COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 116/LM/Dec05
In the large merger between:
Mananga Sugar Packers (Pty) Ltd
and
Sunshine Sugar Specialities (Pty) Ltd / MSASA Sugar (Pty) Ltd
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Reasons
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Introduction
1. On 23 February 2006 the Competition Tribunal approved the merger
between Mananga Sugar Packers (Pty) Ltd and Sunshine Sugar
Specialities (Pty) Ltd, MSASA Sugar (Pty) Ltd and MSASA Holdings
(Pty) Ltd. The reasons are set out below.
The transaction
2. Mananga Sugar Packers (Pty) Ltd (“Mananga”) is acquiring from
Sunshine Sugar Specialities (Pty) Ltd (“SSS”), MSASA Sugar (Pty) Ltd
(“MSASA”) and MSASA Holdings (Pty) Ltd (“MSASA Holdings”) its
sugar packaging equipment as well as its rights to sugar allocations
awarded by the Swaziland Sugar Association (“SSA”)..
3. Mananga, a joint venture established between Transvaal Sugar Ltd
(“TSB”) and Royal Swaziland Sugar Corporation Ltd (“RSSC”), is a
company registered and incorporated in Swaziland. Mananga is jointly
controlled by TSB and RSSC. TSB is ultimately controlled by Remgro
Ltd and RSSC is a public company listed on the Swaziland Stock
Exchange.
4. The primary target firms are all private companies incorporated in
accordance with the laws of Swaziland. MSASA Holdings is a special
purpose vehicle, established specifically for purposes of this
transaction. Both SSS and MSASA are controlled by the same
shareholder, Mr Matthys Marthinus Roux.
Rationale for the transaction
5. According to TSB the transaction will facilitate its entry into the
KwaZuluNatal (“KZN”) and Eastern Cape markets. It could not
previously compete effectively in these areas because of the distance,
and therefore high transport costs, of its mills in Mpumalanga from
these areas. Since Swaziland is much closer to KZN and Eastern Cape
transportation costs will be substantially lower.
6. SSS and MSASA’s shareholders also wish to exit the business.
The Sugar Agreement between South Africa and Swaziland
7. All sugar produced in Swaziland is deemed to be sold to the Swaziland
Sugar Association (SSA), a statutory body created to regulate the
sugar industry in Swaziland. The SSA sells the sugar either directly into
SACU (South African Customs Union) or exports it to other countries of
which the EU is its main buyer 1 or via firms, including packers such as
SSS, which have been awarded sugar quotas by SSA. 2 Millers and
growers therefore cannot market or sell their own sugar. Swaziland is
a member of SACU and as such its sugar exports to South Africa are
not subject to import duties.
8. The South African sugar industry is protected against sugar imports
from Swaziland via an interindustry l agreement, which limits the
access that Swazi producers have to the South African market.
9. The inter industry agreement has been concluded by the South
African Sugar Association (“SASA”), which operates in terms of the
African Sugar Association (“SASA”), which operates in terms of the
South African Sugar Act, 3 and the SSA. The two industry bodies have
agreed that Swazi sugar and South African sugar in the South African
1 Swaziland and the EU have a preferential trade agreement.
2 The criteria that SSA uses in allocating quotas are: sugar availability, preference given to existing
customers based on past performance, business plans, diversification between value adders and other
users and hygienic standards.
3 The Sugar Act, 1978, provides for the establishment of a Sugar Industry agreement that constitutes
subordinate legislation and enables the industry to regulate itself.
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market will be in a ratio of 18.7% and 81.3% respectively. In other
words exports of Swazi sugar into the South African market are limited
to 18.7% of the total South African domestic sugar market.
10. During the 2004/05 season Swaziland sold 275 095 tons of sugar in
South Africa. RSSC has been awarded a quota of 30 000 tons which it
transferred to Mananga and SSS and MSASA have been awarded a
quota of 65 000 tons for the 2005/2006 season. The volume of sugar
exported to South Africa by SSS constitutes approximately 4.4% of the
total volume of sugar sold in South Africa.
The South African Sugar Industry
11. The South African Sugar Industry is highly regulated. The South
African Sugar Act provides for inter alia a tariff that protects the
domestic market against low world sugar prices, 4 and enables the
equitable proceeds arrangement and the single channel export
arrangement by SASA. The equitable proceeds arrangement provides
for the equitable sharing of industry proceeds horizontally between
millers and millers and vertically between growers and millers. The
single channel export arrangement involves surplus production being
exported via a singlechannel export arrangement for raw sugar. SASA
is the single channel exporter of raw sugar, with sugar refiners being
responsible for export of refined sugar. 5
12. The Department of Trade and Industry has been engaged in a review
process of the regulatory framework for the sugar industry for some
time now with a view to deregulating the industry. The review process
had seemingly reached a point where it was anticipated that an
amendment to the Sugar Act would be tabled in Parliament sometime
in 2005.6 However according to a representative of the Department
who was present at the hearings, Ms Koekemoer, the review process
who was present at the hearings, Ms Koekemoer, the review process
had not in fact proceeded to such a stage. No Bill has been tabled in
Parliament and the industry has requested the Minister to further delay
the legislative process, which would have effected certain changes to
the Sugar Act. 7 In her view the regulatory barriers were likely to remain
in place for the immediate future.
The relevant market
4 Currently the tariff is 0% due to the high world sugar price, which currently is US $ 400. The tariff is
triggered when the world price drops below US$ 330.
5 Also refer to the discussion of these regulatory ‘pillars’ in the Tongaat Sugar decision
6 See page 11 of the transcript and page 411 of the record (this is a confidential document).
7 See transcript of 13 February 2006 on page 11.
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13. The merging parties’ activities overlap with regard to the processing,
packaging and sale of white, brown and speciality sugars such as
castor and icing sugar in bulk to industrial customers and as direct
sales to retail and wholesale customers. SSS/MSASA (hereafter
referred to as “SSS”) specializes in packing sugar sold as house
brands (private labels) on behalf of its retail, wholesale and industrial
customers. TSB sells it sugar under the brand name Selati.
14. For purposes of this transaction and based on the merger between
TongaatHulett Group Limited and Transvaal Suiker Beperk and
others,8 (hereafter referred to as the “Tongaat Sugar decision”) the
Commission and the parties defined the relevant product market as the
processing, packaging and sale of refined white sugar. 9 We accept this
market definition.
15. The Commission and the parties both suggest that the relevant
geographic market, as set out in the Tongaat Sugar decision, is South
Africa. Although we accept this delineation of the geographic market
we also take cognisance of the Tribunal’s note in paragraph 57 of its
decision that some allowance needs to be made for imports that are
subject to the arrangement between SASA and SSA, but that such
imports cannot be uncritically incorporated into the market share
figures when considering the effect of a transaction within South Africa.
Effect on competition
16. There are three major players in the South African sugar industry.
Illovo is the largest with a market share of 38.4% based on its sugar
sales for 2004/2005. TongaatHulett is second largest with a market
share of 27% and the third largest player is TSB (including Mananga),
which has 19.2%. SSS (including MSASA) has a market share of 4.1%
which has 19.2%. SSS (including MSASA) has a market share of 4.1%
while the rest of Swaziland’s exports to South Africa represent 11.3%.
Post the transaction the merged entity will remain the third largest
player with a market share of 23.3%.
17. This is a highly concentrated industry with the pre and post merger
HHI being above 1800 points. 10 The change in the HHI as a result of
the transaction will be 156 points, which raises some concerns about
the likelihood of enhanced market power.
18. Competition between the sugar producers, whether it is import
competition or domestic competition, is severely hampered by the
8 Tribunal Case No. 83/LM/Jul00
9 See par 43 – 56 of the Tongaat Sugar decision par 28.
10 See the US Department of Justice and the Federal Trade Commission’s Horizontal Merger
Guidelines issued on 2 April 1992 and revised 8 April 1997.
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regulatory environment in which they operate. The equitable proceeds
arrangement is structured in such a way that a sugar producer whose
South African sales exceed its volumes allocated to it in terms of the
agreement is penalised. This clearly disincentivise producers to
increase their domestic market share.
19. In the Tongaat sugar decision the Tribunal found that price competition
did not exist in the sugar industry and that players mainly competed on
nonprice matters such as delivery reliability and quality of sugar. In
that matter the Tribunal also held that while Swazi sugar was to be
included in the South African market share computation, Swazi sugar
itself did not pose a competitive price constraint on the South African
producers because of the limited volumes that could be imported into
the market.
20. In the course of the Commission’s investigation into this transaction,
some suggestions were made that Swazi sugar was in fact cheaper
than South African sugar. 11
21. At the hearing the merging parties claimed that Swazi packers do not
currently enjoy any price advantage above that of their South African
counterparts. According to them Swazi packers historically did get a
rebate of 7% from SSA to compensate for additional input costs such
as transport, labour, electricity and stock losses etc. and to enable
Swazi packers to sell their sugar at competitive prices in South Africa.
However, this rebate, based on the SASA price less 7%, was phased
out by SSA after 2000 and is now adjusted annually only in line with
inflation or with the average South African producer prices. In light of
this, and the fact that South African packers enjoyed economies of
scale, Swazi packers were unable to meet or compete with South
African rivals on price.
22. Evidence was submitted to the Tribunal that SSS had recently lost an
22. Evidence was submitted to the Tribunal that SSS had recently lost an
account, which represented 20% of its sales volume to a South African
rival, due to the fact that their South African rivals’ sugar were cheaper.
Other examples to illustrate that this was not a once off loss were
submitted to us on request subsequent to the hearing.
23. Allocation of quotas is done by a subcommittee of SSA, referred to as
the Allocations Committee, on which growers and millers have
proportional representation. Criteria taken into account in allocating
quotas are the availability of sugar, past performance, hygienic
standards and submitting a business plan. As mentioned earlier SSS’s
exports in terms of its quota allocation represents 4.1% of the total
volume of sugar sold in South Africa. In total only 18.7% of Swazi
11 See page 542 of the record.
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Sugar is allowed into South Africa in terms of the interindustry
agreement, which meant that even if there was some price competition
from Swazi sugar the volumes did not represent a competitive
constraint on the South African sugar industry.
24. The Tribunal found in the Tongaat sugar decision that “ there is
considerable evidence of coordination that goes beyond the regulatory
framework, most significantly, the geographical division of the South
African market and the division, between Illovo and and TongaatHulett
of retail and industrial sales. ”
25. In South Africa the geographical spread of Illovo’s seven mills range
from Pongola in the north of KwaZuluNatal (“KZN”) to Umzimkulu on
the lower south coast. TongaatHulett’s five mills are all located on the
KZN north coat between Durban and Richards Bay. TSB has two sugar
mills in Malelane and Komatipoort, Mpumalanga. 12
26. The parties allege that the transaction will lead to certain efficiencies.
According to them the merger will allow TSB, via Mananga, to gain
access to areas such as KZN and the Eastern Cape which, to date,
have been dominated by its rivals. It has been unable to compete
effectively within these markets due to higher costs involved in
transporting sugar from TSB’s mills in Mpumalanga.
27. They claim that the envisaged transaction will result in a reduction of
the merged entity’s packaging costs from R400 per tonne to R207 per
tonne owing to an increase in economies of scale and a saving on
transport costs of R70 per tonne because sugar will be transported
from the more cost effective basis in Swaziland to KZN and Eastern
Cape. The lower transport and packaging costs, including the much
larger quota of 95 000 tons, will facilitate the opportunity for entry into
larger quota of 95 000 tons, will facilitate the opportunity for entry into
these regions via Swaziland. These cost saving will however not be
passed on to consumers but will, according to the parties, enable the
merged entity to compete more effectively with TongaatHulett and
Illovo.
28. According to the parties the transaction will enable TSB, referred to as
the maverick of the sugar industry, to become a more cost effective
player in KZN and the Eastern Cape, areas, which up to now were
dominated by Illovo and TongaatHulett.
29. It is possible that the transaction would enable TSB to become a more
effective competitor within South Africa but we make no such finding
here.
12 See par 14 of the Tongaat Sugar decision.
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30. However we do agree with the Commission that it is unlikely that the
transaction will substantially prevent or lessen competition in the
relevant market. The transaction will not result in the removal of an
effective competitor from the market due to the fact that imports into
South Africa by SSS are limited by quotas and that Swazi producers
are not able to match prices offered by the South African producers to
large customers. In addition, SSS’s share of the market is only 4.4%
of the South African sugar market and it is unlikely that the regulatory
regime of the sugar industry will change in the near future.
Public interest considerations
31. The proposed transaction will have no effect on employment or any
other public interest issues.
28 February 2006
Y Carrim Date
Concurring: U Bhoola and M Mokuena
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