Brief Summary

Competition Law — Merger Approval — Proposed merger between Murray & Roberts Limited and Concor Limited — Murray & Roberts to acquire entire issued share capital of Concor — Commission's investigation revealed overlaps in various markets, including building construction and facilities management — No significant competition concerns identified, particularly in the market for toll road operations — Merger approved unconditionally by the Competition Tribunal on 14 June 2006, following comprehensive evaluation and consideration of objections.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned the approval of a large merger before the Competition Tribunal of South Africa under case number 101/LM/Oct05. The Tribunal was required to decide whether the proposed acquisition should be approved, prohibited, or approved subject to conditions in terms of the merger control regime.

The acquiring firm was Murray & Roberts Limited (“M&R”), the main operating subsidiary within a group controlled by Murray & Roberts Holdings Limited, a public company listed on the JSE. The target firm was Concor Limited (“Concor”), also listed on the JSE and controlled by Hochtief AG, a German company.

The Competition Commission conducted a lengthy investigation and ultimately recommended that the transaction be approved unconditionally. The matter proceeded to a Tribunal hearing on 14 June 2006, prompted by an objection from the South African National Roads Agency Limited (“SANRAL”) focused on competition effects in a sub-area of facilities management, namely toll road operations. The Tribunal issued a Merger Clearance Certificate approving the merger on 14 June 2006, with reasons issued on 11 October 2006.

The dispute concerned the competitive assessment of a merger that created horizontal overlaps across several construction- and engineering-related markets. Although multiple markets were investigated, the Tribunal’s reasons focused on toll road operations, treating the analysis as applicable to the other identified markets, and also recorded a residual concern raised and addressed at the hearing in relation to underground mining services.

2. Material Facts

M&R proposed to acquire the entire issued share capital of Concor from its shareholders. The transaction was to be implemented either by a scheme of arrangement or a substitute offer. M&R’s stated rationale included gaining access to capabilities it did not currently have, including Concor’s Technicrete and opencast mining divisions, while Concor’s controlling shareholder sought to exit for strategic business reasons.

Both firms operated across a range of overlapping activities. M&R, through subsidiaries, was involved in construction, engineering, construction materials and services, and fabrication and manufacturing. Concor operated through divisions active in civil engineering, building, structural and mechanical engineering, roads construction, opencast and underground mining contracting, manufacturing of building and mining products, and facilities management. The Commission and the parties agreed that overlaps existed in building/construction, civil engineering, engineering (general), roads, facilities management/concessions, and underground mining. The Commission also identified some degree of vertical integration, because both parties supplied products used in downstream construction-related markets.

The Commission identified several upstream (vertical) markets but found that, on the market share information and presence of alternative suppliers, foreclosure was unlikely, and no vertical competition concerns arose. The Tribunal therefore did not address those vertical markets further.

The Commission identified and analysed horizontal markets including large-project building construction, large-project civil engineering services, engineering (general) services, roads construction, facilities management, and underground mining services. In some of these markets, the post-merger shares and concentration indicators (including HHI measures) were “notably high” and raised prima facie concerns, particularly in engineering (general) services, underground mining, and facilities management.

The only third-party objection received was from SANRAL, and it was limited to the market for toll road operations, treated as a sub-market of facilities management. SANRAL’s statutory mandate under the National Roads Act 1998 included developing, maintaining and managing South Africa’s national road network and awarding contracts for toll road concessions and operations. SANRAL’s concern was that, in government-sponsored toll road operations (CTROM contracts), the merger would reduce the number of bidders and increase the risk of coordination, with high barriers to entry preventing timely replacement competition.

The Tribunal recorded that the parties and the Commission were in agreement that the relevant geographic market for the relevant markets under consideration was national, and the Tribunal accepted this for purposes of analysis.

In relation to the relevant product market, the Tribunal addressed the facilities management overlap only insofar as it related to toll roads and accepted the sub-division of facilities management into toll road concessions and toll road operations. The parties provided estimated market shares for toll road operations consisting of Tolcon (M&R) at 24.1%, Intertoll at 41.0%, Tracc/Basil Read at 17.0%, Concor at 5.3%, and Dragados at 12.6%, implying a post-merger share for the merged entity of 29.4%.

The key factual disputes relevant to outcome were not about the existence of toll road operations as an activity, but about how narrowly the market should be defined and how many effective competitors should be counted. SANRAL initially contended for segmentation between privately sponsored toll road operations and government-sponsored (CTROM) operations and argued that only three firms effectively competed for CTROM work. The merging parties and the Commission contended that, for competition assessment, toll road operations should be treated as a single market and that the tender process and potential competition constrained the merged firm.

3. Legal Issues

The central legal questions concerned whether the proposed merger was likely to substantially prevent or lessen competition in any relevant market, assessed with reference to the statutory merger test (explicitly linked in the reasons to section 12A of the relevant competition legislation).

Within that overall enquiry, the Tribunal was required to determine the appropriate relevant product market for assessing SANRAL’s objection. This required an evaluative determination about whether toll road operations should be segmented into separate markets based on (i) whether operations were tied to privately sponsored concessions or government-sponsored CTROM contracts, (ii) differences in margins and risk allocation, and (iii) the identity of the “customer” (SANRAL versus concessionaires).

The dispute largely concerned the application of competition-law principles to the facts, particularly market definition and competitive effects in a setting characterised by competitive tendering. It also required value judgments about the probative significance of market shares and concentration measures (including HHI) in what the Tribunal described as bidding markets, as well as the extent to which countervailing power, tender design, and potential rivalry constrained the merged firm despite concentration indicators.

4. Court’s Reasoning

The Tribunal approached the matter by isolating the only market where an objection was pressed—toll road operations—and stated that its competition evaluation there applied equally to the other markets identified by the Commission. It accepted a national geographic market.

On product market definition, the Tribunal accepted that facilities management could be divided into toll road concessions and toll road operations, but it rejected SANRAL’s attempt to further segment toll road operations into government-sponsored CTROM operations versus privately sponsored concession-related operations for competition analysis. The Tribunal accepted there were commercial differences (including margin differences and financial-resource requirements), but it stated it would be hesitant to accept differences in margins as the sole basis for segmentation, noting that margins depended on many variables. It also did not accept segmentation based on the identity of the customer, because in this context SANRAL determined the terms and conditions of both concession and CTROM tenders and was described as the “ultimate customer” for national toll roads in both settings.

In evaluating SANRAL’s contention that CTROM competition was effectively limited to three players (a “3-to-2 merger”), the Tribunal treated certain alleged exclusions as unpersuasive. It reasoned that entities such as the Basil Read/Bouygues joint venture (BRB), which was active in CTROM and concession contexts at the time, should be included as a participant notwithstanding statements about possible future non-participation. The Tribunal treated such statements as intentions that might or might not materialise and emphasised that, at the time of the decision, BRB was active and therefore relevant. The Tribunal also noted that contractual restrictions said to limit participation were voluntary rather than regulatory and could potentially be negotiated out of, and it considered it significant that the merging parties themselves operated across both CTROM and concession environments.

Turning to competitive effects, the Tribunal recognised that the toll road operations market displayed a relatively high post-merger share and a high HHI (recorded as 2993) with a change in HHI of 255, which would ordinarily attract closer scrutiny. However, it accepted the Commission’s and parties’ submission that market shares could fluctuate significantly because these were markets for large, infrequent projects awarded via tenders, and that shares in such contexts might not be an accurate reflection of enduring market power.

The Tribunal’s analysis emphasised the characteristics of bidding markets, while also cautioning that the mere invocation of “bidding markets” did not justify suspending antitrust scrutiny. It referred to its prior approach and to commentary describing classical bidding markets, and explained that competition assessment depends on the actual features of the tender process. It distinguished the present setting from contexts where tendering is used for routine, frequently purchased inputs, in which tendering does not necessarily constrain market power.

On the facts, the Tribunal found that SANRAL’s tender process for toll road operations had features consistent with a competitive bidding environment. These included pre-qualification, detailed technical specifications, SANRAL’s control over the tender design, confidentiality of applications and bids, and a winner-takes-all award structure for relatively long-duration contracts. The Tribunal found that SANRAL’s sophistication, use of modelling and benchmarking, and the structured tender process made collusive outcomes difficult to construct and difficult to police among bidders. It considered it unlikely that bidders could monitor deviation from any collusive agreement in the circumstances described.

The Tribunal also dealt with SANRAL’s concern about coordination, higher prices, and even predatory pricing in a setting of fewer bidders. It reasoned that the infrequency and unpredictability of tenders, the possibility of tenders changing form (for example, CTROM to concession), and occasional contract extensions reduced the incentives and feasibility of allocation or predation strategies. It further reasoned that recoupment through predation was not supported on the evidence, including because concession business involves large consortia and separate competitive dynamics.

The Tribunal placed weight on countervailing power in this particular matter. While noting that it had not always favoured such arguments, it considered SANRAL to be a sophisticated customer and regulator with the ability to determine technical specifications, quality, commercial terms, and the size of the market (through its discretion whether to issue tenders). It regarded SANRAL as a “price maker” in the relevant market and found that this position would discourage suppliers from exercising market power.

On barriers to entry, the Tribunal did not fully accept the Commission’s more optimistic view that entry barriers were easily surmountable. It accepted that the market was regulated and required specialised technical and financial capabilities, suggesting high entry barriers. Nonetheless, it considered that SANRAL itself could facilitate entry through tender design choices and market expansion. More importantly for the outcome, it found that even if entry were difficult, the remaining players and prospective bidders (including those appearing on SANRAL’s shortlists) would provide a credible constraint on the merged entity. It regarded the fact that market share figures reflected only awarded contracts—rather than the broader universe of credible prospective bidders—as important in assessing competitive constraint in a tender market.

The Tribunal also recorded a residual concern regarding underground mining services. The Commission had identified possible narrower functional segments within underground mining, while the merging parties contended that they focused on different aspects. The Tribunal was not persuaded to adopt narrower segmentation on the evidence presented and accepted the broad underground mining market as the relevant market for purposes of the transaction. Although post-merger shares were high, the Tribunal noted that the accretion was limited and, applying its competition evaluation, concluded that the merger did not substantially lessen or prevent competition in that market.

Finally, the Tribunal recorded that there were no public interest issues arising from the merger.

5. Outcome and Relief

The Competition Tribunal approved the transaction without conditions and issued a Merger Clearance Certificate on 14 June 2006. The Tribunal’s reasons, issued on 11 October 2006, concluded that the merger was unlikely to substantially prevent or lessen competition in any relevant market and that no public interest issues arose.

No costs order is recorded in the reasons provided.

Cases Cited

Murray & Roberts Limited and The Cementation Company (Africa) Limited (Competition Tribunal of South Africa) Case no.: 02/LM/Jan04.

Massmart Holdings Limited and Moresport Limited (Competition Tribunal of South Africa) Case no.: 62/LM/Jul05.

Clover Fonterra Ingredients (Pty) Ltd and Clover SA (Pty) Ltd / New Zealand Milk Products SA (Pty) Ltd (Competition Tribunal of South Africa) Case number: 92/LM/Nov04.

JD Group Limited and Ellerine Holdings Limited (Competition Tribunal of South Africa) Case no.: 78/LM/Jul00.

Multichoice Subscriber Management (Pty) Ltd and Tiscali (Pty) Ltd (Competition Tribunal of South Africa) Case no.: 72/LM/Sep04.

Legislation Cited

National Roads Act 1998.

Competition Act 89 of 1998 (section 12A).

Companies Act (as referenced in relation to SANRAL’s establishment and registration).

Rules of Court Cited

No rules of court are cited in the reasons provided.

Held

The Tribunal held that the proposed acquisition of Concor Limited by Murray & Roberts Limited was unlikely to substantially prevent or lessen competition in any of the markets examined.

It held that, for purposes of the objection raised, the relevant product market was the provision of toll road operations, and it rejected further segmentation between privately sponsored and government-sponsored toll road operations on the bases advanced (including margin differences and customer identity), particularly given SANRAL’s role in determining tender terms across both categories.

It held that notwithstanding prima facie concerns raised by concentration indicators, the market displayed features of a competitive tender environment, and SANRAL’s tender design and countervailing power, together with credible remaining competitors and prospective bidders, constrained the merged entity. The merger was accordingly approved unconditionally, and no public interest impediments were identified.

LEGAL PRINCIPLES

Market definition in merger analysis is a factual and evaluative exercise in which commercial distinctions (such as differences in margins or funding arrangements) do not, without more, necessarily justify the creation of separate competition-law product markets.

In assessing proposed market segmentation, reliance on the identity of the customer may be inappropriate where, on the facts, the same entity effectively determines the key contractual terms and conditions across the allegedly distinct segments and can be regarded as the ultimate customer for both.

In bidding markets, market shares and concentration measures such as HHI may require careful interpretation because shares can be materially affected by the award of discrete, infrequent, high-value contracts. However, the existence of tendering does not automatically neutralise competition concerns; the competition authority must examine the actual features of the tender process, including pre-qualification, specification-setting, confidentiality, and award structure, and consider how these features affect the feasibility of unilateral or coordinated effects.

The assessment of coordinated effects in tender environments may take account of whether the tender process structure makes collusion difficult to form and difficult to monitor, and whether the timing and predictability of contract opportunities provide adequate incentives for market allocation or predation strategies.

Countervailing power may be given weight where the customer is a sophisticated entity that can materially influence price and non-price dimensions through tender specifications and can influence the size of the market through decisions to issue tenders, thereby constraining supplier market power in the relevant setting.

Barriers to entry are relevant to competitive assessment; even where entry barriers are high, the existence of credible rival firms and a broader pool of prospective bidders (including those capable of qualifying through pre-qualification processes) can be relevant to whether a merger is likely to substantially lessen or prevent competition in a tender-driven market.

Murray & Roberts Limited and Concor Limited (101/LM/Oct05) [2006] ZACT 81; [2006] 2 CPLR 622 (CT) (11 October 2006)