty) Ltd and New Zealand Milk Products SA (Pty) Ltd.
THE TRANSACTION
2. The parties to this merger are Clover SA (Pty) Ltd (“Clover”) and New Zealand Milk
Products SA (Pty) Ltd (“NZMPSA”). Clover is a wholly owned subsidiary of Clover
Industries Limited, a public company. 1 NZMPSA is a wholly owned subsidiary of
Fonterra International Limited ("Fonterra International"), 2 and will be referred to as either
NZMPSA or Fonterra henceforth.
3. Clover and Fonterra have agreed to form a joint venture company, Clover Fonterra
Ingredients (Pty) Ltd (“CFI”), in respect of Clover’s and Fonterra’s dairy ingredients
businesses. Clover and Fonterra will own 51% and 49% of the issued shares in CFI
respectively. However, according to the parties, they will have joint control of CFI by
virtue of the provisions of a shareholders' agreement to be concluded between Clover
and Fonterra in relation to CFI. 3
4. The joint venture is aimed at marketing, selling and distributing these dairy ingredients in
bulk, i.e. as commodity products, in the countries of subSaharan Africa. It is intended
that CFI will market, sell and distribute these commodity products to customers that
prepare food for direct onsale to the consuming public ("food service customers") and
prepare food for direct onsale to the consuming public ("food service customers") and
1 No one firm directly or indirectly controls Clover Industries Limited.
2 Ultimately controlled by Fonterra Cooperative Group Limited.
3 Paragraph 9.3 of CFI’s CC4(2).
1
customers who use products supplied to them for processing to create new products for
distribution and/or purchase products packed in bulk whether for resale to third parties or
not ("ingredients customers"). 4 It is thus not the intention of the joint venture partners to
use CFI to sell to retail customers. Retail sales will remain the prerogative of the partners
individually, and to the extent these activities overlap they remain competitors of one
another. We deal with the consequences of this more fully below.
5. The transaction between the parties is contained in a number of agreements, the Master
Agreement being the core of the consensus between the parties. The Master
Agreement seems to have gone through a number of iterations before the parties
reached finality. 5 Whilst the joint venture is generally in relation to the bulk/commodity
segment of their respective ingredients businesses, excluding retail, the agreement
seems to be a compromise of different strategic objectives with some products being
included, some not, some customers being included and some not. 6
6. The evaluation of this merger has been an equally iterative process, somewhat
convoluted and at times difficult, with information being furnished in piecemeal fashion
by the parties.
HISTORY OF THE PROCEEDINGS
7. On 31 January 2005, the Commission filed its first recommendation (“the Commission’s
Report”) with the Tribunal in which it recommended that the transaction be approved
unconditionally.
8. At a prehearing held on 14 February 2005 the Tribunal requested further documentation
from the parties relating to the transaction.
9. At a subsequent telephonic prehearing on 15 March 2005, the Tribunal requested the
parties and the Commission to make submissions to it on the basis that the transaction
constituted a full merger between Clover and Fonterra.
constituted a full merger between Clover and Fonterra.
10. On 4 April 2005 and after receipt of the additional documentation the Commission filed a
supplementary submission (“Supplementary submission”) with the Tribunal, consisting of
an evaluation of the newly submitted documentation. In the Supplementary submission
the Commission revised its analysis of the market shares and competitive landscape for
skimmed milk powder but persisted with its recommendation that the transaction be
approved unconditionally.
11. A hearing of the matter was held on 7 th and 8 th April 2005. The following witnesses
were examined:
1. Karin Purchase – Aspen Nutritionals (procurement manager);
4 See CFI’s CC4(2).
5 See various versions of the project documentation.
6 For a further discussion see section on the nature of the joint venture .
2
2. Adam Prinsloo – Nestle South Africa
3. Malcolm Tweed – New Zealand Milk Products SA (general manager)
4. Manie Roode – Clover SA (executive director)
5. Mike van den Berg – Milk Producers Organisation (director)
6. Pieter Uys – Clover SA (general manager: Ingredients and Exports)
12. In the course of the hearing further documentation was referred to by the parties, which
documentation was later furnished to the Tribunal.
13. Subsequent to the hearing and after receipt of the further documentation, the
Commission was asked to confirm certain information on market shares and prices. The
Commission filed its second supplementary submission (“2 nd Supplementary
submission”) on 11 th May 2005.
14. As a consequence of the submissions of the parties, the documentation provided, the
evidence led at the hearing and the reports by the Commission this merger has been
approved conditionally. The reasons follow.
BACKGROUND TO THE DAIRY INGREDIENTS INDUSTRY
15. The merging firms are both involved in the processing and manufacturing of dairy,
beverage and other related food products and the marketing, distribution and sale of
such dairy, beverage and other related food products.
16. The dairy industry is broadly divided into the raw milk (fresh milk) segment and the dairy
products or ingredients segment. Dairy products or ingredients, which consist of
products such as cheese, butter, UHT milk and milk powders, are sold both in the retail
and nonretail channels. The nonretail channels involve the sale of such products in
bulk as commodities to food service customers 7 and ingredients customers. 8
17. Clover’s ingredients division supplies sprayed and rollerdried dairy ingredients and
vegetable fats and blends to various customers including infant formulae manufacturers,
bakeries, ice cream and dessert manufacturers. The dairy ingredients products consist
of
bakeries, ice cream and dessert manufacturers. The dairy ingredients products consist
of
Skimmed milk powder
Full cream/ whole milk powder
Buttermilk powder
Whey powder
Natural cheese for use in the manufacture of processed cheese
Nondairy creamers and whiteners
Butter
7 Customers who prepare food for direct onsale to the consuming public, including HORECS (hotel,
restaurant, catering and airline systems) and QSR (quickservice restaurant) systems.
8 Customers who use products supplied to them for processing to create new products for distribution
to market and/or who purchase products packed in bulk whether for resale to third parties or not.
3
18. The business of Fonterra International follows the cowtocustomer value chain, from
milk collection, through manufacturing and logistics and ultimately to the marketing of
ingredients to the international food industry under the New Zealand Milk Products
brand. According to the parties, New Zealand produces more milk than it consumes,
and therefore a major part of the Fonterra group’s business involves selling
manufactured dairy products around the world. 9 Its activities can be divided into three
segments namely Ingredients, New Zealand Milk and Fonterra Enterprises.
19. The four main dairy ingredients sold by the New Zealand Milk Products brand are milk
proteins, milk powders, cheese ingredients and cream products. 10
20. NZMPSA conducts the Fonterra group’s business in relation to ingredients in South
Africa. The products that NZMPSA sells in South Africa are
Milk and whey proteins
Milk powders
Cream products
Cheese and cheese ingredients
Portion controlled (<20ml) UHT milk
Refined and edible lactose
21. While the Fonterra group is considered to be one of the largest milkproducing
companies in the world, NZMPSA does not import raw milk into South Africa nor does it
have a retail (branded) aspect of its ingredients business in South Africa. Clover SA on
the other hand has between 30 35% of the raw milk market in South Africa 11 and has
approximately 32% of the ingredients business, 12 both in the commodity and retail
segments. Clover also exports ingredients and UHT milk to other parts of Africa and
EU.13 Fonterra International also exports milk and dairy products to other parts of the
world including Africa. 14
NATURE OF THE JOINT VENTURE
22. The joint venture is designed by the parties along very discrete aspects of their
ingredients businesses and assumes a hybrid or “mongrel character” 15 with some
products included, some excluded, with some customers included, some not.
23. The products to be sold by CFI ("the defined products') will be ( subject to certain
contractual exclusions):
23.1. Certain bulkpackaged commodity products (with or without valueadded
9 Letter from Deneys Reitz dated 1 April 2005.
10 Letter from Deneys Reitz dated 1 April 2005.
11 Extract from Clover Mail (November 2004)
12 NZMP South Africa Overview – 21 February 2005
13 A list of these products can be found in the letter from Deneys Reitz dated 1 April 2005.
14 The African footprint of the two companies is not relevant for purposes of this matter.
15 As described by the Chairperson at the hearing, page 67 of transcript.
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components16 which do not result in the packaging being altered ) to be sold to
food service customers and ingredients customers, and comprising:
23.1.1. Milk powders (whole milk, skimmed, butter milk),
23.1.2. Whey powder,
23.1.3. Butter,
23.1.4. Anhydrous milk fat,
23.1.5. Edible and refined lactose,
23.1.6. Natural cheese for use in the manufacture of processed cheese,
23.1.7. Whey protein concentrates,
23.1.8. Casein,
23.1.9. Caseinate,
23.1.10. Bulkformulated powdered products e.g. filled milk, whey/milk mixtures,
coffee creamers;
sold to food service customers and ingredients customers.
23.2. Commodities where the valueadded component takes the form of altered
packaging into consumer or catering packs, sold to ingredients customers.
23.3. As special inclusions, sliced processed cheese, portioncontrol (<20ml) UHT milk,
and frozen diced and shredded mozzarella cheese which is supplied to
[confidential information] 17 and [confidential information] .
24. The following are specifically excluded from the activity of CFI:
24.1. Fonterra’s filled milk, whole milk and infant formula contracts with Promasidor;
24.2. Fonterra’s customers which purchase the defined products on a multinational
purchasing contract basis i.e. from Fonterra's head office;
24.3. Clover inventory management transactions which result in ownership of the
product ultimately reverting to Clover;
24.4. Clover’s contract with Nestle for manufacturing of skimmed milk powder; and
24.5. Ingredients used internally by the Clover group (Clover SA, Danone Clover,
Clover Danone Beverages).
25. The parties do not intend to exchange technology or knowhow and any expenditure on
research and development of new products can only be incurred with the approval of the
boards of directors of the parent companies. 18 The joint venture company will
determine its own prices through a process of adding a percentage on prices that are set
independently by the parent companies. 19 Despite its independent pricing structure the
16 Valueadded components means a component of supplied products where the supplier has
contracted as an additional value adding service to the customer to supply an additional specification
such as (but not limited to) packaging of the product in question into a specified container or specific
pack size: see Clause 1.1.44 of the Master Agreement.
17 In a letter from Deneys Reitz dated 1 April 2005, the Tribunal was informed that [confidential
information] has subsequently terminated its relationship with NZMPSA and has elected instead to
be supplied with [confidential information] in South Africa.
18 Clause 8 of Master Agreement.
19 See evidence of Mr Roode.
5
joint venture company is seen as a marketing and distribution agent of the two parent
companies rather than a principal. 20
26. As stated above, CFI will be jointly controlled by the parties with Clover having 51% and
NZMPSA 49%.
RATIONALE FOR THE TRANSACTION
27. The stated commercial rationale for the proposed transaction is that the establishment of
the joint venture will lead to more effective supply of the defined products in the rest of
subSaharan Africa. According to the parties the dairy ingredients business is
characterised by a pattern of surpluses and shortages. This is because the ingredients
business is dependent on the supply of raw milk, which is cyclical and seasonal. This
makes it difficult for Clover to supply defined products such as skimmed milk powder on
a sustained basis. The joint venture will be able to source its supplies from either
Clover SA or Fonterra, which will enable Clover to supply the defined products to
customers in subSaharan Africa on a sustained basis. Fonterra, in turn, will establish a
sustained presence in the region and have access to Clover’s major customers to which
CFI can supply Fonterra’s specialised products. 21
28. In summary, the joint venture in the ingredients business has been agreed upon by the
parties in order to –
28.1. expand the range of products offered to customers of both these businesses;
28.2. satisfy customers' requirements for ingredients on a consistent basis in a market
which has cyclical features of surpluses and shortages; and
28.3. export to subSaharan Africa from a stable supply base. 22
COMMISSION’S RECOMMENDATION
29. The Commission initially recommended that this merger be approved unconditionally.
This recommendation was based on the parties’ submissions to it during its initial
investigation.
Parties Submissions
investigation.
Parties Submissions
30. The parties submit that the products sold by the ingredients businesses of Clover and
NZMPSA in South Africa are largely complementary as opposed to being competitive.
They submit that while both produce generic products such as skimmed milk powder or
whey powder, these are not necessarily substitutable for each other on either the
demand or supply side. For example, they submit that both produce whey powder but
the whey powder sold by NZMPSA in South Africa is a whey protein concentrate which
is used by specialised applications such as nutritional supplements for body builders,
20 Evidence of Mr Tweed and Mr Roode.
21 Paragraph 4.1 of the parties’ competitiveness report.
22 Page 5 of the Commission’s Report. See also page 1213 of the parties’ competitiveness report
and evidence by Mr Tweed on page 50 of transcript.
6
while the whey powder produced by Clover is a less specialised product used for
general application. They submit that the business of NZMPSA in South Africa is
focused mainly on importing and selling specialised valueadded varieties of the defined
products which are generally not produced in South Africa. However they accept that
there is a degree of competition between the merging parties in the following products:
30.1. Butter Milk Powder;
30.2. Butter;
30.3. Skimmed milk powder; and
30.4. Full cream/whole milk powder.
31. The parties submit that each of the above product categories should form the basis for a
separate relevant product market because they are not substitutable from the demand
side and supply side. 23 The parties accordingly submit that the four relevant product
markets are butter, buttermilk powder, skimmed milk powder and whole milk powder.
32. The Commission’s analysis found that there were four relevant product markets as
defined by the parties, and that the geographical markets are least national.
33. The national market shares for the identified markets contained in the Commission’s
Report are tabulated below:
Market
Market shares %
Clover Fonterra Post merger Other players
Skimmed milk
powder
45.70 5.10 50.80 Nestle (30%)
Parmalat (1,3%)
Imports (12,6%)
Whole milk powder 12.72 5.46 18.18 Nestle (75.84)
Imports (11.43)
Buttermilk powder 31.24 15.62 46.86 Imports (53.14%)
Butter
32.25 0.05 32.30 Parmalat (3.38%)
Imports (54.2%)
Other (10.12%)
34. The Commission found no likelihood of a substantial lessening of competition in any of
the relevant product markets. Despite the high concentrations in the markets the
Commission concluded that the parties’ ability to exercise market power would be
constrained by low barriers to entry, a strong degree of countervailing power possessed
constrained by low barriers to entry, a strong degree of countervailing power possessed
by customers and the constraining effect of the level and price of import competition.
Competitors' concerns
23 A different technological process is used to produce each of them.
7
35. Ladismith Cheese and Parmalat, two competitors of Clover, made submissions to the
Commission to the effect that they had concerns with the merger, which concerns were
subsequently not pursued. Both Ladismith Cheese and Parmalat had concerns about
potential dumping since Fonterra is the world’s largest exporter of dairy products.
Parmalat was particularly concerned that “ any limited scope "merger" such as this raises
the competition issue that it potentially provides a platform for collusion between the
merging parties in relation to activities not covered by the approved joint venture, where
the merging parties should compete independently." However, Parmalat's concerns
about the potential future conduct of the merging parties appear to have been “ dealt with
in their discussions” with the merging parties. 24
COMPETITION ANALYSIS
Relevant Market
36. We agree with the merging parties and the Commission that the relevant geographic
markets are at least national, and accordingly this issue need not be considered any
further.
37. In determining the relevant product market, the Tribunal has previously expressed its
preference25 for the test set out by the US Supreme Court in Brown Shoe v United
States.26 In the Brown Shoe case the Court recognised that within a particular (defined)
broad product market, a number of welldefined submarkets may exist which in
themselves could constitute product markets for antitrust purposes. Factors which may
indicate the existence of a submarket include but are not limited to industry or public
recognition of the submarket as a separate economic entity, the product’s peculiar
characteristics and uses, unique production facilities, distinct customers, distinct prices,
sensitivity to price changes and specialised vendors. 27
38. The determination of the relevant product market, while informed by a number of factors
38. The determination of the relevant product market, while informed by a number of factors
and statistics, always involves a factual enquiry in a particular matter. In Nestle (SA) and
Pet Products, the Tribunal endorsed the approach established in Brown Shoe and
considered a number of factors that could be taken into account in the determination of
the relevant product market:
“There are major differences in the production facilities required for the manufacture
of dry and wet pet food and the manufacturing processes are very different.
Furthermore, wet pet food is generally more expensive than dry pet food, even when
sold through the same channel. Products also differ in volume, with dry dog food in
particular being sold by some manufacturers in 8 kg packs whilst wet food is
normally sold in cans of much lower volume. The Commission’s investigations also
24 Letter from Parmalat dated 24 February 2005
25 See JD Group Limited and Ellerines Holdings Ltd [19992000] CPLR 53 (CT); Nestle(SA) and Pet
Products [20012002] CPLR 257 (CT); JD Group Limited and Profurn Limited [2003] 1 CPLR 64 (CT)
26 370 US 294 (1962).
27 At page 325.
8
revealed that wet pet food is perceived in the market as being something of a treat
for pets and a supplement to dry food rather than a substitute thereof. Lastly, we find
that pet food sold through the retail channel belongs to a separate market from pet
food sold through the nonretail channel. Evidence before us reveals a significant
price difference between products sold through the retail and nonretail channels.
Sellers of products in the nonretail channel, for example, veterinarians, are
perceived by consumers as specialists and therefore authorities in pet food.
Consumers are therefore willing to pay higher prices for pet food whose nutritional
value is endorsed by these sellers compared to food sold through the retail channel.
Significantly certain manufacturers who distribute to both channels have different
brands for each of them. Nestle markets its nonretail product under the Olympic
brand and Pets Products under the IVD Life Stages brand ”.28
39. The dairy products or ingredients industry is considered to be a derivative of the raw milk
industry. The ingredients business essentially consists of converting raw milk into a
number of products such as milk powders, butter, cheese, buttermilk, buttermilk
powders, UHT milk, whey powder and casein variations. Raw milk is converted into any
number of these products in order to ensure that surpluses do not go to waste. The
ingredients market may have started out as a ‘balancing’ strategy to the primary
industry, but it is no longer merely that. Skimmed milk powder has become a critical
ingredient in infant formulae, confectionery products and nutritional supplements. Whey
and casein powders also play a role in nutritional supplements and energy foods.
Companies such as Fonterra International spend time and money on research and
development relating to new products. 29
40. Clover, Parmalat, Fonterra and Nestle all seem to have strong brands in the retail
segment of the dairy product or ingredients markets. However a few of these milk
producers also engage in the business ofreselling ingredients or dairy products in bulk
or as commodities, which is distinguishable from the retail market. Evidence was led
that the bulk or commodities market involves the selling of ingredients to food service or
ingredients customers. These products are packaged in larger volumes and do not rely
on the existence of a strong brand. The retail market however involves packaging in
smaller volumes, sold usually to the retail sector directly and relies on the existence of a
strong brand. 30
41. In South Africa Clover and to a smaller extent Parmalat, NZMPSA, Woodlands Dairy and
Ladismith Cheese engage in the nonretail ingredients market. These producers sell
ingredients not only to food service and ingredients customers but also to customers
who compete with them in related markets. Evidence was led that while Nestle may be
the largest user of skimmed milk powder it has a skimmed milk manufacturing
agreement with Clover 31 and does not sell skimmed milk powder to third parties.
28 At paragraph 26.
29 Fonterra is currently engaged in the development of a protein supplement called Colostrum which
is extracted from a cow’s first four milkings (48 hours) after calf birth. This is used as a nutritional
supplement for persons inter alia suffering from HIV/AIDS.
30 Evidence of Mr Tweed, Mr Roode and Mr Uys.
31 See Manufacturing and Packing Agreement in respect of Skim Milk Powder between Nestle and
9
42. The Tribunal is satisfied that the dairy ingredients market is a separate relevant product
market from the raw milk market. Furthermore, the ingredients market is subdivided
into a retail and nonretail market. The nonretail market consists of bulk or commodity
ingredients supplied to food service and ingredients customers.
43. The Tribunal is also satisfied that within the dairy ingredients market separate relevant
product submarkets exist because these are not substitutable from the demand or
supply sides. Butter is not substitutable for skimmed milk powder. Buttermilk powder is
not substitutable for whey powder. Whey powder is not substitutable for whole milk
powder. Skimmed milk powder is more stable than whole milk powder and has many
more uses. If produced under low heat, skimmed milk powder can be used as an input in
the production of infant formulae, ice cream and yoghurt. If produced under medium
heat, it can be used in the production of dry mixes, beverages and ice creams as well as
in vending machines. If produced under high heat, it can be used in the meat industry,
baking industry and in frozen desserts. 32 There is only limited supplyside
substitutability because of the different technological processes used to produce
them.33
44. In addition there seem to be differences between the generic products that producers
produce. For example, while Clover and NZMPSA are competitors in the ingredients
business and both produce whey powder, these are not necessarily substitutable
because NZMPSA’s whey powder is used in more specialised applications. 34 They
both produce butter and buttermilk powder but Clover does not produce casein or
caseinate.
45. The Tribunal is of the view that the transaction, viewed collectively, should be
considered a merger of the bulk (nonretail) ingredients business of the two companies,
as described in the Master Agreement, and has evaluated it as such. For purposes of
this transaction the four relevant product markets are butter, buttermilk powder, whole
milk powder and skimmed milk powder.
Market shares
46. In considering the market share data submitted by the Commission and having regard to
the evidence led at the hearing, the Tribunal is satisfied with the information submitted
by the parties and the Commission in relation to butter and buttermilk powder. The
market share figures originally submitted for whole and skimmed milk powder were
Clover (Annexure A to letter from Werksmans dated 14 March 2005). See also Evidence of Mr
Prinsloo.
32 See Paragraph 3.2.2.1 of the parties’ competitiveness report.
33 Paragraph 5.1.5 of the parties’ competitiveness report. See also evidence of Mr Tweed and Mr
Uys.
34 Such as protein supplements for body builders, whereas the whey powder produced by Clover is
used for general applications.
10
revised after further submissions by the parties and the Commission.
Butter and Buttermilk powder
47. The combined market share for butter of the merged entity will be 32%. The market
share accretion is small, with NZMPSA having only 0.05% of the market premerger.
Imports of butter account for 54.2% of the market. The presence of imported product has
been increasing over time, with a marked increase in imports between 2003 to 2004
from 1509 to 4463 tonnes. 35 Other local suppliers of butter include Dairy Belle and
Parmalat.36 The parties' combined market share for buttermilk powder is 46.86%.
Buttermilk powder imports account for 53% of the market. Imports are thus a large
source of supply in both markets, indicating that the merger is unlikely to lead to a
substantial lessening or prevention of competition in either of them.
Whole Milk and Skimmed Milk Powder
48. In its first report, the Commission found that there were three players, excluding imports,
in the South African market for whole milk powder, namely Nestle, Clover and NZMPSA.
Nestle was cited as having 75% of the bulk industrial market, followed by imports. 37
This figure was later revised by the Commission in its Supplementary submission to the
effect that Nestle was not a competitor as it consumes most or all of its supply and does
not sell to third parties. 38 This was confirmed at the hearing by Mr Adam Prinsloo from
Nestle who was called as a witness by the Commission. 39
49. The revised market shares of the participants (excluding Nestle) 40 in the whole milk
powder market are as follows:
Market participant Sales tons Market share %
Clover 657 42.97
Fonterra 282 18.44
Imports 590 38.59
Total 1529 100.00
50. On the basis of the revised figures the merged entity will have a market share of 61.41%
in respect of whole milk powder.
in respect of whole milk powder.
51. In the market for skimmed milk powder the local participants were listed as Clover,
Fonterra, Nestle, Parmalat and Other. The data was revised by the Commission in its
2nd Supplementary submission to the effect that Nestle was not a participant as it
35 Page 12 of the Commission’s Report 31 January 2005.
36 Page 15 of the Commission's Report 31 January 2005.
37 Pages 1011 of the Commission Report 31 January 2005.
38 Page 5 of the Commission’s Supplementary submission 4 April 2005.
39 At page 28 of the transcript.
40 At page 6 of the Commission’s Supplementary submission 4 April 2005.
11
consumed all of its supply. 41 The Commission's final table of market shares for the
skimmed milk powder market was as follows.
Name of firm Country of origin Quantity (tons) Market share %
Clover South Africa 3 186 58.97
Fonterra New Zealand 409 7.57
Imports42 Argentina 296 5.48
Australia 256 4.74
Canada 49 0.91
Switzerland 26 0.48
Ireland 233 4.31
Poland 112 2.07
Uruguay 350 6.48
Other 77 1.43
Ladysmith Cheese 43 South Africa 200 3.70
Parmalat South Africa 300 5.55
Dairybelle South Africa 100 1.85
Total 5 403 100.00
52. In its first report the Commission stated that Parmalat had a share of 1.3% in the market
for skimmed milk powder. 44 This figure seems to have been obtained from the merging
parties. Parmalat itself estimated its market share to be closer to 22%. 45 At the hearing,
however, it emerged that Parmalat was not involved in selling skimmed milk powder to
third parties. 46 No reasonable explanation could be provided by either the Commission
or the merging parties for the difference between the two figures (i.e. the parties'
estimation of Parmalat’s market share and Parmalat’s own estimation) nor why Parmalat
was, in the first instance, included as a competitor in the market for skimmed milk
powder. Parmalat itself stated that it did indeed produce ingredients for Quick Service
Restaurants.47 On this basis, the Tribunal has included Parmalat as a competitor in the
market for skimmed milk powder.
53. A further anomaly in the figures related to the market share of Fonterra for the year
2004. The import figures obtained from SARS did not tally with the sales figures
provided by the parties. 48 NZMPSA later clarified the discrepancy, saying that the sales
41 This was confirmed by Mr Prinsloo in the hearing.
42 According to the SARS figures total imports for 2004 amounted to 1409 tons. The Commission
only listed the major country of origins. The market share for all imports amount to 26%.
43 This figure was provided by Ladysmith Cheese and is for 2004. It estimates that 2005 it will
produce and sell approximately 300 tons.
44 Pages 1314 of the Commission Report dated 31 st January 2005.
45 Parmalat's submission to the Commission dated 9 th December 2004.
46 Evidence led by Ms Purchase and Mr Prinsloo.
47 Parmalat’s submission to the Commission dated 9 December 2004.
48 Page 4 of the Commission’s 2 nd Supplementary submission 11 May 2005.
12
figure was in fact 140 tons and not 400 as it had initially stated. 49
54. The revised figures for skimmed milk powder (with the correct sales figure for Fonterra)
are
Name of firm Country of origin Quantity (tons) Market share %
Clover South Africa 3 186 59.83
Fonterra New Zealand 140 2.63
Imports50 Argentina 296 5.56
Australia 256 4.81
Canada 49 0.92
Switzerland 26 0.49
Ireland 233 4.36
Poland 112 2.10
Uruguay 350 6.57
Other 77 1.45
Ladismith Cheese South Africa 200 3.76
Parmalat South Africa 300 5.63
Dairybelle South Africa 100 1.88
Total 5325 10051
55. On the basis of the revised figures the merged entity will have a market share of 62.46%
in respect of skimmed milk powder. While Clover is a dominant player in the market,
NZMPSA has a very small market share compared to other importers and other local
players such as Ladismith Cheese and Parmalat.
56. In our view the impact of the merger on competition in the whole milk powder and
skimmed milk powder product markets will be similar, and the following analysis applies
to both these products.
Demand Characteristics
57. Customers for the bulk commodity ingredients are in general large firms which have
countervailing power. Food service customers such as [confidential information]
52 and ingredients customers such as Aspen
Nutritionals (“Aspen”) are all large volume customers. They have the power to negotiate
volume discounts but also have the ability and capability to arrange and organise foreign
sources of supply of these products through international traders. Evidence led by Ms
Karin Purchase, procurement manager of Aspen, which is a customer of both Clover and
NZMPSA, confirmed that it was the practice of Aspen to obtain prices from at least four
different suppliers, including importers and international suppliers, for skimmed milk
powder. While quality, availability and seasonality were taken into account, the price of
49 Letter from Deneys Reitz dated 12 May 2005.
50 According to the SARS figures total imports for 2004 amounted to 1409 tons. The Commission
only listed the major country of origins. The market share for all imports amount to 26%.
51 99.99%
52 Customers approached by Commission.
13
the product was the most important factor in determining which supplier to choose.
Aspen would switch suppliers for a small change in price. This was because “ price was
king” in a business that involved large volumes and low margins. A small difference in
the price of a kilogram could have a large impact on the bottom line. As an example Ms
Purchase postulated that she could obtain a notional shortfall of 300 tons from the next
best supplier when the difference in price between Clover and the next supplier was 60c
a kilogram. 53 This increased Aspen's costs by R500 000. 54 Hence, in her view, if
Clover or the merged entity raised its prices by 510%, Aspen would seek other
suppliers of skimmed milk powder, including importers. In her view, a merger between
Clover and Fonterra would be beneficial for Aspen because the merged entity could
provide her with sustained supplies of product and a wider range of products than was
available from either Clover or Fonterra. 55
Barriers to Entry
58. According to the parties, barriers to entry, in the form of capital expenditure on
equipment, are high. Powder products require expensive equipment such as spray
towers costing approximately R180 million. However, new entrants can easily access
secondhand equipment and could enter the market within six months. According to the
evidence of Mr Uys, 56 in South Africa there is currently a lot of excess capacity in the
installed base of approximately 24 spray drying towers, some of which are standing
idle.57 This means that producers who may have been in the market previously, such
as Parmalat, can reenter the market easily. In addition, the bulk commodity ingredients
market does not depend as much on the ownership of a strong brand as the retail
segment does.
Role of Imports
segment does.
Role of Imports
59. The evidence of all the witnesses at the hearing suggests that milk is produced much
more cheaply in New Zealand and certain other parts of the world than in South Africa.
Milk from the EU and US is obtainable at lower prices because of subsidies in those
countries.58 The local industry is protected by tariffs from cheaper imports. Imported
skimmed milk powder incurs attracted a tariff duty of R4,50 per kilogram. 59 Skimmed
milk powder is imported from a number of countries including Ireland, Argentina and
New Zealand. The total cost of imported skimmed milk powder is roughly between
R19,00 and R21,00 per kilogram depending on the Rand/USD exchange rates. During
2003 and 2004 the volumes of imports were –
53 Page 12 of the transcript.
54 It seems that Ms Purchase was under the impression that the price offered to her by Clover was a
special price negotiated for a specific volume but Mr Uys from Clover clarified that in fact the price
charged in this transaction was the prevailing world price of skimmed milk powder.
55 Page 20 of the transcript.
56 Page 311 of the transcript.
57 Information provided by merging parties to the Commission.
58 See evidence of Mr Michael Van den Berg (Milk Producers Organisation), Mr Uys and Mr Tweed.
59 Commission's Report 31 January 2005.
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Year Total Import quantity (tons) Import Value
2002 10 426 R 135 237 187
2003 5 902 R 75 635 989
2004 1 409 R 18 231 327
Source: South African Revenue Service
60. Evidence was led by Clover that in general it sets its price for skimmed milk powder at
parity with the landed inwarehouse world price. Mr Uys testified that when Clover had
sometimes priced its product above the price of imported skimmed milk powder it had
experienced a drop in volumes sold. 60 Clover provided further details of its import parity
pricing model in the form of graphs handed in to the Tribunal. 61
61. The evidence of Ms Purchase and other witnesses, taken with the Commission’s data,
supports the conclusion that the price of imported skimmed milk powder does indeed act
as a constraint on Clover’s pricing policy. Since this is so, the merger will not lead to
higher prices or a lessening in competition. Clover is already pricing at the maximum
available to it. Since Fonterra is neither a domestic competitor nor, on the final figures
provided to us, one of the significant importers into the South African market, it does not
constitute a de facto or potential constraint on Clover’s pricing power.
VERTICAL ASSESSMENT
Input foreclosure
62. The proposed transaction will result in limited vertical integration because Clover and
NZMPA supply each other and certain of their competitors. However in the Tribunal’s
view there is not a real likelihood of input foreclosure. The level of imports is relatively
high and customers have countervailing power. Customers would easily be able to
source alternative sources of supply if the merged entity sought to engage in anti
competitive conduct. 62
Impact on Milk Producers
63. Concerns were raised that the earnings of farmers (milk producers) could be squeezed
as a result of the merger. At the hearing an explanation of Clover’s pricing policy and
structures was provided by Mr Roode. [confidential information]
structures was provided by Mr Roode. [confidential information]
60 Mr Uys also explained that although it appeared to Ms Purchase that Clover had charged her a
lower price per kilogram in the previous year this was not the case and that the price referred to by
Ms Purchase in her testimony was in fact the world price of skimmed milk powder at the time the
contract was concluded.
61 The Tribunal requested the Commission to review the graphs submitted by Clover. The
Commission was of the view that that the graphs illustrate that neither Clover nor the merged entity
will be able to influence the price or volume of supplies of skimmed milk powder.
62 See evidence of Ms Purchase and Mr Prinsloo.
15
63
Milk production in the local market has plateaued at about two billion litres annually, 64
and there is a limit to how much local household consumption can increase. Hence
farmers are seeking to increase their production and revenues by expanding into foreign
markets. Exports to subSaharan Africa represent a particular opportunity. [confidential
information].
64. Evidence given by Mr Michael Van den Berg of the Milk Producer’s Organisation (MPO)
largely confirms the evidence given by Mr Roode on the issue of the pricing of raw milk,
although Mr van den Berg’s participation in the hearing was premised on a totally
different basis.
65. The MPO is a voluntary body, representing some 82% of the farmers and thus 90% of
the milk produced in South Africa. The participation of Mr van den Berg stems from an
article in Farmers’ Weekly magazine in which Mr van den Berg expressed reservations
about the merger. At the hearing, Mr van den Berg raised a number of concerns, which
may be valid insofar as they may apply to raw milk but which do not have a bearing on
the ingredients market. A major concern is the possibility that Clover will dump raw milk
on the local market that was earmarked for export purposes (Ccategory milk) and
thereby drive down the prices paid to farmers. In addition, Mr van den Berg was
concerned that the joint venture could have the result that cheaper New Zealand
ingredients are brought into the country (because of lower production costs in New
Zealand), and are reconstituted into raw milk, thereby driving local milk prices down and
putting a squeeze on farmers. Mr van den Berg was also concerned that the merger
might lead to a reduction in import tariffs, which he saw as protection against the
cheaper New Zealand, EU and American products.
cheaper New Zealand, EU and American products.
66. However Mr Van den Berg conceded that he could not contemplate Clover being in
agreement with such a strategy and he accepted that increasing the export market was
a good opportunity for the local dairy industry since milk production had stagnated. He
conceded further that these were concerns that would prevail even if there was no
merger, and that he did not have specialised knowledge of the ingredients business.
67. While Mr van den Berg’s evidence was useful in assisting the Tribunal to gain a better
understanding of the broader dairy industry and the anxieties of the milk producers, it
was clear that these concerns were more relevant to a merger in the raw milk segment
or retail segment of the industry.
CONCLUSION
68. The Tribunal is satisfied that despite the large postmerger market share of the parties,
63 Page 227 of the transcript.
64 Page 247 of the transcript.
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NZMPSA has a relatively small share in the markets for whole and skimmed milk
powder. Barriers to entry are not particularly high, and previous players and new
competitors can fairly easily enter the market. The existing significant level of imports
and the free availability of imported supplies serve as competitive constraints on any
exercise of market power in the form of price increases. Local producers are already
pricing at import parity. Prices are relatively transparent and customers are
sophisticated, so that there is a strong likelihood that they would switch to imported
products if the merged entity increased prices without justification. The merger will not
lead to the removal of an effective competitor because NZMPSA is a relatively small
player in the relevant markets (other than that for whole milk powder) and the parties
generally offer complementary rather than identical products to customers. Hence it is
unlikely that the merger will lead to lessening or prevention of competition in the relevant
markets.
Potential for collusion in other markets
69. However, some residual concerns remain. These concerns were also raised by Mr van
den Berg of the MPO and by Parmalat.
70. A significant aspect of the agreement between the parties is that the parties have
reserved their rights to compete, and continue to do so, in the retail segment of the
ingredients market. The parties also continue to compete in the supply of raw milk.
71. Fonterra does not yet have a retail business in South Africa but does have a retail
presence in other parts of Africa through its brands such as Anchor Butter. Clover has a
strong retail business in South Africa and subSaharan Africa. It was made clear by Mr
Roode of Clover that Clover would jealously guard its brands in the retail business such
Roode of Clover that Clover would jealously guard its brands in the retail business such
as UltraMel and Mooirivier butter against those of Fonterra. 65 Evidence led by Mr
Tweed of Fonterra confirmed that Fonterra intended to maintain its freedom to enter the
retail market outside of the joint venture.
72. A second and equally significant aspect of the agreement is that not all of the bulk
ingredients products of the parties have been included in the merger and the agreement
which designates the affected products can be amended at any stage by the parties.
73. The Tribunal is concerned that because the parties still compete in the dairy industry the
merger could create or strengthen a likelihood of collusion between them.
74. In addition, the Tribunal cannot approve a merger transaction of limited scope if the
parties can subsequently amend their agreement at any time without notification to the
Commission.
75. Hence the merger is approved subject to the following condition:
Clover Fonterra Ingredients (Pty) Ltd ("CFI") shall not in the Republic of South Africa
65 At page 166 of the transcript.
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sell or distribute any product of Clover SA (Pty) Ltd ("Clover SA") (or any firm
controlled by Clover SA, controlling Clover SA or controlled by a firm controlling
Clover SA) or New Zealand Milk Products (SA) (Pty) Ltd ("NZMPSA") (or any firm
controlled by NZMPSA, controlling NZMPSA or controlled by a firm controlling
NZMPSA), other than
(a) defined products (including the customer scope) as defined in clause 1.1.18,
read with Schedule A of the Master Agreement; or
1 (b) any product developed for CFI by Fonterra Limited or
Clover SA in terms of clause 8 of the Master Agreement,
unless the relevant parties notify the Competition Commission in the manner
prescribed in the Competition Act 89 of 1998 for a small, intermediate or large
merger (as the case may be), of the intended sale or distribution of such additional
product by CFI and obtain the relevant Competition authority’s prior approval for
such sale or distribution by CFI.
For purposes of this condition, 'Master Agreement' means the agreement titled
"Master Agreement" between Clover SA and Fonterra International Limited, a copy
of which is attached as Schedule 8 to the Form CC4(2) filed on behalf of CFI in the
merger filing that was lodged with the Commission in this matter.
Public Interest
76. According to the merging parties no employees will be retrenched as a result of the
transaction. Furthermore, the employees of both Clover’s ingredients business as well
as of NZMPSA will be transferred to CFI on terms no less favourable than the terms on
which they are currently employed. 66
77. We therefore find that there are no significant public interest issues which would alter our
conclusion.
Y Carrim 21 June 2005
Concurring: N Manoim, L Reyburn
For the merging parties: Advocate R Bhana instructed by D Rudman/P Naggan
For the merging parties: Advocate R Bhana instructed by D Rudman/P Naggan
(Werkmans) for Clover and L Morphet/V Koovejee (Deneys Reitz)
for NZMPSA/Fonterra.
66 See paragraph 7 of the parties’ competitiveness report.
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For the Commission: Maarten van Hooven (Mergers and Acquisitions).
19