COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 93/LM/Sep05
In the large merger between:
Steinhoff Africa Holdings (Pty) Ltd
and
North Eastern Cape Forest Joint Venture and
Goeiehoop Farming (Pty) Ltd
Reasons for Decision
________________________________________________________________
APPROVAL
On 15 December 2005 the Competition Tribunal issued a Merger Clearance
Certificate approving the merger between Steinhoff Africa Holdings (Pty) Ltd
and North Eastern Cape Forest Joint Venture and Goeiehoop Farming (Pty) Ltd in
terms of section 16(2)(a) of the Act. The reasons appear below.
The Parties
1. The acquiring firm is Steinhoff Africa Holdings (Pty) Ltd (“Steinhoff”), a
private company incorporated in South Africa. It is a subsidiary of Steinhoff
International Holdings Limited (“Steinhoff IH”), a public company
incorporated in South Africa. Steinhoff controls over forty subsidiaries within
South Africa which are listed on page 2 of the Commission’s report.
2. The primary target firms are the North Eastern Cape Forest Joint Venture
(“NECF”) and Goeiehoop Farming (Pty) Ltd (“GF”).
3. NECF is a joint venture between the Industrial Development Corporation of
South Africa Ltd (“IDC”), Goeiehoop Farming (Pty) Ltd and Mondi South
Africa Ltd (“Mondi”) and jointly controlled by these entities in a partnership.
The Merger Transaction
4. To facilitate this, two agreements will be entered into:
a. the existing agreement constituting the NECF will be amended to
account for the change in the business of NECF. 1
b. Steinhoff will acquire from Mondi its undivided interest in the assets,
liabilities of the NECF as well as Mondi’s claims against Goeiehoop
and ordinary shares in the issued share capital of Goeiehoop. The
existing management agreement between the NECF, Goeiehoop
and Mondi is to be ceded to Steinhoff.
5. In effect therefore, Steinhoff is replacing Mondi as a partner in NECF.
Rationale for the Transaction
6. Mondi had planned to develop and maintain commercial forestry plantations
on the land owned by Goeiehoop to produce paper pulp for use in its paper
production, this never materialised. The reason being that the plantations
were located too far from Mondi’s paper production facilities. Mondi now
wishes to exit and accordingly is disposing of its interest in the NECF and
Goeiehoop.
7. The primary reason cited by Steinhoff is that it hopes to achieve certain
efficiency benefits arising from a cluster development it intends to
undertake in the North Eastern Cape. 2
1 That is, whereas the NECF initially used its forest timber to produce pulpwood, Steinhoff and the IDC will
henceforth use it to produce sawlogs and pulp grade logs for use in the cluster development.
2 See in this regard Inzuzu Furniture Manufacturers (Pty) Ltd and PG Bison Holdings (Pty) Ltd –
12/LM/Feb04
The NECF Cluster Development
8. Various
activities in the foresttofinished timber producttowaste
valuechain will be combined in a cluster development. The
main participants will be Steinhoff, the IDC, the Eastern
Cape government and several black economic
empowerment groupings. The parties claim various
efficiency benefits for this cluster development. 3 The assets
and activities undertaken at the cluster will include:
Acquisition of timber resources, namely the North
East Cape forests owned by the NECF totalling 78
860 hectares;
Installation of a saw mill to provide for the manufacturers;
Other activities:
o Erection of a new particleboard manufacturing plant ,
envisaged to optimise tree utilisation by consuming the waste
from the forest, saw mill, etc.
o Establishment of manufacturing facilities to make doors, pine
household goods and components for export;
o Utilisation of lower grade timber for pallets;
o Miscellaneous services by SMMEs relating to ancillary activities
such as transport, security, canteen, maintenance and waste
removal.
9. Postmerger,
Steinhoff and the IDC have agreed to use the timber for the production of
sawlogs and pulp grade logs. Steinhoff asserts that it will only use 25% of
the relevant forest yield from NECF’s forests for sawlogs. The remainder
will be utilised for the production of pulp grade logs.P 14
The Flow of the Industry
j. At this stage it is useful to examine the interaction of various
markets comprising this sector .
3 Commission’s Recommendations page 8
The relevant product and geographic markets
11. Steinhoff IH is an integrated saw milling, wood processing and
furniture and bedding manufacturing firm which conducts business through
its various subsidiaries, including Steinhoff Africa. Its specific business
activities are as follows:
Furniture and bedding manufacture
Foam and textile manufacture
Production of processed timber products, such as particleboard
Saw milling
Forestry
12. The only business activities that are relevant to this transaction are those of
forestry, saw milling and the production of processed timber products, in
particular, particleboard. In this regard, Steinhoff owns and operates
various saw mills throughout South Africa. It further owns and manages
around 7 039 hectares of forests in South Africa, all situate in the Southern
Cape region.
13. NECF is an unincorporated joint venture, formed to establish,
develop and maintain commercial forestry plantations and additional fibre
sources in the North Eastern Cape on the land owned by Goeiehoop. The
NECF was formed to establish a beneficiation project in the paper and pulp
industry. However, as discussed above, this project never materialised.
However, these plantations are effectively unused, since NECF maintains
that in 2003, 6 000 out of 34 752 hectares were destroyed by fire.
14. Goeiehoop is the owner of the farm comprising the plantation land operated
by NECF. It was not actively trading at the time of this merger.
15. The merging parties and commission assert that there is no product overlap
insofar as neither NECF nor GH were trading at the time of the transaction.
Therefore they do not compete with the Steinhoff Group.
16. Therefore, this transaction essentially entails the acquisition of commercial
plantation land by a dominant, integrated manufacturing and wood
plantation land by a dominant, integrated manufacturing and wood
processing firm. It has both horizontal and vertical effects, which we
proceed to examine in the next section.
17. The Commission identified four relevant markets:
i.The upstream market for sawlogs
ii.The downstream market for sawn timber
iii.The upstream market for pulp logs
iv.The downstream market for particleboard.
18. We do not deem it necessary to take a view on whether each market is
national or regional as competition concerns do not arise on either definition.
Impact on Competition
Horizontal Effects
19. Steinhoff is acquiring its first plantation in the Eastern Cape. Nationally, the
market share increment is not large, since though the Goeiehoop farm
constitutes 5.8% of the total area under plantation in South Africa, the
Commission found that only 2.5% of the plantation area comprised trees
that were planted. Nevertheless, on a conservative estimate, they state
that postmerger, Steinhoff will own the equivalent of 6.4% of the total area
under plantation in South Africa. This national market share held by
Steinhoff is therefore not large enough to raise any competition concerns.
20. Even on a regional market definition, we do not find that the transaction
raises concerns. Steinhoff does not currently own forest plantations in the
Eastern Cape region. However, through NECF, it is acquiring 21% of the
area under plantation in the Eastern Cape.
21. Notwithstanding Steinhoff’s acquisition of additional forestry plantations, this
does not change the competitive state of the market. The NECF has never
been a player in the market at large. As far as the supply of saw logs and
sawn timber are concerned, the NECF has therefore never been an existing
competitor. The NECF never sold sawlogs since their plantation was only
used for purpose of producing pulp logs. As far as the downstream national
market for sawn timber is concerned, Steinhoff’s national market share for
the sale of saw logs is only 7.5%. On a regional definition of the market,
there is no overlap, since the NECF never sold sawn timber nationally,
there is no overlap, since the NECF never sold sawn timber nationally,
again because their production was that exclusively of pulp logs for use by
Mondi to make paper.
22. Similarly, as far as pulp grade logs are concerned, NECF have not sold
pulp logs at all in the market but dedicated the supply of pulp logs
exclusively for the internal use by Mondi. Therefore, in respect of both pulp
logs and sawn timber, the NECF have never produced anything for sale to
the existing market. Similarly, Steinhoff has not sold any pulp logs in the
market nationally.
23. Therefore, on either the narrower or broader definition of the market, this
transaction raises no competition concerns.
Vertical Effects
The downstream market for particleboard
24. Though the market share of Steinhoff in this market is quite high at 50.4%,
this is not a mergerspecific occurrence since this high market share existed
premerger. As stated before, the NECF is not active in this market at all.
25. In order to produce particleboard, two key inputs are required, namely pulp
logs and wood waste. The latter is derived from the clearing of trees and
through the sawn timber process. It can be obtained from forests or from
sawmills. At present, Hans Merensky (Singisi), NECF, MTO, DWAF and
Amatolga provide these key inputs in the relevant Eastern Cape area.
Singisi is the largest supplier hereof.
26. Magnaboard, a Steinhoff competitor in this market, indicated a concern with
the merger. Its concern related to the continued supply to it of the raw
materials, particularly the wood supply, from surrounding plantations. It
submitted that once Steinhoff’s particlemanufacturing plant was
established, Steinhoff’s share of the particleboard market would increase
with this merger, giving it a near monopoly, thereby enabling it to exclude
Magnaboard from the market. Notwithstanding an invitation to participate in
the hearing, Magnaboard elected to stand by its written submission. In it
submission, it indicated that Steinhoff (through PG Bison, its subsidiary)
had previously made various overtures to the owners of other plantations
and offered to buy the pulp wood (supply) of one such plantation which
would otherwise go to Magnaboard. 4
27. The merging parties ‘ response to this was that the NECF plantation would
be able to sufficiently supply Steinhoff’s needs at its new particleboard
be able to sufficiently supply Steinhoff’s needs at its new particleboard
plant, even though they had traditionally sourced from other suppliers for
those regions where they already had mills. They maintained that they are
not presently buying raw materials from the largest supplier, Singisi, and in
any event, would not require to with the establishment of the plant. Of note
too, so the commission pointed out, is that the NECF had never produced
for the open market therefore its supply of raw materials was not being
denied to the open market, since it was never available to them. Therefore,
Magnaboard never received supply from the NECF and were unlikely to do
so in the future. We were further reassured by the parties at the hearing
4 Page 676 of record
that Magnaboard was not dependent on Singisi as its sole supplier of raw
materials. According to Mr Van Niekerk, Magnaboard had previously gone
to other suppliers when attempting to get a better price out of Singisi.
28. The Commission too dispelled Magnaboard’s concerns. They do not see
the transaction as problematic as they state that the entire output of raw
materials of this plantation had previously been used to supply Mondi for
the production of paper and had not been supplied in the market. Further,
that even though postmerger, the NECF forest would supply in the market,
it was apparent that Steinhoff would need to absorb its entire raw materials
to produce particleboard.
29. Regarding the possibility of any negative competition concerns
downstream, the commission found that it would not make commercial
sense for Steinhoff to foreclose independent manufacturers of particleboard
(prospective new customers) after having invested heavily in a new plant
precisely for this reason.
30. The commission also concluded that, since Steinhoff’s particleboard
manufacturing capacity would be increased by the establishment of the
Eastern Cape plant, they would be able to replace supply shortages
enabling them to produce enough particleboard for the supply to the local
market.
31. Accordingly, for the reasons stated above, we do not see this transaction as
likely to give rise to any competition concerns. We are persuaded by the
merging parties’ arguments and contentions that the new particleboard
plant in this region will increase the supply of particleboard output to the
entire domestic market at large. We are further satisfied that neither
Magnaboard, nor other independent manufacturer will be foreclosed by any
action of the merged entity as a result of this merger.
32. We accordingly agree with the commission that there is unlikely to be any
32. We accordingly agree with the commission that there is unlikely to be any
negative downstream effect in the particleboard market.
Public Interest Issues
33. There are no public interest concerns raised by this transaction. In fact,
there are positive employment creation prospects insofar as the new cluster
development will create approximately 4,500 new jobs in the North Eastern
Cape region.
Conclusion
We are satisfied that this merger is not likely to prevent or substantially lessen
competition in any market. The merger is therefore approved unconditionally.
__________
19 January 2006
N. Manoim Date
Concurring: Y. Carrim, M Mokuena
For the merging parties: Johan Roodt, Roodt Incorporated
For the Commission M. Mahlala, Mergers and Acquisitions